<PAGE>
As filed with the Securities and Exchange Commission on November 5, 1999
Registration No. 333-87325
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--November 4, 1999
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Prospectus
, 1999
5,000,000 Shares of Common Stock
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Symbol & Market: The Offering:
. OPAY/Nasdaq National. We are offering
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>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 5
Forward-Looking Statements.......... 15
Use of Proceeds..................... 16
Dividend Policy..................... 16
Capitalization...................... 17
Dilution............................ 18
Selected Financial Data............. 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 20
Business............................ 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
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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>
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E*TRADE Group, Inc. has agreed to purchase directly from us 512,820 shares
of our common stock at $9.75 per share in a private placement that is expected
to be consummated prior to the completion of this offering.
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 issuable 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.
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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
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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
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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
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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;
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. 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.
Management has broad discretion as to the use of proceeds from this offering.
Our management will have broad discretion with respect to the use of
proceeds from this offering. Most of the proceeds from this offering will be
used for expenses of the business, such as hiring sales and marketing
personnel, repayment of stockholder loans and general working capital. You will
be relying on the judgment of our management about these uses. See "Use of
Proceeds" on page 16. If we do not use the proceeds of this offering
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 sale of 512,820 shares of common stock to E*TRADE Group, Inc. and 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. See "Risk Factors"--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 2.1% to
2.6% of the total amount paid by the consumer, depending on the credit card
used and the type of transaction. We also incur telecommunications costs of
approximately $0.50 per completed transaction through our 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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<PAGE>
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 in the near term.
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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<PAGE>
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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<PAGE>
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.
23
<PAGE>
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.
24
<PAGE>
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.
Other income (expense). In the event we do not consummate this offering
within 120 days after E*TRADE'S purchase of 512,820 shares of our common stock,
E*TRADE has a put option to sell the shares to us for $5,000,000. Imperial Bank
has agreed to acquire these shares if E*TRADE exercises its put option. We will
account for this transaction as a beneficial conversion feature which will be
valued at approximately $1,600,000 using an estimated volatility of 60% over
the 120 day term of the agreement. We will amortize the $1,600,000 to interest
expense over the shorter of 120 days or until this offering is consummated.
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.
25
<PAGE>
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.
26
<PAGE>
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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<PAGE>
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.
28
<PAGE>
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 (38) 1
----- ----- ----- ----- ----- ------ -------
Net income (loss)....... $(132) $ (68) $(108) $ (17) $(121) $ 62 $(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>
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.
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.
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.
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<PAGE>
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.
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<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, Ohio
. 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. 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.
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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.
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<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.
[logo-US Audiotex]
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<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 agreed
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 will be granted to
Mr. Nocco on the earliest to occur of the following future dates: (i) November
1, 2000; (ii) the date the Chairman and CEO determines Mr. Nocco has achieved
certain pre-determined performance goals; or (iii) the date we sign a
definitive agreement that would result in a "change in control" of the Company.
One-half of these options will 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 will 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
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 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
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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 fiscal 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. 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.
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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, Imperial Bank has agreed
to acquire the shares which E*TRADE is to purchase from us in the event that we
do not consummate an initial public offering within 120 days of E*TRADE's
purchase of our common stock and E*TRADE exercises its put option--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 the
consummation of the sale of 512,820 shares of our common stock to E*TRADE
Group, Inc., which we expect to effect prior to the completion of this
offering, the percentage ownership interests of Imperial Bank and Beranson
Holdings Inc. in us will be 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 September 30, 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
15,000,000 shares of our common stock outstanding prior to the closing of this
offering, and 20,000,000 shares outstanding immediately following the
completion of this offering (excluding the 512,820 shares to be purchased by
E*TRADE Group, Inc.). 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 80.0% 12,000,000 60.0%
c/o Imperial Bank
Building
9920 South La Cienega
Boulevard
Inglewood, CA 90301
Beranson Holdings,
Inc.(1)............... 3,000,000 20.0 3,000,000 15.0
c/o Official Payments
Corporation
2333 San Ramon Valley
Boulevard, Suite 450
San Ramon, California
94583
Thomas R. Evans........ 1,325,460(/2/) 8.1 1,325,460 6.2
c/o Official Payments
Corporation
445 Park Avenue, 10th
Floor
New York, New York
10022
Kenneth Stern(1)....... 3,212,073(/3/) 21.1 3,212,073 15.9
c/o Official Payments
Corporation
2333 San Ramon Valley
Boulevard, Suite 450
San Ramon, California
94583
Brian Nocco............ 397,638(/4/) 2.6 397,638 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...... -- -- 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 37.9 7,770,999 31.4
(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.
60
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue up to 150,000,000 shares of common stock,
15,000,000 shares of which are issued and outstanding, held by two 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.
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our securities.
Upon completion of this offering and the sale of 512,820 shares of common stock
to E*TRADE Group, Inc., 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 and Beranson Holdings, Inc. the right to
demand, on four occasions and one occasion, respectively, that we register
their shares of our common stock. In addition, under the terms of the
registration rights agreements, if we propose to register any of our
securities, either for our own account or for the account of another
stockholder exercising registration rights, Imperial Bank and Beranson
Holdings, Inc. are entitled to notice of 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.
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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<PAGE>
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 3, 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 3, 1999, the Company entered into an agreeement with E*TRADE
Group, Inc. (E*TRADE) whereby E*TRADE agreed to purchase 512,820 shares of
common stock at a price of $9.75 per share for a total consideration of
approximately $5 million. If the Company does not consummate an initial public
offering within 120 days from the date of this agreement, E*TRADE shall have
the right to require the Company to repurchase all of its shares at the $9.75
per share price. Imperial Bank, the majority stockholder of the Company, has
agreed to acquire these shares from E*TRADE should E*TRADE exercise its put
option.
F-16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[OFFICIAL PAYMENTS CORP. Logo]
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 an aggregate consideration of $8.00 and 600 shares of common stock to
Beranson Holdings, Inc. for an aggregate 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.
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.
5.1 --Opinion of Cadwalader, Wickersham & Taft.**
10.1 --Amended Employment Agreement, dated as of September 14, 1999, by and
among U.S. Audiotex Corporation, Imperial Bank and Thomas R. Evans.*
10.2 --Employment Agreement, dated August 24, 1999, between U.S. Audiotex
Corporation and Kenneth Stern.*
10.3 --1999 Stock Incentive Plan.*
10.4 --Stockholders Agreement, dated August 24, 1999, by and among U.S.
Audiotex Corporation, U.S. Audiotex, Inc. and Imperial Bank.*
10.5 --Electronic Tax Administration Memorandum of Agreement between the
Internal Revenue Service and U.S. Audiotex, LLC.*
10.5.1 --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.
10.12 --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
** To be filed by amendment.
*** Being refiled
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or the notes thereto.
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 4, 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 4, 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.
5.1 --Opinion of Cadwalader, Wickersham & Taft.**
10.1 --Amended Employment Agreement, dated as of September 14, 1999,
by and among U.S. Audiotex Corporation, Imperial Bank and
Thomas R. Evans.*
10.2 --Employment Agreement, dated August 24, 1999, between U.S.
Audiotex Corporation and Kenneth Stern.*
10.3 --1999 Stock Incentive Plan.*
10.4 --Stockholders Agreement, dated August 24, 1999, by and among
U.S. Audiotex Corporation, U.S. Audiotex, Inc. and Imperial
Bank.*
10.5 --Electronic Tax Administration Memorandum of Agreement between
the Internal Revenue Service and U.S. Audiotex, LLC.*
10.5.1 --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.
10.12 --Employment Agreement, dated September, 1999, between U.S.
Audiotex Corporation and Michael Presto.
10.13 --Employment Agreement, dated September, 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
** To be filed by amendment.
*** Being refiled
<PAGE>
EXHIBIT 4.2
STOCK PURCHASE AGREEMENT
------------------------
THIS STOCK PURCHASE AGREEMENT, dated as of November 3, 1999 (the
"Agreement"), is by and between OFFICIAL PAYMENTS CORPORATION, a Delaware
---------
corporation, formerly known as U.S. Audiotex Corporation (the "Company"), and
-------
E*TRADE GROUP, INC., a Delaware corporation ("E*Trade").
-------
W I T N E S S E T H:
WHEREAS, the Company desires to sell, and E*Trade desires to purchase,
shares of the Company's common stock, par value $0.01 per share, (the "Common
Stock") on the terms and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties hereto agree as follows:
I.
CLOSING; EXCHANGE OF SHARES
---------------------------
1.1 Closing; Payment. Subject to the terms and conditions of this
----------------
Agreement, and upon the basis of the representations and warranties herein
contained, upon execution and delivery of this Agreement by each of the parties
hereto, or such later date as the parties shall agree (the "Closing Date"), the
------------
Company hereby agrees to sell to E*Trade and issue to E*Trade or its nominee,
and E*Trade agrees to purchase from the Company, 512,820 shares of Common Stock
(the "Purchase Amount") at a price of $9.75 per share (the "Purchase Price").
--------------- --------------
E*Trade shall pay the Purchase Amount in currently available funds to the
Company by wire transfer against delivery by the Company of stock certificates
evidencing the Common Stock to be purchased by E*Trade, registered in E*Trade's
name, or that of its nominee. The consummation of the transactions contemplated
hereby is hereinafter called the "Closing." The Closing shall take place on the
-------
Closing Date at 9:00 A.M. Eastern Time at the offices of Cadwalader, Wickersham
& Taft, 100 Maiden Lane, New York, New York, or at such other time and place as
shall be agreed upon by the parties.
II.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
The Company represents and warrants that as of the date hereof and as of
the Closing:
2.1 Organization and Qualification of the Company. The Company is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, with full corporate power and authority to conduct its
business as currently conducted and to own and use its property and is qualified
to do business and is in good standing as a foreign
<PAGE>
corporation in each jurisdiction where the character of its property or the
nature of its activities makes such qualification necessary, except where the
failure so to qualify would not have a material adverse effect on the business,
property, results of operations or financial condition of the Company (a
"Material Adverse Effect").
-----------------------
2.2 No Conflict. The execution and delivery of this Agreement and the
-----------
Company's performance of its obligations hereunder will not (i) violate any
applicable law, ordinance, rule or regulation of any Governmental Authority or
(ii) conflict with or result in a breach of the terms and conditions of, or
constitute any default under, the Company's Certificate of Incorporation or By-
laws (each as amended), or any contract, agreement or instrument to which the
Company is a party or by which the Company or any of its property is bound,
except, in any such case, for violations, conflicts or breaches which
individually or in the aggregate would not have a Material Adverse Effect.
2.3 Legal Proceedings. There are no actions, proceedings or
------------------
investigations pending or, to the knowledge of the Company, threatened against
the Company before any court or before any administrative agency or
administrative officer or executive, which may reasonably be expected to
materially affect the ability of the Company to perform its obligations or
consummate the transactions contemplated under this Agreement.
2.4 Company Authorizations. This Agreement has been duly authorized by
----------------------
the Company. This Agreement has been duly executed and delivered by the Company
and constitutes the legal, valid and binding obligation of the Company,
enforceable in accordance with its terms, except as limited by bankruptcy,
insolvency or other laws affecting the enforcement of creditors' rights
generally or by equitable principals in any action (legal or equitable).
2.5 No Default. The Company is not (i) in default under any (a) order,
----------
judgment, decree or ruling of any court, arbitrator or Governmental Authority or
(b) contract, agreement or instrument to which it is a party or by which it or
any of its property is bound, or (ii) in violation of any applicable law,
ordinance, rule or regulation of any Governmental Authority, in either case,
which could reasonably be expected to have a Material Adverse Effect.
2.6 Capital Stock. The authorized capital stock of the Company on the
-------------
Closing Date will consist solely of 50,000,000 shares of Common Stock. All
outstanding shares of the Company, and the shares of Common Stock to be issued
to E*Trade will be, when issued, duly authorized, validly issued, fully paid and
non-assessable, and E*TRADE shall receive good and marketable title to the
shares, free and clear of all liens and encumbrances and not subject to any
preemptive or similar rights.
2.7 Stock Ownership. As of the Closing Date, 5,000,000 shares of Common
---------------
Stock are issued and outstanding, 4,000,000 of which are owned by Imperial Bank
and 1,000,000 of which are owned by Beranson Holdings, Inc.
2.8 Registration Statement. The Registration Statement and the
----------------------
prospectus and any supplement or amendment thereto comply as to form with the
Securities Act, and at the time the Registration Statement became effective or
on the date of this Agreement, the Registration
-2-
<PAGE>
Statement and the prospectus included therein did 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.
2.9 Brokers; Fees and Expenses. No broker, investment banker, financial
--------------------------
advisor or other person is entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the transactions
contemplated by this Agreement.
III.
REPRESENTATIONS and warranties of E*TRADE
-----------------------------------------
E*Trade represents and warrants that as of the date hereof and as of
the Closing:
3.1 Investment Intent. E*Trade is acquiring the Common Stock for its own
------------------
account for investment and not with a view to, or for sale or other disposition
in connection with, any distribution (within the meaning of the Securities Act)
thereof, nor with any present intention of selling or otherwise disposing of the
same subject, nevertheless, to any requirement of law that the disposition of
E*Trade's property shall at all times be within its control.
3.2 Sophistication, Financial Strength, Access, etc. E*Trade is a
------------------------------------------------
qualified institutional buyer (as that term is defined in Rule 144A promulgated
by the Securities and Exchange Commission under the Securities Act) and its
principal place of business is 4500 Bohannon Drive, Menlo Park, California,
94025. E*Trade acknowledges it is fully informed that the shares of Common Stock
being sold hereunder are being sold pursuant to a private offering exemption of
the Securities Act and are not being registered under the Securities Act or
under the securities or blue sky laws of any state or foreign jurisdiction; that
such shares of Common Stock must be held indefinitely unless they are
subsequently registered under the Securities Act and any applicable state
securities or blue sky laws, or unless an exemption from registration is
available thereunder; and that the Company has no obligation to register such
shares of Common Stock other than as described in Section 4 hereto.
3.3 Organization of E*Trade. E*Trade is a corporation duly organized,
-----------------------
validly existing and in good standing under the laws of the State of Delaware
and has all requisite power and authority to carry out the transactions provided
for in, or contemplated by, this Agreement.
3.4 No Conflict. The execution and delivery of this Agreement and
-----------
E*Trade's performance of its obligations hereunder will not (i) violate any
applicable law, ordinance, rule or regulation of any Governmental Authority or
(ii) conflict with or result in a breach of the terms and conditions of, or
constitute any default under, E*Trade's Certificate of Incorporation or Bylaws
or any contract, agreement or instrument to which E*Trade is a party or by which
E*Trade or any or any of its property is bound, except, in any such case, for
violations, conflicts or breaches which individually or in the aggregate would
not prohibit E*Trade from consummating the transactions contemplated hereby.
3.5 E*Trade Authorizations. This Agreement has been duly authorized by
----------------------
E*Trade. This Agreement has been duly executed and delivered by E*Trade and
constitutes the legal,
-3-
<PAGE>
valid and binding obligations of E*Trade, enforceable in accordance with its
terms, except as limited by bankruptcy, insolvency or other laws affecting the
enforcement of creditors' rights generally or by equitable principles in any
action (legal or equitable).
3.6 Due Diligence; Risks of Investment. E*Trade has conducted its own
----------------------------------
investigation of the Company and has been provided an opportunity to review
financial information of the Company and to obtain any information from the
Company necessary to make an informed investment in the Company, and is relying
solely on its own investigation and not on any representation or warranty,
express or implied, of the Company, other than those expressly contained in this
Agreement. E*Trade is aware that the investment in the Company has risks, and
E*Trade has read and understands the risk factors contained in the Registration
Statement.
IV.
REGISTRATION RIGHTS
-------------------
4.1 Demand Registration Rights.
--------------------------
(a) E*Trade shall have the right, exercisable once at any time
after nine (9) months following the date of the Initial Public Offering, subject
to paragraph (c) of this Section 4.1, (the "Demand Registration Right"), to
-----------
cause the Company to effect the registration under the Securities Act of any
number of shares of Common Stock held by E*Trade.
(b) E*Trade shall exercise its Demand Registration Right by making
a written request (a "Registration Request") to the Company, which Registration
Request shall state the number of shares of Common Stock requested to be
registered and specify the intended method or methods of disposition thereof.
Upon receipt of such Registration Request, the Company shall, as expeditiously
as is possible, use its best efforts to effect the registration under the
Securities Act of all shares of Common Stock which the Company has been so
requested to register by E*Trade for sale, all to the extent required to permit
the disposition (in accordance with the intended method or methods thereof, as
aforesaid) of the shares so registered.
(c) E*Trade shall not be entitled to exercise its Demand
Registration Right during the period within ninety (90) days after a
registration statement filed by the Company under the Securities Act has been
declared effective by the Securities and Exchange Commission.
(d) All expenses incurred in complying with this Section 4.1,
-----------
including, without limitation, all registration and filing fees, printing
expenses, fees and disbursements of counsel for the Company, expenses of any
special audits incident to or required by any such registration and expenses of
complying with the securities laws of any jurisdictions pursuant to Section
-------
4.3(a)(iv) hereof, shall be paid by E*Trade.
- ----------
4.2 Piggyback Registration Rights.
-----------------------------
(a) If, subsequent to six (6) months following the date of the
Initial Public Offering, the Company at any time proposes to file on its behalf
and/or on behalf of any of its
-4-
<PAGE>
security holders (the "demanding holders") a registration statement under the
Securities Act on any form (other than a registration statement on Form S-4 or
S-8 or any successor form for securities to be offered solely in a transaction
of the type referred to in Rule 145 under the Securities Act or to employees of
the Company pursuant to employee benefit plans) for the general registration of
securities to be sold for cash with respect to its Common Stock, it will give
written notice to E*Trade at least twenty (20) days before the initial filing of
such registration statement with the Securities and Exchange Commission, which
notice shall set forth the intended method of disposition of the securities
proposed to be registered by the Company ("Registration Notice"). The
Registration Notice shall offer to include in such filing the aggregate number
of shares of Common Stock as E*Trade may request, subject to the terms hereof.
If the registration of which the Company gives notice involves an underwritten
offering, E*Trade's right to participate in such offering shall be conditioned
upon E*Trade's entry into an underwriting agreement in customary form with the
underwriter or underwriters selected for such offering by the Company, and
E*Trade must sell its shares to such underwriters on the same terms and
conditions as apply to the Company and/or such other sellers of Common Stock, as
the case may be.
(b) E*Trade shall advise the Company in writing within fifteen (15)
days after the date of receipt of such offer from the Company of its election to
participate in such offering, and set forth the number of shares of Common Stock
for which registration is requested. The Company shall thereupon include in such
filing the number of shares of Common Stock for which registration is so
requested, subject to the next sentence, and shall use its best efforts to
effect registration under the Securities Act of such shares of Common Stock. If
the managing underwriter of a proposed offering shall advise the Company in
writing that, in its opinion, the distribution of shares of Common Stock
requested to be included in the registration concurrently with the securities
being registered by the Company or such demanding holders would materially and
adversely affect the distribution of such securities by the Company or such
demanding holders, then all selling holders (other than the Company or any
demanding holder that shall have initially requested such registration pursuant
to "demand registration" rights) shall reduce, on a pro rata basis, the amount
of securities each intended to distribute through such offering to a level
acceptable to such underwriter.
(c) Notwithstanding anything to the contrary contained in the
provisions of this Section 4.2, the Company shall have the right at any time
-----------
after it shall have given Registration Notice (irrespective of whether a written
request for inclusion of any Common Stock shall have been made by E*Trade) 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.
4.3 Registration Procedures.
-----------------------
(a) If the Company is required by the provisions of this Article IV
to effect the registration of shares of Common Stock under the Securities Act,
the Company will, as expeditiously as possible:
(i) prepare and file with the Securities and Exchange
Commission a registration statement with respect to such shares of
Common Stock and use its best efforts to cause such registration
statement to become and remain effective
-5-
<PAGE>
until the earlier to occur of the disposition of all the shares of
Common Stock sold thereunder or the expiration of 180 days;
(ii) prepare and file with the Securities and Exchange
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 and to
comply with the provisions of the Securities Act with respect to the
sale or other disposition of all securities covered by such
registration statement until the earlier of such time as all of such
shares of Common Stock have been disposed thereunder or the
expiration of 180 days;
(iii) furnish to such selling holders such number of
copies of a summary prospectus or other prospectus, including a
preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents (including any amendments
required to be filed pursuant to subsection (ii) above), as such
selling holders may reasonably request;
(iv) use its best efforts to register or qualify the
shares of Common Stock covered by such registration statement under
such other securities or Blue Sky laws of such jurisdictions as the
managing underwriter of the offering shall request (provided,
--------
however, the Company shall not be obligated to qualify as a foreign
-------
corporation to do business under the laws of any jurisdiction in
which it is not then qualified or to file any general consent to
service of process), and do such other reasonable acts and things as
may be required of it to enable such holder to consummate the
disposition in such jurisdiction of the securities covered by such
registration statement;
(v) furnish, at the request of E*Trade, on the date that
such shares of Common Stock are delivered to the underwriters for
sale pursuant to such registration or, if such shares of Common
Stock are not being sold through underwriters, on the date that the
registration statement with respect to such shares of Common Stock
becomes effective, (i) an opinion, dated such date, of the
independent counsel representing the Company for the purposes of
such registration, addressed to the underwriters, if any, and if
such shares of Common Stock are not being sold through underwriters,
then to the holders making such request, stating that such
registration statement has become effective under the Securities Act
and that (A) to the knowledge of such counsel, no stop order
suspending the effectiveness thereof has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the Securities Act, (B) the registration
statement, the related prospectus, and each amendment or supplement
thereto, comply as to form in all material respects with the
requirements of the Securities Act and the applicable rules and
regulations of the Securities and Exchange Commission thereunder,
(C) the descriptions in the registration statement or the
prospectus, or any amendment or supplement thereto, of all legal
matters and contracts and other legal documents or instruments are
accurate and fairly present the information with respect thereto
required to be shown in all material respects, and (D) such counsel
does not know of any legal or
-6-
<PAGE>
governmental proceedings, pending or contemplated, required to be
described in the registration statement or prospectus, or any
amendment or supplement thereto, which are not described as
required, nor of any contracts or documents or instruments of a
character required to be described in the registration statement or
prospectus, or any amendment or supplement thereto, or to be filed
as exhibits to the registration statement which are not described or
filed or incorporated by reference as required; such counsel shall
also confirm that he has no reason to believe that either the
registration statement or the prospectus, or any amendment or
supplement thereto (other than financial material as to which such
counsel need make no statement) contains any untrue statement of
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 in which they were made, not misleading; and
(ii) a letter dated such date, from the independent certified public
accountants of the Company, addressed to the underwriters, if any,
and if shares of Common Stock are not being sold through
underwriters, then to the holders making such request and, if such
accountants refuse to deliver such letter to such holders, then to
the Company stating that they are independent certified public
accountants, and that, in the opinion of such accountants, the
financial statements and other financial data of the Company
included in the registration statement or the prospectus, or any
amendment or supplement thereto, comply as to form in all material
respects with the applicable accounting requirements of the
Securities Act. Such opinion of counsel shall additionally cover
such other customary legal matters in respect of which such opinion
is being given as such holders may reasonably request. Such letter
from the independent certified public accountants shall additionally
cover such other financial matters (including information as to the
period ending not more than five (5) business days prior to the date
of such letter) with respect to the registration in respect of which
such letter is being given as the holders holding a majority of the
shares of Common Stock being so registered may reasonably request;
and
(vi) enter into customary agreements (including an
underwriting agreement in customary form) and take such other
actions as are reasonably required in order to expedite or
facilitate the disposition of such shares of Common Stock.
4.4 Indemnification and Contribution.
---------------------------------
(a) In the event of the filing to register any shares of Common
Stock under the Securities Act pursuant to this Article IV, the Company shall
indemnify and hold harmless E*Trade, E*Trade's directors and officers, and each
other Person, if any, who controls E*Trade within the meaning of the Securities
Act against any losses, claims, damages or liabilities, joint or several, to
which E*Trade or any such director or officer or controlling Person may become
subject under the Securities Act or any other statute or at common law, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon (i) any alleged untrue statement of any material
fact contained, on the effective date thereof or on the date of sale of any
shares of Common Stock, in any registration statement under which such shares of
Common Stock were registered under the Securities Act, any preliminary
prospectus or
-7-
<PAGE>
final prospectus contained therein, or any amendment or supplement thereto, or
(ii) any alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and shall
reimburse E*Trade or such director, officer or controlling Person for any legal
or any other expenses reasonably incurred by E*Trade or such director, officer
or controlling Person in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the Company
-------- -------
shall not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon any alleged untrue statement
or alleged omission made in such registration statement, preliminary prospectus,
prospectus or amendment or supplement in reliance upon and in conformity with
written information furnished to the Company by E*Trade specifically for use
therein. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of E*Trade or such director, officer or
controlling Person, and shall survive the transfer of such securities by
E*Trade.
(b) In the event of the filing to register any shares of Common
Stock under the Securities Act pursuant to this Article IV, E*Trade shall
indemnify and hold harmless the Company, its directors and officers, and each
other Person, if any, who controls the Company within the meaning of the
Securities Act against any losses, claims, damages or liabilities, joint or
several, to which the Company or any such director or officer or controlling
Person may become subject under the Securities Act or any other statute or at
common law, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon (i) any alleged untrue
statement of any material fact contained, on the effective date thereof or on
the date of sale of any shares of Common Stock, in any registration statement,
any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereto, or (ii) any alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and shall reimburse the Company or such director,
officer or controlling Person for any legal or any other expenses reasonably
incurred by the Company or such director, officer or controlling Person in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that E*Trade shall only be liable in any
-------- -------
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon any alleged untrue statement or alleged omission made in
such registration statement, preliminary prospectus, prospectus or amendment or
supplement in reliance upon and in conformity with written information furnished
by E*Trade to the Company specifically for use therein. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of the Company or such director, officer or controlling Person, and shall
survive the transfer of such securities by the Company.
(c) If the indemnification provided for in this Section 4.5 from
-----------
the indemnifying party is unavailable to an indemnified party hereunder in
respect of any losses, claims, damages, liabilities or expenses to which such
indemnified party would be otherwise entitled under Section 4.4(a) or 4.4(b),
then the 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 or expenses in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party and indemnified parties in connection with the actions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations; provided that, the liability of E*Trade shall
-------- ----
be limited to the proportion of any such loss, claim, damage or liability, which
is equal to the proportion that the
-8-
<PAGE>
public offering price of the shares of Common Stock sold by E*Trade bears to the
total public offering price of all securities sold pursuant to the registration
statement, but not to exceed the proceeds (net of underwriting discounts and
commissions) received by E*Trade from such sale. The relative fault of such
indemnifying party and indemnified parties shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information supplied by,
such indemnifying party or indemnified parties, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such action. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include any legal or other fees or expenses reasonably incurred by such party in
connection with any investigation or proceeding.
4.5 Information Concerning E*Trade. It shall be a condition precedent to
------------------------------
the obligation of the Company to take any action pursuant to this Article IV in
respect of the securities which are to be registered at the request of E*Trade
that E*Trade shall furnish to the Company such information regarding the shares
of Common Stock held by E*Trade and the intended method of disposition thereof
as the Company shall reasonably request and as shall be required by applicable
law in connection with the action taken by the Company.
4.6 Suspension of Company Obligations. Notwithstanding anything to the
---------------------------------
contrary set forth in this Agreement, the Company's obligation under this
Article IV to file any registration statement and to use its best efforts to
cause securities to be registered as provided herein shall be suspended if, in
the good faith determination of the Company's board of directors, effecting the
registration of securities would adversely affect a material financing,
acquisition, disposition of assets or stock, merger or other comparable
transaction, would violate any law, regulation or agreement of the Company, or
would require the Company to make public disclosure of information the public
disclosure of which would have a material adverse effect upon the Company (any
of such being hereinafter referred to as a "Suspension Event"), but such
suspension continue only for so long as such event or its effect is continuing.
The Company shall promptly notify E*Trade in writing of the existence of any
Suspension Event.
V.
PUT RIGHT
---------
5.1 Put Right of E*Trade. If an Initial Public Offering is not
--------------------
consummated within 120 days from the Closing Date, E*Trade shall have the right,
by giving written notice at any time thereafter to the Company, to cause the
Company to purchase all, but not less than all, of the shares of Common Stock
purchased by E*Trade hereunder at a price equal to the Purchase Price.
-9-
<PAGE>
VI.
CONDITIONS TO CLOSING
---------------------
6.1 E*Trade's obligation to purchase Common Stock at the Closing and to
consummate the other transactions contemplated herein, as provided in Article I
hereof, shall be subject to the satisfaction of the following condition, which
may be waived by E*Trade in writing:
Representations and Warranties True at Closing; Non-Occurrence of
-----------------------------------------------------------------
Default. The representations and warranties contained in Article II hereof shall
- -------
be true as of the Closing Date, there shall exist no condition, event or fact
constituting, or which, with notice or passage of time or both, would constitute
a material default in the observance of any of the Company's undertakings or
covenants hereunder, and no material adverse change shall have occurred in the
business, property, results of operations or condition (financial or otherwise)
of the Company.
VII.
COVENANTS OF E*TRADE
--------------------
7.1 Restrictive Legends. E*Trade agrees to the placement of a legend on
-------------------
the shares of Common Stock purchased by E*Trade, which legend shall be
substantially in the form as follows:
"These securities are not registered under State or U.S. Federal Securities
Laws and may not be offered, sold, pledged, hypothecated or otherwise
distributed or transferred for value, nor may these securities be
transferred on the books of the Company in the absence of such registration
unless the Company has been furnished with an opinion of counsel
satisfactory to the Company that registration is not required."
7.2 Lock-Up Agreement. Concurrently with the Initial Public Offering,
-----------------
E*Trade will enter into a lock up agreement with respect to the shares of Common
Stock to be purchased pursuant to this Agreement, in the form attached hereto as
Exhibit 6.2, and such lock up agreement will become effective upon completion of
an Initial Public Offering of at least 3,000,000 shares offered for at least $10
per share.
7.3 Transfer Restrictions. E*Trade agrees not to transfer the shares
---------------------
purchased hereby between the Closing Date and the date in which the lock up
period expires, except if pursuant to the put right described in Section 5.1
hereof.
7.4 Right of First Refusal.
----------------------
(a) During any time prior to an Initial Public Offering, in the
event that E*Trade receives a bona fide offer (a "Transfer Offer") to purchase
for cash any or all of the shares of Common Stock purchased hereunder (for
purposes of this Section 7.4 only, the "Transfer Stock") from any third party
-----------
(the "Offeror") that E*Trade wishes to accept, E*Trade shall cause
-10-
<PAGE>
the Transfer Offer to be reduced to writing and shall provide a written notice
of such Transfer Offer (the "Transfer Notice") to the Company. The Transfer
Notice shall also contain an irrevocable offer to sell the Transfer Stock to the
Company at a price equal to the price, and upon substantially the same terms,
contained in the Transfer Offer and shall be accompanied by a true and correct
copy of the Transfer Offer (which shall identify the Offeror, the price
contained in the Transfer Offer and all other terms and conditions of the
Transfer Offer). The Company shall have the irrevocable right and option, within
twenty-five (25) days after the date the Transfer Notice is given (the "Notice
Period"), to accept such offer as to any shares of the Transfer Stock. If the
Company desires to exercise such option, it shall provide E*Trade with written
notice (specifying the number of shares of the Transfer Stock as to which the
Company is accepting the offer) within the Notice Period, and it shall
consummate the purchase within 30 days after the expiration of the Notice
Period.
(b) If at the end of the applicable notice period described in
Section 7.4(a) above, the Company shall not have accepted the offer contained in
such notice as to all the Transfer Stock covered thereby, E*Trade shall have
ninety (90) days in which to sell any or all of the Transfer Stock to the
Offeror at a price not less than that contained in the Transfer Notice and on
terms not more favorable to the Offeror than were contained in the Transfer
Notice. Promptly after any sale pursuant to this Section 7.4(b), E*Trade shall
notify the Company of the consummation thereof and shall furnish such evidence
of the completion (including time of completion) of such sale and of the terms
thereof as the Company may request. If, at the end of such 90 day period,
E*Trade has not completed the sale of all of the Transfer Stock, E*Trade shall
no longer be permitted to sell such shares pursuant to this Section 7.3 without
again fully complying with the provisions of this Section 7.4 and all the
restrictions on sale, transfer or assignment contained in this Agreement shall
again be in effect with respect to all of E*Trade's shares of Common Stock,
including the Transfer Stock.
VIII.
TERMINATION
-----------
8.1 This Agreement may be terminated at any time before the Closing
Date: (a) by mutual written consent of each of the Company and E*Trade; (b) by
E*Trade, if the Company shall have breached in any material respect any of its
representations and warranties contained in Article II; or (c) by the Company,
if E*Trade shall have breached in any material respect any of its
representations and warranties contained in Article III.
IX.
DEFINITIONS
-----------
For the purposes of this Agreement, the following terms shall have the
following meanings:
"Agreement" shall mean, and the words "herein," "hereof," "hereunder" and
---------
words of similar import shall refer to this Agreement and any amendment or
supplement hereto.
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<PAGE>
"Closing" shall have the meaning set forth in Section 1.2 hereof.
------- ------------
"Closing Date" shall have the meaning set forth in Section 1.2 hereof.
------------ ------------
"Company" shall have the meaning set forth in the introductory paragraph of
-------
this Agreement.
"Governmental Authority" shall mean (a) the government of (i) the United
----------------------
States of America or any state or other political subdivision thereof, or (ii)
any jurisdiction in which the Company conducts all or any part of its business,
or (b) any entity exercising executive, legislative, judicial, regulatory or
administrative functions of, or pertaining to, any such government.
"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.
"Material Adverse Effect" shall have the meaning set forth in Section 2.1
----------------------- -----------
hereof.
"Person" shall mean an individual, partnership, corporation, business
------
trust, joint stock company, limited liability company, trust, unincorporated
association, joint venture or other entity of whatever nature.
"Registration Statement" shall mean the registration statement on Form S-1,
----------------------
and the prospectus included therein, prepared by the Company relating to the
Initial Public Offering.
"Securities Act" shall mean the Securities Act of 1933, as amended prior to
--------------
or after the date of this Agreement, or any federal statute or statutes which
shall be enacted to take the place of such Act, together with all rules and
regulations promulgated thereunder.
"Securities and Exchange Commission" shall mean the United States
----------------------------------
Securities and Exchange Commission or any successor to the functions of such
agency.
X.
MISCELLANEOUS
-------------
10.1 Amendment and Waiver.
--------------------
(a) Any term, covenant, agreement or condition contained in this
Agreement may be amended, or compliance therewith may be waived (either
generally or in particular instances and either retroactively or prospectively),
by written instruments signed by E*Trade and the Company.
(b) This Agreement shall not be altered, amended or supplemented
except by a written instrument. Any waiver of any term, covenant, agreement or
-12-
<PAGE>
condition contained in this Agreement shall not be deemed a waiver of any other
term, covenant, agreement or condition, and any waiver of any default in any
such term, covenant, agreement or condition shall not be deemed a waiver of any
later default thereof or of any other term, covenant, agreement or condition. No
delay on the part of either party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof.
10.2 Lost Securities. Upon receipt by the Company of evidence
---------------
satisfactory to it of the loss, theft, destruction or mutilation of any
certificate of Common Stock and (in case of loss, theft or destruction) receipt
of indemnity satisfactory to it, and upon surrender and cancellation of such
Common Stock certificate, if mutilated, the Company will make and deliver, in
lieu of such Common Stock certificate, a new Common Stock certificate of like
tenor. Any Common Stock certificate made and delivered in accordance with the
provisions of this Section 10.2 shall be dated as of the date of the Common
-------------
Stock certificate is made and delivered. If E*Trade is the beneficial owner of
such lost, stolen or destroyed Common Stock certificate, then the affidavit of
E*Trade president (or other chief executive officer) and any vice president or
treasurer, setting forth the fact of loss, theft or destruction and E*Trade's
beneficial ownership of such Common Stock certificate at the time of such loss,
theft or destruction shall be accepted as satisfactory evidence thereof, and,
except as required by law, no indemnity shall be required as a condition to
execution and delivery of a new Series A Preferred certificate other than
E*Trade's written agreement to indemnify the Company and its directors, officers
and agents.
10.3 Survival of Covenants; Termination of Representations and
---------------------------------------------------------
Warranties. All covenants contained herein shall survive the execution and
- ----------
delivery of this Agreement and the issuance and sale or other transfer of Common
Stock hereunder; provided, however, that all representations and warranties
contained herein (other than those in Section 2.6, which shall survive
indefinitely) shall terminate upon the Initial Public Offering pursuant to the
Registration Statement.
10.4 Severability. In the event that any court or any Governmental
------------
Authority or agency declares all or any part of this Agreement to be unlawful or
invalid, such unlawfulness or invalidity shall not serve to invalidate any other
part of this Agreement, and in the event that only a portion of any Section is
so declared to be unlawful or invalid, such unlawfulness or invalidity shall not
serve to invalidate the balance of such Section.
10.5 Successors and Assigns. All representations, warranties, covenants
----------------------
and agreements of the parties contained in this Agreement, shall, except as
otherwise provided herein, be binding upon and inure to the benefit of their
respective successors and assigns.
10.6 Notices. All notices and other communications required or permitted
-------
hereunder shall be in writing, shall be deemed duly given upon actual receipt,
and shall be delivered (a) in person, (b) by registered or certified mail (air
mail if addressed to an address outside of the country in which mailed), postage
prepaid, return receipt requested, (c) by a generally recognized overnight
courier service which provides written acknowledgment by the addressee of
receipt, or (d) by facsimile or other generally accepted means of electronic
transmission (provided that a copy of any notice delivered pursuant to this
clause (d) shall also be sent pursuant to clause (b)), addressed as follows:
-13-
<PAGE>
(i) If to the Company:
Official Payments Corporation
445 Park Avenue, 10th Floor
New York, New York 10022
Attention: Brian W. Nocco
with a copy to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Attention: Dennis J. Block, Esq.
(212) 504-5555 (telephone)
(212) 504-5557 (facsimile)
(ii) If to E*Trade:
E*TRADE Group, Inc.
4500 Bohannon Drive
Menlo Park, California 94025
Attention: Thomas A. Bevilacqua
(650) 331-6000 (telephone)
(650) 331-6803 (facsimile)
with a copy to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, California 94303
Attention: Curtis L. Mo, Esq.
(650) 424-0160 (telephone)
(650) 496-2885 (facsimile)
10.7 Successors and Assigns. The provisions of this Agreement shall be
----------------------
binding upon and inure to the benefit of the parties hereto and their respective
heirs, successors and permitted assigns. Neither this Agreement nor any right,
remedy, obligation or liability arising hereunder or by reason hereof shall be
assignable by either party without the prior written consent of the other;
provided, however, that E*Trade may assign its rights and obligations hereunder,
- -------- -------
without the written consent of the Company, to an affiliated subsidiary or
affiliated fund of E*Trade that is either a qualified institutional buyer as
defined in Rule 144A or a large institutional accredited investor as defined in
Rule 501, as both are promulgated under the Securities Act.
10.8 Governing Law. The validity, meaning and effect of this Agreement
-------------
shall be determined in accordance with the domestic laws of the State of New
York applicable to
-14-
<PAGE>
contracts made and to be performed in that state without giving effect to any
choice or conflict of law provision or rule (whether in the State of New York or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of New York.
10.9 Counterparts. This Agreement may be executed in counterparts, each
------------
of which shall be deemed an original but both of which shall together constitute
one and the same document.
10.10 Headings. The headings used herein are solely for the convenience of
--------
the parties and shall not constitute a part hereof or serve to modify or
interpret the text.
10.11 Entire Agreement; Exhibits. This Agreement and the Exhibits hereto
--------------------------
constitute and encompass the entire agreement and understanding of the parties
hereto with regard to the transactions contemplated or provided for herein.
-15-
<PAGE>
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the
day first above written.
OFFICIAL PAYMENTS CORPORATION
By: /s/ Brian W. Nocco
------------------------------
Name: Brian W. Nocco
Title: Chief Financial Officer
E*TRADE GROUP, INC.
By: /s/ Thomas Bevilacqua
------------------------------
Name: Thomas Bevilacqua
Title: EVP, Corporate Development
-16-
<PAGE>
Exhibit 7.2
November __, 1999
Official Payments Corporation
2333 San Ramon Valley Boulevard, Suite 450
San Ramon, California 94583
Donaldson, Lufkin & Jenrette Securities Corporation
CIBC World Markets Corp.
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
The undersigned understands that Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") and CIBC World Markets Corp., as Representatives of the
several underwriters (all of the foregoing hereinafter collectively being
referred to as the "Underwriters"), propose to enter into an Underwriting
Agreement with Official Payments Corporation (the "Company"), providing for the
initial public offering (the "Initial Public Offering") of common stock, par
value $.01 per share (the "Common Stock") of the Company.
To induce the Underwriters that may participate in the Initial Public
Offering to continue their efforts in connection with the Initial Public
Offering, the undersigned, during the period commencing on the date hereof and
ending 180 days after the date of the final prospectus relating to the Initial
Public Offering:
(i) agrees not to (x) 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 (including, without
limitation, shares of Common Stock or securities convertible into or exercisable
or exchangeable for Common Stock which may be deemed to be beneficially owned by
the undersigned in accordance with the rules and regulations of the Securities
and Exchange Commission) or (y) 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 (x) or (y) is to be settled by the delivery of Common Stock,
or such other securities, in cash or otherwise), without the prior written
consent of DLJ; provided, however, that the provisions of this paragraph (i)
------------------
shall not apply to transactions (each, a "Transaction") between the undersigned,
on the one hand, and any corporation, partnership, limited liability company or
other entity which is wholly owned by the undersigned or E*TRADE Electronic
Commerce Fund, L.P. (each, an Affiliate"), on the other hand, and only if: (aa)
each such Affiliate agrees in writing to be bound by this letter agreement to
the same extent as the undersigned, (bb) each such Affiliate remains wholly
owned by the undersigned at all times during the period commencing on the date
of the first Transaction with such Affiliate and ending 180 days after the date
of the final prospectus relating to the Initial Public Offering, and
<PAGE>
(cc) the aggregate number of Affiliates which are a party to one or more
Transactions does not exceed three (3);
(ii) agrees not to 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, without the
prior written consent of DLJ; and
(iii) authorizes the Company to cause the transfer agent to decline to
transfer and/or to note stop transfer restrictions on the transfer books and
records of the Company with respect to any shares of Common Stock and any
securities convertible into or exercisable for Common Stock for which the
undersigned is the record holder and, in the case of any such shares or
securities for which the undersigned is the beneficial but not the record
holder, agrees to cause the record holder to cause the transfer agent to decline
to transfer and/or to note stop transfer restrictions on such books and records
with respect to such shares or securities.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to enter into the agreements set forth herein, and
that, upon request, the undersigned will execute additional documents necessary
(not involving any additional warranties or obligations on the part of the
undersigned) in connection with the enforcement hereof. All authority herein
conferred or agreed to be conferred shall survive the death or incapacity of the
undersigned and any obligations of the undersigned shall be binding upon the
heirs, personal representatives, successors, and assigns of the undersigned.
Very truly yours,
E*TRADE GROUP, INC.
By:
------------------------------
Name:
Title:
- -----------------------------------
(Social Security or Taxpayer Identification No.)
Number of shares of Common Stock owned:
----------
Certificate Numbers:
----------
Number of shares of _______________________
[list names of securities that are convertible into,
or exercisable or exchangeable for, Common Stock]:
----------
Number of shares of Common Stock issuable upon
conversion, exercise or exchange of such securities:
----------
-2-
<PAGE>
Certificate Numbers:
----------
-3-
<PAGE>
Exhibit 10.9
PROCESSING AGREEMENT
This Agreement made as of July 16, 1995, by and between IMPERIAL Bank,
("IMPERIAL"), a California state banking corporation organized under the laws of
the State of California, organized under the laws of the State of California and
U.S. Audiotex, LLC. ("COMPANY"), a limited liability company with principal
offices located at 18 Crow Canyon Court, Suite 300, San Ramon, California 94583.
A. COMPANY provides services to government and private merchants
("MERCHANTS"). COMPANY is an independent contractor, not an employee or agent
of IMPERIAL, and is entitled to none of the benefits accorded IMPERIAL
employees.
B. IMPERIAL is a member of Visa USA, Inc. ("VISA") and MasterCard
International, Inc. ("MASTERCARD"), and provides processing and other services
regarding MASTERCARD and VISA sales transactions ("SALES"). VISA and MASTERCARD
are herein jointly referred to as the "ASSOCIATIONS".
C. MASTERCARD, VISA and IMPERIAL have adopted rules, regulations and
directives relating to all aspects of SALES and SALES processing. Such rules,
regulations and directives, as amended from time to time, are herein called the
"RULES."
For good and valuable consideration, COMPANY and IMPERIAL agree as
follows:
1. COMPANY will provide the following services to MERCHANTS:
A. Place terminals at MERCHANT locations
1. Training for employees
2. Customer Service
3. Coding
B. Provide MERCHANTS with P.O.S. Deployment "Help-Desk" services
including:
1. The procurement, deployment, repair, programming and
shipment of electronic payment processing terminals to
MERCHANT locations;
2. The training of MERCHANTS in the use of electronic
terminal equipment; and
3. The monitoring of the usage of electronic terminal
equipment and the availability to
<PAGE>
assist MERCHANTS via telephone with problems related to
the usage of electronic terminal equipment.
2. IMPERIAL shall provide processing and clearance of Credit and Debit
Card Sales transactions and payment for such transactions directly with
MERCHANT.
3. IMPERIAL agrees to sponsor COMPANY as an independent service provider
pursuant to the RULES during the term of this Agreement so long as COMPANY shall
maintain acceptable registration as an agent of IMPERIAL pursuant to the RULES.
This requirement will be waived if deemed not necessary by MasterCard Visa
regulations.
4. COMPANY agrees to use its best efforts to use IMPERIAL as its provider
of processing and clearance of Credit and Debit Card Sales transactions. COMPANY
agrees to abide by all RULES. IMPERIAL agrees to provide any changes in the
RULES promptly (usually within ten days) in writing to COMPANY.
5. IMPERIAL agrees to facilitate settlement of electronic transmissions
(or other media acceptable to IMPERIAL) of SALES originated by MERCHANTS
accepted by IMPERIAL and thereafter transmit the same to appropriate
interchanges for settlement. IMPERIAL agrees to receive and or facilitate from
the MASTERCARD and VISA systems such credits and debits ("CHARGEBACKS") as are
attributable to such transactions. Neither COMPANY nor MERCHANT shall receive
credit for such SALES until IMPERIAL receives credit from MASTERCARD or VISA.
Notwithstanding anything to the contrary herein, COMPANY shall be offered its
choice of various network services used by IMPERIAL for processing transactions
of MERCHANTS signed by COMPANY, and COMPANY may choose any such services which
IMPERIAL, using its business judgment, agrees COMPANY is capable of properly
utilizing, which agreement IMPERIAL shall not unreasonably withhold, and
provided that COMPANY will not require IMPERIAL to approve any services that
would cause IMPERIAL to breach its service agreement with First Data
Corporation. For the same to be offered to MERCHANTS, and be approved by
IMPERIAL, will require a separate written contract between the parties and that
the parties negotiate and reach agreement on numerous credit and performance
issues. IMPERIAL will commence such negotiations whenever COMPANY desires.
6. COMPANY will train MERCHANTS and will use its reasonable efforts to
require the MERCHANTS compliance with all RULES. COMPANY shall report to
IMPERIAL any fees it charges to MERCHANTS. No change to such fees shall be
implemented by COMPANY except as set forth herein, or as otherwise may be in
- 2 -
<PAGE>
compliance with RULES and any contracts between IMPERIAL and MERCHANTS.
7. COMPANY will not have liability for CHARGEBACKS or other losses
resulting from SALES and processing contracts between IMPERIAL and individual
MERCHANTS.
8. For the services rendered by IMPERIAL and to pay IMPERIAL for use of
VISA and MASTERCARD interchanges, IMPERIAL is authorized to retain from SALES
revenues the fees ("FEES") described on the attached Exhibit A, which may be
amended as provided in such Exhibit.
9. IMPERIAL is not liable nor responsible for any failure or delay in
performance caused by acts of God, strikes, flood, fire, war, public enemy,
electrical or equipment failure, failures by third parties, or other events
beyond its control.
10. IMPERIAL shall keep confidential and disclose to no other person,
firm or entity, other than VISA or MASTERCARD, the schedule of FEES, the RULES,
the methods of doing business of COMPANY, or the identity of the MERCHANTS or
their business addresses. COMPANY shall keep confidential, and disclose during
the term of this agreement or following its termination, to no other person,
firm or entity, other than VISA or MASTERCARD, the schedule of FEES, the RULES,
IMPERIAL'S method of doing business, or the identity of the MERCHANTS or their
business addresses, except as required by applicable law, including federal and
state securities law.
11. The initial term of this Agreement shall begin as of July 16, 1996;
provided, however, this Agreement shall automatically renew for successive
annual terms following the expiration of the initial term or any renewal thereof
unless a party shall provide the other party written notice of nonrenewal at
least 90 days prior to the commencement of the additional renewal term, or
unless this Agreement is otherwise terminated pursuant to the terms hereof.
12. COMPANY may terminate this agreement, by sending written notice to
IMPERIAL, for any of the following reasons: (i) a default by IMPERIAL of its
obligations to COMPANY hereunder and the failure to cure such default within
thirty days after written notice by COMPANY of such default; or (ii) in the
event of insolvency or receivership of IMPERIAL, or in the event that a
substantial part of IMPERIAL'S property is or becomes subject to any levy,
seizure, assignment or sale for or by any creditor or governmental agency
without being released or satisfied within thirty days thereafter, or (iii) if
IMPERIAL fails to abide by any of the RULES; or (iv) in the event of a merger,
stock
- 3 -
<PAGE>
exchange or the sale of substantially all of the assets of IMPERIAL or any
subsidiary comprising more than 30% of IMPERIAL'S assets.
13. IMPERIAL may terminate this agreement by sending written notice to
COMPANY, for any of the following reasons: (i) a default by COMPANY of its
obligations to IMPERIAL hereunder and the failure to cure such default within
thirty days after written notice by IMPERIAL of such default; or (ii) in the
event of insolvency, receivership or voluntary or involuntary bankruptcy or
COMPANY, in the event of an assignment for the benefit of COMPANY's creditors,
or in the event that a substantial part of COMPANY's property is or becomes
subject to any levy, seizure, assignment or sale for or by any creditor or
governmental agency without, being released or to make any payment required
hereunder when due or is in breach of Section 6(b), or (iv) if COMPANY fails to
abide by any of the RULES.
14. A. COMPANY shall make no representations to any entity, including
MERCHANTS, as to IMPERIAL. COMPANY is not authorized to commit IMPERIAL to any
contractual forms with any MERCHANT. COMPANY hereby agrees to hold IMPERIAL,
MASTERCARD and VISA harmless and indemnify them from any loss, cost or damages
suffered by them as the result of failure of COMPANY to abide by the covenants
contained herein or the duties described in the RULES.
B. IMPERIAL shall indemnify, defend and hold harmless the COMPANY,
its employees, officers, directors, shareholders, agents, corporate parents and
affiliates against any and all liability, loss, damage, cost or expense directly
or indirectly related or attributable to (i) IMPERIAL'S negligence or misconduct
in performance hereunder, or IMPERIAL's breach of this Agreement or any
provision hereof, and (ii) any action or claim brought against COMPANY by
MERCHANTS concerning actions or inaction by IMPERIAL pursuant to this Agreement.
15. If COMPANY substantially fails to provide services to MERCHANTS
required under this Agreement for three days after notice to COMPANY, IMPERIAL
may provide services to MERCHANTS at the FEES identified in Exhibit A, after
notice to COMPANY. As to any particular service not provided by COMPANY,
IMPERIAL may provide such service on request of MERCHANT, and charge COMPANY the
scheduled FEE for such service.
16. COMPANY shall not use the name of IMPERIAL either verbally or in
writing without prior written consent of IMPERIAL. COMPANY and IMPERIAL agree
that VISA and MASTERCARD have the right to perform procedural reviews of COMPANY
and any MERCHANTS,
- 4 -
<PAGE>
and the parties agree to cooperate to assure VISA and MASTERCARD receive program
data as required by VISA and MASTERCARD.
17. In the event of the termination of this Agreement other than pursuant
to Section 12 of this Agreement, IMPERIAL agrees to renew and extend those
MERCHANT contracts acquired by COMPANY from IMPERIAL, and to continue to pay
"RESIDUAL COMPENSATION" to COMPANY, in accordance with this Agreement, for a
period not to exceed 36 months after termination of this Agreement and so long
as the MERCHANTS continue to provide to those MERCHANTS the services stipulated
herein. RESIDUAL COMPENSATION is the difference between the discount charged to
the MERCHANT by IMPERIAL for sales processing and the applicable FEES described
on the attached Exhibit A. The provisions contained in Section 6 of this
Agreement shall survive termination for the duration of the period IMPERIAL pays
residual compensation to COMPANY pursuant to the terms of this Section 17.
18. It is the intention of the parties hereto that COMPANY shall not have
the right at any time to solicit MERCHANTS for transfer or to assign MERCHANTS
contracts (such solicitation and assignment are herein collectively referred to
as "TRANSFER"), MERCHANTS' files, MERCHANTS' records (paper and fiche), BINs,
ICAs and FDR systems relating to MERCHANTS' accounts and utilized by COMPANY to
other members of the ASSOCIATIONS in competition with IMPERIAL.
19. This Agreement, along with the exhibits attached to said Agreement and
all, documents referred to in said Agreement, contains the entire understanding
between the parties hereto for the purposes set forth above. This Agreement may
not be altered, amended or modified except in writing executed by a duly
authorized representative of each party.
20. This Agreement is not assignable, by either party without the written
consent of the other party.
21. This Agreement is to be interpreted and construed under the laws of
the State of California.
22. Time is of the essence in this Agreement.
IN WITNESS WHEREOF, the parties have set their hands on the date first set
forth above.
IMPERIAL BANK U.S Audiotex, LLC.
By: /s/ William Capps By: /s/ Kenneth Stern
--------------------------- ---------------------------
Its: Exec. V.P. Its: President
-------------------------- --------------------------
- 5 -
<PAGE>
EXHIBIT A
Merchant discount fees charged to U.S. Audiotex, LLC will be agreed upon between
Imperial Bank and U.S. Audiotex, LLC on an individual merchant basis. Merchant
discount fees will be those customary and usually charged for similar merchant
credit card processing services.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SOLICITATION/CONTRACT/ORDER FOR COMMERCIAL ITEMS 1. REQUISITION NUMBER PAGE 1 OF
OFFEROR TO COMPLETE BLOCKS 12,17,23,24, & 30 0-9-N8-07-07-A39 001 24
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2. CONTRACT NO. 3. AWARD/EFFECTIVE 4. ORDER NUMBER 5. SOLICITATION NUMBER 6. SOLICITATION ISSUE
TIRNO-99-C-00033 DATE 09/30/1999 DATE
- -----------------------------------------------------------------------------------------------------------------------------------
7. FOR SOLICITATION a. NAME b. TELEPHONE NUMBER (No collect call) 8. OFFER DUE DATE/
INFORMATION CALL: LOCAL TIME
- -----------------------------------------------------------------------------------------------------------------------------------
9. ISSUED BY CODE irs0088 10. THIS ACQUISITION IS 11. DELIVERY FOR 12. DISCOUNT TERMS
------------
[] UNRESTRICTED DESTINATION UNLESS Discount: 0%
INTERNAL REVENUE SERVICE [] SET ASIDE: % FOR BLOCK IS MARKED Days: 0
A/C PROCUREMENT Suite 700 [] SMALL BUSINESS [] SEE SCHEDULE Net due: 30
-------------------------------------------------
6009 OXON HILL ROAD [] SMALL DISADV. BUSINESS [] 13a. THIS CONTRACT IS A RATED ORDER
OXON HILL, MD 20743 [] 9 (A) UNDER DPAS(15 CFR 700)
-------------------------------------------------
13b. RATING
-------------------------------------------------
SIC: 14. METHOD OF SOLICITATION
SIZE STANDARD: [] RFQ [] IFS [] RFP
- -----------------------------------------------------------------------------------------------------------------------------------
15. DELIVER TO CODE 20706210 16. ADMINISTERED BY CODE irs0088
------------ ------------
Internal Revenue Service, OP:ETA:E INTERNAL REVENUE SERVICE
ATTN: Linda Rickard, C4-332 NCFB A/C PROCUREMENT Suite 700
5000 Ellin Road 6009 OXON HILL ROAD
Lanham, MD 20706 OXON HILL, MD 20745
- -----------------------------------------------------------------------------------------------------------------------------------
17a. CONTRACTOR/ 50463 FACILITY 18a. PAYMENT WILL BE MADE BY CODE
OFFEROR CODE --------- CODE ------------ --------
US Audiotax Corporation Not Applicable
Steven R. Johnson
2333 San Ramon Valley Boulevard
San Ramon, CA 94583
TELEPHONE NO. 925-838-7996
- -----------------------------------------------------------------------------------------------------------------------------------
[] 17b. CHECK IF REMITTANCE IS DIFFERENT AND PUT SUCH ADDRESS 18b. SUBMIT INVOICES TO ADDRESS SHOWN IN BLOCK 18a UNLESS BLOCK
IN OFFER BELOW
IS CHECKED [] SEE ADDENDUM
- -----------------------------------------------------------------------------------------------------------------------------------
19. 20. 21. 22. 23. 24.
ITEM NO. SCHEDULE OF SUPPLIES/SERVICES QUANTITY UNIT UNIT PRICE AMOUNT
See attached schedule
(Attach Additional Sheets as Necessary)
- ------------------------------------------------------------------------------------------------------------------------------------
25. ACCOUNTING AND APPROPRIATION DATA 26. TOTAL AWARD AMOUNT (For Govt. Uses Only)
0.00
- -----------------------------------------------------------------------------------------------------------------------------------
[] 27a. SOLICITATION INCORPORATES BY REFERENCE FAR 62.212-1, 62.212-4. FAR 62.212-3 AND 62.212-5 ARE ATTACHED. ADDENDA
[] ARE [] ARE NOT ATTACHED.
[] 27b. CONTRACT/PURCHASE ORDER INCORPORATES BY REFERENCE FAR 62.212-4, FAR 62.212-5 IS ATTACHED. ADDENDA [X] ARE
[] ARE NOT ATTACHED.
- -----------------------------------------------------------------------------------------------------------------------------------
28. CONTRACTOR IS REQUIRED TO SIGN THIS DOCUMENT AND RETURN 3 COPIES 29. AWARD OF CONTRACT: REFERENCE ________ OFFER
------
[X] TO ISSUING OFFICE. CONTRACTOR AGREES TO FURNISH AND DELIVER ALL ITEMS SET [] DATED ____ .YOUR OFFER ON SOLICITATION
FORTH OR OTHERWISE IDENTIFIED ABOVE AND ON ANY ADDITIONAL SHEETS (BLOCK 5), INCLUDING ANY ADDITIONS OR CHANGES
SUBJECT TO THE TERMS AND CONDITIONS SPECIFIED HEREIN. WHICH ARE SET FORTH HEREIN IS ACCEPTED AS TO
ITEMS:
- -----------------------------------------------------------------------------------------------------------------------------------
30a. SIGNATURE OF OFFEROR/CONTRACTOR 31a. UNITED STATES OF AMERICA (SIGNATURE OF CONTRACTING OFFICER)
/s/ Kenneth Stern /s/ Jeffrey P. Petrino
- -----------------------------------------------------------------------------------------------------------------------------------
30b. NAME AND TITLE OF SIGNER (TYPE OR PRINT) 30c. DATE SIGNED 31b. NAME OF CONTRACTING OFFICER (TYPE OR PRINT) 31c. DATE SIGNED
Kenneth Stern, President 9/30/99 Jeffrey P. Petrino 9/30/99
- -----------------------------------------------------------------------------------------------------------------------------------
32a. QUANTITY IN COLUMN 21 HAS BEEN 33. SHIP NUMBER 34. VOUCHER NUMBER 35. ACCOUNT VERIFIED
ACCEPTED, AND CONFORMS TO THE CORRECT FOR
[] RECEIVED [] INSPECTED [] EXCEPT AS NOTED PARTIAL FINAL
- -----------------------------------------------------------------------------------------------------------------------------------
32b. SIGNATURE OF AUTHORIZED GOVT. REPRESENTATIVE 32c. DATE 36. PAYMENT 37. CHECK NUMBER
[] COMPLETE [] PARTIAL [] FINAL
--------------------------------------------------------------------
38. S/R ACCOUNT NUMBER 39. S/R VOUCHER NUMBER 40. PAID BY
- -----------------------------------------------------------------------------------------------------------------------
41a. I CERTIFY THIS ACCOUNT IS CORRECT AND PROPER FOR PAYMENT 42a. RECEIVED BY (Print)
- --------------------------------------------------------
41b. SIGNATURE AND TITLE OF CERTIFYING OFFICER 41c. DATE 42b. RECEIVED AT (Location)
- --------------------------------------------------------
42c. DATE REC'D (YY/MM/DD) 42d. TOTAL CONTAINERS
- -----------------------------------------------------------------------------------------------------------------------------------
AUTHORIZED FOR LOCAL REPRODUCTION STANDARD FORM 1449 (10-96)
Prescribed by GSA FAR (48 CFR) 53.21
</TABLE>
TIRNO-99-C-00033
<PAGE>
<TABLE>
<CAPTION>
ITEM DESCRIPTION QUANTITY U/I UNIT PRICE AMOUNT
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
1001 Pilot of Integrated Electronic Filing 1.00 EA 0.000000 0.00
and Payment of Individual Income Tax by
Credit Card for Tax Year 1999/Filing
Season 2000
</TABLE>
Page 1A
<PAGE>
SECTION C - CONTRACT TERMS AND CONDITIONS
-----------------------------------------
C.1 CONTRACT TERMS AND CONDITIONS - COMMERCIAL
ITEMS FAR 52.212-4 (MAR 1999)........................................Page 4
C.2 STATEMENT OF WORK - ADDENDUM TO FAR 52.212-4.........................Page 7
C.2.1 INTRODUCTION..................................................Page 7
C.2.2 GENERAL REQUIREMENTS..........................................Page 7
C.2.3 DUTIES AND RESPONSIBILITIES OF THE
CONTRACTOR....................................................Page 7
C.2.4 DUTIES AND RESPONSIBILITIES OF THE GOVERNMENT............... Page 11
C.2.5 DELIVERABLES.................................................Page 12
C.2.5.1 PILOT FINDINGS REPORT.................................Page 12
C.2.5.2 MONTHLY STATUS REPORT.................................Page 12
C.2.5.3 RECURRING TRANSACTION REPORTS.........................Page 13
C.2.6 PILOT SUCCESS DETERMINATION..................................Page 13
C.2.7 SCHEDULE OF PERFORMANCE......................................Page 14
C.2.8 PERFORMANCE REQUIREMENTS.....................................Page 14
C.3 AUTHORITY - CONTRACTING OFFICER, CONTRACTING
OFFICER'S TECHNICAL REPRESENTATIVE AND
CONTRACTOR'S PROJECT MANAGER........................................Page 15
C.3.1 ADMINISTRATIVE CONTRACTING OFFICER...........................Page 15
C.3.2 CONTRACTING OFFICER'S TECHNICAL
REPRESENTATIVE...............................................Page 15
C.3.3 PROJECT MANAGER..............................................Page 16
C.4 CONTRACT CORRESPONDENCE.............................................Page 16
C.5 DISCLOSURE OF INFORMATION--SAFEGUARDS (IRSAP
1052.224-9000)(JAN 1998)............................................Page 17
C.6 DISCLOSURE OF "OFFICIAL USE ONLY" INFORMATION SAFEGUARDS
(IRSAP 1052.224-70(d)) (DEC 1988)..................................Page 17
C.7 DISCLOSURE OF INFORMATION-CRIMINAL/CIVIL
SANCTIONS (IRSAP 1052.224-71(a)) (JAN 1998).........................Page 17
C.8 DISCLOSURE OF INFORMATION-OFFICIAL USE
ONLY (IRSAP 1052.224-71(b)) (DEC 1988)..............................Page 18
TIRNO-99-C-00033 Page 2
<PAGE>
C.9 DISCLOSURE OF INFORMATION-INSPECTION
(IRSAP 1052.224-72) (DEC 1988)..........................Page 19
C.10 PUBLIC RELEASE OF INFORMATION ..........................Page 19
C.11 IRSAP 1052.239-9002 - YEAR 2000 WARRANTY -
COMMERCIAL SUPPLY PRODUCTS .............................Page 19
C.12 ADDENDUM 1 .............................................Page 21
C.12.1 FAR CLAUSES INCORPORATED BY REFERENCE ...........Page 21
C.13 CONTRACT TERMS AND CONDITIONS REQUIRED TO
IMPLEMENT STATUTES OR EXECUTIVE ORDERS -
COMMERCIAL ITEMS, FAR 52.212-5 (AUG 1996) ..............Page 21
TIRN0-99-C-00033 Page 3
<PAGE>
SECTION C - CONTRACT TERMS AND CONDITIONS
-----------------------------------------
C.1 CONTRACT TERMS AND CONDITIONS -- COMMERCIAL ITEMS FAR 52.212-4
(MAR 1999)(TAILORED)
(a) Inspection/Acceptance. The Contractor shall only tender for acceptance
those items that conform to the requirements of this contract. The Government
reserves the right to inspect or test any supplies or services that have been
tendered for acceptance. The Government may require repair or replacement of
nonconforming supplies or performance of nonconforming services without change
in the mutual agreement that all work will be at no cost to the Government. The
Government must exercise its post acceptance rights--
(1) Within a reasonable time after the defect was discovered or should
have been discovered; and
(2) Before any substantial change occurs in the condition of the item,
unless the change is due to the defect in the item.
(b) Changes. Changes in the terms and conditions of this contract may be
made only by written agreement of the parties.
(c) Disputes. This contract is subject to the Contract Disputes Act of
1978, as amended (41 U.S.C. 601-613). Failure of the parties to this contract to
reach agreement on any request for equitable adjustment, claim, appeal or action
arising under or relating to this contract shall be a dispute to be resolved in
accordance with the clause at FAR 52.233-1, Disputes, which is incorporated
herein by reference. The Contractor shall proceed diligently with performance of
this contract, pending final resolution of any dispute arising under the
contract.
(d) Definitions. The clause at FAR 52.202-1, Definitions, is incorporated
herein by reference.
(e) Excusable delays. The Contractor shall be liable for default unless
nonperformance is caused by an occurrence beyond the reasonable control of the
Contractor and without its fault or negligence such as, acts of God or the
public enemy, acts of the Government in either its sovereign or contractual
capacity, fires, floods, epidemics, quarantine restrictions, strikes, unusually
severe weather, and delays of common carriers. The Contractor shall notify the
Contracting Officer in writing as soon as it is reasonably possible after the
commencement of any excusable delay, setting forth the full particulars in
connection therewith, shall remedy such occurrence with all
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reasonable dispatch, and shall promptly give written notice to the Contracting
Officer of the cessation of such occurrence.
(f) Patent indemnity. The Contractor shall indemnify the Government and its
officers, employees and agents against liability, including costs, for actual or
alleged direct or contributory infringement of, or inducement to infringe, any
United States or foreign patent, trademark or copyright, arising out of the
performance of this contract, provided the Contractor is reasonably notified of
such claims and proceedings.
(g) No consideration or fee. The Contractor and the Government have
mutually agreed that all work will be at no cost to the Government. This
agreement is a result of the prohibition in the Taxpayer Relief Act of 1997
codified at Internal Revenue code 6311(d)(2), namely, "the Secretary is
authorized to enter into contracts to obtain services related to receiving
payment by other means where cost beneficial to the government. The Secretary
may not provide any fee or provide any other consideration under such
contracts."
(h) Risk of loss. Unless the contract specifically provides otherwise, risk
of loss or damage to the supplies provided under this contract shall remain with
the Contractor until, and shall pass to the Government upon:
(1) Delivery of the supplies to a carrier, if transportation is
f.o.b. origin; or
(2) Delivery of the supplies to the Government at the destination
specified in the contract, if transportation is f.o.b.
destination.
(i) Termination for the Government's Convenience. The Government reserves
the right to terminate this contract, or any part hereof, for its sole
convenience. In the event of such termination, the Contractor shall immediately
stop all work hereunder and shall immediately cause any and all of its suppliers
and subcontractors to cease work. Because the parties to the contract have
mutually agreed that all work performed will be at no cost to the Government,
the Contractor will not be paid for any costs of contract performance as a
result of the termination for the Government's convenience.
(j) Termination for cause. The Government may terminate this contract, or
any part hereof, for cause in the event of any default by the Contractor, or if
the Contractor fails to comply with any contract terms and conditions, or fails
to provide the Government, upon request, with adequate assurances of future
performance. In the event of termination for cause, the Government shall not be
liable to the Contractor for any amount for supplies or services not accepted,
and the Contractor shall be liable to the Government for any and all rights and
remedies provided by law. If it is determined that the Government improperly
terminated this contract for default, such termination
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shall be deemed a termination for convenience.
(k) Title. Unless specified elsewhere in this contract, title to
deliverable items, that is, reports (see C.2.5) furnished under this contract
shall pass to the Government upon acceptance, regardless of when or where the
Government takes physical possession.
(1) Limitation of liability. Except as otherwise provided by an express or
implied warranty, the Contractor will not be liable to the Government for
consequential damages resulting from any defect or deficiencies in accepted
items.
(m) Other compliances. The Contractor shall comply with all applicable
Federal, State and local laws, executive orders, rules and regulations
applicable to its performance under this contract.
(n) Compliance with laws unique to Government contracts. The Contractor
agrees to comply with 31 U.S.C. 1352 relating to limitations on the use of
appropriated funds to influence certain Federal contracts; 18 U.S.C. 431
relating to officials not to benefit; 40 U.S.C 327, et seq., Contract Work
Hours and Safety Standards Act, 41 U.S.C. 51-58, Anti-Kickback Act of 1986; 41
U.S.C. 265 and 10 U.S.C. 2409 relating to whistle blower protections; 49 U.S.C
40118, Fly American; and 41 U.S.C. 243 relating to procurement integrity.
(o) Order of precedence. Any inconsistencies in this solicitation or
contract shall be resolved by giving precedence in the following order
(1) Disputes, Other Compliances, and Compliance with Laws Unique to
Government Contracts paragraphs of this clause.
(2) The clause at 52.212-5.
(3) Addenda to this solicitation or contract, including any license
agreements for computer software.
(4) Solicitation provisions if this is a solicitation
(5) Other paragraphs of this clause.
(6) The Standard Form 26.
(7) Other documents, exhibits, and attachments.
(8) The statement of work.
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C.2 STATEMENT OF WORK - ADDENDUM TO FAR 52.212-4
C.2.1 INTRODUCTION
With passage of the Taxpayer Relief Act of 1997, the federal government can
accept tax payments via any commercially acceptable means.
The purpose of this contract is to pilot and implement a more convenient
method for the taxpayer to pay income taxes owed, which will also reduce
governmental costs and improve cash flow to the federal government.
C.2.2 GENERAL REQUIREMENTS
This is a "commercial item" acquisition, as that term is defined in the
Federal Acquisition Regulations (FAR) 2.101.
The Contractor shall provide an electronic credit card authorization system
and shall conduct a pilot that allows taxpayers to file federal individual tax
returns (Form 1040 Series) with a payment of the balance due by means of the
return transmission software employed, using American Express, DiscoverCard, and
MasterCard credit cards. The Contractor shall enable payment with up to a
sixteen digit credit card number and a four or six digit expiration date. The
Contractor shall ensure that certain edits are performed to confirm the validity
of the credit card number and expiration date, The Contractor shall provide an
acknowledgement of acceptance back to the taxpayer.
The Contractor may charge taxpayers a traditional "merchant fee" for the
convenience of having an electronic payment authorized and made. On average,
this fee shall not exceed 3% of the tax payment. In the event that other credit
card companies are subcontracted to participate in the program, the Contractor
shall negotiate to minimize merchant fees and other credit card related
transaction fees to minimize taxpayer surcharges. The Contractor shall collect
and disburse all such fees from the cardholder and post all charges to the
cardholder's account.
C.2.3 DUTIES AND RESPONSIBILITIES OF THE CONTRACTOR
The Contractor's duties and responsibilities during the term of this contract
are to:
1. Provide individual federal taxpayers access to the credit card and
electronic filing transaction processing networks employed by the
Contractor beginning on January 14, 2000 and ending on October 16, 2000 at
a rate equal to or exceeding 95% availability (total number of customers
accessing the Contractor's credit card transaction network on the first
attempt/total number of attempts). Excusable
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downtime for the electronic filing transaction processing network includes
the time necessary for regular backup and maintenance procedures.
2. Provide an accuracy rate Of 99% or higher for all transmitted transaction
data as provided by the taxpayer. This includes accuracy of electronic
payment data resulting from intermediate actions taken by the Contractor
necessary for coding, applying, and transmitting payment data.
3. Provide documentation to the Government (with "limited rights" as defined
in the "Rights in Data" clause in Section C.12.1) before the pilot
commences, of the transaction processing networks employed in the pilot and
the networks' interfaces including testing certification plan, test
reports, and procedural guide.
4. Notify taxpayers of the dollar amounts of a11 fees to be charged to their
credit card and obtain taxpayers' acknowledgements of charges prior to
initiating credit authorizations. Notify the Government of the method of
obtaining taxpayers' acknowledgement before the pilot commences.
5. Provide taxpayers with confirmation of payment transactions electronically
through the return transmission software used by participating electronic
return originators or tax practitioners, through the period ending October
16, 2000.
6. Provide taxpayers, upon request, with IRS general information in an easily
accessible, readable and print-ready form through the return transmission
software used by participating electronic return originators or tax
practitioners.
7. Provide incident reports of any material network outages, work stoppages,
or other payment processing problems. This includes but is not limited to
systemic problems related to authorizing credit on-line and human errors
that result in duplicate payments or non-payment. The Contractor shall
inform the Contracting Officer'S Technical Representative (COTR) of all
incidents within 24 hours of occurrence or awareness, and shall provide an
incident report within 5 business days. Incident reports shall include a
description of the incident, the cause, number of taxpayers impacted,
duration of the incident, and actions taken by the Contractor to remedy the
incident. The Contractor shall comply with the EFTPS Credit Card Bulk Filer
Requirements dated May 17, 1999, and provide all reports (EDI.X.12) as
stated therein. No additional "bulk filer" reports are required.
8. Make reasonable efforts to make any necessary modifications to software,
systems, and services in accordance with its commercial business practices
to conform to the provisions of IRS regulations promulgated under U.S.C.
6311 (d)(1). This contract is considered modified automatically to
incorporate by reference the current provisions of such IRS regulations
during the life of this contract.
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9. Retain credit card authorization logs for 72 months from the date of each
transaction. The information in such logs shall include the transaction
dates and times, card member account number and expiration date, amount of
transaction, and approval code. This requirement shall survive the life of
this contract, and the Government shall have the right to inspect such logs
upon reasonable notice to the Contractor.
10. Retain taxpayer electronic filing information for 36 months following the
end of each tax filing season. This requirement shall survive the life of
this contract, and the Government shall have the right to inspect such logs
upon reasonable notice to the Contractor.
11. Convert credit card transactions to ACH debit authorizations and settle
funds to the Government's designated Treasury Financial Agent (TFA). Any
adjustments necessary because of failure to correctly verify and validate
credit information shall be the responsibility of the Contractor. The TFA
shall initiate one bulk daily debit to the account established for this
purpose. The Contractor shall instruct the TFA to initiate ACH debit
authorizations only upon the Government's acceptance of an
electronically-filed tax return.
12. Settle all credit card payment transactions in accordance with the
following standard timeframes for settlement for each credit card as stated
in the applicable merchant agreement. MasterCard funds will be deposited on
the 2nd business day after the date of authorization of the transaction.
American Express and DiscoverCard funds shall be deposited on the 3rd
business day after the date of authorization of the transaction. Any funds
held overnight from one business day to the next business day shall be
subject to U.S. Treasury penalties and interest. Provide settled credit
card payments where the authorization date is less than 11 days prior to
the settlement date; except that American Express and DiscoverCard payments
shall be forwarded to the TFA one business day prior to settlement.
13. Provide only guaranteed payments to the Government for taxes owed.
14. Maintain the confidentiality of any information relating to credit card
transactions with absolutely no disclosure or use except to the extent
authorized by written procedures promulgated by the IRS pursuant to 25
U.S.C. 6311 (e)(3).
15. Maintain the confidentiality of any information relating to Federal/State
credit card payments completed in a single transaction. This includes
absolutely no disclosure or use of information collected during this
transaction for any purpose other than processing the transaction to the
U.S. Treasury or appropriate State. Information
TERNO-99-C-00033 Page 9
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collected during this transaction shall not be disclosed or used for any
purpose prohibited by Section 6311 of the Internal Revenue Code.
16. Pay all credit card discount fees and other transaction fees.
17. Provide a merchant descriptor on the taxpayer's credit card statement
indicating the tax payment amount as a unique line item entitled "U S
Treasury Tax Payment."
18. Provide a merchant descriptor on the taxpayer's credit card statement
indicating the convenience fee amount as a unique line item.
19. Provide status reports (daily and monthly), as described in C.2.5.2 and
C.2.5.3 below, containing the number of taxpayers using the system and
total dollar amount of authorized and settled payments sent to the IRS, and
any problems encountered. Aggregate and cumulative payment volumes shall be
provided daily. The daily reports, containing the prior days activity,
shall be delivered to the designated IRS point of contact (POC) by 2:00 pm
Eastern time each day through May 15, 2000, provided that payment
confirmation is received by 12:00 pm (Noon) Eastern Time. The Contractor
shall notify the IRS POC if payment confirmation is either not received by
Noon or is received after Noon, and the Government shall establish a
revised reporting time for that day if necessary. Monthly reports shall be
delivered to the designated IRS point of contact by the 10th day of each
month.
20. Provide weekly reports of all chargeback actions identifying the
transaction date, dollar amount, action request date, and reason for
action. These actions shall be in conformance with chargeback procedures
issued by the IRS and meet the definition of chargebacks provided by the
Contractor and agreed to by the IRS. These reports shall be delivered to
the designated IRS point of contact by close of business each Friday.
21. Provide Marketing plan and deliverables that support and facilitate public
awareness of IRS e-file and electronic payments. This shall include (1)
development and execution of an Electronic Payment Marketing Plan (to
include IRS e-file key messages, plan milestones/deliverables and
measurements for success); (2) description of how the Contractor will track
and report the number of unique taxpayers that use the IRS e-file/payment
product as a result of the marketing plan execution, and also the number of
unique visits to its World Wide Web site by way of a hyperlink from the IRS
Digital Daily Web Site; and (3) submission of marketing performance
reports. The reports shall contain a narrative description of
accomplishments; difficulties/barriers; and measurement of success (number
of unique taxpayers that electronically file and pay as a result of the
marketing campaign), The reports shall be included in the monthly status
reports described above, as a separate section. An initial and supplemental
marketing performance
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findings report shall be submitted in conjunction with the Pilot Findings
Report described in C.2.5.1 and C.2.7. The initial report shall include
activity occurring between January and April 2000. The supplemental report
shall include a summary of the initial report findings and marketing activity
from May through October 2000. These reports are subject to inspection,
verification and approval by the IRS.
C.2.4 DUTIES AND RESPONSIBILITIES OF THE GOVERNMENT
The Government's, that is, the Internal Revenue Service's, duties and
responsibilities during the term of this contract are to:
1. Provide electronic record specifications necessary for settlement of funds
and posting of tax records related to the credit card payments.
2. Provide no consideration to the Contractor for credit card related
transactions.
3. Designate Treasury Financial Agent(s) to act on the Government's behalf for
settlement of funds in payment of individual taxes owed. The TFA(s) will
have no authority to access accounts, use information, or place
requirements on any person or organization to use the taxpayer's credit
card to collect any amount beyond what has been authorized by the
taxpayer.
4. Provide required information or instructions for the contractor to
communicate to taxpayers.
5. Provide required reporting formats.
6. Provide a mechanism for returning funds received by credit card payment in
order to correct errors arising from a credit card transaction posted to a
cardholder's account without the cardholder's authorization.
7. Process chargeback actions in accordance with its written procedures. This
shall include reimbursing the Contractor for unauthorized charges that are
substantiated by the cardholder and approved by the Contractor's duly
authorized management representative. The Contractor must have completed
and delivered the appropriate IRS chargeback form and supporting
documentation to the IRS as described in IRS chargeback procedures. Such
chargeback requests shall be processed based on the Contractor's
determination of the appropriateness of this action as signified by its
authorized claimant's signature.
8. Provide a hyperlink from the IRS Digital Daily Web Site to the Contractor's
Web Site.
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C.2.5 DELIVERABLES
The Contractor shall submit the following deliverables in accordance with the
schedule outlined in Section C.2.7.
C.2.5.1 PILOT FINDINGS REPORT
The Contractor shall provide an initial and supplemental pilot findings report.
A copy of the report shall be provided to the IRS Contracting Officer (CO)(one
copy), the Contracting Officer's Technical Representative (COTR) (one copy), and
the IRS Program Manager (three copies). The report shall describe:
1. the pilot features,
2. the conduct and findings of the pilot as they relate to the Contractor's
and any subcontractor's performance (including a summary of all payment
transactions, any problems, changes made during the pilot and lessons
learned)
3. recommendations for improvement including changes to the Contractor's
and/or IRS processes, and
4. practitioner and/or client feedback including customer satisfaction survey
results.
The initial report will include activity occurring between January 2000 and
April 2000. The supplemental report will include a summary of the initial
report's findings and activity from May through October 2000.
C.2.5.2 MONTHLY STATUS REPORTS
The Contractor shall provide monthly status reports on the 10th day of each
month through the implementation date of the pilot. The report shall cover the
overall progress of the pilot's development. Copies of the report shall be
provided to the IRS Contracting Officer (CO) (one copy) and the Contracting
Officer's Technical Representative (COTR) (one copy) and the IRS Program Manager
(one copy). The report shall contain the following information:
1. date of report,
2. project manager name,
3. project manager telephone number, fax number and e-mail address,
4. a brief description of the work accomplished, emphasizing the progress made
since the last reporting period,
5. a description of any unresolved and/or anticipated problems, if any
(include schedule impacts),
6. an estimate of the percent of work accomplished to date; and a statement on
the status of the pilot as it relates to the work breakdown schedule,
either confirming that the task is on schedule or explaining the nature and
extent of the pending delay.
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C.2.5.3 RECURRING TRANSACTION REPORTS
The Contractor shall provide daily and monthly transaction reports. The reports
shall cover the post-implementation progress of the pilot. Daily reports shall
be provided no later than 9:00 am Eastern Time and should include all prior day
transactions and cumulative volumes. Monthly reports shall be provided by the
10th day of each month and include all prior month transactions and reconcile
any adjustments made during that month. Copies of the reports shall be provided
to the IRS Contracting Officer (CO)(one copy), the Contracting Officer`s
Technical Representative (COTR) (one copy) and the Program Manager (one copy) or
his/her designee. The report shall contain the following information:
1. date of report,
2. period covered,
3. total number of transactions,
4. dollar amount of transactions,
5. total number of payment attempts,
6. total number of successful attempts,
7. dollar amount of successful attempts,
8. average payment amount,
9. total number of failed attempts,
10. dollar amount of failed attempts,
11. reasons for failed attempts, and
12. customer service activity.
C.2.6 PILOT SUCCESS DETERMINATION
The Contractor shall provide a customer satisfaction survey for a select number
of taxpayers participating in the pilot. The contractor will provide this data
in their Pilot Findings Report (see C.2.5.1).
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C.2-7 SCHEDULE OF PERFORMANCE
Responsible Event Date
Party
- --------------------------------------------------------------------------------
Contractor Provide draft Project Schedule October 7,1999
- --------------------------------------------------------------------------------
Contractor Provide marketing plan October 31, 1999
- --------------------------------------------------------------------------------
IRS Provide comments on draft Project October 18, 1999
Schedule
- --------------------------------------------------------------------------------
Contractor Provide final Project Schedule October 29, 1999
- --------------------------------------------------------------------------------
IRS Provide revised General Information October 7, 1999
for inclusion in tax preparation
software
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Contractor Obtain signed contracts with other September 30, 1999
participating credit card companies,
if applicable
- --------------------------------------------------------------------------------
IRS Provide revised chargeback October 29, 1999
procedures
- --------------------------------------------------------------------------------
Contractor Begin internal feature testing November 1, 1999
- --------------------------------------------------------------------------------
Contractor Complete integrated readiness December 30,1999
testing with IRS/TFA
- --------------------------------------------------------------------------------
Contractor Complete internal feature testing December 29, 1999
- --------------------------------------------------------------------------------
Contractor Begin Pilot January 14, 2000
- --------------------------------------------------------------------------------
IRS Provide hyperlink from the Digital January 14, 2000
Daily to the Contractor's Web Site
- --------------------------------------------------------------------------------
Contractor Deliver Initial Pilot Findings Report June 30, 2000
- --------------------------------------------------------------------------------
Contractor End Pilot October 16, 2000
- --------------------------------------------------------------------------------
Contractor Deliver Final Pilot Findings Report November 16, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
C.2.8 PERFORMANCE REQUIREMENTS
1. All electronic returns shall adhere to the policies and procedures described
in the version of the following publications for the tax year corresponding to
the filing period of the pilot: (1) Handbook for Electronic Filers of Individual
Income Tax Returns, Publication 1345; (2) Electronic Return File Specifications
and Record layouts for Individual Income Tax Returns, Publication 1346; or (3)
IRS e-file Program for Form 1040, Revenue Procedure 98-50, and (4) On-Line
Filing Program: 1040, Revenue Procedure 98-51.
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C.2.8 PERFORMANCE REQUIREMENTS (continued)
2.The required data fields for each tax payment include: (1) The primary
taxpayer's identification number (social security number as shown on the tax
return for the year for which the payment applies); (2) The first four
characters of the last name of the primary taxpayer; (3) The payment type; (4)
The tax period (six character date field); (5) The payment amount; (6) The
payment or credit authorization date; (7) Daytime telephone number; (8) Unique
identification number (such as declaration control number or confirmation
number); and (9) Bank account number, if applicable.
3.The Contractor shall comply with the Electronic Federal Tax Payment System
(EFTPS) Credit Card Bulk filer Requirements dated May 17, 1999 and Payment by
Credit Card and Debit Card Temporary Regulations, Section 6311 of the Internal
Revenue Code (IRC).
C.3 AUTHORITY - CONTRACTING OFFICER, CONTRACTING OFFICER'S
TECHNICAL REPRESENTATIVE AND CONTRACTOR'S PROJECT MANAGER
C.3.1 ADMINISTRATIVE CONTRACTING OFFICER
The IRS Contracting Officer designated for administering this contract is:
Carol Ransom
VOICE: (202) 283-1163
FAX: (202) 283-1099
email: [email protected]
The Contracting Officer, in accordance with Subpart 1.6 of the Federal
Acquisition Regulation, is the only person authorized to make or approve any
changes in any of the requirements of this contract, and notwithstanding any
clauses contained elsewhere in this contract, the said authority remains solely
with the Contracting Officer. In the event the Contractor makes any changes at
the direction of any person other than the Contracting Officer, the change will
be considered to have been made without authority and not binding on the
Government.
C.3.2 CONTRACTING OFFICER'S TECHNICAL REPRESENTATIVE
The Contracting Officer's Technical Representative (COTR) designated for this
contract is:
Linda Rickard
VOICE: (202) 283-6852
FAX: (202) 283-4786
email: [email protected]
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The COTR will represent the Contracting Officer in the administration of
technical details within the scope of this contract. The COTR is also
responsible for the final inspection and acceptance of all reports, and such
other responsibilities as may be specified in the contract. The COTR is not
otherwise authorized to make any representations or commitments of any kind on
behalf of the Contracting Officer or the Government
The COTR does not have authority to alter the Contractor's obligations or to
change the contract specifications, price, terms or conditions. If, as a result
of technical discussions, it is desirable to modify contract obligations or the
statement of work, changes will be issued in writing and signed by the
Contracting Officer.
The COTR assignment for this contract may be changed at any time by the
Government without prior notice to the Contractor. The Contractor will be
notified of the change.
C.3.3 PROJECT MANAGER
The Contractor's designated Project Manager for this contract is:
Steven R. Johnson
VOICE: 800-487-4567 or 925-855-5040
FAX: 925-838-4395
Email: [email protected]
The Contractor shall provide a Project Manager for this contract who shall have
the authority to make any no-cost contract, technical, hiring and dismissal
decisions, or special arrangements regarding this contract. The Project Manager
shall be responsible for the overall management and coordination of this
contract and shall act as the central point of contact with the Government. The
Project Manager shall have full authority to act for the Contractor in the
performance of the required services. The Project Manager, or a designated
representative, shall meet with the COTR to discuss problem areas as they occur.
The Project Manager, or designated representative, shall respond within four
work hours after notification of the existence of a problem. The Project Manager
shall be able to fluently read, write, and speak the English language.
C.4 CONTRACT CORRESPONDENCE
Notwithstanding the Contractor's responsibility for total management during the
performance of this contract, the administration of the contract will require
maximum coordination between the Government and the Contractor. To promote
timely and effective administration, all correspondence pertaining to
contractual or administrative matters under the contract shall be addressed to
the assigned Administrative
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Contracting Officer.
C.5 DISCLOSURE OF INFORMATION-SAFEGUARDS (IRSAP 1052.224-9000)
(JANUARY 1998)
In performance of this contract, the contractor agrees to comply and assume
responsibility for compliance by his/her employees with the following
requirements:
(1) All work shall be performed under the supervision of the contractor or
the contractor's responsible employees.
(2) Any return or return information made available shall be used only for
the purpose of carrying out the provisions of this contract.
Information contained in such material shall be treated as
confidential and shall not be divulged or made known in any manner to
any person except as may be necessary in the performance of the
contract. Inspection by or disclosure to anyone other than an officer
or employee of the contractor shall require prior written approval of
the Internal Revenue Service. Requests to make such inspections or
disclosures should be addressed to the IRS Contracting Officer
(3) Should a person (contractor or subcontractor) or one of his/her
employees make any unauthorized inspection(s) or disclosure(s) of
confidential tax information, the terms of the Default clause (FAR
52.2498), incorporated herein by reference, may be invoked, and the
person (contractor or subcontractor) will be considered to be in
breach of this contract.
C.6 DISCLOSURE OF "OFFICIAL USE ONLY" INFORMATION SAFEGUARDS
(IRSAP 1052.224-70(D) (DECEMBER 1988)
Any Treasury Department Information made available or to which access is
provided, and which is marked or should be marked "Official Use Only", shall be
used only for the purpose of carrying out the provisions of this contract and
shall not be divulged or made known in any manner to any person except as may be
necessary in the performance of the contract. Disclosure to anyone other than an
officer or employee of the contractor or subcontractor at any tier shall require
prior written approval of the IRS. Requests to make such disclosure should be
addressed to the IRS Contracting Officer.
C.7 DISCLOSURE OF INFORMATION-CRIMINAL/CIVIL SANCTIONS (IRSAP
1052.224-71(a) (JANUARY 1998)
(1) Each officer or employee of any person (contractor or subcontractor) at any
tier to whom returns or return information is or may be disclosed shall be
notified in writing by the person (contractor or subcontractor) that returns or
return information disclosed to such officer or employee can be used only for a
purpose and to the extent authorized
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herein, and that further disclosure of any such returns or return information
for a purpose or to an extent unauthorized herein constitutes a felony
punishable upon conviction by a fine of as much as $5,000 or imprisonment for as
long as five years, or both, together with the costs of prosecution. Such person
(contractor or subcontractor) shall also notify each such officer and employee
that any such unauthorized future disclosure of returns or return information
may also result in an award of civil damages against the officer or employee in
an amount not less than $1,000 with respect to each instance of unauthorized
disclosure plus in the case of willful disclosure or a disclosure which is the
result of gross negligence, punitive damages, plus the cost of the action. These
penalties are prescribed by IRC Sections 7213 and 7431 and set forth at 26 CFR
301.6103(n).
(2) Each officer or employee of any person (contractor or subcontractor) to whom
returns or return information is or may be disclosed shall be notified in
writing by such person that any return or return information made available in
any format shall be used only for the purpose of carrying out the provisions of
this contract and that inspection of any such returns or return information for
a purpose or to an extent not authorized herein constitutes a criminal
misdemeanor punishable upon conviction by a fine of as much as $1,000.00 or
imprisonment for as long as 1 year, or both, together with the costs of
prosecution. Such person (contractor or subcontractor) shall also notify each
such officer and employee that any such unauthorized inspection of returns or
return information may also result in an award of civil damages against the
officer or employee in an amount equal to the sum of the greater of $1,000.00
for each act of unauthorized inspection with respect to which such defendant is
found liable or the sum of the actual damages sustained by the plaintiff as a
result of such unauthorized inspection plus in the case of a willful inspection
or an inspection which is the result of gross negligence, punitive damages, plus
the costs of the action. The penalties are prescribed by IRC Sections 7213A and
7431.
(3) Additionally, it is incumbent upon the contractor to inform its officers and
employees of the penalties for improper disclosure imposed by the Privacy Act of
1974, 5 U.S.C. 552a. Specifically, 5 U.S.C. 552a(l)(1), which is made applicable
to contractors by 5 U.S.C. 552a(m)(1), provides that any officer or employee of
a contractor, who by virtue of his/her employment or official position, has
possession of or access to agency records which contain individually
identifiable information, the disclosure of which is prohibited by the Privacy
Act or regulations established thereunder, and who knowing that disclosure of
the specific material is so prohibited, willfully discloses the material in any
manner to any person or agency not entitled to receive it, shall be guilty of a
misdemeanor and fined not more than $5,000.
C.8 DISCLOSURE OF INFORMATION-OFFICIAL USE ONLY (IRSAP 1052.224-71(b)
(DECEMBER 1988)
Each officer or employee of the contractor to whom "Official Use Only"
information may
TTIRNO-99-C-00033 Page 18
<PAGE>
be made available or disclosed shall be notified in writing by the contractor
that "Official Use Only" information disclosed to such officer or employee can
be used only for a purpose and to the extent authorized herein, and that further
disclosure of any such "Official Use Only" information, by any means, for a
purpose or to an extent unauthorized herein, may subject the offender to
criminal sanctions imposed by 18 U.S.C. Sections 641.
C.9 DISCLOSURE OF INFORMATION-INSPECTION (IRSAP 1052.224-72)
(DECEMBER 1988)
The Internal Revenue Service shall have the right to send its officers and
employees into the offices and plants of the contractor for inspection of the
facilities and operations provided for the performance Of any work under this
contract. On the basis of such inspection, the Contracting Officer may require
specific measures in cases where the contractor is found to be noncompliant with
contract safeguards.
C.10 PUBLIC RELEASE OF INFORMATION
1. The Contractor shall obtain the written permission of the IRS Program Manager
or COTR before releasing or using any information regarding work on the
contract. Information including, but not limited to, advertisements,
unclassified speeches, articles, press releases, presentations, displays or
demonstrations developed or proposed for release to the public must be submitted
in their entirety to the Contracting Officer. The Contractor shall request, in
writing, permission to release information describing the scope of the
information to be released and the purpose for its release. This clause does not
affect the Contractor's rights with regard to patents, which are governed by the
patent clauses of this contract.
2. In the event of a termination for the convenience of the Government, the
Government shall be responsible for press releases, jointly prepared with the
Contractor, declaring the termination of the pilot by the Government. The
Government shall consider the contractor's reasonable request for the news media
to receive such releases. The Government shall also consider the contractor's
reasonable request that it not issue a public release or public announcement of
the termination of the contract for the Government's convenience.
C.11 IRSAP 1052.239-9002-YEAR 2000 WARRANTY-COMMERCIAL SUPPLY
PRODUCTS
1.The contractor warrants that each hardware, software, and firmware product
provided under this contract and described in (2) and (3) below shall be able to
accurately process date data (including, but not limited to, calculating,
comparing and sequencing) from, into, and between the twentieth and
twenty-first centuries, including leap year calculations, when used in
accordance with the product documentation provided by the
TTIRNO-99-C-00033 Page 19
<PAGE>
contractor, provided that all listed or unlisted products (e.g. hardware,
software, firmware) used in combination with such listed product properly
exchange date data with it. If the contract requires that specific listed
products must perform as a system in accordance with the foregoing warranty,
then that warranty shall apply to those listed products as a system. The
duration of this warranty and the remedies available to the Government for
breach of this warranty shall be as defined in, and subject to, the terms and
limitations of the contractor's standard commercial warranty or warranties
contained in this contract, provided that notwithstanding any provision to the
contrary in such commercial warranty or warranties, the remedies available to
the Government under this warranty shall include repair or replacement of any
listed product whose non-compliance is discovered and made known to the
contractor in writing within the time period consistent with this contract's
Inspection clause. Nothing in this warranty shall be construed to limit any
rights or remedies the Government may otherwise have under this contract with
respect to defects other than Year 2000 performance.
2. Contractor-owned proprietary software, derivative works thereof or other
software created by the Contractor (collectively "Contractor Software) will be
year 2000 compliant (i.e., will correctly calculate and process, in accordance
with such software's intended use and applicable specifications, date-related
information and associated date calculations) prior to, during and after the
year 2000. If any Contractor Software is determined not to be year 2000
compliant, the Contractor's sole responsibility will be to timely replace it
with other software of equivalent or better functionality at no additional cost
to Internal Revenue Service. The above remedy is the sole remedy for the failure
of Contractor Software to be year 2000 compliant. The Contractor will have no
responsibility for the failure of any software other than Contractor Software.
Where the Contractor believes that any third-party software licensed by the
Contractor and incorporated in Contractor Software or systems will not be year
2000 compliant or compatible with Contractor Software or hardware, the
Contractor will notify Internal Revenue Service and work with Internal Revenue
Service to identify alternative third party software as needed.
3. OrrTax Software Inc.'s software for use by electronic return originators and
tax practitioners in electronically transmitting taxpayers' returns and credit
card information to OrrTax who, in turn, electronically transmits the returns to
the IRS, and upon approval by the IRS, transmits the taxpayer and credit card
data to U.S. Audiotex for authorization is year 2000 compliant as defined in 2
above and warranted as stated in 1 above. All of OrrTax's screens and data
elements accept 8 character date entries. No interpretation or conversion logic
is necessary
TTMNO-99-C-00033 Page2O
<PAGE>
C.12 ADDENDUM 1
C.12.1 FAR CLAUSES INCORPORATED BY REFERENCE
52.252-2 CLAUSES INCORPORATED BY REFERENCE (JUN 1988)
This contract incorporates one or more clauses by reference, with the same force
and effect as if they were given in full text. Upon request, the Contracting
Officer will make their full text available.
FEDERAL ACQUISITION REGULATION (48 CFR CHAPTER 1) CLAUSES
INCORPOPATED BY REFERENCE
NUMBER TITLE DATE
52.203-3 GRATUITIES APR 1984
52.209-6 PROTECTING THE GOVERNMENT'S JUL 1995
INTEREST WHEN SUBCONTRACTING
WITH CONTRACTORS DEBARRED,
SUSPENDED, OR PROPOSED FOR
DEBARMENT
52.227-14 RIGHTS IN DATA -- GENERAL (ALT III & JUN 1987
IV)
C.13 CONTRACT TERMS AND CONDITIONS REQUIRED TO IMPLEMENT
STATUTES OR EXECUTIVE ORDERS -- COMMERCIAL ITEMS, FAR 52.212.6
(MAY 1999)
(a) The Contractor agrees to comply with the following FAR clauses, which
are incorporated in this contract by reference, to implement provisions of law
or Executive orders applicable to acquisitions of commercial items:
(1) 52.222-3, Convict Labor (E.O. 11755); and
(2) 52.233-3, Protest After Award (31 U.S.C 3553).
(b) The Contractor agrees to comply with the FAR clauses in this paragraph
(b) which the contracting officer has indicated as being incorporated in this
contract by reference to implement provisions of law or executive orders
applicable to acquisitions of commercial items or components:
TTIRNO-99-C-00033 Page 2l
<PAGE>
(Contracting Officer shall check as appropriate.)
_X_(1) 52-203-6, Restrictions ori Subcontractor Sales to the Government, with
Alternate I (41 U.S.C. 253g and 10 U.S.C. 2402).
___(2) 52.219-3, Notice of HUBZone Small Business set-Aside (Jan 1999)
_X_(3) 52.219-8, Utilization of Small Business Concerns and Small Disadvantaged
Business Concerns (U.S.C. 637 (d)(2) and (3)).
___(4) 52.219-14, Limitation on Subcontracting (15 U.S.C. 637(a)(14)).
_X_(5) 52.222-21, Prohibition of Segregated Facilities (Feb 1999).
_X_(6) 52.222-26, Equal Opportunity (E.O. 11246).
_X_(7) 52.222-35, Affirmative Action for Disabled Veterans and Veterans of the
Vietnam Era (38 U.S.C. 4212).
_X_(8) 52.222-36, Affirmative Action for Workers with Disabilities (29 U.S.C.
793).
_X_(9) 52.222-37, Employment Reports on Disabled Veterans and Veterans of the
Vietnam Era (38 U.S.C. 4212).
___(10) 52.225-3, Buy American Act-Supplies (41 U.S.C. 10).
___(11) 52.225-9, Buy American Act-Trade Agreements Act-Balance of Payments
Program (41 U.S.C. 10, 19 U.S.C. 2501-2582).
___(12) Reserved.
___(13) 52.225-18, European Union Sanction for End Products (E.O. 12849).
___(14) 52.225-19, European Union Sanction for Services (E.O. 12849).
___(15) (i) 52.225-21, Buy American Act-North American Free Trade Agreement
Implementation Act-Balance of Payments Program (41 U.S.C 10, Pub. L.
103-187).
___ (ii) Alternate I of 52.225-21.
_X_(16) 52.239-1, Privacy or Security Safeguards (5 U.S.C. 552a).
TTIRNO-99-C-00033 Page 22
<PAGE>
___(17) 52.247-64, Preference for Privately Owned U.S.-Flag Commercial Vessels
(46 U.S.C. 1241).
(c) The Contractor agrees to comply with the FAR clauses in this paragraph
(c), applicable to commercial services, which the Contracting Officer has
indicated as being incorporated in this contract by reference to implement
provisions of law or executive orders applicable to acquisitions of commercial
items or components:
(Contracting Officer check as appropriate.)
___(1) 52.222-41 Service Contract Act of 1965, As amended (41 U.S.C. 351, et
seq.).
___(2) 52.222-42, Statement of Equivalent Rates for Federal Hires (29 U.S.C.
206 and 41 U.S.C. 351, et seq.).
___(3) 52.222-43, Fair Labor Standards Act and Service Contract Act-Price
Adjustment (Multiple Year and Option Contracts) (29 U.S.C. 206 and 41
U.S.C. 351, et seq.).
___(4) 52.222-44, Fair Labor Standards Act and Service Contract Act- Price
Adjustment (29 U.S.C. 206 and 41 U.S.C. 351, et seq.).
___(5) 52.222-47, SCA Minimum Wages and Fringe Benefits Applicable to
Successor Contract Pursuant to Predecessor Contractor Collective
Bargaining Agreement (CBA) (41 U.S.C. 351, et seq.).
(d) Comptroller General Examination of Record. The Contractor agrees to
comply with the provisions of this paragraph (d) if this contract was awarded
using other than sealed bid, is in excess of the simplified acquisition
threshold, and does not contain the clause at 52.215-2, Audit and
Records--Negotiation.
(1) The Comptroller General of the United States, or an authorized
representative of the Comptroller General, shall have access to and right to
examine any of the Contractor's directly pertinent records involving
transactions related to this contract.
(2) The Contractor shall make available at its offices at all reasonable
times the records, materials, and other evidence for examination, audit, or
reproduction, until 3 years after final payment under this contract or for any
shorter period specified in FAR Subpart 4.7, Contractor Records Retention, of
the other clauses of this contract. If this contract is completely or partially
terminated, the records relating to the work terminated shall be made available
for 3 years after any resulting final termination settlement. Records relating
to appeals under the disputes clause or to litigation or the
TTMNO-99-C-00033 Page 23
<PAGE>
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (this "Agreement") is made as of September 30,
---------
1999 by and among U.S. Audiotex Corporation, a Delaware corporation (the
"Company"), Imperial Bank ("Imperial) and Brian W. Nocco ("Executive").
- -------- -------- ---------
RECITALS
--------
WHEREAS, the Company desires to employ Executive to serve as Chief
Financial Officer of the Company on the terms and conditions herein provided;
WHEREAS, Executive desires to become an employee of the Company on the
terms and conditions herein provided;
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows:
1. Employment. The Company hereby employs Executive, subject to the terms
----------
and conditions herein provided. During the Employment Period (as defined
below), Executive shall faithfully and diligently perform his duties under this
Agreement and shall use his best efforts to promote the interests of the
Company. The executive shall be appointed to the Board of Directors of the
Company.
2. Term. Subject to the terms and conditions hereof, the initial term of
----
employment of Executive by each Company under this Agreement shall be for the
period commencing on the date hereof (the "Commencement Date") and expiring when
-----------------
terminated as provided in Section 8 hereof (the "Expiration Date"). For
---------------
purposes hereof, such period is referred to herein as the "Employment Period").
-----------------
3. Executive's Obligations.
-----------------------
In his capacity as an executive of the Company, Executive shall report
directly to the Chief Executive Officer. Executive shall at all times comply
with and be subject to the Company's policies, procedures, directives and
regulations as established by the Company from time to time. Executive accepts
such employment, responsibility and authority and agrees to perform the services
of Chief Financial Officer of the Company and such other services as shall from
time to time be reasonably assigned to him and agrees to devote all of his
working time, skill and attention to such services.
Notwithstanding the foregoing, the parties agree that the Executive may
continue any educational, charitable and community activities (including
membership on the board of educational, charitable or community organizations)
in which he is engaged on the date hereof
<PAGE>
and may engage in other educational, charitable and community activities
(including membership on the board of educational, charitable or community
organizations) and serve on boards of directors of other companies provided such
activities do not materially interfere with the performance of his duties to the
Company.
4. Executive's Compensation and Benefits. During the Employment Period,
-------------------------------------
as full compensation to the Executive for his performance of the services
hereunder and for his acceptance of the responsibilities described herein, the
Company agrees to pay the Executive, and the Executive agrees to accept, the
following salary and other benefits:
4.1 Base Salary. From the Commencement Date of this agreement the Company
-----------
shall pay the Executive a salary at the annual rate of $200,000. The base
salary due the Executive hereunder (the "Base Salary") shall be payable in
-----------
accordance with the Company's standard payment policy, less any amounts required
to be withheld by the Company from such Base Salary pursuant to the benefit
plans in which Executive participates pursuant to Section 4.5 and applicable
laws and regulations.
4.2 Bonus. (a) The Executive shall be eligible to receive annual bonuses
-----
(each a "Bonus") at the discretion of, and in the amounts and at the times
-----
determined by, the compensation committee of the Board of Directors (the
"Compensation Committee"). Executive agrees that there can be no assurance that
the Compensation Committee will grant a Bonus in any year except that the
Executive shall be paid a guaranteed bonus in the minimum amount of $100,000 in
the first year of his employment. .
4.3 Long Term Incentives. On the Commencement Date, the Company will
--------------------
grant Executive options to acquire 75,000 shares of its common stock, which
represent 1.5 % of the Company's Fully Diluted Common Stock outstanding on the
Commencement Date (inclusive of the 75,000 share option grant to Executive). On
or before the IPO Date, the Company will grant executive additional options to
acquire such number of shares of its common stock so that, when combined with
the options granted in the immediately preceding sentence, Executive will have
received pursuant to this Section 4.3 options to acquire shares of common stock
equal to an aggregate of one and one-half percent (1.5 %) of the Fully Diluted
Common Stock of the Company outstanding as of the IPO Date (inclusive of the
option grant to Executive). For purposes of this Section 4.3, "Fully Diluted
-------------
Common Stock" shall mean the aggregate of (i) the number of shares of Company
- ------------
common stock authorized and outstanding determined on an as-converted basis and
(ii) the number of shares of Company common stock subject to outstanding
options, warrants and other rights to acquire Company common stock determined on
an as-converted bases. Such options will be non-transferable and shall be
exercisable at any time for a ten year period after the date of grant. The
exercise price of such options shall be equal to $4.00 per share. All of the
option shares shall initially be unvested and subject to repurchase by the
Company at the exercise price paid per share. Subject to Section 8 hereof,
Executive shall acquire a vested interest in, and the Company's repurchase right
shall accordingly lapse with respect to one-third of the option shares granted
pursuant to this Section 4.3 on the first anniversary of the Commencement Date
and the remaining option shares in a series of twenty
<PAGE>
four (24) successive equal monthly installments during the Employment Period.
Following termination of the Employment Period, Executive shall acquire a vested
interest in, and the Company's repurchase right shall accordingly terminate with
respect to, all of any unvested option shares for which the Company did not
exercise its repurchase right within thirty (30) days following such
termination. Executive shall be entitled to pay the exercise price of such
options in the same manner and on the same terms as the Company offers to
members of its senior management who receive similar options.
4.4 Other Benefit Plans. Subject to all eligibility requirements, and to
-------------------
the extent permitted by law, the Executive shall be entitled to participate in
any and all employee benefit plans (including, but not limited to, retirement,
life insurance, medical, dental, disability, and savings plans) established or
maintained by the Company from time to time for the benefit of their employees
(or executives) in general.
4.5 Vacation. The Executive shall be entitled to four weeks paid vacation
--------
per annum.
4.6 Shareholder Rights. If, at any time, Imperial is granted "piggy-
------------------
back" registration rights with respect to its shares of the Company's common
stock, Executive shall, at such time, be granted "piggy-back" registration
rights similar to those granted to Imperial, subject to customary underwriters
carve-backs and a carve-back in proportion to such shares sold by Imperial, if
any. Executive shall have "tag-along" rights, on a proportionate basis, on any
sales of Company shares by Imperial prior to consummation of an initial public
offering by the Company.
5. Reasonable Expenses. The Company will reimburse the Executive for all
-------------------
reasonable business expenses, including travel and lodging, which are properly
incurred by him in the performance of his duties hereunder, upon presentation of
proper vouchers therefor and in accordance with written policies established
from time to time by the Company for such reimbursements.
6. Assistance. Executive shall make himself reasonably available, upon
----------
the request of the Company, to testify or otherwise assist in litigation,
arbitration, or other disputes involving the Company, or any of its officers,
directors, employees, subsidiaries or affiliates, during the Employment Period.
7. Covenant Not to Compete.
-----------------------
7.1 General Covenant. During the Employment Period and for a period of
----------------
one year after the termination of this Agreement pursuant to Sections 8.3, 8.4,
or 8.5.1 (the "Non-Compete Period"), except in pursuit of his services as an
------------------
officer and employee of the Company, Executive shall not, either individually or
as a partner, joint venturer, consultant, shareholder, member or Representative
(as defined below) of another Person (as defined below) or otherwise, directly
or indirectly, participate in, engage in, or have a financial or management
interest in, promote, or assist any other Person in any business operation or
any enterprise if such business operation or enterprise engages, or would
engage, in a Restricted Business in a Restricted Area; provided,
---------
<PAGE>
however, the Executive may own up to one percent of the outstanding equity
- -------
securities of any Person.
For purposes of this Section 7.1: "Person" means an individual, a
------
partnership, a limited liability company, a joint venture, a corporation, a
trust, an unincorporated organization, a division or operating group of any of
the foregoing, a government or any department or agency thereof or any other
entity.
"Representative" means any officer, director, principal, agent, employee,
--------------
consultant or other representative of a Person.
"Restricted Business" means any business involved in the processing of
-------------------
payments
to government entities or any other business in which the Company is actively
engaged on the date of termination of the Employment Period.
"Restricted Area" means any country in which the Company or its
---------------
subsidiaries conducts a Restricted Business on the date of termination of the
Employment Period.
7.2 Nonsolicitation. During the Non-Compete Period and for a period of
---------------
one year following termination of the Agreement, except a termination pursuant
to Section 8.5.2, Executive shall not, directly or indirectly (i) employ or seek
to employ any person who is at the date of termination of this Agreement, an
officer, general manager or director or equivalent or more senior level employee
of the Company, their subsidiaries or affiliates or otherwise solicit,
encourage, cause or induce any such employee of the Company, its subsidiaries or
affiliates to terminate such employee's employment with the Company, its
subsidiaries or affiliates for the employment of another company (including for
this purpose the contracting with any person who was an independent contractor
(excluding consultant) of the Company during such period), except for persons
who are recruited by Executive to the Company within ninety (90) days after the
Commencement Date and are identified in writing by Executive to the Company
after the end of such period, or (ii) take any action that would interfere with
the relationship of the Company, its subsidiaries and affiliates with their
respective suppliers and franchisees, except to the extent permitted by the
Board.
7.3 Enforcement. Executive agrees that all restrictions and agreements
-----------
contained in this Section 7, including, without limitation, those relating to
duration and restricted territory, are necessary and fundamental to the
protection of the business of the Company and are reasonable and valid.
Executive agrees that the remedy at law for any breach of this Agreement will be
inadequate, and that the damages flowing from such breach are not readily
susceptible to being measured in monetary terms. Accordingly, Executive agrees
that upon breach of this Section 7, the Company shall be entitled to immediate
injunctive relief and may obtain a temporary order restraining any threatened
further breach. Nothing in this Agreement shall be deemed to limit the
Company's remedies at law or in equity for any breach by Executive of any of the
provisions of this Agreement that may be pursued or availed of by the Company.
Nothing contained herein shall be construed as prohibiting the Company from
pursuing any other remedies available to it for such breach or threatened
breach, including the recovery of damages from the Executive.
<PAGE>
Although the restrictions contained in Sections 7. 1 and 7.2 are considered
by the parties to be fair and reasonable in the circumstances, it is recognized
that restrictions of such nature may fail for technical reasons, and accordingly
it is hereby agreed that if any of such restrictions shall be adjudged to be
void or unenforceable for whatever reason, but would be valid if part of the
wording thereof were deleted, or the period thereof reduced or the area dealt
with thereby reduced in scope, the restriction contained in Sections 7.1 and 7.2
shall be enforced to the maximum extent permitted by law, and the parties
consent and agree that such scope or wording may be accordingly judicially
modified in any proceeding brought to enforce such restrictions.
Notwithstanding that the Executive's employment hereunder may be terminated
as provided in Section 8, this Agreement shall continue in full force and effect
insofar as is necessary to enforce the covenants and agreements of the Executive
contained in this Section 7.
8. Termination.
-----------
8.1 Termination by the Company Without Cause. The Company may terminate
----------------------------------------
the Employment Period upon sixty (60) days' prior written notice to Executive
for any reason other than the reasons specified in Sections 8.2, 8.3 and 8.4.
Upon termination of the Employment Period pursuant to this Section 8.1, neither
the Company on the one hand, nor Executive, on the other hand, will have any
liability or obligation to the other in respect of this Agreement, except that
(A) for the one-year period following the date of such notice, Executive shall
be entitled to continue to (i) receive the Base Salary then in effect and (ii)
to the extent permitted by such plans, participate in the employee benefit plans
maintained by the Company in which Executive participated as of the date of such
notice, or, to the extent not permitted by such plans, receive equivalent
benefits or cash payments on an individual basis, (B) in addition to options or
shares that are vested through the date of termination of the Employment Period,
all of the remaining unvested options or shares as of the date of termination of
the Employment Period (such number of options or shares hereinafter referred to
as the "Severance Shares") shall immediately vest, notwithstanding anything to
----------------
the contrary in any other agreement between Executive and the Company and (C)
Executive shall continue to be entitled to the Guarantee Bonus set forth in
Section 4.2. In the event of any termination of employment hereunder, the
executive shall be under no obligation to seek other employment and there shall
be no offset against any amounts due Executive under this Agreement on account
of any remuneration attributable to any subsequent employment that Executive may
obtain. If Executive dies after a termination of employment but prior to
receiving all amounts due him, the remaining amounts shall be paid to his
designated beneficiary or, if none, his estate.
8.2 Death. If Executive dies during the Employment Period, the Employment
-----
Period applicable to the Company shall automatically terminate and all
obligation of the parties shall terminate effective the date of death, except
for obligations under any and all employee benefit plans maintained by the
Company in which the Executive participates as of the date of termination, for
which the terms of the plans shall govern. However, the Severance Shares shall
immediately vest, notwithstanding anything to the contrary in any other
agreement between the Executive and the Company.
<PAGE>
8.3 Disability. If Executive becomes Disabled (as hereinafter defined)
----------
during the Employment Period, the Company shall be entitled to terminate his
employment and the Employment Period upon written notice to Executive or a
person acting on his behalf. In the event of such termination, Executive shall
be released from any duties hereunder, and for the one year period following
such termination the Company shall be required to pay Executive the Base Salary
then in effect ("Salary Continuation Period"). In such event, to the extent
permitted by such plans, Executive shall also continue to participate during the
Salary Continuation Period in the employee benefit plans maintained by the
Company in which Executive participates as of the date of termination. In
addition, the Severance Shares shall immediately vest, notwithstanding anything
to the contrary in any other agreement between the Executive and the Company.
For purposes of this Agreement, "Disabled" shall mean mental or physical
--------
impairment or incapacity rendering Executive substantially unable to perform his
duties under this Agreement for a period of longer than 120 days out of any 360
day period during the Employment Period. A determination of whether Executive
is Disabled shall be made by the Company in its sole discretion upon its own
initiative after obtaining certification from a duly licensed physician or upon
request of Executive or a person acting on his behalf.
8.4 Termination by the Company for Cause. The Company may terminate the
------------------------------------
Employment Period effective immediately upon written notice to Executive in the
event of any of the following:
(i) Executive's material breach of any material term or
condition of this Agreement, such breach continuing unremedied for 30
days after written notice thereof from the Company specifying the acts
constituting the breach and requesting that they be remedied, it being
understood that issues with respect to the quality of Executive's
performance or results thereof shall not be grounds for termination
under this Section 8.4;
(ii) Executive's
(A) personal dishonesty, fraud, misappropriation, willful
misconduct or breach of fiduciary duty, in each such case materially
harmful to the Company's property, personnel or business operations,
or materially damaging to the Company's relationships with its
customers, clients or employees or materially detrimental to the
goodwill of the Company; or
(B) intentional failure to perform the duties of his
employment or his other obligations hereunder, or any continuing
action by Executive materially detrimental to the goodwill of the
Company or materially damaging to the Company's relationships with its
customers, clients or employees, which non-performance or actions
remain unremedied for 30 days after written notice thereof from the
Company specifying in detail the non-performance or actions and
requesting that they be remedied, it being understood that issues with
respect
<PAGE>
to the quality of Executive's performance or results thereof shall not
be grounds for termination under this Section 8.4;
(iii) Executive's pleading guilty or no-contest to, or
conviction of, a felony or a crime involving moral turpitude or fraud;
(iv) misappropriation (or attempted misappropriation) of
company's funds or property or of a business opportunity of the
Company, including attempting to secure or securing any personal
profit in connection with any transaction entered into on behalf of
the Company;
(v) Executive's conviction of any criminal offense involving
dishonesty or breach of trust or money laundering, or Executive's
agreement to enter into a pretrial diversion or similar program in
connection with a prosecution for such offense;
(vi) Executive's excessive drunkenness, use of illegal drugs
or abuse of any controlled substance; or
(vii) Executive's excessive absenteeism not related to
Executive's illness, which absenteeism remains unremedied for 30 days
after written notice thereof requesting that it be remedied.
Upon termination of the Employment Period pursuant to this Section 8.4, the
Executive will be bound by the provisions of Section 7 and the Company will not
have any liability to Executive in respect of this Agreement, including, without
limitation, claims for damages or liability to the Company by Executive for
compensation, severance payments and other benefits which would have accrued to
Executive hereunder after termination; provided, however, that all compensation,
-------- -------
benefits and reimbursements accrued through the date of termination shall be
paid to Executive at the times normally paid by the Company. Upon termination
of the Employment Period pursuant to this Section 8.4, all of Executive's
unvested options to acquire share of common stock of the Company shall be
canceled.
8.5 Termination by Executive.
------------------------
8.5.1 Voluntary Termination. Executive may terminate the Employment
---------------------
Period upon sixty (60) days' written notice to the Company and, upon such
termination, the provisions of the last paragraph of Section 8.4 shall apply,
except in the event that Executive terminates this Agreement pursuant to Section
8.5.2. Upon termination of the Employment Period pursuant to this Section
8.5.1, all of Executive's unvested options to acquire shares of common stock of
the Company shall be canceled. Executive agrees, in connection with the
termination of the Employment Period pursuant to this Section 8.5.2, not to
disclose his intent to resign.
8.5.2 Termination for Good Reason. Executive may terminate the Employment
---------------------------
Period at any time for Good Reason. "Good Reason" shall mean (i) a material
-----------
diminution of
<PAGE>
Executive's authority, duties and responsibilities as provided in Section 3,
(ii) a reduction in or failure to pay timely Executive's base salary, or (iii)
the appointment of any person to a superior executive position, (iv) any
relocation of the Company's corporate headquarters to a place 90 miles or more
outside of New York City, (v) the Company's breach of any material term or
condition of this Agreement and (vi) after expiration of the six (6) month
period following a Change in Control (as defined in Section 9.2); provided,
--------
however, that each of the reasons set forth in (i) through (vi) of the preceding
- -------
sentence shall be identified in written notice thereof delivered by Executive to
the Company specifying the nature of the reason and the Company shall have been
afforded a period of thirty (30) days to respond to such notice and cure the
condition set forth in such notice if capable of being cured. If Executive
terminates this Agreement for Good Reason, the provisions of Section 8.1 shall
apply and Executive shall be bound by the provisions of Section 7.
9. Change in Control.
-----------------
9.1 Acceleration of Options. If a Change in Control occurs, all of
-----------------------
Executive's options to acquire shares of common stock of the Company shall
immediately vest and shall become immediately exercisable and all of Executive's
option shares shall immediately vest and cease to be subject to repurchase
rights, if any, notwithstanding anything to the contrary in any other agreement
between Executive and the Company. In addition, if the Company terminates the
Employment Period without cause as provided in Section 8.1 and within three (3)
months thereafter the Company enters into a definitive agreement for a Change in
Control (as defined in Section 9.2) occurs, Executive shall be entitled to the
benefits set forth in this Section 9.1.
9.2 Definition of Change of Control. For purposes of this Section 9,
-------------------------------
"Change in Control" shall mean: (i) the sale, lease, transfer, conveyance or
- ------------------
other disposition (other than by way of merger or consolidation), in one or a
series of related transactions, of all or substantially all of the assets of the
Company and subsidiaries (if any), taken as a whole to any Person other than to
the Company or one of its wholly-owned subsidiaries; (ii) the Company
consolidates with or merges into another Person (other than a subsidiary) or any
Person (other than a subsidiary) consolidates with, or merges into, the Company,
in any such event pursuant to a transaction in which the outstanding shares of
common stock of the Company are changed into or exchanged for cash, securities
or other property, other than any such transaction where the holders of the
shares of common stock of the Company immediately prior to such transaction own,
directly or indirectly, not less than a controlling interest in the voting
equity of the surviving or resulting Person immediately after such transaction;
(iii) the consummation of any transaction or series of transaction (including.
without limitation, any merger or consolidation) the result of which is that any
Person (other than a subsidiary of the Company), becomes the beneficial owner
(as such term is defined in Rule l3d-3 and Rule l3d-5 under the Securities
Exchange Act of 1934, as amended), directly or indirectly, of fifty percent
(50%) or more of the voting equity of the Company; or (iv) following the
Company's initial public offering, a change in the composition of the Company's
Board of Directors, as a result of which fewer than a majority of the incumbent
directors are directors who either (A) had been directors of the Company on the
Commencement Date or the date 24 months prior to the date of the event that may
constitute a Change in Control (the "original directors") or (B) were elected,
------------------
or nominated for election, to the Company's Board
<PAGE>
of Directors with the affirmative votes of at least a majority of the aggregate
of the original directors who were still in office at the time of the election
or nomination and the directors whose election or nomination was previously so
approved. Notwithstanding the foregoing, the term "Change in Control" shall not
-----------------
include any transaction or series of transactions with or to (A) any affiliate
of the Company, (B) any entity or successor entity in which the Company holds at
least a majority of the total voting power of such entity or successor entity
(or retains the right or ability by voting power, contract or otherwise to elect
or designate for election a majority of the members of the board of directors or
other governing body of such entity or successor entity), (C) any entity or
successor entity in which no person or entity holds a greater percentage of the
total voting power of such entity or successor entity than the Company's
percentage voting interest in such entity or successor entity or (D) any entity
formed at the direction of the Company in connection with obtaining financing
for the Company or any of its subsidiaries under an arrangement that provides
the Company with an option to reacquire its assets or other properties or other
similar financing arrangement.
10. Insurance. The Company will have the right at its own cost and
---------
expense to apply for and secure in its own name, or otherwise, life, health or
accident insurance or any or all of them covering Executive, and Executive
agrees to submit to the usual and customary medical examination and otherwise to
cooperate with the Company in connection with the procurement of any such
insurance, and any claims thereunder.
11. Confidentiality; Books and Records; Company Property. Except in
----------------------------------------------------
accordance with the provisions of this Agreement, during the Employment Period
and thereafter, Executive shall keep secret and retain in strictest confidence,
and shall not use for the benefit of Executive or others, all confidential
matters and affairs relating to the Company. Upon any termination of this
agreement Executive shall promptly deliver to the Company all confidential
information theretofore supplied to him, and each copy thereof, whether in his
possession or otherwise available to him, and shall certify in writing to the
Company that all analysis, studies and other documents that discuss or analyze
the business of the Company have been destroyed. All papers, books and records
of every kind and description relating to the business and affairs of the
Company, whether or not prepared by Executive, and all property owned by the
Company shall be the sole and exclusive property of the Company and Executive
shall surrender them to the Company upon request, during and after the
Employment Period.
12. Miscellaneous.
-------------
12.1 Notices. All notices, requests, demands and other communications
-------
which are required to be or may be given under this Agreement to any of the
other parties shall be in writing and shall be deemed to have been duly given
when (a) delivered in person, the day following dispatch by an overnight courier
service (such as Federal Express or UPS, etc.) or (b) five days after dispatch
by certified or registered first class mail, postage prepaid, return receipt
requested, to the party to whom the same is so given or made:
<PAGE>
If to the Company,
addressed to:
U.S. Audiotex Corporation
18 Crow Canyon Court
Suite 300
San Ramon, CA 94583
Telephone: (925) 838-7996
Facsimile: (925) 838-4395
Attn:
If to Executive,
addressed to him at:
Brian W. Nocco
78 Jockey Hollow Rd.
Bernardsville, NJ 07924
908-221-0515
12.2 Amendments. This Agreement cannot be altered or otherwise amended
----------
except pursuant to an instrument in writing signed by each of the parties.
12.3 Assignment. Executive acknowledges that the services required of
----------
Executive hereunder are personal and that Executive may not assign this
Agreement or any rights or duties under this Agreement. The Company may not
assign or otherwise transfer this Agreement to any other entity without the
prior written consent of Executive, which consent shall not be unreasonably
withheld.
12.4 Entire Agreement. This Agreement contains the entire agreement
----------------
between the parties with respect to the transactions contemplated herein and
supersedes all previous written or oral negotiations, commitments and
understandings.
12.5 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
12.6 Headings. All headings are inserted for convenience of reference
--------
only and shall not affect the meaning or interpretation of any such provisions
or of this Agreement, taken as an entirety.
12.7 Severability. If and to the extent that any court of competent
------------
jurisdiction holds any provision (or any part thereof) of this agreement to be
invalid or unenforceable, such holding shall in no way affect the validity or
enforceability of the remainder of this Agreement, but shall be confined in its
operation to the jurisdiction in which made and to the provisions of this
<PAGE>
Agreement directly involved in the controversy in which such judgment shall have
been rendered.
12.8 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York without reference to the
conflicts of laws principles thereof .
12.9 Binding Effects. This Agreement shall be binding upon and inure to
---------------
the benefit of the parties hereto and their respective successors, legal
representatives and assigns.
12.10 Acquisitions, Mergers, Etc. Nothing herein contained shall be
---------------------------
construed to prevent or limit any acquisition, consolidation, or merger of the
Company.
12.11 Covenants, Etc. Executive hereby covenants, warrants and represents
---------------
that (i) the execution of this Agreement and the discharge of his obligations
hereunder will not breach or conflict with any other contract, agreement or
understanding between Executive and any other party or parties; (ii) there are
no agreements or arrangements, whether written or oral, in effect which would
prevent Executive from rendering services to the Company during the term of this
Agreement; (iii) Executive has not made and will not make any commitment to do
any act in conflict with this Agreement; and (iv) the terms of this Agreement
have been fully explained to him, that he understands the nature and extent of
the rights and obligations provided under this Agreement, and that he has been
given the opportunity to be represented by legal counsel in the negotiation and
preparation of this Agreement. The Company hereby covenants, warrants and
represents that (i) the execution of this Agreement and the discharge of its
obligations hereunder will not breach or conflict with any other contract,
agreement or understanding between the Company and any other party or parties,
(ii) the execution and delivery of this Agreement have been duly and validly
authorized by the Company; and (iii) this Agreement is binding upon and
enforceable against the Company in accordance with its terms.
12.12 Waiver. No consent or waiver, express or implied, by any party to
------
or of any breach or default by another party in performance by the breaching
party of its obligations under this Agreement shall be deemed or construed to be
a consent or waiver to or of any breach or default by the breaching party in the
performance by such breaching party of any other obligations of such breaching
party under this Agreement. Failure on the part of any party to object to or
complain of any act or failure to act of any of the other parties or to declare
any of the other parties in default shall not constitute a waiver of any right
or remedy or the ability to object or complain or to declare any default at any
time in the future.
12.13 Survival. The provisions of Sections 5,7,8,11 and 12 shall survive
--------
the termination of this Agreement.
12.14 Legal Fees. Each party will be responsible for their own legal
----------
fees and costs of counsel incurred in connection with negotiation and
preparation of this Agreement.
<PAGE>
12.15 Other Employment. Executive hereby represents and warrants to the
----------------
Company that Executive is not prohibited from accepting employment with the
Company by any non-competition or other restriction contained in any employment
agreement with any other entity. Executive understands and agrees that any
breach of this representation or warranty that results in Executive being
prohibited from performing his duties under this Agreement will constitute a
material breach for purposed of Section 8.4 (i) of this Agreement, and on or at
any time after it is determined that Executive is so prohibited, the Company
will be permitted to terminate Executive's employment pursuant to Section 8.4.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on
the day and year first above written.
U.S. AUDIOTEX CORPORATION
By: /s/ Thomas R. Evans
_____________________________
Name: Thomas R. Evans
Title: Chairman & CEO
/s/ Brian W. Nocco
_______________________________
Brian W. Nocco
<PAGE>
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (this "Agreement") is made as of September 1999
---------
by and among U.S. Audiotex Corporation, a Delaware corporation (the "Company"),
-------
Imperial Bank ("Imperial) and Michael Presto ("Executive").
-------- ---------
RECITALS
--------
WHEREAS, the Company desires to employ Executive to serve as Chief
Operating Officer of the Company on the terms and conditions herein provided;
WHEREAS, Executive desires to become an employee of the Company on the
terms and conditions herein provided;
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows:
1. Employment. The Company hereby employs Executive, subject to the
----------
terms and conditions herein provided. During the Employment Period (as defined
below), Executive shall faithfully and diligently perform his duties under this
Agreement and shall use his best efforts to promote the interests of the
Company.
2. Term. Subject to the terms and conditions hereof, the initial term of
----
employment of Executive by each Company under this Agreement shall be for the
period commencing on the date hereof (the "Commencement Date") and expiring when
-----------------
terminated as provided in Section 8 hereof (the "Expiration Date"). For
---------------
purposes hereof, such period is referred to herein as the "Employment Period").
-----------------
3. Executive's Obligations.
-----------------------
In his capacity as an executive of the Company, Executive shall report
directly to the Chief Executive Officer Thomas R. Evans. Executive shall at
all times comply with and be subject to the Company's policies, procedures,
directives and regulations as established by the Company from time to time.
Executive accepts such employment, responsibility and authority and agrees to
perform the services of Chief Operating Officer of the Company and such other
services as shall from time to time be reasonably assigned to him and agrees to
devote all of his working time, skill and attention to such services.
Notwithstanding the foregoing, the parties agree that the Executive may
continue any educational, charitable and community activities (including
membership on the board of educational, charitable or community organizations)
in which he is engaged on the date hereof and may engage in other educational,
charitable and community activities (including
<PAGE>
membership on the board of educational, charitable or community organizations)
and serve on boards of directors of other companies provided such activities do
not materially interfere with the performance of his duties to the Company.
4. Executive's Compensation and Benefits. During the Employment Period,
-------------------------------------
as full compensation to the Executive for his performance of the services
hereunder and for his acceptance of the responsibilities described herein, the
Company agrees to pay the Executive, and the Executive agrees to accept, the
following salary and other benefits:
4.1 Base Salary. From the Commencement Date of this agreement the Company
-----------
shall pay the Executive a salary at the annual rate of $200,000. The base
salary due the Executive hereunder (the "Base Salary") shall be payable in
-----------
accordance with the Company's standard payment policy, less any amounts required
to be withheld by the Company from such Base Salary pursuant to the benefit
plans in which Executive participates pursuant to Section 4.5 and applicable
laws and regulations.
4.2 Bonus. (a) The Executive shall be eligible to receive annual bonuses
-----
(each a "Bonus") at the discretion of, and in the amounts and at the times
-----
determined by, the compensation committee. Executive agrees that there can be
no assurance that the Compensation Committee will grant a Bonus in any year
except that the Executive shall be paid a guaranteed bonus in the minimum
amount of $100,000 in the first year of his employment ("Guaranteed Payment").
------------------
4.3 Long Term Incentives. On the Commencement Date, the Company will
--------------------
grant Executive options to acquire 125,000 shares of its common stock, which
represent 2.5% of the Company's Fully Diluted Common Stock on the Commencement
Date (inclusive of the 125,000 share option grant to Executive). On the IPO
Date, the Company will grant executive additional options to acquire such number
of shares of its common stock so that, when combined with the options granted in
the immediately preceding sentence, Executive will have received pursuant to
this Section 4.3 options to acquire shares of common stock equal to an aggregate
of two and one-half percent (2.5%) of the Fully Diluted Common Stock of the
Company outstanding as of the IPO Date (inclusive of the option grant to
Executive). For purposes of this Section 4.3, "Fully Diluted Common Stock"
--------------------------
shall mean the aggregate of (i) the number of shares of Company common stock
authorized and outstanding determined on an as-converted basis and (ii) the
number of shares of Company common stock subject to outstanding options,
warrants and other rights to acquire Company common stock determined on an as-
converted bases. Such options will be non-transferable and shall be exercisable
at any time for a ten year period after the date of grant. The exercise price
of such options shall be equal to $4.00 per share. All of the option shares
shall initially be unvested and subject to repurchase by the Company at the
exercise price paid per share. Subject to Section 8 hereof, Executive shall
acquire a vested interest in, and the Company's repurchase right shall
accordingly lapse with respect to one-third of the option shares granted
pursuant to this Section 4.3 on the first anniversary of the Commencement Date
and the remaining option shares in a series of twenty four (24) successive equal
monthly installments during the Employment Period. Following termination of the
Employment Period, Executive
<PAGE>
shall acquire a vested interest in, and the Company's repurchase right shall
accordingly terminate with respect to, all of any unvested option shares for
which the Company did not exercise its repurchase right within thirty (30) days
following such termination. Executive shall be entitled to pay the exercise
price of such options in the same manner and on the same terms as the Company
offers to members of its senior management who receive similar options.
4.4 Other Benefit Plans. Subject to all eligibility requirements,
-------------------
and to the extent permitted by law, the Executive shall be entitled to
participate in any and all employee benefit plans (including, but not limited
to, retirement, life insurance, medical, dental, disability, and savings plans)
established or maintained by the Company from time to time for the benefit of
their employees (or executives) in general.
4.5 Vacation. The Executive shall be entitled to four weeks paid
--------
vacation per annum.
4.6 Shareholder Rights. If, at any time, Imperial is granted
------------------
"piggy-back" registration rights with respect to its shares of the Company's
common stock, Executive shall, at such time, be granted "piggy-back"
registration rights similar to those granted to Imperial, subject to customary
underwriters carve-backs and a carve-back in proportion to such shares sold by
Imperial, if any. Executive shall have "tag-along" rights, on a proportionate
basis, on any sales of Company shares by Imperial prior to consummation of an
initial public offering by the Company.
5. Reasonable Expenses. The Company will reimburse the Executive for all
-------------------
reasonable business expenses, including travel and lodging, which are properly
incurred by him in the performance of his duties hereunder, upon presentation of
proper vouchers therefor and in accordance with written policies established
from time to time by the Company for such reimbursements.
6. Assistance. Executive shall make himself reasonably available, upon
----------
the request of the Company, to testify or otherwise assist in litigation,
arbitration, or other disputes involving the Company, or any of its officers,
directors, employees, subsidiaries or affiliates, during the Employment Period.
7. Covenant Not to Compete.
-----------------------
7.1 General Covenant. During the Employment Period and for a period of
----------------
one year after the termination of this Agreement pursuant to Sections 8.3, 8.4,
or 8.5.1 (the "Non-Compete Period"), except in pursuit of his services as an
------------------
officer and employee of the Company, Executive shall not, either individually or
as a partner, joint venturer, consultant, shareholder, member or Representative
(as defined below) of another Person (as defined below) or otherwise, directly
or indirectly, participate in, engage in, or have a financial or management
interest in, promote, or assist any other Person in any business operation or
any enterprise if such business operation or enterprise engages, or would
engage, in a Restricted Business in a Restricted Area; provided,
--------
<PAGE>
however, the Executive may own up to one percent of the outstanding
- -------
equity securities of any Person.
For purposes of this Section 7.1: "Person" means an individual, a
------
partnership, a limited liability company, a joint venture, a corporation, a
trust, an unincorporated organization, a division or operating group of any of
the foregoing, a government or any department or agency thereof or any other
entity.
"Representative" means any officer, director, principal, agent, employee,
--------------
consultant or other representative of a Person.
"Restricted Business" means any business involved in the processing of
-------------------
payments to government entities or any other business in which the Company is
actively engaged on the date of termination of the Employment Period.
"Restricted Area" means any country in which the Company or its
---------------
subsidiaries conducts a Restricted Business on the date of termination of the
Employment Period.
7.2 Nonsolicitation. During the Non-Compete Period and for a period of
---------------
one year following termination of the Agreement, except a termination pursuant
to Section 8.5.2, Executive shall not, directly or indirectly (i) employ or
seek to employ any person who is at the date of termination of this Agreement,
an officer, general manager or director or equivalent or more senior level
employee of the Company, their subsidiaries or affiliates or otherwise solicit,
encourage, cause or induce any such employee of the Company, its subsidiaries or
affiliates to terminate such employee's employment with the Company, its
subsidiaries or affiliates for the employment of another company (including for
this purpose the contracting with any person who was an independent contractor
(excluding consultant) of the Company during such period), except for persons
who are recruited by Executive to the Company within ninety (90) days after the
Commencement Date and are identified in writing by Executive to the Company
after the end of such period, or (ii) take any action that would interfere with
the relationship of the Company, its subsidiaries and affiliates with their
respective suppliers and franchisees, except to the extent permitted by the
Board.
7.3 Enforcement. Executive agrees that all restrictions and agreements
-----------
contained in this Section 7, including, without limitation, those relating to
duration and restricted territory, are necessary and fundamental to the
protection of the business of the Company and are reasonable and valid.
Executive agrees that the remedy at law for any breach of this Agreement will be
inadequate, and that the damages flowing from such breach are not readily
susceptible to being measured in monetary terms. Accordingly, Executive agrees
that upon breach of this Section 7, the Company shall be entitled to immediate
injunctive relief and may obtain a temporary order restraining any threatened
further breach. Nothing in this Agreement shall be deemed to limit the Company's
remedies at law or in equity for any breach by Executive of any of the
provisions of this Agreement that may be pursued or availed of by the Company.
Nothing contained herein
<PAGE>
shall be construed as prohibiting the Company from pursuing any other remedies
available to it for such breach or threatened breach, including the recovery of
damages from the Executive.
Although the restrictions contained in Sections 7. 1 and 7.2 are considered
by the parties to be fair and reasonable in the circumstances, it is recognized
that restrictions of such nature may fail for technical reasons, and accordingly
it is hereby agreed that if any of such restrictions shall be adjudged to be
void or unenforceable for whatever reason, but would be valid if part of the
wording thereof were deleted, or the period thereof reduced or the area dealt
with thereby reduced in scope, the restriction contained in Sections 7.1 and 7.2
shall be enforced to the maximum extent permitted by law, and the parties
consent and agree that such scope or wording may be accordingly judicially
modified in any proceeding brought to enforce such restrictions.
Notwithstanding that the Executive's employment hereunder may be terminated
as provided in Section 8, this Agreement shall continue in full force and effect
insofar as is necessary to enforce the covenants and agreements of the Executive
contained in this Section 7.
8. Termination.
-----------
8.1 Termination by the Company Without Cause. The Company may terminate
----------------------------------------
the Employment Period upon sixty (60) days' prior written notice to Executive
for any reason other than the reasons specified in Sections 8.2, 8.3 and 8.4.
Upon termination of the Employment Period pursuant to this Section 8.1, neither
the Company on the one hand, nor Executive, on the other hand, will have any
liability or obligation to the other in respect of this Agreement, except that
(A) for the one-year period following the date of such notice, Executive shall
be entitled to continue to (i) receive the Base Salary then in effect and (ii)
to the extent permitted by such plans, participate in the employee benefit plans
maintained by the Company in which Executive participated as of the date of such
notice, or, to the extent not permitted by such plans, receive equivalent
benefits or cash payments on an individual basis, (B) in addition to options or
shares that are vested through the date of termination of the Employment Period,
all of the remaining unvested options or shares as of the date of termination of
the Employment Period (such number of options or shares hereinafter referred to
as the "Severance Shares") shall immediately vest, notwithstanding anything to
----------------
the contrary in any other agreement between Executive and the Company and (C)
Executive shall continue to be entitled to the Guarantee Payment set forth in
Section 4.2. In the
<PAGE>
event of any termination of employment hereunder, Executive shall be under no
obligation to seek other employment and there shall be no offset against any
amounts due Executive under this Agreement on account of any remuneration
attributable to any subsequent employment that Executive may obtain. If
Executive dies after a termination of employment but prior to receiving all
amounts due him, the remaining amounts shall be paid to his designated
beneficiary or, if none, his estate.
8.2 Death. If Executive dies during the Employment Period, the Employment
-----
Period applicable to the Company shall automatically terminate and all
obligation of the parties shall terminate effective the date of death, except
for obligations under any and all employee benefit plans maintained by the
Company in which the Executive participates as of the date of termination, for
which the terms of the plans shall govern. However, the Severance Shares shall
immediately vest, notwithstanding anything to the contrary in any other
agreement between the Executive and the Company.
8.3 Disability. If Executive becomes Disabled (as hereinafter defined)
----------
during the Employment Period, the Company shall be entitled to terminate his
employment and the Employment Period upon written notice to Executive or a
person acting on his behalf. In the event of such termination, Executive shall
be released from any duties hereunder, and for the one year period following
such termination the Company shall be required to pay Executive the Base Salary
then in effect ("Salary Continuation Period"). In such event, to the extent
permitted by such plans, Executive shall also continue to participate during
the Salary Continuation Period in the employee benefit plans maintained by the
Company in which Executive participates as of the date of termination. In
addition, the Severance Shares shall immediately vest, notwithstanding anything
to the contrary in any other agreement between the Executive and the Company.
For purposes of this Agreement, "Disabled" shall mean mental or physical
--------
impairment or incapacity rendering Executive substantially unable to perform his
duties under this Agreement for a period of longer than 120 days out of any 360
day period during the Employment Period. A determination of whether Executive
is Disabled shall be made by the Company in its sole discretion upon its own
initiative after obtaining certification from a duly licensed physician or upon
request of Executive or a person acting on his behalf.
8.4 Termination by the Company for Cause. The Company may terminate the
------------------------------------
Employment Period effective immediately upon written notice to Executive in the
event of any of the following:
(i) Executive's material breach of any material term or condition
of this Agreement, such breach continuing unremedied for 30 days after
written notice thereof from the Company specifying the acts
constituting the breach and requesting that they be remedied, it being
understood that issues with respect to
<PAGE>
the quality of Executive's performance or results thereof shall not be
grounds for termination under this Section 8.4;
(ii) Executive's
(A) personal dishonesty, fraud, misappropriation, willful
misconduct or breach of fiduciary duty, in each such case materially
harmful to the Company's property, personnel or business operations,
or materially damaging to the Company's relationships with its
customers, clients or employees or materially detrimental to the
goodwill of the Company; or
(B) intentional failure to perform the duties of his
employment or his other obligations hereunder, or any continuing
action by Executive materially detrimental to the goodwill of the
Company or materially damaging to the Company's relationships with its
customers, clients or employees, which non-performance or actions
remain unremedied for 30 days after written notice thereof from the
Company specifying in detail the non-performance or actions and
requesting that they be remedied, it being understood that issues with
respect to the quality of Executive's performance or results thereof
shall not be grounds for termination under this Section 8.4;
(iii) Executive's pleading guilty or no-contest to, or conviction
of, a felony or a crime involving moral turpitude or fraud;
(iv) misappropriation (or attempted misappropriation) of
company's funds or property or of a business opportunity of the
Company, including attempting to secure or securing any personal
profit in connection with any transaction entered into on behalf of
the Company;
(v) Executive's conviction of any criminal offense involving
dishonesty or breach of trust or money laundering, or Executive's
agreement to enter into a pretrial diversion or similar program in
connection with a prosecution for such offense;
(vi) Executive's excessive drunkenness, use of illegal drugs or
abuse of any controlled substance; or
(vii) Executive's excessive absenteeism not related to
Executive's illness, which absenteeism remains unremedied for 30 days
after written notice thereof requesting that it be remedied.
Upon termination of the Employment Period pursuant to this Section 8.4, the
Executive will be bound by the provisions of Section 7 and the Company will not
have any liability to Executive in respect of this Agreement, including, without
limitation, claims for damages or liability to the Company by Executive for
compensation, severance payments and other benefits which would have accrued to
Executive hereunder after termination; provided, however, that all
-------- -------
<PAGE>
compensation, benefits and reimbursements accrued through the date of
termination shall be paid to Executive at the times normally paid by the
Company. Upon termination of the Employment Period pursuant to this Section 8.4,
all of Executive's unvested options to acquire share of common stock of the
Company shall be canceled.
8.5 Termination by Executive.
------------------------
8.5.1 Voluntary Termination. Executive may terminate the Employment
---------------------
Period upon sixty (60) days' written notice to the Company and, upon such
termination, the provisions of the last paragraph of Section 8.4 shall apply,
except in the event that Executive terminates this Agreement pursuant to Section
8.5.2. Upon termination of the Employment Period pursuant to this Section
8.5.1, all of Executive's unvested options to acquire shares of common stock of
the Company shall be canceled. Executive agrees, in connection with the
termination of the Employment Period pursuant to this Section 8.5.2, not to
disclose to the media his intent to resign.
8.5.2 Termination for Good Reason. Executive may terminate the
---------------------------
Employment Period at any time for Good Reason. "Good Reason" shall mean (i) a
-----------
material diminution of Executive's authority, duties and responsibilities as
provided in Section 3, (ii) a reduction in or failure to pay timely Executive's
base salary, or (iii) the appointment of any person to a superior executive
position, (iv) any relocation of the Company's corporate headquarters to a place
90 miles or more outside of New York City, (v) the Company's breach of any
material term or condition of this Agreement and (vi) after expiration of the
six (6) month period following a Change in Control (as defined in Section 9.2);
provided, however, that each of the reasons set forth in (i) through (vi) of
- -------- -------
the preceding sentence shall be identified in written notice thereof delivered
by Executive to the Company specifying the nature of the reason and the Company
shall have been afforded a period of thirty (30) days to respond to such notice
and cure the condition set forth in such notice if capable of being cured. If
Executive terminates this Agreement for Good Reason, the provisions of Section
8.1 shall apply and Executive shall be bound by the provisions of Section 7.
9. Change in Control.
-----------------
9.1 Acceleration of Options. If a Change in Control occurs, all of
-----------------------
Executive's options to acquire shares of common stock of the Company shall
immediately vest and shall become immediately exercisable and all of Executive's
option shares shall immediately vest and cease to be subject to repurchase
rights, if any, notwithstanding anything to the contrary in any other agreement
between Executive and the Company. In addition, if the Company terminates the
Employment Period without cause as provided in Section 8.1 and within three (3)
months thereafter the Company enters into a definitive agreement for a Change in
Control (as defined in Section 9.2) occurs, Executive shall be entitled to the
benefits set forth in this Section 9.1.
9.2 Definition of Change of Control. For purposes of this Section 9,
-------------------------------
"Change in Control" shall mean: (i) the sale, lease, transfer, conveyance or
-----------------
other disposition (other than by
<PAGE>
way of merger or consolidation), in one or a series of related transactions, of
all or substantially all of the assets of the Company and subsidiaries (if any),
taken as a whole to any Person other than to the Company or one of its wholly-
owned subsidiaries; (ii) the Company consolidates with or merges into another
Person (other than a subsidiary) or any Person (other than a subsidiary)
consolidates with, or merges into, the Company, in any such event pursuant to a
transaction in which the outstanding shares of common stock of the Company are
changed into or exchanged for cash, securities or other property, other than any
such transaction where the holders of the shares of common stock of the Company
immediately prior to such transaction own, directly or indirectly, not less than
a controlling interest in the voting equity of the surviving or resulting Person
immediately after such transaction; (iii) the consummation of any transaction or
series of transaction (including. without limitation, any merger or
consolidation) the result of which is that any Person (other than a subsidiary
of the Company), becomes the beneficial owner (as such term is defined in Rule
l3d-3 and Rule l3d-5 under the Securities Exchange Act of 1934, as amended),
directly or indirectly, of fifty percent (50%) or more of the voting equity of
the Company; or (iv) following the Company's initial public offering, a change
in the composition of the Company's Board of Directors, as a result of which
fewer than a majority of the incumbent directors are directors who either (A)
had been directors of the Company on the Commencement Date or the date 24 months
prior to the date of the event that may constitute a Change in Control (the
"original directors") or (B) were elected, or nominated for election, to the
------------------
Company's Board of Directors with the affirmative votes of at least a majority
of the aggregate of the original directors who were still in office at the time
of the election or nomination and the directors whose election or nomination was
previously so approved. Notwithstanding the foregoing, the term "Change in
---------
Control" shall not include any transaction or series of transactions with or
- -------
to (A) any affiliate of the Company, (B) any entity or successor entity in which
the Company holds at least a majority of the total voting power of such entity
or successor entity (or retains the right or ability by voting power, contract
or otherwise to elect or designate for election a majority of the members of the
board of directors or other governing body of such entity or successor entity),
(C) any entity or successor entity in which no person or entity holds a greater
percentage of the total voting power of such entity or successor entity than the
Company's percentage voting interest in such entity or successor entity or (D)
any entity formed at the direction of the Company in connection with obtaining
financing for the Company or any of its subsidiaries under an arrangement that
provides the Company with an option to reacquire its assets or other properties
or other similar financing arrangement.
10. Insurance. The Company will have the right at its own cost and
---------
expense to apply for and secure in its own name, or otherwise, life, health or
accident insurance or any or all of them covering Executive, and Executive
agrees to submit to the usual and customary medical examination and otherwise to
cooperate with the Company in connection with the procurement of any such
insurance, and any claims thereunder.
11. Confidentiality; Books and Records; Company Property. Except in
----------------------------------------------------
accordance with the provisions of this Agreement, during the Employment Period
and thereafter, Executive shall keep secret and retain in strictest confidence,
and shall not use for the benefit of Executive or others, all confidential
matters and affairs relating to the Company. Upon any termination of this
agreement Executive shall promptly deliver to the Company all confidential
information
<PAGE>
theretofore supplied to him, and each copy thereof, whether in his possession or
otherwise available to him, and shall certify in writing to the Company that all
analysis, studies and other documents that discuss or analyze the business of
the Company have been destroyed. All papers, books and records of every kind and
description relating to the business and affairs of the Company, whether or not
prepared by Executive, and all property owned by the Company shall be the sole
and exclusive property of the Company and Executive shall surrender them to the
Company upon request, during and after the Employment Period.
12. Miscellaneous.
-------------
12.1 Notices. All notices, requests, demands and other communications
-------
which are required to be or may be given under this Agreement to any of the
other parties shall be in writing and shall be deemed to have been duly given
when (a) delivered in person, the day following dispatch by an overnight courier
service (such as Federal Express or UPS, etc.) or (b) five days after dispatch
by certified or registered first class mail, postage prepaid, return receipt
requested, to the party to whom the same is so given or made:
If to the Company,
addressed to:
U.S. Audiotex Corporation
18 Crow Canyon Court
Suite 300
San Ramon, CA 94583
Telephone: (925) 838-7996
Facsimile: (925) 838-4395
Attn:
If to Executive,
addressed to him at: Michael P. Presto
1385 York Avenue - Apt 30G
New York, NY 10021
Telephone: 212.585.1870
Facsimile: 212 ______________
12.2 Amendments. This Agreement cannot be altered or otherwise amended
----------
except pursuant to an instrument in writing signed by each of the parties.
12.3 Assignment. Executive acknowledges that the services required of
----------
Executive hereunder are personal and that Executive may not assign this
Agreement or any rights or duties under this Agreement. The Company may not
assign or otherwise transfer this Agreement to any
<PAGE>
other entity without the prior written consent of Executive, which consent shall
not be unreasonably withheld.
12.4 Entire Agreement. This Agreement contains the entire agreement
----------------
between the parties with respect to the transactions contemplated herein and
supersedes all previous written or oral negotiations, commitments and
understandings.
12.5 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
12.6 Headings. All headings are inserted for convenience of reference
--------
only and shall not affect the meaning or interpretation of any such provisions
or of this Agreement, taken as an entirety.
12.7 Severability. If and to the extent that any court of competent
------------
jurisdiction holds any provision (or any part thereof) of this agreement to be
invalid or unenforceable, such holding shall in no way affect the validity or
enforceability of the remainder of this Agreement, but shall be confined in its
operation to the jurisdiction in which made and to the provisions of this
Agreement directly involved in the controversy in which such judgment shall have
been rendered.
12.8 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York without reference to the
conflicts of laws principles thereof.
12.9 Arbitration. All disputes and controversies arising under or
-----------
in connection with this Agreement, other than the seeking of injunctive or other
equitable relief pursuant to Section 7.3 hereof, shall be settled by arbitration
conducted before a panel of three (3) arbitrators sitting in New York City, New
York, or such other location agreed by the parties hereto, in accordance with
the rules for expedited resolution of commercial disputes of the American
Arbitration Association then in effect. The determination of the majority of
the arbitrators shall be final and binding on the parties. Judgment may be
entered on the award of the arbitrator in any court having proper jurisdiction.
12.10 Indemnification. The Company shall indemnify Executive to the
---------------
fullest extent permitted by law for any and all costs, liabilities, judgments,
damages and expenses incurred by Executive that arise out of, is in connection
with or is related to Executive's actions or inactions in his performance of his
duties hereunder as an employee, director or committee member of fiduciary of
the Company, or any benefit plan of any of the foregoing that are not covered,
and actually paid, by the Company's directors and officers liability insurance
policies. The Company, within ten (10) days of presentation of invoices, shall
advance to Executive reimbursement of all legal fees and disbursements incurred
by the
<PAGE>
Executive in connection with any potentially indemnifiable matter. The Company
shall have the right to select counsel of its choice to undertake such defense.
12.11 Binding Effects. This Agreement shall be binding upon and inure to
---------------
the benefit of the parties hereto and their respective successors, legal
representatives and assigns.
12.12 Acquisitions, Mergers, Etc. Nothing herein contained shall
--------------------------
be construed to prevent or limit any acquisition, consolidation, or merger of
the Company.
12.13 Covenants, Etc. Executive hereby covenants, warrants and
--------------
represents that (i) the execution of this Agreement and the discharge of his
obligations hereunder will not breach or conflict with any other contract,
agreement or understanding between Executive and any other party or parties;
(ii) there are no agreements or arrangements, whether written or oral, in effect
which would prevent Executive from rendering services to the Company during the
term of this Agreement; (iii) Executive has not made and will not make any
commitment to do any act in conflict with this Agreement; and (iv) the terms of
this Agreement have been fully explained to him, that he understands the nature
and extent of the rights and obligations provided under this Agreement, and that
he has been given the opportunity to be represented by legal counsel in the
negotiation and preparation of this Agreement. The Company hereby covenants,
warrants and represents that q (i) the execution of this Agreement and the
discharge of its obligations hereunder will not breach or conflict with any
other contract, agreement or understanding between the Company and any other
party or parties, (ii) the execution and delivery of this Agreement have been
duly and validly authorized by the Company; and (iii) this Agreement is binding
upon and enforceable against the Company in accordance with its terms.
12.14 Waiver. No consent or waiver, express or implied, by any
------
party to or of any breach or default by another party in performance by the
breaching party of its obligations under this Agreement shall be deemed or
construed to be a consent or waiver to or of any breach or default by the
breaching party in the performance by such breaching party of any other
obligations of such breaching party under this Agreement. Failure on the part
of any party to object to or complain of any act or failure to act of any of the
other parties or to declare any of the other parties in default shall not
constitute a waiver of any right or remedy or the ability to object or complain
or to declare any default at any time in the future.
12.15 Survival. The provisions of Sections 5,7,8,11 and 12 shall survive
--------
the termination of this Agreement.
12.16 Legal Fees. Each party will be responsible for their own legal
----------
fees and costs of counsel incurred in connection with negotiation and
preparation of this Agreement.
12.17 Other Employment. Executive hereby represents and warrants to the
----------------
Company that Executive is not prohibited from accepting employment with the
Company by any non-competition or other restriction contained in any employment
agreement with any other entity. Executive understands and agrees that any
breach of this representation or warranty that results in Executive being
prohibited from performing his duties under this Agreement will
<PAGE>
constitute a material breach for purposed of Section 8.4 (i) of this Agreement,
and on or at any time after it is determined that Executive is so prohibited,
the Company will be permitted to terminate Executive's employment pursuant to
Section 8.4.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on
the day and year first above written.
U.S. AUDIOTEX CORPORATION
By: /s/ Thomas R. Evans
_____________________________
Name: Thomas R. Evans
Title: Chairman & CEO
/s/ Michael Presto
________________________________
Michael Presto
<PAGE>
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (this "Agreement") is made as of September 1999
---------
by and among U.S. Audiotex Corporation, a Delaware corporation (the "Company"),
-------
Imperial Bank ("Imperial) and Michael Barrett ("Executive").
-------- ---------
RECITALS
--------
WHEREAS, the Company desires to employ Executive to serve as Chief Internet
and Sales Officer of the Company on the terms and conditions herein provided;
WHEREAS, Executive desires to become an employee of the Company on the
terms and conditions herein provided;
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows:
1. Employment. The Company hereby employs Executive, subject to the terms
----------
and conditions herein provided. During the Employment Period (as defined
below), Executive shall faithfully and diligently perform his duties under this
Agreement and shall use his best efforts to promote the interests of the
Company.
2. Term. Subject to the terms and conditions hereof, the initial term of
----
employment of Executive by each Company under this Agreement shall be for the
period commencing on the date hereof (the "Commencement Date") and expiring when
-----------------
terminated as provided in Section 8 hereof (the "Expiration Date"). For
---------------
purposes hereof, such period is referred to herein as the "Employment Period").
-----------------
3. Executive's Obligations.
-----------------------
In his capacity as an executive of the Company, Executive shall report
directly to the Chief Executive Officer, Thomas R. Evans. Executive shall at all
times comply with and be subject to the Company's policies, procedures,
directives and regulations as established by the Company from time to time.
Executive accepts such employment, responsibility and authority and agrees to
perform the services of Chief Internet and Sales Officer of the Company and such
other services as shall from time to time be reasonably assigned to him and
agrees to devote all of his working time, skill and attention to such services.
Notwithstanding the foregoing, the parties agree that the Executive may
continue any educational, charitable and community activities (including
membership on the board of educational, charitable or community organizations)
in which he is engaged on the date hereof and may engage in other educational,
charitable and community activities (including
<PAGE>
membership on the board of educational, charitable or community organizations)
and serve on boards of directors of other companies provided such activities do
not materially interfere with the performance of his duties to the Company.
4. Executive's Compensation and Benefits. During the Employment Period,
-------------------------------------
as full compensation to the Executive for his performance of the services
hereunder and for his acceptance of the responsibilities described herein, the
Company agrees to pay the Executive, and the Executive agrees to accept, the
following salary and other benefits:
4.1 Base Salary. From the Commencement Date of this agreement the Company
-----------
shall pay the Executive a salary at the annual rate of $200,000. The base
salary due the Executive hereunder (the "Base Salary") shall be payable in
-----------
accordance with the Company's standard payment policy, less any amounts required
to be withheld by the Company from such Base Salary pursuant to the benefit
plans in which Executive participates pursuant to Section 4.5 and applicable
laws and regulations.
4.2 Bonus. (a) The Executive shall be eligible to receive annual bonuses
-----
(each a "Bonus") at the discretion of, and in the amounts and at the times
-----
determined by, the compensation committee. Executive agrees that there can be
no assurance that the Compensation Committee will grant a Bonus in any year
except that the Executive shall be paid a guaranteed bonus in the minimum amount
of $100,000 in the first year of his employment. The guaranteed payment shall
be paid in two installments, six months and twelve months from the commencement
of the executives employment with the company.
4.3 Long Term Incentives. On the Commencement Date, the Company will
--------------------
grant Executive options to acquire 150,000 shares of its common stock, which
represent 3 % of the Company's Fully Diluted Common Stock on the Commencement
Date (inclusive of the 150,000 share option grant to Executive). On the IPO
Date, the Company will grant executive additional options to acquire such number
of shares of its common stock so that, when combined with the options granted in
the immediately preceding sentence, Executive will have received pursuant to
this Section 4.3 options to acquire shares of common stock equal to an aggregate
of three percent (3 %) of the Fully Diluted Common Stock of the Company
outstanding as of the IPO Date (inclusive of the option grant to Executive).
For purposes of this Section 4.3, "Fully Diluted Common Stock" shall mean the
--------------------------
aggregate of (i) the number of shares of Company common stock authorized and
outstanding determined on an as-converted basis and (ii) the number of shares of
Company common stock subject to outstanding options, warrants and other rights
to acquire Company common stock determined on an as-converted bases. Such
options will be non-transferable and shall be exercisable at any time for a ten
year period after the date of grant. The exercise price of such options shall
be equal to $4.00 per share. All of the option shares shall initially be
unvested and subject to repurchase by the Company at the exercise price paid per
share. Subject to Section 8 hereof, Executive shall acquire a vested interest
in, and the Company's repurchase right shall accordingly lapse with respect to
one-third of the option shares granted pursuant to this Section 4.3 on the first
anniversary of the Commencement Date and the remaining option shares in a series
of twenty four (24) successive equal monthly installments
<PAGE>
during the Employment Period. Following termination of the Employment Period,
Executive shall acquire a vested interest in, and the Company's repurchase right
shall accordingly terminate with respect to, all of any unvested option shares
for which the Company did not exercise its repurchase right within thirty (30)
days following such termination. Executive shall be entitled to pay the exercise
price of such options in the same manner and on the same terms as the Company
offers to members of its senior management who receive similar options.
4.4 Other Benefit Plans. Subject to all eligibility requirements, and to
-------------------
the extent permitted by law, the Executive shall be entitled to participate in
any and all employee benefit plans (including, but not limited to, retirement,
life insurance, medical, dental, disability, and savings plans) established or
maintained by the Company from time to time for the benefit of their employees
(or executives) in general.
4.5 Vacation. The Executive shall be entitled to four weeks paid vacation
--------
per annum.
4.6 Shareholder Rights. If, at any time, Imperial is granted "piggy-
------------------
back" registration rights with respect to its shares of the Company's common
stock, Executive shall, at such time, be granted "piggy-back" registration
rights similar to those granted to Imperial, subject to customary underwriters
carve-backs and a carve-back in proportion to such shares sold by Imperial, if
any. Executive shall have "tag-along" rights, on a proportionate basis, on any
sales of Company shares by Imperial prior to consummation of an initial public
offering by the Company.
5. Reasonable Expenses. The Company will reimburse the Executive for all
-------------------
reasonable business expenses, including travel and lodging, which are properly
incurred by him in the performance of his duties hereunder, upon presentation of
proper vouchers therefor and in accordance with written policies established
from time to time by the Company for such reimbursements.
6. Assistance. Executive shall make himself reasonably available, upon
----------
the request of the Company, to testify or otherwise assist in litigation,
arbitration, or other disputes involving the Company, or any of its officers,
directors, employees, subsidiaries or affiliates, during the Employment Period.
7. Covenant Not to Compete.
-----------------------
7.1 General Covenant. During the Employment Period and for a period of
----------------
one year after the termination of this Agreement pursuant to Sections 8.3, 8.4,
or 8.5.1 (the "Non-Compete Period"), except in pursuit of his services as an
------------------
officer and employee of the Company, Executive shall not, either individually or
as a partner, joint venturer, consultant, shareholder, member or Representative
(as defined below) of another Person (as defined below) or otherwise, directly
or indirectly, participate in, engage in, or have a financial or management
interest in, promote, or assist any other Person in any business operation or
any enterprise if such business operation or enterprise engages, or would
engage, in a Restricted Business in a Restricted Area; provided,
--------
<PAGE>
however, the Executive may own up to one percent of the outstanding equity
- -------
securities of any Person.
For purposes of this Section 7.1: "Person" means an individual, a
------
partnership, a limited liability company, a joint venture, a corporation, a
trust, an unincorporated organization, a division or operating group of any of
the foregoing, a government or any department or agency thereof or any other
entity.
"Representative" means any officer, director, principal, agent, employee,
--------------
consultant or other representative of a Person.
"Restricted Business" means any business involved in the processing of
-------------------
payments to government entities or any other business in which the Company is
actively engaged on the date of termination of the Employment Period.
"Restricted Area" means any country in which the Company or its
---------------
subsidiaries conducts a Restricted Business on the date of termination of the
Employment Period.
7.2 Nonsolicitation. During the Non-Compete Period and for a period of
---------------
one year following termination of the Agreement, except a termination pursuant
to Section 8.5.2, Executive shall not, directly or indirectly (i) employ or seek
to employ any person who is at the date of termination of this Agreement, an
officer, general manager or director or equivalent or more senior level employee
of the Company, their subsidiaries or affiliates or otherwise solicit,
encourage, cause or induce any such employee of the Company, its subsidiaries or
affiliates to terminate such employee's employment with the Company, its
subsidiaries or affiliates for the employment of another company (including for
this purpose the contracting with any person who was an independent contractor
(excluding consultant) of the Company during such period), except for persons
who are recruited by Executive to the Company within ninety (90) days after the
Commencement Date and are identified in writing by Executive to the Company
after the end of such period, or (ii) take any action that would interfere with
the relationship of the Company, its subsidiaries and affiliates with their
respective suppliers and franchisees, except to the extent permitted by the
Board.
7.3 Enforcement. Executive agrees that all restrictions and agreements
-----------
contained in this Section 7, including, without limitation, those relating to
duration and restricted territory, are necessary and fundamental to the
protection of the business of the Company and are reasonable and valid.
Executive agrees that the remedy at law for any breach of this Agreement will be
inadequate, and that the damages flowing from such breach are not readily
susceptible to being measured in monetary terms. Accordingly, Executive agrees
that upon breach of this Section 7, the Company shall be entitled to immediate
injunctive relief and may obtain a temporary order restraining any threatened
further breach. Nothing in this Agreement shall be deemed to limit the
Company's remedies at law or in equity for any breach by Executive of any of the
provisions of this Agreement that may be pursued or availed of by the Company.
Nothing contained herein shall be construed as prohibiting the Company from
pursuing any other remedies available to it for such breach or threatened
breach, including the recovery of damages from the Executive.
<PAGE>
Although the restrictions contained in Sections 7. 1 and 7.2 are considered
by the parties to be fair and reasonable in the circumstances, it is recognized
that restrictions of such nature may fail for technical reasons, and accordingly
it is hereby agreed that if any of such restrictions shall be adjudged to be
void or unenforceable for whatever reason, but would be valid if part of the
wording thereof were deleted, or the period thereof reduced or the area dealt
with thereby reduced in scope, the restriction contained in Sections 7.1 and 7.2
shall be enforced to the maximum extent permitted by law, and the parties
consent and agree that such scope or wording may be accordingly judicially
modified in any proceeding brought to enforce such restrictions.
Notwithstanding that the Executive's employment hereunder may be terminated
as provided in Section 8, this Agreement shall continue in full force and effect
insofar as is necessary to enforce the covenants and agreements of the Executive
contained in this Section 7.
8. Termination.
-----------
8.1 Termination by the Company Without Cause. The Company may terminate
----------------------------------------
the Employment Period upon sixty (60) days' prior written notice to Executive
for any reason other than the reasons specified in Sections 8.2, 8.3 and 8.4.
Upon termination of the Employment Period pursuant to this Section 8.1, neither
the Company on the one hand, nor Executive, on the other hand, will have any
liability or obligation to the other in respect of this Agreement, except that
(A) for the one-year period following the date of such notice, Executive shall
be entitled to continue to (i) receive the Base Salary then in effect and (ii)
to the extent permitted by such plans, participate in the employee benefit plans
maintained by the Company in which Executive participated as of the date of such
notice, or, to the extent not permitted by such plans, receive equivalent
benefits or cash payments on an individual basis, (B) in addition to options or
shares that are vested through the date of termination of the Employment Period,
all of the remaining unvested options or shares as of the date of termination of
the Employment Period (such number of options or shares hereinafter referred to
as the "Severance Shares") shall immediately vest, notwithstanding anything to
----------------
the contrary in any other agreement between Executive and the Company and (C)
Executive shall continue to be entitled to the Guarantee Payment set forth in
Section 4.2. In the event of any termination of employment hereunder, the
executive shall be under no obligation to seek other employment and there shall
be no offset against any amounts due Executive under this Agreement on account
of any remuneration attributable to any subsequent employment that Executive may
obtain. If Executive dies after a termination of employment but prior to
receiving all amounts due him, the remaining amounts shall be paid to his
designated beneficiary or, if none, his estate.
8.2 Death. If Executive dies during the Employment Period, the Employment
-----
Period applicable to the Company shall automatically terminate and all
obligation of the parties shall terminate effective the date of death, except
for obligations under any and all employee benefit plans maintained by the
Company in which the Executive participates as of the date of termination, for
which the terms of the plans shall govern. However, the Severance Shares shall
immediately vest, notwithstanding anything to the contrary in any other
agreement between the Executive and the Company.
<PAGE>
8.3 Disability. If Executive becomes Disabled (as hereinafter defined)
----------
during the Employment Period, the Company shall be entitled to terminate his
employment and the Employment Period upon written notice to Executive or a
person acting on his behalf. In the event of such termination, Executive shall
be released from any duties hereunder, and for the one year period following
such termination the Company shall be required to pay Executive the Base Salary
then in effect ("Salary Continuation Period"). In such event, to the extent
permitted by such plans, Executive shall also continue to participate during the
Salary Continuation Period in the employee benefit plans maintained by the
Company in which Executive participates as of the date of termination. In
addition, the Severance Shares shall immediately vest, notwithstanding anything
to the contrary in any other agreement between the Executive and the Company.
For purposes of this Agreement, "Disabled" shall mean mental or physical
--------
impairment or incapacity rendering Executive substantially unable to perform his
duties under this Agreement for a period of longer than 120 days out of any 360
day period during the Employment Period. A determination of whether Executive
is Disabled shall be made by the Company in its sole discretion upon its own
initiative after obtaining certification from a duly licensed physician or upon
request of Executive or a person acting on his behalf.
8.4 Termination by the Company for Cause. The Company may terminate the
------------------------------------
Employment Period effective immediately upon written notice to Executive in the
event of any of the following:
(i) Executive's material breach of any material term or
condition of this Agreement, such breach continuing unremedied for 30
days after written notice thereof from the Company specifying the acts
constituting the breach and requesting that they be remedied, it being
understood that issues with respect to the quality of Executive's
performance or results thereof shall not be grounds for termination
under this Section 8.4;
(ii) Executive's
(A) personal dishonesty, fraud, misappropriation, willful
misconduct or breach of fiduciary duty, in each such case materially
harmful to the Company's property, personnel or business operations,
or materially damaging to the Company's relationships with its
customers, clients or employees or materially detrimental to the
goodwill of the Company; or
(B) intentional failure to perform the duties of his
employment or his other obligations hereunder, or any continuing
action by Executive materially detrimental to the goodwill of the
Company or materially damaging to the Company's relationships with its
customers, clients or employees, which non-performance or actions
remain unremedied for 30 days after written notice thereof from the
Company specifying in detail the non-performance or actions and
requesting that they be remedied, it being understood that issues with
respect
<PAGE>
to the quality of Executive's performance or results thereof shall not
be grounds for termination under this Section 8.4;
(iii) Executive's pleading guilty or no-contest to, or
conviction of, a felony or a crime involving moral turpitude or fraud;
(iv) misappropriation (or attempted misappropriation) of
company's funds or property or of a business opportunity of the
Company, including attempting to secure or securing any personal
profit in connection with any transaction entered into on behalf of
the Company;
(v) Executive's conviction of any criminal offense involving
dishonesty or breach of trust or money laundering, or Executive's
agreement to enter into a pretrial diversion or similar program in
connection with a prosecution for such offense;
(vi) Executive's excessive drunkenness, use of illegal drugs or
abuse of any controlled substance; or
(vii) Executive's excessive absenteeism not related to
Executive's illness, which absenteeism remains unremedied for 30 days
after written notice thereof requesting that it be remedied.
Upon termination of the Employment Period pursuant to this Section 8.4, the
Executive will be bound by the provisions of Section 7 and the Company will not
have any liability to Executive in respect of this Agreement, including, without
limitation, claims for damages or liability to the Company by Executive for
compensation, severance payments and other benefits which would have accrued to
Executive hereunder after termination; provided, however, that all compensation,
-------- -------
benefits and reimbursements accrued through the date of termination shall be
paid to Executive at the times normally paid by the Company. Upon termination
of the Employment Period pursuant to this Section 8.4, all of Executive's
unvested options to acquire share of common stock of the Company shall be
canceled.
8.5 Termination by Executive.
------------------------
8.5.1 Voluntary Termination. Executive may terminate the Employment
---------------------
Period upon sixty (60) days' written notice to the Company and, upon such
termination, the provisions of the last paragraph of Section 8.4 shall apply,
except in the event that Executive terminates this Agreement pursuant to Section
8.5.2. Upon termination of the Employment Period pursuant to this Section
8.5.1, all of Executive's unvested options to acquire shares of common stock of
the Company shall be canceled. Executive agrees, in connection with the
termination of the Employment Period pursuant to this Section 8.5.2, not to
disclose his intent to resign.
8.5.2 Termination for Good Reason. Executive may terminate the Employment
---------------------------
Period at any time for Good Reason. "Good Reason" shall mean (i) a material
-----------
diminution of
<PAGE>
Executive's authority, duties and responsibilities as provided in Section 3,
(ii) a reduction in or failure to pay timely Executive's base salary, or (iii)
the appointment of any person to a superior executive position, (iv) any
relocation of the Company's corporate headquarters to a place 90 miles or more
outside of New York City, (v) the Company's breach of any material term or
condition of this Agreement and (vi) after expiration of the six (6) month
period following a Change in Control (as defined in Section 9.2); provided,
--------
however, that each of the reasons set forth in (i) through (vi) of the preceding
- -------
sentence shall be identified in written notice thereof delivered by Executive to
the Company specifying the nature of the reason and the Company shall have been
afforded a period of thirty (30) days to respond to such notice and cure the
condition set forth in such notice if capable of being cured. If Executive
terminates this Agreement for Good Reason, the provisions of Section 8.1 shall
apply and Executive shall be bound by the provisions of Section 7.
9. Change in Control.
-----------------
9.1 Acceleration of Options. If a Change in Control occurs, all of
-----------------------
Executive's options to acquire shares of common stock of the Company shall
immediately vest and shall become immediately exercisable and all of Executive's
option shares shall immediately vest and cease to be subject to repurchase
rights, if any, notwithstanding anything to the contrary in any other agreement
between Executive and the Company. In addition, if the Company terminates the
Employment Period without cause as provided in Section 8.1 and within three (3)
months thereafter the Company enters into a definitive agreement for a Change in
Control (as defined in Section 9.2) occurs, Executive shall be entitled to the
benefits set forth in this Section 9.1.
9.2 Definition of Change of Control. For purposes of this Section 9,
-------------------------------
"Change in Control" shall mean: (i) the sale, lease, transfer, conveyance or
- ------------------
other disposition (other than by way of merger or consolidation), in one or a
series of related transactions, of all or substantially all of the assets of the
Company and subsidiaries (if any), taken as a whole to any Person other than to
the Company or one of its wholly-owned subsidiaries; (ii) the Company
consolidates with or merges into another Person (other than a subsidiary) or any
Person (other than a subsidiary) consolidates with, or merges into, the Company,
in any such event pursuant to a transaction in which the outstanding shares of
common stock of the Company are changed into or exchanged for cash, securities
or other property, other than any such transaction where the holders of the
shares of common stock of the Company immediately prior to such transaction own,
directly or indirectly, not less than a controlling interest in the voting
equity of the surviving or resulting Person immediately after such transaction;
(iii) the consummation of any transaction or series of transaction (including.
without limitation, any merger or consolidation) the result of which is that any
Person (other than a subsidiary of the Company), becomes the beneficial owner
(as such term is defined in Rule l3d-3 and Rule l3d-5 under the Securities
Exchange Act of 1934, as amended), directly or indirectly, of fifty percent
(50%) or more of the voting equity of the Company; or (iv) following the
Company's initial public offering, a change in the composition of the Company's
Board of Directors, as a result of which fewer than a majority of the incumbent
directors are directors who either (A) had been directors of the Company on the
Commencement Date or the date 24 months prior to the date of the event that may
constitute a Change in Control (the "original directors") or (B) were elected,
------------------
or nominated for election, to the Company's Board
<PAGE>
of Directors with the affirmative votes of at least a majority of the aggregate
of the original directors who were still in office at the time of the election
or nomination and the directors whose election or nomination was previously so
approved. Notwithstanding the foregoing, the term "Change in Control" shall not
-----------------
include any transaction or series of transactions with or to (A) any affiliate
of the Company, (B) any entity or successor entity in which the Company holds at
least a majority of the total voting power of such entity or successor entity
(or retains the right or ability by voting power, contract or otherwise to elect
or designate for election a majority of the members of the board of directors or
other governing body of such entity or successor entity), (C) any entity or
successor entity in which no person or entity holds a greater percentage of the
total voting power of such entity or successor entity than the Company's
percentage voting interest in such entity or successor entity or (D) any entity
formed at the direction of the Company in connection with obtaining financing
for the Company or any of its subsidiaries under an arrangement that provides
the Company with an option to reacquire its assets or other properties or other
similar financing arrangement.
10. Insurance. The Company will have the right at its own cost and
---------
expense to apply for and secure in its own name, or otherwise, life, health or
accident insurance or any or all of them covering Executive, and Executive
agrees to submit to the usual and customary medical examination and otherwise to
cooperate with the Company in connection with the procurement of any such
insurance, and any claims thereunder. The company agrees to pay the executives
current Cobra payment for a period of four months following the commencement of
the executives employment with the company.
11. Confidentiality; Books and Records; Company Property. Except in
----------------------------------------------------
accordance with the provisions of this Agreement, during the Employment Period
and thereafter, Executive shall keep secret and retain in strictest confidence,
and shall not use for the benefit of Executive or others, all confidential
matters and affairs relating to the Company. Upon any termination of this
agreement Executive shall promptly deliver to the Company all confidential
information theretofore supplied to him, and each copy thereof, whether in his
possession or otherwise available to him, and shall certify in writing to the
Company that all analysis, studies and other documents that discuss or analyze
the business of the Company have been destroyed. All papers, books and records
of every kind and description relating to the business and affairs of the
Company, whether or not prepared by Executive, and all property owned by the
Company shall be the sole and exclusive property of the Company and Executive
shall surrender them to the Company upon request, during and after the
Employment Period.
12. Miscellaneous.
-------------
12.1 Notices. All notices, requests, demands and other communications
-------
which are required to be or may be given under this Agreement to any of the
other parties shall be in writing and shall be deemed to have been duly given
when (a) delivered in person, the day following dispatch by an overnight courier
service (such as Federal Express or UPS, etc.) or (b) five days after dispatch
by certified or registered first class mail, postage prepaid, return receipt
requested, to the party to whom the same is so given or made:
<PAGE>
If to the Company,
addressed to:
U.S. Audiotex Corporation
18 Crow Canyon Court
Suite 300
San Ramon, CA 94583
Telephone: (925) 838-7996
Facsimile: (925) 838-4395
Attn:
If to Executive,
addressed to him at:
12.2 Amendments. This Agreement cannot be altered or otherwise amended
----------
except pursuant to an instrument in writing signed by each of the parties.
12.3 Assignment. Executive acknowledges that the services required of
----------
Executive hereunder are personal and that Executive may not assign this
Agreement or any rights or duties under this Agreement. The Company may not
assign or otherwise transfer this Agreement to any other entity without the
prior written consent of Executive, which consent shall not be unreasonably
withheld.
12.4 Entire Agreement. This Agreement contains the entire agreement
----------------
between the parties with respect to the transactions contemplated herein and
supersedes all previous written or oral negotiations, commitments and
understandings.
12.5 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
12.6 Headings. All headings are inserted for convenience of reference
--------
only and shall not affect the meaning or interpretation of any such provisions
or of this Agreement, taken as an entirety.
12.7 Severability. If and to the extent that any court of competent
------------
jurisdiction holds any provision (or any part thereof) of this agreement to be
invalid or unenforceable, such holding shall in no way affect the validity or
enforceability of the remainder of this Agreement, but shall be confined in its
operation to the jurisdiction in which made and to the provisions of this
Agreement directly involved in the controversy in which such judgment shall have
been rendered.
<PAGE>
12.8 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York without reference to the
conflicts of laws principles thereof.
12.9 Binding Effects. This Agreement shall be binding upon and inure to
---------------
the benefit of the parties hereto and their respective successors, legal
representatives and assigns.
12.10 Acquisitions, Mergers, Etc. Nothing herein contained shall be
---------------------------
construed to prevent or limit any acquisition, consolidation, or merger of the
Company.
12.11 Covenants, Etc. Executive hereby covenants, warrants and represents
---------------
that (i) the execution of this Agreement and the discharge of his obligations
hereunder will not breach or conflict with any other contract, agreement or
understanding between Executive and any other party or parties; (ii) there are
no agreements or arrangements, whether written or oral, in effect which would
prevent Executive from rendering services to the Company during the term of this
Agreement; (iii) Executive has not made and will not make any commitment to do
any act in conflict with this Agreement; and (iv) the terms of this Agreement
have been fully explained to him, that he understands the nature and extent of
the rights and obligations provided under this Agreement, and that he has been
given the opportunity to be represented by legal counsel in the negotiation and
preparation of this Agreement. The Company hereby covenants, warrants and
represents that q (i) the execution of this Agreement and the discharge of its
obligations hereunder will not breach or conflict with any other contract,
agreement or understanding between the Company and any other party or parties,
(ii) the execution and delivery of this Agreement have been duly and validly
authorized by the Company; and (iii) this Agreement is binding upon and
enforceable against the Company in accordance with its terms.
12.12 Waiver. No consent or waiver, express or implied, by any party to
------
or of any breach or default by another party in performance by the breaching
party of its obligations under this Agreement shall be deemed or construed to be
a consent or waiver to or of any breach or default by the breaching party in the
performance by such breaching party of any other obligations of such breaching
party under this Agreement. Failure on the part of any party to object to or
complain of any act or failure to act of any of the other parties or to declare
any of the other parties in default shall not constitute a waiver of any right
or remedy or the ability to object or complain or to declare any default at any
time in the future.
12.13 Survival. The provisions of Sections 5,7,8,11 and 12 shall survive
--------
the termination of this Agreement.
12.14 Legal Fees. Each party will be responsible for their own legal
----------
fees and costs of counsel incurred in connection with negotiation and
preparation of this Agreement.
12.15 Other Employment. Executive hereby represents and warrants to the
----------------
Company that Executive is not prohibited from accepting employment with the
Company by any
<PAGE>
non-competition or other restriction contained in any employment agreement with
any other entity. Executive understands and agrees that any breach of this
representation or warranty that results in Executive being prohibited from
performing his duties under this Agreement will constitute a material breach for
purposed of Section 8.4 (i) of this Agreement, and on or at any time after it is
determined that Executive is so prohibited, the Company will be permitted to
terminate Executive's employment pursuant to Section 8.4.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on
the day and year first above written.
U.S. AUDIOTEX CORPORATION
By: /s/ Thomas R. Evans
_____________________________
Name: Thomas R. Evans
Title: Chairman & CEO
/s/ Michael Barrett
_____________________________
Michael Barrett
<PAGE>
EXHIBIT 10.15
AGREEMENT
This Agreement, made and entered into as of the 1st day of October, 1999
(Effective Date), by and between National City Bank of Michigan/Illinois, a
national banking association (National City), and U S Audiotex Corp., a Delaware
Corporation (USA).
A. Scope of Agreement
------------------
USA has offered Interactive Voice Response (IVR) and Internet Payment
Program (IPP) services in conjunction with bankcard programs to the State
of Illinois. The State of Illinois wishes to use USA products in
conjunction with the integrated IRS program. National City desires to
participate in the IVR and IPP offered by USA. National City will act as
the acquiring bank and perform authorization and settlement services.
National City acknowledges that the IVR and IPP services provided by USA
contain patents, trade secrets and copyrights exclusively owned by USA.
Nothing in this agreement transfers any ownership interests in these
products to National City. National City agrees not to reverse engineer any
product or service provided by USA.
National City acknowledges that 1-888-2PAY-TAX and 8882paytax.com are
registered trademarks of USA and nothing in this Agreement transfers any
ownership in these products to National City.
B. Handling of Transactions
------------------------
1. National City warrants that Columns A and B of Exhibit 1 attached
hereto match exactly the fees set forth in National City's contract
with the State of Illinois.
2. USA's shall charge users of USA systems and services the respective
convenience fees set forth in Column B of Exhibit 1. USA shall refund
such convenience fees on any recharged, reversed, voided, credited
transactions or similar transaction. National City shall refund all
transaction fees for any recharged, reversed, voided, credited
transactions or similar transaction.
3. USA shall create separate transactions for the primary payment
transaction (i.e., the "Column A" amount) and for the convenience fee
(i.e., the "Column B" amount) and shall transmit both transactions to
National City.
<PAGE>
C. Fees
----
1. For each successfully transmitted primary payment transaction (i.e.,
the "Column A" amount) received by National City from USA, utilizing
as the payment vehicle a MasterCard card number or a VISA card number,
National City shall pay USA the amount indicated in Column D of
Exhibit 1 hereto which corresponds to the amount of the primary
payment transaction indicated in Column A of said Exhibit 1. National
City shall pay such amount to USA on or before the 15th day of the
calendar month following the month in which NPC received the
transmission. Payments shall be made by check or, at USA's option, by
ACII to a domestic bank account specified in writing by USA.
2. For each successfully transmitted primary payment transaction (i.e.,
the "Column A" amount) received by National City from USA, utilizing
as the payment vehicle a Discover card number or an American Express
card number, USA shall pay National City fifteen cents ($0.15).
National City shall invoice USA monthly in arrears for such fees. USA
shall pay such invoices within thirty (30) days of receipt.
D. Limitation of Liability
-----------------------
Except for a breach of confidentiality under Section F, in no event shall
either party be liable to the other party for any special, consequential,
or indirect damages in connection with this Agreement.
E. Term and Termination
--------------------
This Agreement shall have an initial term of one (1) year from the
Effective Date and shall thereafter automatically renew for successive
twelve (12) month periods. Either party may terminate this Agreement by
notifying the other party in writing at least sixty (60) days prior to the
expiration of the initial term or any renewal term, with such termination
to occur at the expiration of such term.
If either party defaults in the performance of any obligation under this
Agreement and fails to remedy such default within thirty (30) calendar days
after receipt of written notice of the default, the other party may
terminate this Agreement upon written notice.
F. Confidentiality
---------------
The parties agree that the terms of this Agreement, as well as all
information of a business nature relating to the business operations of the
parties, which are disclosed in connection with this Agreement, are
confidential. The parties shall not, without the express prior written
consent of the other party, use (except as contemplated by this Agreement)
disclose or permit access to any such confidential information during the
term of this Agreement or for a period of two (2) years thereafter. Each
party agrees to cause its
<PAGE>
employees and agents to take such action as shall be reasonably necessary
to preserve and protect the confidentiality of such information.
The obligations imposed upon either party herein shall not apply to
information:
1. which becomes available to the public through no wrongful act of the
receiving party; or
2. which may be published prior to the date hereof; or
3. which is already in the possession of the receiving party and not
subject to an existing agreement of confidence between parties; or
4. which is received from a third party without restriction and without
breach of this agreement or any other agreement of confidence; or
5. which is independently developed by the receiving party (without use
of information provided hereunder); or
6. which is disclosed pursuant to a requirement or request of a
government agency or a court competent jurisdiction.
G. Notices
-------
Any notices permitted or required hereunder shall be deemed given when
deposited in the United States mail with postage prepaid and addressed as
follows:
If to National City: National City Bank of Michigan/Illinois
Merchant Services
1 National City Parkway
Kalamazzo MI 49009
If to USA: U.S. Audiotex Corp.
2333 San Ramon Valley Blvd, Suite 450
San Ramon CA 94583
Attention: President
H. Governing Law
-------------
This Agreement shall be governed by and shall be construed in accordance
with the laws of the State of Illinois. If any provisions of this Agreement
shall be held to be invalid, illegal, or unenforceable, the validity,
legality, and enforceability of the remaining provisions shall not in any
way be affected or impaired thereby.
I. Business Relationship
---------------------
The relationship of National City and USA is that of independent contractor
only. Nothing herein shall be deemed to create any partnership, agency,
joint venture or other relationship between parties and neither party shall
hold itself out as the same. Except as expressly authorized in writing,
neither party may bind the other or make representation on behalf of the
other.
<PAGE>
J. General Provisions
------------------
1. This Agreement contains the full understanding of the parties with
respect to the subject matter hereof, and no waiver, alteration or
modification of any of the provisions hereof shall be binding unless in
writing and signed by officers of both parties.
2. Neither party to this Agreement may assign its rights or obligations
under this Agreement without the express prior written consent of the
other party, such consent not to be unreasonably withheld or delayed,
except that the obligations of National City under this Agreement may be
provided or fulfilled by any parent, subsidiary, affiliate, successor
corporation or subcontractor of National City assumes full
responsibility for such obligations.
3. Each party represents that the individual executing this Agreement on
its behalf has the requisite power and authority to do so and that this
Agreement constitutes the valid and binding obligation of its
corporation.
4. In the event that either party brings an action against the other party
to enforce the terms and conditions of this Agreement, the prevailing
party shall be entitled to recover its reasonable costs and expenses,
including reasonable attorney fees, incurred in connection therewith.
K. Force Maieure
-------------
Neither party shall be liable for the failure to fulfill its obligations
under this Agreement if such failure is due to any cause or condition
beyond such party's reasonable control, such as: natural disaster, acts of
God, strikes, fire, floods, war, riot, electrical power failure, decrees of
governmental bodies or communications failure.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement, on
the day first above written.
National City Bank of Michigan/Illinois
(National City)
By: /s/ MARK PFAU
-------------------------
Mark Pfau, Vice President
U S Audiotex Corp.
(USA)
By: /s/ KENNETH STERN
-------------------------
Kenneth Stern, President
<PAGE>
NATIONAL CITY BANK OF MICHIGAN/ILLINOIS
FEE SCHEDULE FOR THE STATE OF ILLINOIS
DEPARTMENT OF REVENUE
A B C D
- --------------------------------------------------------------------------------
1 STATE OF
2 ILLINOIS US AUTDIOTEX
3 TICKET FEE NCB INCOME
4 RANGE SCHEDULE COST AMOUNT
- --------------------------------------------------------------------------------
5 $1.00-$10.00 $0.75 $0.50 $0.25
- --------------------------------------------------------------------------------
6 $10.01-$25.00 $0.98 $0.78 $0.20
- --------------------------------------------------------------------------------
7 $25.01-$50.00 $1.90 $1.25 $0.65
- --------------------------------------------------------------------------------
8 $50.01-$75.00 $2.28 $1.73 $0.55
- --------------------------------------------------------------------------------
9 $75.01-$100.00 $3.00 $2.20 $0.80
- --------------------------------------------------------------------------------
10 $100.01-$150.00 $4.50 $3.15 $1.35
- --------------------------------------------------------------------------------
11 $150.01-$200.00 $5.50 $4.10 $1.40
- --------------------------------------------------------------------------------
12 $200.01-$250.00 $6.50 $5.05 $1.45
- --------------------------------------------------------------------------------
13 $250.01-$300.00 $7.50 $6.00 $1.50
- --------------------------------------------------------------------------------
14 $300.01-$400.00 $10.00 $8.10 $1.90
- --------------------------------------------------------------------------------
15 $400.01-$500.00 $12.50 $10.05 $2.45
- --------------------------------------------------------------------------------
16 $500.01-$600.00 $14.50 $12.00 $2.50
- --------------------------------------------------------------------------------
17 $600.01-$700.00 $16.50 $13.95 $2.55
- --------------------------------------------------------------------------------
18 $700.01-$800.00 $19.00 $15.90 $3.10
- --------------------------------------------------------------------------------
19 $800.01-$900.00 $21.50 $17.85 $3.65
- --------------------------------------------------------------------------------
20 $900.01-$1,000.00 $24.00 $19.80 $4.20
- --------------------------------------------------------------------------------
21 $1000.01-$1500.00 $34.00 $29.55 $4.45
- --------------------------------------------------------------------------------
22 $1500.01-$2000.00 $46.00 $39.30 $6.70
- --------------------------------------------------------------------------------
23 $2000.01-$2500.00 $56.00 $49.05 $6.95
- --------------------------------------------------------------------------------
24 $2500.01-$3000.00 $67.00 $58.80 $8.20
- --------------------------------------------------------------------------------
25 $3000.01-$3500.00 $78.00 $68.55 $9.45
- --------------------------------------------------------------------------------
26 $3500.01-$4000.00 $89.00 $78.30 $10.70
- --------------------------------------------------------------------------------
27 $4000.01-$4500.00 $99.00 $88.05 $10.95
- --------------------------------------------------------------------------------
28 $4500.01-$5000.00 $110.00 $97.80 $12.20
- --------------------------------------------------------------------------------
29 $5000.01-$5500.00 $122.00 $107.55 $14.45
- --------------------------------------------------------------------------------
30 $5500.01-$6000.00 $132.00 $117.30 $14.70
- --------------------------------------------------------------------------------
31 $6000.01-$6500.00 $144.00 $127.05 $16.95
- --------------------------------------------------------------------------------
32 $6500.01-$7000.00 $154.00 $136.60 $17.20
- --------------------------------------------------------------------------------
33 $7000.01-$7500.00 $164.00 $146.55 $17.45
- --------------------------------------------------------------------------------
34 $7500.01-$8000.00 $175.00 $156.30 $18.70
- --------------------------------------------------------------------------------
35 $8000.01-$8500.00 $185.00 $166.05 $18.95
- --------------------------------------------------------------------------------
36 $8500.01-$9000.00 $196.00 $175.80 $20.20
- --------------------------------------------------------------------------------
<PAGE>
NATIONAL CITY BANK OF MICHIGAN/ILLINOIS
FEE SCHEDULE FOR THE STATE OF ILLINOIS
DEPARTMENT OF REVENUE
- -------------------------------------------------------------------------------
A B C D
- -------------------------------------------------------------------------------
3 TICKET FEE NCH INCOME
- -------------------------------------------------------------------------------
37 $9000.01-$9500.00 $207.00 $185.55 $21.45
- -------------------------------------------------------------------------------
38 $9500.01-$10000.00 $217.00 $195.30 $21.70
- -------------------------------------------------------------------------------
39 $10000.01-$10500.00 $227.00 $205.05 $21.95
- -------------------------------------------------------------------------------
40 $10500.01-$11000.00 $239.00 $214.80 $24.20
- -------------------------------------------------------------------------------
41 $11000.01-$11500.00 $250.00 $224.50 $25.45
- -------------------------------------------------------------------------------
42 $11500.01-$12000.00 $260.00 $234.30 $25.70
- -------------------------------------------------------------------------------
43 $12000.01-$12500.00 $271.00 $244.05 $26.95
- -------------------------------------------------------------------------------
44 $12500.01-$13000.00 $282.00 $253.80 $28.20
- -------------------------------------------------------------------------------
45 $13000.01-$13500.00 $292.00 $263.55 $28.45
- -------------------------------------------------------------------------------
46 $13500.01-$14000.00 $303.00 $273.30 $29.70
- -------------------------------------------------------------------------------
47 $14000.01-$14500.00 $314.00 $283.05 $30.95
- -------------------------------------------------------------------------------
48 $14500.01-$15000.00 $325.00 $292.80 $32.20
- -------------------------------------------------------------------------------
49 $15000.01-$15500.00 $336.00 $302.55 $33.45
- -------------------------------------------------------------------------------
50 $15500.01-$16000.00 $340.00 $312.00 $33.70
- -------------------------------------------------------------------------------
51 $16000.01-$16500.00 $357.00 $322.05 $34.95
- -------------------------------------------------------------------------------
52 $16500.01-$17000.00 $368.00 $331.60 $36.20
- -------------------------------------------------------------------------------
53 $17000.01-$17500.00 $379.00 $341.55 $37.45
- -------------------------------------------------------------------------------
54 $17500.01-$18000.00 $390.00 $351.30 $38.70
- -------------------------------------------------------------------------------
55 $18000.01-$18500.00 $400.00 $361.05 $38.95
- -------------------------------------------------------------------------------
56 $18500.01-$19000.00 $411.00 $370.80 $40.20
- -------------------------------------------------------------------------------
57 $19000.01-$19500.00 $422.00 $380.55 $41.45
- -------------------------------------------------------------------------------
58 $19500.01-$20000.00 $432.00 $390.30 $41.70
- -------------------------------------------------------------------------------
59 $20000.01-$22000.00 $476.00 $429.30 $45.70
- -------------------------------------------------------------------------------
60 $22000.01-$24000.00 $518.00 $468.30 $49.70
- -------------------------------------------------------------------------------
61 $24000.01-$26000.00 $561.00 $507.30 $53.70
- -------------------------------------------------------------------------------
62 $26000.01-$28000.00 $604.00 $546.30 $57.70
- -------------------------------------------------------------------------------
63 $28000.01-300000.00 $647.00 $585.30 $61.70
- -------------------------------------------------------------------------------
64 $30000.01-$35000.00 $754.00 $682.80 $71.20
- -------------------------------------------------------------------------------
65 $35000.01-$40000.00 $862.00 $780.30 $81.70
- -------------------------------------------------------------------------------
66 $40000.01-$45000.00 $970.00 $877.80 $92.20
- -------------------------------------------------------------------------------
67 $45000.01-$50000.00 $1,077.00 $975.30 $101.70
- -------------------------------------------------------------------------------
68 $50000.01-$60000.00 $1,292.00 $1,170.30 $121.70
- -------------------------------------------------------------------------------
69 $60000.01-$70000.00 $1,507.00 $1,365.30 $141.70
- -------------------------------------------------------------------------------
70 $70000.01-$80000.00 $1,722.00 $1,560.30 $161.70
- -------------------------------------------------------------------------------
71 $80000.01-$90000.00 $1,937.00 $1,755.30 $181.70
- -------------------------------------------------------------------------------
72 $90000.01-$99999.99 $2,152.00 $1,950.30 $201.70
- -------------------------------------------------------------------------------
<PAGE>
STATE OF ILLINOIS
DEPARTMENT OF REVENUE
CUSTOMER FEE SCHEDULE
STATE OF
ILLNOIS
TICKET FEE
RANGE SCHEDULE
------------------------------------------------
$1.00-$10.00 $0.75
------------------------------------------------
$10.01-$25.00 $0.98
------------------------------------------------
$25.01-$50.00 $1.90
------------------------------------------------
$50.01-$75.00 $2.28
------------------------------------------------
$75.01-$100.00 $3.00
------------------------------------------------
$100.01-$150.00 $4.50
------------------------------------------------
$150.00-$200.00 $5.50
------------------------------------------------
$200.01-$250.00 $6.50
------------------------------------------------
$250.01-$300.00 $7.50
------------------------------------------------
$300.01-$400.00 $10.00
------------------------------------------------
$400.01-$500.00 $12.50
------------------------------------------------
$500.01-$600.00 $14.50
------------------------------------------------
$600.01-$700.00 $16.50
------------------------------------------------
$700.01-$800.00 $19.00
------------------------------------------------
$800.01-$900.00 $21.50
------------------------------------------------
$900.01-$1000.00 $24.00
------------------------------------------------
$1000.01-$1500.00 $34.00
------------------------------------------------
$1500.01-$2000.00 $46.00
------------------------------------------------
$2000.01-$2500.00 $56.00
------------------------------------------------
$2500.01-$3000.00 $67.00
------------------------------------------------
$3000.01-$3500.00 $78.00
------------------------------------------------
$3500.01-$4000.00 $89.00
------------------------------------------------
$4000.01-$4500.00 $99.00
------------------------------------------------
<PAGE>
STATE OF ILLINOIS
DEPARTMENT OF REVENUE
CUSTOMER FEE SCHEDULE
STATE OF
ILLNOIS
TICKET FEE
RANGE SCHEDULE
------------------------------------------------
$4500.01-$5000.00 $110.00
------------------------------------------------
$5000.01-$5500.00 $122.00
------------------------------------------------
$5500.01-$6000.00 $132.00
------------------------------------------------
$6000.01-$6500.00 $144.00
------------------------------------------------
$6500.01-$7000.00 $154.00
------------------------------------------------
$7000.01-$7500.00 $164.00
------------------------------------------------
$7500.01-$8000.00 $175.00
------------------------------------------------
$8000.01-$8500.00 $185.00
------------------------------------------------
$8500.01-$9000.00 $196.00
------------------------------------------------
$9000.01-$9500.00 $207.00
------------------------------------------------
$9500.01-$10000.00 $217.00
------------------------------------------------
$10000.01-$10500.00 $227.00
------------------------------------------------
$10500.01-$11000.00 $239.00
------------------------------------------------
$11000.01-$11500.00 $250.00
------------------------------------------------
$11500.01-$12000.00 $260.00
------------------------------------------------
$12000.01-$12500.00 $271.00
------------------------------------------------
$12500.01-$13000.00 $282.00
------------------------------------------------
$13000.01-$13500.00 $292.00
------------------------------------------------
$13500.01-$14000.00 $303.00
------------------------------------------------
$14000.01-$14500.00 $314.00
------------------------------------------------
$14500.01-$15000.00 $325.00
------------------------------------------------
$15000.01-$15500.00 $336.00
------------------------------------------------
$15500.01-$16000.00 $346.00
------------------------------------------------
<PAGE>
STATE OF ILLINOIS
DEPARTMENT OF REVENUE
CUSTOMER FEE SCHEDULE
STATE OF
ILLNOIS
TICKET FEE
RANGE SCHEDULE
------------------------------------------------
$16000.01-$16500.00 $357.00
------------------------------------------------
$16500.01-$17000.00 $368.00
------------------------------------------------
$17000.01-$17500.00 $379.00
------------------------------------------------
$17500.01-$18000.00 $390.00
------------------------------------------------
$18000.01-$18500.00 $400.00
------------------------------------------------
$18500.01-$19000.00 $411.00
------------------------------------------------
$19000.01-$19500.00 $422.00
------------------------------------------------
$19500.01-$20000.00 $432.00
------------------------------------------------
$20000.01-$22000.00 $475.00
------------------------------------------------
$22000.01-$24000.00 $518.00
------------------------------------------------
$24000.01-$26000.00 $561.00
------------------------------------------------
$26000.01-$28000.00 $604.00
------------------------------------------------
$28000.01-$30000.00 $647.00
------------------------------------------------
$30000.01-$35000.00 $754.00
------------------------------------------------
$35000.01-$40000.00 $862.00
------------------------------------------------
$40000.01-$45000.00 $970.00
------------------------------------------------
$45000.01-$50000.00 $1,077.00
------------------------------------------------
$50000.01-$60000.00 $1,292.00
------------------------------------------------
$60000.01-$70000.00 $1,507.00
------------------------------------------------
$70000.01-$80000.00 $1,722.00
------------------------------------------------
$80000.01-$90000.00 $1,937.00
------------------------------------------------
$90000.01-$99999.99 $2,152.00
------------------------------------------------
<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 3, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
condensed financial statements of U.S. Audiotex Corporation for the nine months
ended September 30, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 514
<SECURITIES> 0
<RECEIVABLES> 532
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,737
<PP&E> 1,183
<DEPRECIATION> (433)
<TOTAL-ASSETS> 2,523
<CURRENT-LIABILITIES> 3,037
<BONDS> 0
0
0
<COMMON> 150
<OTHER-SE> (872)
<TOTAL-LIABILITY-AND-EQUITY> 2,523
<SALES> 7,208
<TOTAL-REVENUES> 7,208
<CGS> 5,427
<TOTAL-COSTS> 5,427
<OTHER-EXPENSES> 3,292
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29
<INCOME-PRETAX> (1,540)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,540)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
