SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number 000-28187
OFFICIAL PAYMENTS CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 52-2190781
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Three Landmark Square
Stamford, CT 06901-2501
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(Address of principal executive offices) (Zip Code)
(203) 356-4200
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No___
As of November 7, 2000, 21,510,770 shares of the registrant's
common stock were issued and outstanding.
OFFICIAL PAYMENTS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
ITEM PAGE NUMBER
---- -----------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements.................................. 3
Condensed Balance Sheets as of September 30, 2000
and December 31, 1999............................. 3
Condensed Statements of Operations for the three and
nine-month periods ended September 30, 2000 and 1999.. 4
Condensed Statements of Cash Flows for the nine-month
periods ended September 30, 2000 and 1999............. 5
Notes to the Condensed Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................... 19
PART II: OTHER INFORMATION
Item 1. Legal Proceedings..................................... 20
Item 2. Changes in Securities and Use of Proceeds............. 20
Item 3. Defaults Upon Senior Securities....................... 20
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 21
Item 5. Other Information..................................... 21
Item 6. Exhibits and Reports on Form 8-K...................... 22
Signatures.......................................................... 22
Index to Exhibits
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OFFICIAL PAYMENTS CORPORATION
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash ............................................. $ 712 $ 1,643
Short-term investments............................ 70,638 79,182
Accounts receivable, net.......................... 1,091 1,135
Prepaid expenses.................................. 268 465
Other current assets.............................. 24 73
---------
Total current assets............................ 72,733 82,498
Property and equipment, net......................... 5,773 1,802
Other assets........................................ 95 -
--------- ---------
Total assets.................................... $ 78,601 $ 84,300
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 315 $ 176
Accrued merchant discount fees.................... 1,440 419
Accrued payroll and severance..................... 1,749 551
Accrued expenses.................................. 2,112 931
Deferred revenues................................. 110 65
Current portion of notes payable and capital
lease obligations................................ 583 206
-------- ---------
Total current liabilities....................... 6,309 2,348
Notes payable and capital lease obligations......... 712 391
-------- ---------
Total liabilities............................... 7,021 2,739
-------- ---------
Stockholders' equity:
Common stock, $.01 par value; 150,000,000 shares authorized;
21,512,270 and 21,262,820 shares issued and outstanding
as of September 30, 2000 and December 31, 1999,
respectively.................................... 215 213
Additional paid-in capital........................ 129,500 127,707
Deferred stock-based compensation................. (22,788) (34,965)
Accumulated deficit............................... (35,347) (11,394)
--------- ---------
Stockholders' equity...................... 71,580 81,561
--------- ---------
Total liabilities and stockholders' equity.... $ 78,601 $ 84,300
========= =========
See accompanying notes to condensed financial statements.
</TABLE>
OFFICIAL PAYMENTS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------- --------------------------------
2000 1999 2000 1999
---------- ---------- -------- ---------
Revenues:
<S> <C> <C> <C> <C>
Transaction fees.............. $ 3,383 $ 1,020 $ 22,687 $ 6,995
Other revenues............... 31 75 266 213
-------- -------- -------- --------
Total revenues........... 3,414 1,095 22,953 7,208
-------- -------- -------- --------
Cost of revenues:
Cost of transaction fees...... 1,798 126 13,416 3,577
Cost of transaction fees
to related party............. 880 319 4,925 1,612
Cost of other revenues........ 5 100 104 121
-------- -------- -------- --------
Total cost of revenues...... 2,683 545 18,445 5,310
-------- -------- -------- --------
Gross profit..................... 731 550 4,508 1,898
-------- -------- -------- --------
Operating expenses:
Sales and marketing............ 1,661 368 8,977 802
Development costs.............. 743 383 1,757 702
General and
administrative................ 5,146 1,105 19,927 1,648
Depreciation and
amortization.................. 410 50 1,029 132
Allocated expenses
from related parties.......... 15 125 118 125
-------- -------- -------- --------
Total operating
expenses................... 7,975 2,031 31,808 3,409
-------- -------- -------- --------
Loss from operations............. (7,244) (1,481) (27,300) (1,511)
Interest and other
income (expenses), net........ 1,168 1 3,347 (29)
--------- ---------- --------- ---------
Net loss......................... $ (6,076) $ (1,480) $(23,953) $ (1,540)
========== ========== ========= =========
Basic and diluted
net loss per share............ $ (0.28) $ (0.10) $ (1.12) $ (0.10)
======== ======== ======== ========
Shares used in computing
basic and diluted
net loss per share............. 21,495 15,000 21,392 15,000
======== ======== ======== =======
</TABLE>
See accompanying notes to condensed financial statements.
OFFICIAL PAYMENTS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2000 1999
---------- ----------
Cash flow used in operating activities:
<S> <C> <C>
Net loss.......................................... $ (23,953) $ (1,540)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 1,029 132
Amortization of deferred stock-based
compensation................................. 12,770 516
Services performed by related party.......... - 118
Changes in operating assets and liabilities
Accounts receivable.......................... 44 22
Prepaid expenses and other assets............ 151 (698)
Accounts payable and other accrued expenses.. 3,539 538
Deferred revenues............................ 45 8
-------- ---------
Net cash used in operating activities...... (6,375) (904)
-------- ---------
Cash flows provided by (used in) investing activities:
Proceeds from sale of short-term investments...... 8,544 -
Capital expenditures.............................. (4,970) (255)
--------- ----------
Net cash provided by (used in) investing
activities.............................. 3,574 (255)
-------- ----------
Cash flow provided by financing activities:
Proceeds from exercise of stock options, net...... 1,202 -
Borrowings on sale-leaseback agreement............ 968 -
Notes payable to related party.................... - 1,132
Advances from related party....................... - 440
Repayment of notes payable to related party....... - (440)
Repayment of notes payable and capital leases..... (300) (90)
-------- ----------
Net cash provided by financing activities.. 1,870 1,042
-------- ----------
Net decrease in cash................................ (931) (117)
Cash at the beginning of the period................. 1,643 631
-------- ---------
Cash at the end of the period....................... $ 712 $ 514
Supplement disclosure of noncash activity:
Cash paid for interest.............................. $ 278 $ 66
========= ========
Assets acquired through capital leases.............. $ 998 $ 94
========= ========
Cash paid for income taxes.......................... $ 37 $ 0
========= ========
See accompanying notes to condensed financial statements.
</TABLE>
OFFICIAL PAYMENTS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Official Payments Corporation 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 "Company"), was formed on
August 24, 1999. Effective September 30, 1999, the LLC merged with and into
the Company. 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, tuition payments, Department of Motor Vehicles ("DMV") fees,
property taxes and fines for traffic violations and parking citations, at
the Company's website or via the telephone.
BASIS OF PRESENTATION
The accompanying condensed financial statements as of September 30,
2000, and the three and nine months ended September 30, 2000 and 1999, are
unaudited. The unaudited interim condensed financial statements have been
prepared on the same basis as the annual financial statements, and in the
opinion of management, reflect all adjustments necessary to present fairly
the Company's financial position, results of operations and cash flows as
of September 30, 2000 and for the three and nine months ended September 30,
2000 and 1999. These adjustments are of a normal, recurring nature. These
condensed financial statements and notes thereto are unaudited and should
be read in conjunction with the Company's audited financial statements and
related notes included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999. The results for the nine months ended
September 30, 2000 are not necessarily indicative of the expected results
for the year ending December 31, 2000. Certain prior period balances have
been reclassified to conform to the current period presentation.
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 reported results of operations during the
reporting period. Actual results could differ from those estimates.
INVESTMENTS
As of September 30, 2000, the Company had short-term investments of
$70.6 million. The Company classifies its short-term investments as
"available-for-sale." Financial instruments classified as short-term
investments include government securities and commercial paper, with
maturity dates of less than six months at the date of acquisition. Such
short-term investments are recorded at fair value based on quoted market
prices, with unrealized gains and losses recorded as other comprehensive
income (loss) until realized. As of September 30, 2000, no comprehensive
income (loss) was reported, as the fair value of the Company's short-term
investments approximated the quoted market prices.
COMPREHENSIVE INCOME (LOSS)
The Company has no components of other comprehensive income (loss).
STOCK-BASED COMPENSATION
In the third and fourth quarter of 1999, the Company recorded on its
balance sheet a deferred amount representing the estimated fair value of
the common stock underlying options granted to certain officers and
employees of the Company in August, September, and November of 1999 in
excess of the exercise prices of those options.
In the second quarter of 2000, the Company recorded on its balance
sheet deferred stock-based compensation totaling $633,000 representing the
fair value of restricted shares of common stock granted to employees as
performance-based awards and also in replacement of, and in exchange for
cancelled, unvested stock options with exercise prices in excess of the
current market value at the time of grant.
The Company uses the intrinsic value method to account for all of its
employee stock-based compensation plans. Expense associated with
stock-based compensation is being amortized on a straight-line basis over
the vesting period of the individual award consistent with the method
described in Accounting Principles Board (APB) Opinion No. 25 and FASB
Interpretation No. 44.
REVENUE RECOGNITION
The Company's revenues consist primarily of transaction revenues 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 period 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.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. Such costs are
included in sales and marketing expense and totaled approximately $79,500
and $10,300 for the three months ended September 30, 2000 and 1999
respectively, and $4.9 million and $62,300 for the nine months ended
September 30, 2000 and 1999, respectively.
Note 2. NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the
weighted-average number of outstanding shares of common stock in the
period. Diluted net loss per share is computed by dividing net loss by the
weighted-average number of shares of common stock outstanding and, when
dilutive, potential common shares from options to purchase common stock
using the treasury stock method.
The following table presents the calculation of basic and diluted net
loss per share (in thousands, except share and per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
Net (loss) income............. $ (6,076) $ (1,480) $ (23,953) $ (1,540)
Weighted-average shares
used in computing basic
and diluted net loss per
common share................ 21,495,074 15,000,000 21,391,642 15,000,000
----------- ----------- ----------- ------------
Basic and diluted net loss
per common share ........... $ (0.28) $ (0.10) $ (1.12) $ (0.10)
------------ ------------ ------------ -------------
</TABLE>
Net loss per share for the three and nine months ended September 30, 2000
does not include the effect of approximately 5,059,423 and 6,457,779 stock
options, respectively, with a weighted-average exercise prices of $1.72 and
$4.57 per share, respectively, because their effects are anti-dilutive.
There were no potentially dilutive common stock equivalents outstanding as
of September 30, 1999.
Note 3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-----------------------------------
2000 1999
-------- --------
<S> <C> <C>
Computer equipment.............................. $ 6,307 $ 1,836
Furniture and fixtures.......................... 1,014 485
--------- ---------
7,321 2,321
Less accumulated depreciation and amortization.. 1,548 519
--------- ---------
$ 5,773 $ 1,802
========= =========
</TABLE>
In April 2000, the Company entered into a sale-leaseback agreement for
approximately $968,000 in interactive voice response system (IVR)
equipment. The sale-leaseback transaction did not result in any profit or
loss for the Company because the selling price of the equipment was equal
to the cost on the closing date of the agreement. The term of the agreement
is 36 months. The leased equipment was accounted for as a capital lease, in
accordance with SFAS No. 13 Accounting for Leases, and is included as
computer equipment as of September 30, 2000.
Note 4. AMORTIZATION OF DEFERRED STOCK-BASED COMPENSATION
Amortization of deferred stock-based compensation consists of the
following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------- ---------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Sales and marketing............. $ 318 $ 67 $ 833 $ 67
Development costs............... 38 57 48 57
General and administrative...... 2,614 392 11,889 392
-------- --------- --------- --------
$ 2,970 $ 516 $ 12,770 $ 516
======== ======== ========= ========
</TABLE>
Note 5. SEVERANCE AND OTHER RELATED CHARGES
During the second quarter of 2000, the Company incurred $4.1 million in
severance and other related charges in conjunction with the departure of
the former Chief Financial Officer, Brian W. Nocco, which are included in
general and administrative expenses on the condensed statement of
operations. The largest component of this expense was a non-cash deferred
stock-based compensation charge, in accordance with generally accepted
accounting principles and pursuant to his previously existing employment
contract, of $3.6 million, representing the acceleration of the vesting of
options granted to Mr. Nocco in August, September, and November of 1999 at
exercise prices below their fair market values at the dates of grant. The
remaining $522,000 is attributable to severance, relocation, and other
contractual obligations, required to be estimated and accrued for by
generally accepted accounting principles, and the unpaid portion is
included in accrued payroll and severance on the condensed balance sheets.
Note 6. INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net, consists of the following (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income................. $ 1,200 $ 3 $ 3,615 $ 17
Interest expense............... (42) (21) (283) (69)
Other income (expenses), net.... 10 19 15 23
---------- ------- --------- ---------
$ 1,168 $ 1 $ 3,347 $ (29)
========== ======= ========= =========
</TABLE>
Note 7. SEGMENT INFORMATION
The Company operates in a single operating segment within the United
States. The Chief Executive Officer (CEO) has been identified as the Chief
Operating Decision Maker because he has final authority over resource
allocation decisions and performance assessment. The CEO 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 CEO is consistent with the
information presented in the accompanying statements of operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Revenues by product are
Transaction fees:
<S> <C> <C> <C> <C>
Federal.................. $ 1,831 $ - $ 17,416 $ 4,342
State.................... 401 118 2,003 291
Local.................... 1,151 902 3,268 2,362
Other revenues............. 31 75 266 213
--------- -------- --------- ---------
Total revenues............. $ 3,414 $ 1,095 $ 22,953 $ 7,208
========= ======== ========= =========
</TABLE>
Note 8. SUBSEQUENT EVENTS
On November 1, 2000, the board of directors of Imperial Bancorp, the
parent holding company of Imperial Bank (which owns approximately 56% of
the Company's outstanding common stock), approved a definitive agreement to
be acquired in a tax-free, stock-for-stock transaction by Comerica
Incorporated. Comerica and Imperial Bancorp have announced that they expect
the transaction to close in the first quarter of 2001. Currently, Imperial
Bank provides the Company with certain human resources and payroll services
(for which the Company pays Imperial Bank a fee), and the Company is
currently evaluating various internal and outsourcing options to have these
services provided in the future.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information in this report contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and section 21E of the Securities Exchange Act of 1934, as
amended. Any statements contained herein that are not statements of
historical facts may be deemed to be forward-looking statements. For
example, words such as "may", "will", "should", "estimates", "predicts",
"potential", "continue", "strategy", "believes", "anticipates", "plans",
"expects", "intends", and similar expressions are intended to identify
forward-looking statements. Such statements are based upon the current
economic environment and current expectations that involve risks and
uncertainties, including, but not limited to statements regarding the
Company's competitive position, expected operating and financial
performance, business model and expected growth of electronic payments to
government entities. All forward-looking statements included in this report
are based upon information available to the Company as of the date hereof.
You are cautioned that these statements are not guarantees of future
performance. The Company's actual results and the timing of certain events
may differ significantly from those anticipated in, or caused by, any
forward-looking statements as a result of certain risks and uncertainties,
including, without limitation, the general economic and business
conditions, major systems failures, constraints in capacity, rapid
technological changes, ability to retain existing government contracts and
enter into new government contracts, competitive nature of the market in
which the Company competes, the early stages of development of the
Company's products, and the lack of widespread market acceptance of the
Company's products. A more complete description of these and other risks
and uncertainties associated with the Company's business can be found in
the Company's filings with the United States Securities and Exchange
Commission, including its Annual Report on Form 10-K for the year ended
December 31, 1999. The Company does not undertake any obligation to update
publicly any forward-looking statement, whether as a result of new
information, future events or otherwise.
Overview
Official Payments Corporation is the leading provider of electronic
payment options to government entities enabling consumers to use their
credit cards to pay, through the Internet or over the telephone, personal
federal and state income taxes, sales and use taxes, property taxes and
fines for traffic violations and parking citations. The Company added two
new payment types to its services during the third quarter of 2000, higher
education and DMV. The Company will begin collecting tuition payments in
October 2000 for two of the state universities in Illinois. In addition,
the Company's contracts with the state of Arkansas, beginning in February
2001, provide for the processing of the state's DMV fees. The Company's
interactive toll-free telephone number, 1-888-2PAY-TAXSM, allows customers
to make payments and receive certain customer service information. The
Company's website, at www.officialpayments.com, currently allows consumers
to make certain payments through the Internet.
The Company's revenues consist primarily of convenience fees, which
are transaction fees paid by consumers for using the Company's credit card
payment services. For processing personal federal and state income tax
payments and local property tax payments, the convenience fee charged is a
percentage of the payment amount. For processing fines for traffic
violations and parking citations, a fixed amount is charged per ticket. The
Company also derives a small amount of other revenues from sales of its
proprietary technologies and related services to government entities. In
these cases, revenues from software systems sales are recognized upon
installation and completion of training, and revenues from maintenance are
recognized ratably over the service period based on vendor-specific
objective evidence. Consulting revenues are recognized as the services are
performed.
The Company's contract with the IRS currently accounts for a
significant portion of the Company's revenues. The Company has offered its
services for the balance-due and extension payment of personal federal
income taxes due on April 17, 2000 (1999 tax year) and continues to offer
its services for estimated tax payments for the 2000 tax year. In the nine
months ended September 30, 2000, convenience fees from tax payments to the
IRS accounted for approximately 76% of the Company's total revenues. The
IRS has selected the Company to provide electronic payment services with
respect to balance-due and extension tax payments for the 2000 tax year, as
well as estimated tax payments for the 2001 tax year (with the IRS having
the option to renew the Company's services for an additional year). If the
IRS does not continue to select the Company to perform these services in
subsequent years, the business, operating results and financial position of
the Company could be materially and adversely affected.
The Company's primary cost of revenues is the merchant discount fee
paid to its credit card processors, which is a function of the total amount
paid by the consumer, depending on the credit card used and the type of
transaction. The Company also incurs telecommunications costs through its
telephone conduit.
Processing fines for traffic violations and parking citations produces
a higher gross margin as a percentage of related revenue than processing
income tax, property tax payments and other Company services. The
convenience fee, as a percentage of fines processed for traffic violations
and parking citations is significantly greater because such fees are fixed
and, in most cases, represents a greater percentage of related dollars
processed.
Operating expenses include sales and marketing expenses, development
costs, general and administrative expenses, depreciation and amortization,
and allocated expenses from related parties. The largest component of these
expenses was the amortization of deferred stock-based compensation, which
amounted to approximately $3.0 million and $12.8 million for the three and
nine months ending September 30, 2000. The amortization expense for the
nine months ended September 30, 2000 included a one-time $3.6 million
non-cash deferred stock-based compensation charge for the Company's former
Chief Financial Officer, Brian W. Nocco, which was incurred in the second
quarter in connection with the termination of his employment with the
Company.
Sales and marketing expenses consist primarily of advertising
expenses and salaries and commissions for sales and marketing personnel.
Development costs consist primarily of salaries for engineering personnel
and research and development expenses for the Company's customer service
application. General and administrative expenses consist primarily of
salaries for executive, finance, customer service and administrative
personnel.
The Company has incurred significant losses since inception and
expects to continue to incur losses for the foreseeable future. As of
September 30, 2000, the Company had an accumulated deficit of approximately
$35.3 million.
The Company recorded on its balance sheet a capital lease obligation
totaling $968,000 in April 2000. The sale-leaseback transaction did not
result in any profit or loss for the Company because the selling price of
the equipment was equal to the cost on the closing date of the agreement.
The term of the agreement is 36 months. The leased equipment is being
accounted for in accordance with SFAS No. 13, Accounting for Leases.
The Company recorded on its balance sheet deferred stock-based
compensation totaling $42.9 million in the third and fourth quarters of
1999. This deferred charge consists of an amount of $10.0 million,
representing the guaranteed value of options granted to Thomas R. Evans,
the Company's Chairman and Chief Executive Officer, and an amount of $32.9
million, representing the estimated value of the common stock underlying
options granted to certain other officers and employees of the Company in
August, September and November of 1999 in excess of the exercise prices of
those options. The $10.0 million deferred charge related to Mr. Evans'
options and $23.9 million of deferred charges related to new options
granted to other officers and employees is being amortized, on a
straight-line basis, over a three-year vesting period, beginning in the
third quarter of 1999. $4.5 million of deferred compensation related to
option grants to the Company's former Chief Financial Officer, Brian W.
Nocco, which beginning in the third quarter of 1999 were being amortized
over a three-year vesting period. Mr. Nocco's employment with the Company
terminated during the second quarter of 2000, and in connection therewith,
as required by generally accepted accounting principles and pursuant to his
previously existing employment contract, the Company accounted on its books
for the acceleration of the vesting of the unamortized portion of the
deferred stock-based compensation relating to Mr. Nocco during the second
quarter of 2000. $4.5 million of deferred compensation related to options
granted to other officers and employees of the Company were expensed upon
completion of its initial public offering on November 29, 1999. See Note 4
to the Company's December 31, 1999 audited financial statements.
The Company also recorded on its balance sheet deferred stock-based
compensation totaling $633,000 in the second quarter of 2000. This deferred
charge represented the fair market value of restricted shares of common
stock granted to employees as performance-based awards and also in
replacement of, and in exchange for cancelled, unvested stock options with
exercise prices in excess of the current market value. The deferred charge
is being amortized, on a straight-line basis, over a one-year vesting
period, which is consistent with the lapsing schedule of the restrictions
placed on the common shares.
At September 30, 2000, the amount of deferred stock-based compensation
on the Company's balance sheet totaled $22.8 million.
RESULTS OF OPERATIONS
The following table sets forth, for the periods illustrated, certain
statements of operations data expressed as a percentage of total revenues.
The data has been derived from the unaudited financial statements contained
in this report, which in management's opinion, have been prepared on
substantially the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial information for the
periods presented. The operating results for any period should not be
considered indicative of the results for any future period. This
information should be read in conjunction with the financial statements
included in this report, as well as the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Revenues:
<S> <C> <C> <C> <C>
Transaction fees.............. 99% 93% 99% 97%
Other revenues............... 1 7 1 3
-------- -------- ------ -----
Total revenues........... 100 100 100 100
-------- -------- ------ -----
Cost of revenues:
Cost of transaction
fees......................... 53 12 59 50
Cost of transaction fees
to related party............. 26 29 21 22
Cost of other revenues........ 0 9 0 2
-------- -------- ----- -----
Total cost of
revenues.................... 79 50 80 74
-------- -------- ----- -----
Gross profit..................... 21 50 20 26
-------- -------- ----- ------
Operating expenses:
Sales and marketing............ 49 34 39 11
Development costs.............. 22 35 8 10
General and
administrative................ 150 100 87 22
Depreciation and
amortization.................. 12 5 4 2
Allocated expenses
from related party............ 0 11 1 2
-------- -------- ------ ------
Total operating
expenses................... 233 185 139 47
-------- -------- ------ ------
(Loss) income from operations.... (212) (135) (119) (21)
Other income, net................ 34 0 15 0
-------- -------- ------ ------
Net loss......................... (178)% (135)% (104)% (21)%
======== ========= ====== ======
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES
Total Revenues. Total revenues increased $2.3 million to $3.4 million
for the three months ended September 30, 2000 from $1.1 million for
the three months ended September 30, 1999, an increase of 209%. This
increase is primarily attributable to increases in revenues generated
from processing federal income tax payments for balance-due and
estimated payments and state income and sales and use tax payments for
the 2000 tax filing season.
Federal Transaction Fees. Revenues from processing federal payments
during the third quarter are derived from convenience fees for federal
income tax payments for balance-due for the 1999 tax year and
estimated payments for the 2000 tax year. Federal transaction fees
were $1.8 million for the three months ended September 30, 2000. For
the three months ended September 30, 2000, the Company processed
approximately 17,800 transactions totaling $66.0 million. On average,
the Company charged a 2.8% convenience fee based upon the dollar
amount of the IRS payment for processing personal federal income taxes
during the three months ended September 30, 2000. The Company did not
process any payments for federal income taxes during the third quarter
of 1999, as the Company's contract for the 1998 tax year only covered
balance due payments, accepted through April 19, 1999. Federal
transaction fees represented 53% of total revenues for the three
months ended September 30, 2000.
State Transaction Fees. Revenues from processing state payments are
related to state income tax payments for balance-due and estimated
personal taxes and sales and use taxes to the states of California,
New Jersey, Illinois, Connecticut, Oklahoma, Minnesota and the
District of Columbia and sales and use tax to the states of California
and New Jersey. State transaction fees increased $283,000 to $401,000
for the three months ended September 30, 2000 from $118,000 for the
three months ended September 30, 1999, an increase of 240%. For the
three months ended September 30, 2000, the Company processed
approximately 9,900 transactions totaling $13.6 million, compared to
approximately 4,900 transactions totaling $3.9 million for the three
months ended September 30, 1999. The increase in revenues is primarily
related to additional state contracts and additional payment services
and options provided to existing state contracts. The Company
processed income tax payments for seven states during the three months
ended September 30, 2000, as compared to three states during the three
months ended September 30, 1999. On average, the Company charged a
3.0% convenience fee based upon the dollar amount of the payment for
processing state income and sales and use taxes during the three
months ended September 30, 2000, as compared to a 3.1% convenience fee
in the three months ended September 30, 1999. State transaction fees
represented 12% of total revenues for the three months ended September
30, 2000 compared to 11% of total revenues for the three months ended
September 30, 1999.
Local Transaction Fees. Revenues from processing local payments
consist of property taxes, traffic violations, parking citations, fax
filing, and utility payments. Local transaction fees increased
$249,000 to $1.2 million for the three months ended September 30, 2000
from $902,000 for the three months ended September 30, 1999, an
increase of 28%. For the three months ended September 30, 2000, the
Company processed approximately 135,800 transactions totaling $33.2
million, compared to approximately 96,300 transactions totaling $23.6
million for the three months ended September 30, 1999. Revenues from
processing property tax payments increased $156,000 to $557,000 for
the three months ended September 30, 2000 from $401,000 for the three
months ended September 30, 1999, an increase of 39%. Revenues from
processing fines for traffic violations increased $46,000 to $363,000
for the three months ended September 30, 2000 from $317,000 for the
three months ended September 30, 1999, an increase of 15%. Revenues
from processing fines for parking citations increased $43,000 to
$111,000 for the three months ended September 30, 2000 from $68,000
for the three months ended September 30, 1999, an increase of 63%.
Revenues from other transaction fees increased $4,000 to $120,000 for
the three months ended September 30, 2000 from $116,000 for the three
months ended September 30, 1999, an increase of 3%. The additional
property tax, moving violation, and parking citation clients and
increased brand awareness contributed to the increase in local
transaction fees. Local transaction fees represented 34% of total
revenues for the three months ended September 30, 2000 compared to 82%
of total revenues for the three months ended September 30, 1999.
Other Revenues. Other revenues during the three months ended September
30, 2000 consist of maintenance and consulting revenues. Other
revenues decreased $44,000 to $31,000 for the three months ended
September 30, 2000 from $75,000 for the three months ended September
30, 1999. The decrease in other revenues is due primarily to no
stand-alone system sales during the third quarter of 2000, as compared
to one system sale during the third quarter of 1999. Other revenues
represented 1% of total revenues for the three months ended September
30, 2000 compared to 7% of total revenues for the three months ended
September 30, 1999.
COST OF REVENUES
Cost of Transaction Fees. Cost of transaction fees increased $2.2
million to $2.7 million for the three months ended September 30, 2000
from $445,000 for the three months ended September 30, 1999, an
increase of 494%. The largest component of cost of transaction fees,
merchant discount fees, increased $1.9 million to $2.3 million for the
three months ended September 30, 2000 from $364,000 for the three
months ended September 30, 1999, an increase of 522%. The average
merchant discount rate was 2.08% for the three months ended September
30, 2000, as compared to 1.69% for the three months ended September
30, 1999. The cost of telecommunication charges for the Company's IVR
system increased $233,000 to $293,000 for the three months ended
September 30, 2000 from $60,000 for the three months ended September
30, 1999, an increase of 388%. Other cost of transaction fees
increased $19,000 to $40,000 for the three months ended September 30,
2000 from $21,000 for the three months ended September 30, 1999,
primarily related to Internet costs incurred during the current fiscal
period. These costs increased as a direct result of the Company's
increase in dollars processed during the quarter. Cost of transaction
fees was 79% of total revenues for the three months ended September
30, 2000, compared to 41% for the three months ended September 30,
1999. The increase in cost of transaction fees as a percentage of
revenues is primarily due to increases in federal and state tax
payments during the current period, which have a lower gross profit
margin than other services provided and increased telecommunication
costs resulting from the increased number of servers in operation, as
compared to the third quarter of fiscal year 1999.
Cost of Other Revenues. Cost of other revenues decreased $95,000 to
$5,000 for the three months ended September 30, 2000 from $100,000 for
the three months ended September 30, 1999. The decrease is primarily
due to no stand-alone system sales during the third quarter of 2000,
as compared to one system sale during the third quarter of 1999.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased $1.3
million to $1.7 million for the three months ended September 30, 2000
from $368,000 for the three months ended September 30, 1999. This
increase is primarily attributable to an increase in sales commission
expenses during the three months ended September 30, 2000. The
increase is also attributable to an increase in amortization of
deferred stock-based compensation of $252,000 to $319,000 for the
three months ended September 30, 2000, from $67,000 for the three
months ended September 30, 1999. The increase in salary and travel
expenses resulting from the increase in sales and marketing personnel
from September 30, 1999 to September 30, 2000 also contributed to the
increase in sales and marketing expenses. Sales and marketing expenses
represented 49% of total revenues for the three months ended September
30, 2000 compared to 34% for the three months ended September 30,
1999.
Development Costs. Development costs increased $360,000 to $743,000
for the three months ended September 30, 2000 from $383,000 for the
three months ended September 30, 1999. The increase is primarily
attributable to the increase in engineering personnel and related
salary costs from September 30, 1999 to September 30, 2000.
Development costs represented 22% of total revenues for the three
months ended September 30, 2000 compared to 35% for the three months
ended September 30, 1999.
General and Administrative. General and administrative expenses
increased $4.0 million to $5.1 million for the three months ended
September 30, 2000 from $1.1 million for the three months ended
September 30, 1999. The increase is primarily attributable to an
increase in amortization of deferred stock-based compensation of $2.2
million to $2.6 million for the three months ended September 30, 2000,
from $392,000 for the three months ended September 30, 1999. Salary
and travel expenses for the Company's general and administrative
employees also increased due to the increase in headcount from
September 30, 1999 to September 30, 2000. General and administrative
expenses represented 150% of total revenues for the three months ended
September 30, 2000 compared to 100% for the three months ended
September 30, 1999.
Depreciation and Amortization. Depreciation and amortization increased
$360,000 to $410,000 for the three months ended September 30, 2000
from $50,000 for the three months ended September 30, 1999. The
increase is primarily related to an increase in IVR equipment
purchased during the first quarter of fiscal year 2000 in preparation
and handling of the higher volume of federal and state tax payments.
The increase is also attributable to the additional office equipment
and furniture and fixtures purchased during the Company's move to its
new headquarters in May 2000. Depreciation and amortization
represented 12% of total revenues for the three months ended September
30, 2000 compared to 5% for the three months ended September 30, 1999.
Allocated Expenses from Related Parties. Related party expenses were
$15,000 for the three months ended September 30, 2000, as compared to
$125,000 for the three months ended September 30, 1999. Related party
expenses consist of payments to Imperial Bank and Bruce Nelson.
Imperial Bank, a California chartered bank and wholly owned subsidiary
of Imperial Bancorp, is the beneficial owner of approximately 56% of
the outstanding common stock of the Company and charges the Company
for human resource and other services, including payroll processing
and benefits administration. Bruce Nelson, one of the Company's
directors, provides consulting services in connection with the
Company's marketing and advertising campaigns and corporate
positioning strategies. The three months ended September 30, 1999 also
includes a one-time non-cash allocation of $118,000 for Imperial Bank
employees that provided consulting services related to the Company's
initial public offering.
OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of interest income, interest
expense and other non-operating expenses. Other income, net, increased to
$1.2 million for the three months ended September 30, 2000 compared to
$1,000 in other income, net for the three months ended September 30, 1999.
This increase is directly related to higher interest income resulting from
higher average cash balances during the recent period, as compared to the
third quarter of fiscal year 1999.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES
Total Revenues. Total revenues increased $15.7 million to $22.9
million for the nine months ended September 30, 2000 from $7.2 million
for the nine months ended September 30, 1999, an increase of 218%.
This increase is primarily attributable to increases in revenues
generated from processing personal federal and state income tax
payments for the 1999 and 2000 tax year and increases in the total
number of clients and services provided subsequent to September 30,
1999.
Federal Transaction Fees. Federal transaction fees increased $13.1
million to $17.4 million for the nine months ended September 30, 2000
from $4.3 million for the nine months ended September 30, 1999, an
increase of 305%. For the nine months ended September 30, 2000, the
Company processed approximately 192,500 transactions totaling $630.2
million, compared to approximately 44,800 transactions totaling $174.0
million for the nine months ended September 30, 1999. On average, the
Company charged a 2.8% convenience fee based upon the dollar amount of
the IRS payment for processing personal federal income taxes during
the nine months ended September 30, 2000. The Company did not process
federal tax payments during the third quarter of 1999. Federal
transaction fees represented 76% of total revenues for the nine months
ended September 30, 2000 compared to 60% of total revenues for the
nine months ended September 30, 1999.
State Transaction Fees. State transaction fees increased $1.7 million
to $2.0 million for the nine months ended September 30, 2000 from
$291,000 for the nine months ended September 30, 1999, an increase of
584%. For the nine months ended September 30, 2000, the Company
processed approximately 54,300 transactions totaling $69.2 million,
compared to approximately 12,300 transactions totaling $9.7 million
for the nine months ended September 30, 1999. The increase in revenues
is primarily related to additional state contracts and additional
payment services and options provided to existing state contracts.
State transaction fees represented 9% of total revenues for the nine
months ended September 30, 2000 compared to 4% of total revenues for
the nine months ended September 30, 1999.
Local Transaction Fees. Local transaction fees increased $906,000 to
$3.3 million for the nine months ended September 30, 2000 from $2.4
million for the nine months ended September 30, 1999, an increase of
38%. For the nine months ended September 30, 2000, the Company
processed approximately 375,200 transactions totaling $103.4 million,
compared to approximately 270,100 transactions totaling $73.9 million
for the nine months ended September 30, 1999. Revenues from processing
property tax payments increased $610,000 to $1.6 million for the nine
months ended September 30, 2000 from $954,000 for the nine months
ended September 30, 1999, an increase of 64%. Revenues from processing
fines for traffic violations increased $154,000 to $1.0 million for
the nine months ended September 30, 2000 from $888,000 for the nine
months ended September 30, 1999, an increase of 17%. Revenues from
processing fines for parking citations increased $113,000 to $319,000
for the nine months ended September 30, 2000 from $206,000 for the
nine months ended September 30, 1999, an increase of 55%. Revenues
from other transaction fees increased $24,000 to $338,000 for the nine
months ended September 30, 2000 from $314,000 for the nine months
ended September 30, 1999, an increase of 8%. The additional property
tax, moving violation, and parking citation clients and increased
brand awareness contributed to the increase in local transaction fees.
Local transaction fees represented 14% of total revenues for the nine
months ended September 30, 2000 compared to 33% of total revenues for
the nine months ended September 30, 1999.
Other Revenues. Other revenues increased $53,000 to $266,000 for the
nine months ended September 30, 2000 from $213,000 for the nine months
ended September 30, 1999. The increase from the comparable period in
the prior fiscal year is related to two significant system sales
during the first quarter of 2000. Other revenues represented 1% of
total revenues for the nine months ended September 30, 2000 compared
to 3% of total revenues for the nine months ended September 30, 1999.
COST OF REVENUES
Cost of Transaction Fees. Cost of transaction fees increased $13.1
million to $18.3 million for the nine months ended September 30, 2000
from $5.2 million for the nine months ended September 30, 1999, an
increase of 252%. The largest component of cost of transaction fees,
merchant discount fees, increased $12.0 million to $16.9 million for
the nine months ended September 30, 2000 from $4.9 million for the
nine months ended September 30, 1999, an increase of 245%. The average
merchant discount rate was 2.11% for the nine months ended September
30, 2000, as compared to 1.97% for the nine months ended September 30,
1999. The cost of telecommunication charges for the Company's
toll-free interactive telephone system increased $1.0 million to $1.2
million for the nine months ended September 30, 2000 from $196,000 for
the nine months ended September 30, 1999, an increase of 510%. Other
cost of transaction fees increased $127,000 to 178,000 for the nine
months ended September 30, 2000 from $51,000 for the nine months ended
September 30, 1999 primarily related to Internet costs incurred during
the current fiscal period. Cost of transaction fees was 80% of total
revenues for the nine months ended September 30, 2000, compared to 72%
for the nine months ended September 30, 1999. The increase in cost of
transaction fees as a percentage of revenues is due primarily to
one-time telecommunication costs incurred during the second quarter in
preparation and handling of the higher volume of federal and state tax
payments, which has a lower gross profit margin than other services
provided.
Cost of Other Revenues. Cost of other revenues decreased $17,000 to
$104,000 for the nine months ended September 30, 2000 from $121,000
for the nine months ended September 30, 1999.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased $8.2
million to $9.0 million for the nine months ended September 30, 2000
from $802,000 for the nine months ended September 30, 1999. This
increase is primarily related to $4.9 million in advertising expenses,
$4.8 million of which was incurred during the first and second quarter
of 2000 to promote the Company's federal tax payment services and
increase brand awareness. The increase is also attributable to
amortization of $834,000 primarily for deferred stock-based
compensation for options to purchase shares of the Company's common
stock at exercise prices below their fair market value at the date of
grant which were granted to the Company's sales and marketing
employees in August, September, and November 1999. The increase in
sales and marketing personnel from September 30, 1999 to September 30,
2000 and sales commissions also contributed to the increase in sales
and marketing expenses. Sales and marketing expenses represented 39%
of total revenues for the nine months ended September 30, 2000
compared to 11% for the nine months ended September 30, 1999.
Development Costs. Development costs increased $1.1 million to $1.8
million for the nine months ended September 30, 2000 from $702,000 for
the nine months ended September 30, 1999. The increase is primarily
attributable to the increase in engineering personnel and related
salary costs from September 30, 1999 to September 30, 2000 and
consultants contracted to assist in the testing and data conversion of
the interactive voice response platform. Development costs represented
8% of total revenues for the nine months ended September 30, 2000
compared to 10% for the nine months ended September 30, 1999.
General and Administrative. General and administrative expenses
increased $18.3 million to $19.9 million for the nine months ended
September 30, 2000 from $1.6 million for the nine months ended
September 30, 1999. $4.1 million of the increase relates to the
one-time severance charge incurred during the second quarter of 2000
for the Company's former Chief Financial Officer, Brian W. Nocco and
$7.9 million of the increase relates to the amortization of deferred
stock-based compensation. The additional increase is attributable to
the enhancement of the Company's customer service department in
preparation and handling of the increased volume of federal and state
tax payments. Salary and travel expenses for the Company's general and
administrative employees also increased due to the increase in
headcount from September 30, 1999 to September 30, 2000. General and
administrative expenses represented 87% of total revenues for the nine
months ended September 30, 2000 compared to 22% for the nine months
ended September 30, 1999.
Depreciation and Amortization. Depreciation and amortization increased
$897,000 to $1.0 million for the nine months ended September 30, 2000
from $132,000 for the nine months ended September 30, 1999. The
increase is primarily related to an increase in IVR equipment
purchased during the first quarter of fiscal year 2000 in preparation
and handling of the higher volume of federal and state tax payments.
The increase is also attributable to the additional office equipment
and furniture and fixtures purchased during the Company's move to its
new headquarters in May 2000. Depreciation and amortization
represented 4% of total revenues for the nine months ended September
30, 2000 compared to 2% for the nine months ended September 30, 1999.
Allocated Expenses from Related Parties. Related party expenses were
$118,000 for the nine months ended September 30, 2000, as compared to
$125,000 for the nine months ended September 30, 1999. The Company did
not utilize Imperial Bank's services during the first and second
quarter of 1999, as well as Mr. Nelson's services during the first
three quarters of 1999.
OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of interest income, interest
expense and other non-operating expenses. Other income, net, increased to
$3.3 million for the nine months ended September 30, 2000 from $29,000 in
other expenses, net, for the nine months ended September 30, 1999. This
increase is directly related to higher interest income resulting from
higher average cash balances during the recent period, as compared to the
first three quarters of fiscal year 1999.
INCOME TAXES
The Company incurred operating losses during the period of its
incorporation from September 30, 1999 through September 30, 2000. The
Company has recorded a valuation allowance for the full amount of net
deferred tax assets, since the future realization of the tax benefit is
unlikely. Prior to September 30, 1999, Official Payments was a California
limited liability company. Therefore, all tax operating losses were used by
the members of the limited liability company on their respective corporate
tax returns.
LIQUIDITY AND CAPITAL RESOURCES
In November 1999, the Company completed the initial public offering of
its common stock and realized net proceeds from the offering of
approximately $78.7 million. Prior to the offering the Company had financed
its operations through private sales of common stock, with net proceeds of
$1.2 million, and through bank and shareholder loans. As of September 30,
2000, the Company had $71.4 million in cash and investments, and $66.4
million in working capital.
Net cash used in operating activities was $6.4 million and $904,000
for the nine months ended September 30, 2000 and 1999, respectively. The
cash used in operating activities for the nine months ended September 30,
2000 was primarily attributable to the Company's net loss offset by
non-cash operating expenses (such as amortization of deferred stock-based
compensation and depreciation) and an increase in accounts payable and
accrued expenses (resulting from increases in bonus and commission
payables). The cash used in operating activities for the nine months ended
September 30, 1999 was primarily attributable to the Company's net loss and
a decrease in other receivables and prepaid expenses and other assets,
offset by non-cash operating expenses (such as amortization of deferred
stock-based compensation, allocated financial consulting expenses from
Imperial Bank, and depreciation) and an increase in accounts payable and
accrued expenses.
Net cash provided from investing activities was $3.6 million for the
nine months ended September 30, 2000. During the first quarter of 2000, the
Company increased its IVR equipment purchases in preparation for the higher
volume of federal and state tax payments during the first two weeks of
April 2000. Additionally, the Company increased its purchases of office
equipment and furniture and fixtures during the Company's move to its new
Stamford, Connecticut headquarters in May 2000. These expenditures were
offset by the sale of short-term investments during the nine months ended
September 30, 2000. Net cash used in investing activities was $255,000 for
the nine months ended September 30, 1999. Cash used in investing activities
primarily reflects purchases of property and equipment during that period.
Net cash provided by financing activities was $1.9 million and $1.0
million for the nine months ended September 30, 2000 and 1999,
respectively. The cash generated in fiscal year 2000 was primarily related
to the exercise of stock options by one of the Company's directors
(although the shares of the Company's common stock so purchased remain
subject to a right of repurchase by the Company in accordance with the
terms of the Company's 1999 Stock Incentive Plan), and borrowings against a
sale-leaseback agreement for IVR equipment that was acquired in preparation
for the higher volume of federal and income tax payments made during the
first two weeks of April 2000. These cash inflows were offset by the
repayment of capital lease obligations. The cash generated in fiscal year
1999 was primarily related to $1.6 million in notes payable from the
Company's stockholders. This amount was offset by the repayment of a
portion of the notes payable from stockholders and capital leases.
The Company expects to experience growth in its operating expenditures
for the foreseeable future in order to execute its business plan,
particularly in the areas of web development expenditures and sales and
marketing. As a result, the Company estimates that these operating
expenditures, as well as other planned expenditures, will constitute a
significant use of cash. The Company believes that the current cash
resources will be sufficient to meet its working capital and capital
expenditures for the foreseeable future.
SEASONALITY AND FLUCTUATION OF QUARTERLY RESULTS
The Company has generally experienced fiscal quarter over fiscal
quarter revenue growth with some seasonal fluctuations, primarily in the
second and fourth quarters. The sharp increase in revenues in the second
quarter is due to the processing of personal federal and state income tax
payments, specifically in the month of April. The fluctuations in the
second and fourth quarter also relate to an increase in revenues from
processing property tax payments, which are generally collected twice a
year - in April and December. The Company expects that results for the
second quarter of future years will continue to be impacted by the April
15th deadline for paying personal federal and state income taxes.
Since the Company did not process extension personal federal income
tax payments in the third quarter and since a significant portion of the
federal income tax payments are due in April, as expected, revenues in the
third quarter were lower than in the second quarter.
The Company expects that its operating expenses will continue to
increase due to the development of its website and its ongoing marketing
campaign to increase consumer awareness of the Company's electronic payment
services. If revenues in any quarter do not increase correspondingly with
increases in expenses, the Company's results for that quarter would be
materially and adversely affected. In addition, as of September 30, 2000,
the Company had $22.8 million in deferred stock-based compensation. The
Company intends to amortize $22.4 million of this amount on a straight-line
basis over the remaining of the three-year vesting period. The Company
intends to amortize the remaining $409,000 on a straight-line basis over
the remaining of the one-year vesting period.
For the foregoing reasons, the Company believes that comparisons of
its quarterly operating results are not necessarily meaningful and that its
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 the Company's operating results will be below
the expectations of research analyst and investors, and in that case, the
price of the Company's common stock may decline.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company does
not use derivative financial instruments in its investment portfolio. The
primary objective of the Company's investment activities is to preserve
principal while maximizing yields without significantly increasing risk.
This is accomplished by investing in widely diversified investments,
consisting primarily of investment grade securities. Due to the nature of
the Company's investments, the Company believes that there is no material
risk exposure. All investments are carried at market value, which
approximates cost.
The table below represents principal amounts and related
weighted-average interest rates by year of maturity for the Company's
investment portfolio.
<TABLE>
<CAPTION>
FY2000 FY2001 FY2002 FY2003 FY2004 Thereafter Total
------ ------ ------ ------ ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Money market fund
and cash $ 712 $ - $ - $ - $ - $ - $ 712
Average interest
Rate 3.19% 0.00% 0.00% 0.00% 0.00% 0.00%
Investments $ 60,390 $ 10,248 $ - $ - $ - $ - $70,638
Average interest
rate 6.69% 6.79% 0.00% 0.00% 0.00% 0.00%
-------- -------- -------- -------- ------- -------- -------
Total cash and
investments $ 61,102 $ 10,248 $ - $ - $ - $ - $71,350
======== ======== ======== ======== ======= ======== =======
</TABLE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company currently is not involved in any material legal
proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 29, 1999, the Company completed the initial public
offering of its common stock. The managing underwriters in the offering
were Donaldson, Lufkin, & Jenrette, CIBC World Markets and DLJdirect Inc.
The shares of the common stock sold in the offering were registered under
the Securities Act of 1933, as amended, on a Registration Statement on Form
S-1 (No. 333-87325). The Securities and Exchange Commission declared the
Registration Statement effective on November 22, 1999.
The offering commenced on November 23, 1999 and was completed on
November 29, 1999 after the Company had sold all of the 5,750,000 shares of
common stock registered under the Registration Statement (including 750,000
shares sold in connection with the exercise of the underwriters'
over-allotment option). The initial public offering price was $15.00 per
share, resulting in gross proceeds from the initial public offering of
$86.2 million.
The Company paid a total of $6.0 million in underwriting discounts and
commissions and approximately $1.5 million has been incurred for costs and
expenses related to the offering. None of the costs and expenses related to
the offering were paid directly or indirectly to any director or officer of
the Company or their associates, persons owning 10 percent or more of any
class of equity securities of the Company or an affiliate of the Company.
After deducting the underwriting discounts and commissions and the
offering expenses, the estimated net proceeds to the Company from the
offering were approximately $78.7 million. The net offering proceeds have
been used to make the following payments: approximately $2.8 million for
the purchase and installation of computer equipment to expand transaction
processing capabilities and approximately $4.9 million for direct marketing
and promotional activities. None of these costs or expenses were paid
directly or indirectly to any director or officer of the Company or their
associates, persons owning 10 percent or more of any class of equity
securities of the Company or an affiliate of the Company.
In the future, the Company will use a portion of its net proceeds to
further enhance its website. In addition, the Company may use a portion of
its net proceeds to acquire or invest in businesses, technologies, products
or services (which amount has not been specifically allocated as of the
date hereof). Unused proceeds are invested in short-term investments.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on
September 19, 2000. The following nine nominees were elected as directors
of the Company for a one-year term:
Total Vote Total Vote Withheld
Nominee For Each Nominee For Each Nominee
------- ---------------- -------------------
Andrew Cohan 20,487,655 38,115
Christos Cotsakos 20,487,655 38,115
Norman P. Creighton 20,487,655 38,115
Thomas R. Evans 20,446,355 79,415
George L. Graziadio, Jr. 20,487,655 38,115
Vernon Loucks Jr. 20,487,655 38,115
Lee E. Mikles 20,487,655 38,115
Bruce S. Nelson 20,487,655 38,115
Kenneth Stern 20,486,055 39,715
In addition, the stockholders approved an amendment to the Company's
1999 Stock Incentive Plan, as amended, increasing the aggregate number of
shares of the Company's common stock available for issuance pursuant to the
exercise of stock options granted under such plan from 6,900,000 (6,000,000
shares for employees and consultants and 900,000 shares for directors) to
7,650,000 (6,750,000 shares for employees and consultants and 900,000
shares for directors), with 19,484,451 shares voting in favor, 1,034,979
shares voting against, and 6,340 shares abstaining.
The stockholders also ratified the selection of the firm KPMG LLP as
independent auditors for the fiscal year ending December 31, 2000, with
20,510,132 shares voting in favor, 8,785 shares voting against and 6,853
shares abstaining.
ITEM 5. OTHER INFORMATION
On November 1, 2000, the board of directors of Imperial Bancorp, the
parent holding Company of Imperial Bank (which owns approximately 56% of
the Company's outstanding common stock), approved a definitive agreement to
be acquired in a tax-free, stock-for-stock transaction by Comerica
Incorporated. Comerica and Imperial Bancorp have announced that they expect
the transaction to close in the first quarter of 2001. Based on discussions
to date with representatives of Imperial and Comerica, the Company does not
expect the Imperial-Comerica merger to have a material effect on its
operations for the fiscal year ending December 31, 2000. Consummation of
the merger will constitute a "change of control" of the Company under the
Company's 1999 and 2000 Stock Incentive Plans, triggering the acceleration
of various employee stock options granted under such plans. Assuming the
Imperial-Comerica merger is completed at the end of the first quarter of
2001, upon such completion, the acceleration of the employee stock options
will result in the Company recognizing previously recorded deferred
compensation of approximately $16.8 million.
On October 19, 2000, the Company entered into a cooperative
advertising agreement with MasterCard International for $255,000. The
Company will utilize these funds for an advertising campaign directly
related to the federal income tax payment program with the IRS, tentatively
scheduled for March and April 2001.
In mid-October 2000, the Company entered into a contract with the
State of Kansas to accept Internet credit card payments for individual
income tax and retailer sales tax payments for the 2000 tax year. Also in
October, the Company reached an agreement with the State of Virginia to
accept telephone and Internet credit card payments for balance-due income
taxes for the 2000 tax year.
On October 10, 2000, the Company entered into a contract with the
State of New York to accept telephone and Internet credit card payments for
balance-due and extension taxes for the 2000 tax year and estimated taxes
for the 2001 tax year.
In mid-September 2000, the Company reached an agreement with the State
of Ohio to collect credit card payments via the Internet and telephone for
balance-due and extension taxes for the 2000 tax year and estimated taxes
for the 2001 tax year. Also in September, the Company signed an agreement
with the State of Washington and American Express Travel Related Services
Company, Inc. pursuant to which businesses in the state of Washington that
file their excise tax returns electronically will have the option of using
the Company's services to pay their business sales and use taxes using the
American Express(R) Card via the Internet.
In mid-August 2000, the Company signed an agreement with the State of
Maryland to collect individual tax year 2000 balance-due tax payments and
delinquent tax payments by credit card, via the Internet and telephone. In
late August, the Company reached an agreement with the Alabama Department
of Revenue to collect balance-due and delinquent income tax payments by
credit card, via Internet and telephone, beginning with the 2000 tax year.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No current reports on Form 8-K were filed during the quarter
covered by this report.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act,
the Registrant has caused this report to be signed on its behalf by the
undersigned, there unto duly authorized.
OFFICIAL PAYMENTS CORPORATION
November 14, 2000 By: /s/ Thomas R. Evans
----------------------------
Thomas R. Evans
Chairman of the Board and Chief
Executive Officer
November 14, 2000 By: /s/ Edward J. DiMaria
----------------------------
Edward J. DiMaria
Chief Financial Officer
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
27.1 Financial Data Schedule