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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 June 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 August 3, 2000, 21,491,270 shares of the registrant's common
stock were issued and outstanding.
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OFFICIAL PAYMENTS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
ITEM PAGE NUMBER
---------- -----------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements...................................3
Condensed Balance Sheets as of June 30, 2000 and
December 31, 1999...................................3
Condensed Statements of Operations for the three and
six-month periods ended June 30, 2000 and 1999......4
Condensed Statements of Cash Flows for the six-
month periods ended June 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...................11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.....................................21
Item 2. Changes in Securities and Use of Proceeds.............21
Item 3. Defaults Upon Senior Securities.......................21
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)
JUNE 30, DECEMBER 31,
2000 1999
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash .............................................$ 2,445 $ 1,643
Short-term investments............................ 72,064 79,182
Accounts receivable, net.......................... 690 1,135
Prepaid expenses.................................. 276 465
Other current assets.............................. - 73
-------- --------
Total current assets............................ 75,475 82,498
Property and equipment, net......................... 5,388 1,802
Other assets........................................ 95 -
-------- --------
Total assets....................................$ 80,958 $ 84,300
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................$ 396 $ 176
Accrued merchant discount fees.................... 1,298 419
Accrued payroll and severance..................... 1,546 551
Accrued expenses.................................. 1,559 931
Deferred revenue.................................. 109 65
Current portion of notes payable and capital
lease obligations................................ 585 206
-------- --------
Total current liabilities....................... 5,493 2,348
Notes payable and capital lease obligations......... 818 391
-------- --------
Total liabilities............................... 6,311 2,739
-------- --------
Stockholders' equity:
Common stock, $.01 par value; 150,000,000 shares
authorized; 21,491,270 and 21,262,820 shares
issued and outstanding as of June 30, 2000 and
December 31, 1999, respectively................. 215 213
Additional paid-in capital........................ 129,500 127,707
Deferred stock-based compensation................. (25,797) (34,965)
Accumulated deficit............................... (29,271) (11,394)
--------- ---------
Stockholders' equity...................... 74,647 81,561
--------- ---------
Total liabilities and stockholders' equity.... $ 80,958 $ 84,300
========= =========
See accompanying notes to condensed financial statements.
OFFICIAL PAYMENTS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
-------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Transaction fees.............. $ 17,648 $ 5,247 $ 19,304 $ 5,975
Other revenues............... 67 36 235 138
-------- -------- -------- --------
Total revenues........... 17,715 5,283 19,539 6,113
-------- -------- -------- --------
Cost of revenues:
Cost of transaction fees...... 10,672 3,270 11,618 3,451
Cost of transaction fees
to related party............. 3,558 1,087 4,045 1,293
Cost of other revenues........ 22 2 99 21
-------- -------- -------- --------
Total cost of revenues...... 14,252 4,359 15,762 4,765
-------- -------- -------- --------
Gross profit..................... 3,463 924 3,777 1,348
-------- -------- -------- --------
Operating expenses:
Sales and marketing............ 2,870 259 7,316 434
Development costs.............. 532 179 1,014 319
General and administrative..... 9,547 347 14,781 543
Depreciation and amortization.. 429 45 619 82
Allocated expenses
from related parties.......... 58 - 103 -
-------- -------- -------- --------
Total operating
expenses................... 13,436 830 23,833 1,378
-------- -------- -------- --------
(Loss) income from operations.... (9,973) 94 (20,056) (30)
Interest and other
income (expenses), net........ 1,045 (33) 2,179 (30)
-------- -------- -------- --------
Net (loss) income................ $ (8,928) $ 61 $(17,877) $ (60)
========= ======== ======== ========
Basic and diluted
net loss per share............ $ (0.42) $ 0.00 $ (0.84) $ 0.00
========= ======== ========= ========
Shares used in computing
basic and diluted
net loss per share............. 21,376 15,000 21,339 15,000
========= ======== ======== ========
</TABLE>
See accompanying notes to condensed financial statements.
OFFICIAL PAYMENTS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash flow used in operating activities:
Net loss.......................................... $ (17,877) $ (60)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 619 82
Amortization of deferred stock-based
compensation................................. 9,800 -
Changes in operating assets and liabilities
Accounts receivable.......................... 445 (391)
Prepaid expenses and other assets............ 167 (8)
Accounts payable and other accrued expenses.. 2,722 (167)
Deferred revenue............................. 44 34
--------- --------
Net cash used in operating activities...... (4,080) (509)
--------- --------
Cash flows provided by (used in) investing
activities:
Proceeds from sale of short-term investments...... 7,118 -
Capital expenditures.............................. (4,175) (268)
--------- --------
Net cash provided by (used in) investing
activities.............................. 2,943 (268)
--------- --------
Cash flow provided by financing activities:
Proceeds from exercise of stock options, net...... 1,163 -
Borrowings on sale-leaseback agreement............ 968 -
Notes payable to related party.................... - 440
Repayment of notes payable and capital leases..... (192) (45)
--------- --------
Net cash provided by financing activities.. 1,939 395
--------- --------
Net increase (decrease) in cash..................... 802 (382)
Cash at the beginning of the period................. 1,643 631
--------- --------
Cash at the end of the period....................... $ 2,445 $ 249
Supplement disclosure of noncash activity:
Cash paid for interest.............................. $ 221 $ 48
========= ========
Assets acquired through capital leases.............. $ 998 $ 79
========= ========
Cash paid for taxes................................. $ 103 $ 8
========= ========
</TABLE>
See accompanying notes to condensed financial statements.
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, property taxes and fines for traffic violations and parking
citations.
The Company has only a limited operating history, and it is difficult
to evaluate its business and prospects and the risks, expenses and
difficulties that the Company may face in implementing its business model.
The Company's success will depend on maintaining its relationship with the
Internal Revenue Services (IRS) and on developing additional relationships
with state and local government agencies. There are no assurances that the
Company will be able to develop new relationships or maintain existing
relationships, and the failure to do so could have a material and adverse
effect on the business, operating results and financial condition of the
Company.
BASIS OF PRESENTATION
The accompanying condensed financial statements as of June 30, 2000
and December 31, 1999, and the three and six months ended June 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 June 30, 2000 and for the three and six months ended June
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 six
months ended June 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 June 30, 2000, the Company had short-term investments of $72.1
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 three 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 June 30, 2000, no comprehensive income
(loss) was reported, as the fair value of the Company's short-term
investments equaled 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 charge 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.
The Company also recorded on its balance sheet a deferred stock-based
compensation expense 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. See Note 1 to the Company's accompanying
condensed financial statements.
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
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 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. As vendor specific objective
evidence does not exist for each element of the contract, revenues are
recognized, under the completed contract method, 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.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. Such costs are
included in sales and marketing expense and totaled approximately $1.6
million and $45,000 for the three months ended June 30, 2000 and 1999
respectively, and $4.8 million and $52,000 for the six months ended June
30, 2000 and 1999, respectively.
Note 2. NET LOSS PER SHARE
Basic and diluted net loss per share is computed using the
weighted-average number of outstanding shares of common stock in the
period. Diluted net loss per share is computed using 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- -------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net (loss) income............. $ (8,928) $ 61 $ (17,877) $ (60)
Weighted-average shares
used in computing basic
and diluted net loss per
common share................ 21,376,000 15,000,000 21,339,000 15,000,000
----------- ---------- ---------- ----------
Basic and diluted net loss
per common share ........... $ (0.42) $ 0.00 $ (0.84) $ (0.00)
----------- ---------- ---------- ----------
</TABLE>
Net loss per share for the three and six months ended June 30, 2000
does not include the effect of approximately 6,200,098 stock
options with a weighted-average exercise price of $4.48 per share
because their effects are anti-dilutive. There were no potentially
dilutive common stock equivalents outstanding as of June 30, 1999.
Note 3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
JUNE 30, DECEMBER 31,
---------------------------
2000 1999
Computer equipment.............................. $ 5,505 $ 1,836
Furniture and fixtures.......................... 1,021 485
--------- ---------
6,526 2,321
Less accumulated depreciation and amortization.. 1,138 519
--------- ---------
$ 5,388 $ 1,802
======== ========
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 June 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- -------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales and marketing............. $ 266 $ - $ 515 $ -
Development costs............... 10 - 10 -
General and administrative...... 6,327 - 9,275 -
---------- ---------- ---------- ----------
$ 6,603 $ - $ 9,800 $ -
========== ========== ========== ==========
</TABLE>
Note 5. SEVERANCE AND OTHER RELATED CHARGES
In the three month period ended June 30, 2000, as a requirement of
generally accepted accounting principles, 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, 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 is included in
accrued payroll and severance on the condensed balance sheets.
Note 6. INTEREST AND OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of the following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- -------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income................. $ 1,275 $ 10 $ 2,415 $ 14
Interest expense................ (229) (37) (241) (48)
Other income (expenses), net.... (1) (6) 5 4
---------- ---------- ---------- ----------
$ 1,045 $ (33) $ 2,179 $ (30)
========== ========== ========== ==========
</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 JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- -------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues by product are
Transaction fees:
Federal.................. $ 15,063 $ 4,228 $ 15,585 $ 4,342
State.................... 1,319 151 1,602 173
Local.................... 1,266 868 2,117 1,460
Other revenues............. 67 36 235 138
---------- ---------- ---------- ----------
Total revenues............. $ 17,715 $ 5,283 $ 19,539 $ 6,113
========== ========== ========== ==========
</TABLE>
Note 8. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements. SAB 101 provides guidance on applying generally
accepted accounting principles to revenue recognition issues in financial
statements. In March 2000, the SEC issued Staff Accounting Bulletin No.
101A (SAB 101A), Amendment: Revenue Recognition in Financial Statements.
SAB 101A delayed for one fiscal quarter the implementation date of SAB 101
for registrants with fiscal years beginning between December 16, 1999 and
March 31, 2000. In June 2000, the SEC issued Staff Accounting Bulletin No.
101B (SAB 101B), Second Amendment: Revenue Recognition in Financial
Statements. SAB 101B delays the implementation of SAB 101 until no later
than the fourth fiscal quarter of fiscal years beginning after December 15,
1999. The Company will adopt SAB 101 as required in the fourth quarter of
2000 and is evaluating the effect that such adoption may have on its
results of operations and financial position.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. In
June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS
No. 133, which deferred the effective date of SFAS No. 133. In June 2000,
the FASB issued SFAS No. 138, Accounting for Derivative Instruments and
Certain Hedging Activities and amendment of FASB Statement No. 133, which
amended the accounting and reporting standards of Statement 133 for certain
derivative instruments and certain hedging activities. SFAS No. 133 and
SFAS No. 138 are effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company will adopt SFAS No. 133 as
required in the first quarter of 2001 and is evaluating the effect that
such adoption may have on its results of operations and financial position.
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 than 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, by 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's interactive
toll-free telephone number, 1-888-2PAY-TAXSM, allows customers to make
payments and receive certain customer service information. The Company's
websites, at www.8882paytax.comSM and at www.officialpayments.comSM,
currently allow 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 our credit card payment
services. For processing personal federal and state income tax payments and
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 systems to government
entities and other miscellaneous fees such as for maintenance and
consulting. 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 six months ended June
30, 2000, convenience fees from tax payments to the IRS accounted for
approximately 80% 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 would 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 than processing income tax and property tax payments
because the convenience fee as a percentage of fines processed is
significantly higher.
Operating expenses include sales and marketing expenses, development
costs, general and administrative expenses, depreciation and amortization,
and allocated expenses from related parties. One of the largest components
of these expenses was the amortization of deferred stock-based
compensation, which amounted to $6.6 million and $9.8 million for the three
and six months ending June 30, 2000. The amortization expense in the second
quarter of 2000 includes a one-time $3.6 million non-cash deferred
stock-based compensation charge for the Company's former Chief Financial
Officer, Brian W. Nocco.
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 June 30,
2000, the Company had an accumulated deficit of approximately $29.3
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 a deferred stock-based
compensation expense 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 expenses 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, 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 expenses
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 a deferred stock-based
compensation expense 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. See Note 1 to the Company's accompanying
condensed financial statements.
At June 30, 2000, the amount of deferred stock-based compensation on the
Company's balance sheet totaled $25.8 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- ---------------------------------
2000 1999 2000 1999
---------- ---------- -------- --------
Revenues:
<S> <C> <C> <C> <C>
Transaction fees.............. 100% 99% 99% 98%
Other revenues............... - 1 1 2
-------- ----- ----- -----
Total revenues........... 100 100 100 100
-------- ------ ----- -----
Cost of revenues:
Cost of transaction fees...... 60 62 59 57
Cost of transaction fees
to related party............. 20 20 21 21
Cost of other revenues........ - - 1 -
-------- ------ ----- -----
Total cost of revenues....... 80 82 81 78
-------- ------ ----- -----
Gross profit..................... 20 18 19 22
-------- ------ ----- -----
Operating expenses:
Sales and marketing............ 16 5 37 7
Development costs.............. 3 3 5 6
General and administrative..... 54 7 76 9
Depreciation and amortization... 2 1 3 1
Allocated expenses
from related party............ - - 1 -
-------- ------ ---- ----
Total operating
expenses................... 76 16 122 23
-------- ------ ---- ----
(Loss) income from operations.... (56) 2 (103) -
Other (loss) income, net......... 6 (1) 11 -
-------- ------- ----- ----
Net (loss) income................ (50)% 1% (92)% (1)%
======== ======== ===== =====
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES
Total Revenues. Total revenues increased $12.4 million to $17.7 million
for the three months ended June 30, 2000 from $5.3 million for the three
months ended June 30, 1999, an increase of 234%. This increase is
primarily attributable to increases in revenues generated from
processing personal federal and state income tax payments during the
2000 tax filing season.
Federal Transaction Fees. Revenues from processing federal payments are
solely related to federal income tax payments for balance-due,
extension, and estimated payments. Federal transaction fees increased
$10.9 million to $15.1 million for the three months ended June 30, 2000
from $4.2 million for the three months ended June 30, 1999, an increase
of 260%. For the three months ended June 30, 2000, the Company processed
approximately 164,000 transactions totaling $545.7 million, compared to
approximately 41,500 transactions totaling $169.6 million for the three
months ended June 30, 1999. The Company believes the increase in revenue
from the comparable period in 1999 is primarily the result of new
processing of extension and estimated federal tax payments, as well as
the advertising of the Company's services by the Company, the IRS, and
participating credit card companies. 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
June 30, 2000, as compared to a 2.5% convenience fee in the three months
ended June 30, 1999. Federal transaction fees represented 85% of total
revenues for the three months ended June 30, 2000 compared to 80% of
total revenues for the three months ended June 30, 1999.
State Transaction Fees. Revenues from processing state payments are
related to state income tax payments for balance-due, estimated and
extension personal taxes and sales and use taxes to the states of
California, New Jersey, Illinois, Connecticut, Oklahoma, Minnesota and
the District of Columbia. State revenues increased $1.2 million to $1.3
million for the three months ended June 30, 2000 from $151,000 for the
three months ended June 30, 1999, an increase of 795%. For the three
months ended June 30, 2000, we processed approximately 36,800
transactions totaling $46.0 million, compared to approximately 6,400
transactions totaling $5.1 million for the three months ended June 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
nine states during the three months ended June 30, 2000, as compared to
three states during the three months ended June 30, 1999. On average,
the Company charged a 2.9% convenience fee based upon the dollar amount
of the payment for processing state income and sales and use taxes
during the three months ended June 30, 2000, as compared to a 3.0%
convenience fee in the three months ended June 30, 1999. State
transaction fees represented 7.4% of total revenues for the three months
ended June 30, 2000 compared to 3% of total revenues for the three
months ended June 30, 1999.
Local Transaction Fees. Revenues from processing local payments consist
of property taxes, traffic violations, parking citations, fax filing,
and utility payments. Local revenues increased $398,000 to $1.3 million
for the three months ended June 30, 2000 from $868,000 for the three
months ended June 30, 1999, an increase of 46%. For the three months
ended June 30, 2000, we processed approximately 133,100 transactions
totaling $47.0 million, compared to approximately 98,000 transactions
totaling $33.4 million for the three months ended June 30, 1999.
Revenues from processing property tax payments increased $292,000 to
$688,000 for the three months ended June 30, 2000 from $396,000 for the
three months ended June 30, 1999, an increase of 74%. Revenues from
processing fines for traffic violations increased $68,000 to $361,000
for the three months ended June 30, 2000 from $293,000 for the three
months ended June 30, 1999, an increase of 23%. Revenues from processing
fines for parking citations increased $35,000 to $109,000 for the three
months ended June 30, 2000 from $74,000 for the three months ended June
30, 1999, an increase of 47%. Revenues from other transaction fees
increased $3,000 to $108,000 for the three months ended June 30, 2000
from $105,000 for the three months ended June 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 7% of total
revenues for the three months ended June 30, 2000 compared to 16% of
total revenues for the three months ended June 30, 1999.
Other Revenues. Other revenues consist of system sales, maintenance, and
consulting revenues. Other revenues increased $31,000 to $67,000 for the
three months ended June 30, 2000 from $36,000 for the three months ended
June 30, 1999. Other revenues represented 0.4% of total revenues for the
three months ended June 30, 2000 compared to 0.7% of total revenues for
the three months ended June 30, 1999.
COST OF REVENUES
Cost of Transaction Fees. Cost of transaction fees increased $9.8
million to $14.2 million for the three months ended June 30, 2000 from
$4.4 million for the three months ended June 30, 1999, an increase of
223%. The largest component of cost of transaction fees, merchant
discount fees, increased $9.4 million to $13.6 million for the three
months ended June 30, 2000 from $4.2 million for the three months ended
June 30, 1999, an increase of 224%. The cost of telecommunication
charges for the Company's toll-free interactive telephone system
increased $428,000 to $518,000 for the three months ended June 30, 2000
from $90,000 for the three months ended June 30, 1999, an increase of
476%. Other cost of transaction fees increased $62,000 to $82,000 for
the three months ended June 30, 2000 from $20,000 for the three months
ended June 30, 1999, primarily related to Internet costs incurred during
the current fiscal period. Cost of transaction fees was 80% of total
revenues for the three months ended June 30, 2000, compared to 82% for
the three months ended June 30, 1999. The decrease in cost of
transaction fees as a percentage of revenues is primarily due to an
increase in the average convenience fee charged for federal income tax
payments to 2.8% for the 2000 tax filing season compared to 2.5% for the
1999 tax filing season.
Cost of Other Revenues. Cost of other revenues increased $20,000 to
$22,000 for the three months ended June 30, 2000 from $2,000 for the
three months ended June 30, 1999.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased $2.6 million
to $2.9 million for the three months ended June 30, 2000 from $259,000
for the three months ended June 30, 1999. This increase is primarily
attributable to a $1.6 million advertising campaign to promote the
Company's services for balance-due, extension, and estimated federal tax
payments. The increase is also attributable to amortization of $266,000
for deferred stock-based compensation primarily 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 June 30, 1999 to June
30, 2000 and sales commission payables also contributed to the increase
in sales and marketing expenses. Sales and marketing expenses
represented 16% of total revenues for the three months ended June 30,
2000 compared to 5% for the three months ended June 30, 1999.
Development Costs. Development costs increased $353,000 to $532,000 for
the three months ended June 30, 2000 from $179,000 for the three months
ended June 30, 1999. The increase is primarily attributable to the
increase in engineering personnel and related salary costs from June 30,
1999 to June 30, 2000 and consultants contracted to assist in the
enhancement of the interactive voice response platform. Development
costs represented 4% of total revenues for the three months ended June
30, 2000 compared to 3% for the three months ended June 30, 1999.
General and Administrative. General and administrative expenses
increased $9.2 million to $9.5 million for the three months ended June
30, 2000 from $347,000 for the three months ended June 30, 1999. This
increase is primarily attributable to a non-one-time severance charge
for the Company's former Chief Financial Officer, Brian W. Nocco in the
amount of $4.1 million. The charge included a non-cash amortization
expense of $3.6 million for deferred stock-based compensation for
options granted to Mr. Nocco in August, September, and November 1999.
The increase is also attributable to additional amortization expense of
$2.7 million 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 general and administrative employees in August, September,
and November 1999. The additional increase is primarily 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 during the first two weeks of April 2000. Salary and travel
expenses for the Company's general and administrative employees also
increased due to the increase in headcount from June 30, 1999 to June
30, 2000. General and administrative expenses represented 54% of total
revenues for the three months ended June 30, 2000 compared to 7% for the
three months ended June 30, 1999.
Depreciation and Amortization. Depreciation and amortization increased
$384,000 to $429,000 for the three months ended June 30, 2000 from
$45,000 for the three months ended June 30, 1999. The increase is
primarily related to an increase in IVR equipment purchased during the
first quarter of fiscal year 2000 in preparation for the higher volume
of federal and state tax payments during the first two weeks of April
2000. 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 2% of total revenues for the three months ended June 30,
2000 compared to 1% for the three months ended June 30, 1999.
Allocated Expenses from Related Parties. Related party expenses were
$58,000 for the three months ended June 30, 2000, relating to payments
made 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 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 services in connection with the
Company's marketing and advertising campaign, analyst, and other
presentations and corporate positioning strategy. The Company did not
utilize Imperial Bank's or Mr. Nelson's services during the three months
ended June 30, 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
$1.0 million for the three months ended June 30, 2000 compared to $33,000
in other expenses, net for the three months ended June 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
second quarter of fiscal year 1999.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES
Total Revenues. Total revenues increased $13.4 million to $19.5 million
for the six months ended June 30, 2000 from $6.1 million for the six
months ended June 30, 1999, an increase of 220%. This increase is
primarily attributable to increases in revenues generated from
processing personal federal and state income tax payments during the
2000 tax filing season.
Federal Transaction Fees. Federal transaction fees increased $11.3
million to $15.6 million for the six months ended June 30, 2000 from
$4.3 million for the six months ended June 30, 1999, an increase of
262%. For the six months ended June 30, 2000, the Company processed
approximately 174,700 transactions totaling $564.2 million, compared to
approximately 44,800 transactions totaling $174.0 million for the six
months ended June 30, 1999. Federal transaction fees represented 80% of
total revenues for the six months ended June 30, 2000 compared to 71% of
total revenues for the six months ended June 30, 1999.
State Transaction Fees. State revenues increased $1.4 million to $1.6
million for the six months ended June 30, 2000 from $173,000 for the six
months ended June 30, 1999, an increase of 826%. For the six months
ended June 30, 2000, the Company processed approximately 44,400
transactions totaling $55.6 million, compared to approximately 7,400
transactions totaling $5.8 million for the six months ended June 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 8% of total
revenues for the six months ended June 30, 2000 compared to 3% of total
revenues for the six months ended June 30, 1999.
Local Transaction Fees. Local revenues increased $657,000 to $2.1
million for the six months ended June 30, 2000 from $1.5 million for the
six months ended June 30, 1999, an increase of 45%. For the six months
ended June 30, 2000, the Company processed approximately 239,500
transactions totaling $70.2 million, compared to approximately 173,800
transactions totaling $50.3 million for the six months ended June 30,
1999. Revenues from processing property tax payments increased $457,000
to $1.0 million for the six months ended June 30, 2000 from $553,000 for
the six months ended June 30, 1999, an increase of 86%. Revenues from
processing fines for traffic violations increased $110,000 to $681,000
for the six months ended June 30, 2000 from $571,000 for the six months
ended June 30, 1999, an increase of 19%. Revenues from processing fines
for parking citations increased $70,000 to $208,000 for the six months
ended June 30, 2000 from $138,000 for the six months ended June 30,
1999, an increase of 51%. Revenues from other transaction fees increased
$20,000 to $218,000 for the six months ended June 30, 2000 from $198,000
for the six months ended June 30, 1999, an increase of 10%. 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 11% of total
revenues for the six months ended June 30, 2000 compared to 24% of total
revenues for the six months ended June 30, 1999.
Other Revenues. Other revenues increased $96,000 to $234,000 for the six
months ended June 30, 2000 from $138,000 for the six months ended June
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 six
months ended June 30, 2000 compared to 2% of total revenues for the six
months ended June 30, 1999.
COST OF REVENUES
Cost of Transaction Fees. Cost of transaction fees increased $11.0
million to $15.7 million for the six months ended June 30, 2000 from
$4.7 million for the six months ended June 30, 1999, an increase of
234%. The largest component of cost of transaction fees, merchant
discount fees, increased $10.0 million to $14.6 million for the six
months ended June 30, 2000 from $4.6 million for the six months ended
June 30, 1999, an increase of 217%. The cost of telecommunication
charges for the Company's toll-free interactive telephone system
increased $777,000 to $913,000 for the six months ended June 30, 2000
from $136,000 for the six months ended June 30, 1999, an increase of
571%. Other cost of transaction fees increased $108,000 to $138,000 for
the six months ended June 30, 2000 from $30,000 for the six months ended
June 30, 1999 primarily related to Internet costs incurred during the
current fiscal period. Cost of transaction fees was 80% of total
revenues for the six months ended June 30, 2000, compared to 78% for the
six months ended June 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 recent period in preparation
for the anticipated higher volume of federal and state tax payments
during the first two weeks in April 2000 and higher volume of federal
income tax payments processed, which has a lower gross profit margin
than other services provided.
Cost of Other Revenues. Cost of other revenues increased $78,000 to
$99,000 for the six months ended June 30, 2000 from $21,000 for the six
months ended June 30, 1999. The increase in other revenues is primarily
attributable to the equipment cost associated with the two significant
system sales during the first quarter of 2000.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased $6.9 million
to $7.3 million for the six months ended June 30, 2000 from $434,000 for
the six months ended June 30, 1999. This increase is primarily related
to $4.8 million in advertising expenses 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 $515,000 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 June 30, 1999 to June 30, 2000 and sales
commission payables also contributed to the increase in sales and
marketing expenses. Sales and marketing expenses represented 37% of
total revenues for the six months ended June 30, 2000 compared to 7% for
the six months ended June 30, 1999.
Development Costs. Development costs increased $685,000 to $1.0 million
for the six months ended June 30, 2000 from $319,000 for the six months
ended June 30, 1999 The increase is primarily attributable to the
increase in engineering personnel and related salary costs from June 30,
1999 to June 30, 2000 and consultants contracted to assist in the
enhancement of the interactive voice response platform. Development
costs represented 5% of total revenues for the six months ended June 30,
2000 compared to 5% for the six months ended June 30, 1999.
General and Administrative. General and administrative expenses
increased $14.3 million to $14.8 million for the six months ended June
30, 2000 from $543,000 for the six months ended June 30, 1999. $4.1
million of the increase relates to the one-time severance charge for the
Company's former Chief Financial Officer, Brian W. Nocco and $5.6
million of the increase relates to the amortization of deferred
stock-based compensation. The additional increase is primarily
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 during the first two weeks of April 2000.
Salary and travel expenses for the Company's general and administrative
employees also increased due to the increase in headcount from June 30,
1999 to June 30, 2000. General and administrative expenses represented
76% of total revenues for the six months ended June 30, 2000 compared to
9% for the six months ended June 30, 1999.
Depreciation and Amortization. Depreciation and amortization increased
$537,000 to $619,000 for the six months ended June 30, 2000 from $82,000
for the six months ended June 30, 1999. The increase is primarily
related to an increase in IVR equipment purchased during the first
quarter of fiscal year 2000 in preparation for the higher volume of
federal and state tax payments during the first two weeks of April 2000.
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 3%
of total revenues for the six months ended June 30, 2000 compared to 1%
for the six months ended June 30, 1999.
Allocated Expenses from Related Parties. Related party expenses
were $103,000 for the six months ended June 30, 2000. The
Company did not utilize Imperial Bank's or Mr. Nelson's services
during the six months ended June 30, 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
$2.2 million for the six months ended June 30, 2000 from $30,000 in other
expenses, net for the six months ended June 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 two
quarters of fiscal year 1999.
INCOME TAXES
The Company incurred operating losses during the period of its
incorporation from September 30, 1999 through June 30, 2000. The Company
has recorded a valuation allowance for the full amount of net deferred tax
assets, as the future realization of the tax benefit is not currently
likely. For the nine months ended 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 June 30, 2000,
the Company had $74.5 million in cash and investments, and $70.0 million in
working capital.
Net cash used in operating activities was $4.0 million and $509,000 for
the six months ended June 30, 2000 and 1999, respectively. The cash used in
operating activities for the six months ended June 30, 2000 was primarily
the result of 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 due
to improved cash management. The cash used in operating activities for the
six months ended June 30, 1999 was primarily the result of the Company's
net loss and a decrease in accounts receivable, accounts payable, and
accrued expenses.
Net cash provided from investing activities was $2.9 million for the six
months ended June 30, 2000. During the first quarter of 2000, the Company
increased its IVR equipment purchases in preparation of 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 headquarters in
May 2000. These expenditures were offset by the sale of short-term
investments during the six months ended June 30, 2000. Net cash used in
investing activities was $268,000 for the six months ended June 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 $395,000
for the six months ended June 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
interactive voice response telephone system (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 agreements. The cash
generated in fiscal year 1999 was primarily related to a $440,000 notes
payable from the Company's stockholders. This amount was slightly offset by
the repayment of capital leases.
The Company expects to experience growth in its operating costs for the
foreseeable future in order to execute its business plan, particularly in
the areas of web development costs and sales and marketing. As a result,
the Company estimates that these operating costs, 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.
YEAR 2000 IMPACT
As of the date of this filing, the Company has not incurred any
significant business disruptions as a result of Year 2000 issues. However,
while no such occurrence has developed, Year 2000 issues that may arise
related to key suppliers and service providers may not become apparent
immediately. We have received assurances of Year 2000 compliance from key
suppliers. The Company has received assurances from key service providers
such as financial institutions and Imperial Bank (which provides
transaction processing services and various employee benefits services for
the Company) as to their Year 2000 readiness. The Company will continue to
monitor its own systems and business partners to identify and address any
potential risk situations related to the Year 2000. No assurance can be
provided that the Company will not be adversely affected by these suppliers
and service providers due to noncompliance in the 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 processing 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. We expect 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 does not process balance-due and extension personal
federal income tax payments in the third quarter, revenues in that quarter
are expected to be lower than in the second quarter.
The Company anticipates that its operating expenses will continue to
increase due to the expansion of its sales force in order to obtain
additional state and municipal clients and the continuous marketing
campaign to make consumer users aware of its electronic payment option. 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 June 30, 2000, the Company had $25.8
million in deferred stock-based compensation. The Company intends to
amortize $25.2 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 $594,000 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 is likely to 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 $ 2,445 $ - $ - $ - $ - $ - $ 2,445
Average interest
Rate 3.45% 0.00% 0.00% 0.00% 0.00% 0.00%
Investments $ 72,064 $ - $ - $ - $ - $ - $ 72,064
Average interest
rate 6.63% 0.00% 0.00% 0.00% 0.00% 0.00%
--------- -------- ------- -------- ------- -------- -------
Total cash and
investments $ 74,509 $ - $ - $ - $ - $ - $ 74,509
======== ======= ======= ======= ======= ======== ========
</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 $2.0 million for
the purchase and installation of computer equipment to expand transaction
processing capabilities and approximately $4.8 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 may also 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
During the six months ended June 30, 2000, there were no matters
submitted to a vote of security holders through a solicitation of proxies
or otherwise.
ITEM 5. OTHER INFORMATION
On August 9, 2000, the Company entered into an Employment Agreement with
Edward J. DiMaria, pursuant to which Mr. DiMaria will serve as the
Company's Chief Financial Officer. A copy of this employment agreement is
included as an exhibit to this Report. Mr. DiMaria's employment with the
Company is expected to begin in late August 2000.
On July 17, 2000, the Company entered into a contract with the State of
Arkansas to accept telephone and Internet tax payments for balance-due,
estimated, extension, and sales taxes.
On June 2, 2000, the Company's Board of Directors approved and adopted
the Company's 2000 Stock Incentive Plan (the "2000 Plan"), pursuant to
which up to the Company may from time to time grant certain employees of
the Company restricted shares of, and/or options to purchase, the Company's
common stock. Up to 1,250,000 shares of the Company's common stock are
available for issuance under the 2000 Plan. The 2000 Plan is administered
by the Compensation Committee of the Board of Directors. Directors and
executive officers of the Company are not eligible to participate in the
2000 Plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement, dated as of August 9, 2000,
between Edward J. DiMaria and the Company.
10.2 Form of Incentive Stock Option Agreement used by the Company
under the Company's 1999 Stock Incentive Plan (also referenced
as Annex A to Exhibit 10.1 hereto).
10.3 Form of Non-Qualified Stock Option Agreement used by the
Company under the Company's 1999 Stock Incentive Plan (also
referenced as Annex B to Exhibit 10.1 hereto).
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
August 11, 2000 By: /s/ Thomas R. Evans
----------------------------
Thomas R. Evans
Chairman of the Board and Chief Executive
Officer
August 11, 2000 By: /s/ Hyunjin F. Lerner
----------------------------
Hyunjin F. Lerner
Controller (Chief Accounting Officer)
INDEX TO EXHIBITS
Exhibit
No. Description
------- -----------
10.1 Employment Agreement, dated as of August 9, 2000,
between Edward J. DiMaria and the Company.
10.2 Form of Incentive Stock Option Agreement used by
the Company under the Company's 1999 Stock
Incentive Plan (also referenced as Annex A to
Exhibit 10.1 hereto).
10.3 Form of Non-Qualified Stock Option Agreement used
by the Company under the Company's 1999 Stock
Incentive Plan (also referenced as Annex B to
Exhibit 10.1 hereto).
27.1 Financial Data Schedule