As filed with the Securities and Exchange Commission on September 17, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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U.S. AUDIOTEX CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 7374 52-2190781
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
2333 San Ramon Valley Boulevard, Suite 450
San Ramon, California 94583
(925) 838-7996
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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Thomas R. Evans
Chief Executive Officer
2333 San Ramon Valley Boulevard, Suite 450
San Ramon, California 94583
(925) 838-7996
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Dennis J. Block, Esq. Daniel Clivner, Esq.
Cadwalader, Wickersham & Taft Simpson Thacher & Bartlett
100 Maiden Lane 10 University City Plaza, Suite 852
New York, New York 10038 Universal City, California 91608
(212) 504-6000 (818) 755-7000
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
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CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Amount Maximum Maximum
Title of Each Class of to be Offering Price Aggregate Amount of
Securities to be Registered Registered(1) Per Share(2) Offering Price(2) Registration Fee
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Common stock, par value
$0.01 per share........ shares $ . $60,000,000 $16,680
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(1) Includes shares subject to an over-allotment option granted to
the underwriters by us. See "Underwriting."
(2) Estimated solely for purposes of computing the registration fee pursuant
to Rule 457(f).
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to
Section 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by U.S. federal securities law to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION-- , 1999
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Prospectus
, 1999
U.S. AUDIOTEX CORPORATION
Shares of Common Stock
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The Company: The Offering:
. We are the leading . We are offering
provider of shares of our common
electronic payment stock.
options to
government entities . We have granted the
enabling consumers underwriters an
to use their credit option to purchase
cards to pay, by up to an additional
telephone or through shares from us
the Internet, to cover over-
personal federal and allotments.
state income taxes,
sales and use taxes, . This is our initial
property taxes and public offering, and
fines for traffic no public market
violations and currently exists for
parking citations. our shares. We
anticipate that the
. U.S. Audiotex initial public
Corporation offering price will
2333 San Ramon Valley be between $ and
Boulevard $ per share.
Suite 450
San Ramon, California
94583
(925) 838-7996
www.8882paytax.com
Symbol & Market:
. /Nasdaq National
Market
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Per Share Total
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Public offering price: $ $
Underwriting fees:
Proceeds to us:
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Investing in our common stock involves risks. See "Risk Factors" beginning
on page 5.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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Donaldson, Lufkin & Jenrette CIBC World Markets
The undersigned is facilitating Internet distribution:
DLJdirect Inc.
[Inside Front Cover Artwork]
TABLE OF CONTENTS
Page
Prospectus Summary.................. 1
Risk Factors........................ 5
Forward-Looking Statements.......... 15
Use of Proceeds..................... 16
Dividend Policy..................... 16
Capitalization...................... 17
Dilution............................ 18
Selected Financial Data............. 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 20
Business............................ 31
Management.......................... 45
Page
Certain Relationships and Related
Transactions...................... 50
Principal Stockholders............. 51
Description of Capital Stock....... 52
Shares Eligible for Future Sale.... 54
Underwriting....................... 56
Legal Matters...................... 58
Experts............................ 58
Where You Can Find Additional
Information....................... 58
Index to Consolidated Financial
Statements ....................... F-1
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission. You should read this prospectus together
with the additional information described in the "Where You Can Find Additional
Information" section of this prospectus. The information on our
www.8882paytax.com Web site is not part of this prospectus.
8882paytax.com/SM/, 1-888-2PAY-TAX/SM/ and US Audiotex/SM/ are registered
service marks of U.S. Audiotex Corporation. All other brand names, trademarks
and service marks appearing in this prospectus are the property of their
respective holders.
i
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary is not complete and does not contain all of the
information that you should consider before buying shares in this offering. We
urge you to read the entire prospectus carefully.
SUMMARY
Our Business
We are the leading provider of electronic payment options to government
entities enabling consumers to use their credit cards to pay, by telephone or
through the Internet, personal federal and state income taxes, sales and use
taxes, property taxes and fines for traffic violations and parking citations.
Our interactive voice response (IVR) toll-free telephone number, 1-888-2PAY-
TAX/SM/, allows consumers to make payments and receive certain customer service
information. Our 8882paytax.com Web site allows consumers to make certain
payments, and we are working with our existing government clients, including
the Internal Revenue Service (IRS), to enable consumers to make additional tax
and other payments through the Internet. We are also enhancing our Web site so
that consumers will be able to print receipts, save their personal data to
facilitate future payments, obtain information regarding our services and
access additional tax and other information.
Our government clients include the IRS, the States of California and New
Jersey, the District of Columbia and over 400 municipalities. Our pilot program
for personal federal income taxes processed over 45,000 tax filings totaling
more than $174 million in payments to the IRS from January 15, 1999 to April
15, 1999. Based on IRS data, we had a 95% market share (based on dollar volume)
for credit card payments of personal federal income taxes in the first six
months of 1999. We also processed over 187,000 payments for our state and
municipal government clients totaling $55 million in the first six months of
1999.
We combine expertise in facilitating credit card transactions, an Internet
focus and targeted marketing techniques to attract both government clients and
consumers to our services. Our services allow our government clients to provide
their constituents with user-friendly electronic payment options at no charge
to the government entity. Consumers who use our payment services pay us a
convenience fee that is added to their payment. We believe that consumers use
our services for the convenience, the payment flexibility and the perquisites
associated with paying by credit card.
Our Market Opportunity and Solution
In addition to payments made automatically on a taxpayer's behalf, such as
payroll withholding taxes, individuals and small businesses make a variety of
payments to government entities at the federal, state and local levels. Based
on IRS data, federal balance-due, estimated and extension payments for personal
income taxes are estimated to be $414 billion for the 1999 tax year. At the
state level, we estimate such taxes to be approximately $73 billion for the
1999 tax year. Based on U.S. Census data, 1998 state sales and use taxes were
approximately $155 billion, a portion of which is currently paid by small
businesses using checks or money orders. Based on U.S. Census data, local real
estate taxes were approximately $209 billion in 1996. Based on our experience,
approximately 50% of such taxes are not already included with mortgage
payments. We estimate fines for traffic violations and parking citations to be
in excess of $5 billion annually.
We believe our electronic payment solutions are attractive to government
entities because they provide an added service to consumers while reducing
paperwork and encouraging the electronic filing of tax forms. Our services
address the IRS' publicly-stated goal to substantially increase taxpayer access
to electronic filing, payment, and communication products and services. Many
government entities lack the expertise, technical
1
personnel and economies of scale to cost-effectively implement and maintain the
hardware and software necessary to accept credit card payments from consumers
by telephone or through the Internet. Our services are designed to work with
their existing information systems, require minimal implementation and are
provided at no cost to government entities.
Individuals and small businesses who utilize a particular payment service
can be grouped into user communities distinguished by specific demographics and
psychographics. Because these customers are active online consumers, they
represent a valuable opportunity to cross-sell other related products and
services. For example, we may be able to facilitate the sale of consulting or
other related services to small businesses that use our services to pay sales
taxes, or the sale of automobile insurance or online driving school services to
consumers paying fines for moving traffic violations.
Our Strategy
Our goal is to continue to be the leading provider of, and further develop
the market for, electronic payment services using credit cards to pay
government obligations. The following are key elements of our strategy:
. Expand and enhance our service offerings for personal federal income tax
payments. For the 1998 tax year, we processed only balance-due personal
federal income tax payments. By early 2000, we expect to also process
personal estimated and extension tax payments.
. Obtain additional state and municipal clients. We currently provide our
credit card payment services to the States of California and New Jersey,
the District of Columbia and over 400 municipal clients. We are focusing
on establishing relationships with additional states and municipalities
by leveraging our existing relationships with the IRS and other clients.
. Continue the roll-out of our Internet services. Within the next 6 to 12
months, we expect to offer our existing government clients the option to
add Internet payments services while new clients will have the option to
sign up for both Internet and IVR payment services.
. Broaden our payment service offerings. We expect to expand our services
to include payment solutions for state estimated and extension personal
income tax payments, corporate taxes and fees, public university tuition
and building permit fees.
. Cross-sell related services to small business and individual users. By
grouping consumers according to the type of payments they make, we
intend to target distinct groups of users to cross-sell related products
and services.
. Increase brand awareness and consumer usage. We have relied on our
government clients and credit card issuers, and will continue to work
with them, to publicize our services through government publications and
credit card billing and promotional inserts. In addition, we intend to
advertise directly in order to publicize our services.
. Pursue strategic relationships and acquisitions to reach additional
consumers and provide related services.
2
General Information
We are located on the Internet at www.8882paytax.com. Our executive offices
are located at 2333 San Ramon Valley Boulevard, Suite 450, San Ramon,
California 94583 and our telephone number is 925-838-7996.
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References in this prospectus to a particular income tax year mean taxes for
that calendar year due in April of the next calendar year.
Unless otherwise indicated, all share and per share information in this
prospectus:
. Assumes that the underwriters will not exercise their over-allotment
option; and
. Reflects the merger of U.S. Audiotex, LLC into us which we expect to
effect as of September 30, 1999.
The Offering
Common stock offered............. shares
Common stock to be outstanding
after this offering............. shares(/1/)
Use of proceeds.................. We intend to use the net proceeds of this offering,
which are estimated to be approximately $ million,
(i) to repay the outstanding balance of promissory
notes, evidencing advances made to us by our
stockholders and (ii) for working capital and general
corporate purposes. For a more detailed discussion of
the advances made to us by our stockholders, please see
the "Use of Proceeds" and "Certain Relationships and
Related Transactions" sections of this prospectus.
Proposed Nasdaq National Market
symbol..........................
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(1) The number of shares of common stock to be outstanding after this offering
is based on shares outstanding as of , 1999, and excludes:
. 535,714 shares of common stock issuable upon exercise of options that
have been granted under our 1999 Stock Incentive Plan at an exercise
price of $4.00 per share;
. 1,764,286 shares of common stock reserved for issuance as of ,
1999 under our 1999 Stock Incentive Plan.
For a more detailed description of our capitalization, please see the
"Capitalization" section of this prospectus.
3
Summary Financial Data
You should read the following summary financial data in conjunction with the
"Selected Financial Data" and the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" sections of this prospectus and
our audited financial statements and the related notes included elsewhere in
this prospectus.
Year Ended Six Months
December 31, Ended June 30,
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1996(1) 1997 1998 1998(2) 1999
(In thousands, except per share data)
Statements of Operations
Data:
Total revenues............... $ 786 $1,202 $2,369 $ 899 $ 6,113
Total cost of revenues....... 305 696 1,080 372 4,839
------ ------ ------ ------- -------
Gross profit................. 481 506 1,289 527 1,274
Operating expenses........... 766 1,002 1,559 705 1,304
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Income (loss) from
operations.................. (285) (496) (270) (178) (30)
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Net income (loss)............ $ (323) $ (502) $ (325) $ (200) $ (59)
====== ====== ====== ======= =======
Basic and diluted net income
(loss) per share:........... $(0.03)/(3)/ $(0.10) $(0.07) $ (0.04) $ (0.01)
====== ====== ====== ======= =======
Shares used in computing
basic and diluted
net income (loss) per
share:...................... 5,000 5,000 5,000 5,000 5,000
====== ====== ====== ======= =======
June 30, 1999
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Actual As Adjusted(4)
Balance Sheet Data:
Cash and cash equivalents................................. $ 249 $
Working capital........................................... 55
Total assets.............................................. 2,028
Total debt including current portion...................... 1,283
Stockholders' equity ..................................... 125
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(1) Includes the results of operations of the predecessor company for the
period from January 1, 1996 to June 26, 1996.
(2) June 30, 1998 information is derived from our unaudited financial
statements.
(3) Basic and diluted net income (loss) per share excludes net income (loss) of
$(156,000) of the predecessor company.
(4) Reflects (a) the issuance and sale of shares of common stock in this
offering at an assumed initial offering price of $ per share (the
midpoint of the range set forth on the cover page of this prospectus), and
(b) the use of the net proceeds from this offering as described in the "Use
of Proceeds" section of this prospectus. See the "Certain Relationships and
Related Transactions" section of this prospectus and Note 4 to our
financial statements.
4
RISK FACTORS
Before you invest in our common stock, you should be aware of various risks,
including those risks described in the risk factors below. You should carefully
consider these risk factors, together with all of the other information
included in this prospectus, before you decide whether to purchase shares of
our common stock. The risks described below may not be exhaustive. There may be
additional risks that we do not know of or that we deem immaterial based on the
information currently available to us. You should keep these risk factors in
mind when you read forward-looking statements elsewhere in this prospectus. Any
or all of these risks could have a material adverse effect on our business,
operating results and financial condition.
Risks Related to Our Business
We have a history of losses and expect to continue to incur losses.
We have incurred net losses of approximately $1,053,000 for the period from
June 26, 1996 (inception) to June 30, 1999. We expect to incur losses from
operations for the foreseeable future. We cannot assure you that we will become
or remain profitable. See the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of this prospectus.
In addition, in the third quarter of 1999 we will record on our balance
sheet a deferred stock compensation expense totaling $12.9 million. This
expense consists of an amount of $10 million, representing the guaranteed value
of the options granted to Thomas R. Evans, our Chairman and Chief Executive
Officer, and an amount of $2.9 million, representing the difference between the
estimated value of the common stock underlying options we granted to certain of
our other officers and employees in August 1999 and the exercise price of those
options. The total amount of this expense will increase as a result of
additional options that we will grant prior to the completion of this offering.
The $10 million expense related to Mr. Evans' options will be amortized, using
a straight-line method, over a three-year period, starting in the third quarter
of 1999. The $2.9 million expense related to options granted to our other
officers will be expensed upon completion of this offering. See the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview," "Management--1999 Stock Incentive Plan" and
"Management--Employment Agreements" sections of this prospectus and Note 8 to
our financial statements.
We intend to expend significant resources on increasing our sales and
marketing staff and capabilities and systems development. As a result, we will
need to significantly increase our revenues to achieve and maintain
profitability. We cannot assure you that we will be able to achieve the
necessary revenue growth. If our revenues do not increase sufficiently, our
operating results and financial condition could be materially and adversely
affected.
Because our business model is unproven and evolving, it is difficult to
evaluate our business.
The use of credit cards to make payments to government agencies is
relatively new and evolving. To date, our business has consisted primarily of
providing credit card payment options for the payment of balance-due federal
and state personal income taxes, property taxes, and fines for traffic
violations and parking citations. Because we have only a limited operating
history, it is difficult to evaluate our business and prospects and the risks,
expenses and difficulties that we may face in implementing our business model.
Our success will depend on maintaining our relationship with the IRS and on
developing additional relationships with state and local government agencies,
especially state taxing authorities, and their respective constituents. We
cannot assure you that we will be able to develop new relationships or maintain
existing relationships, and our failure to do so could have a material and
adverse effect on our business, operating results and financial condition.
Our success depends on the acceptance of our payment system as a method for
making payments to government entities.
We work with government entities to allow us to provide credit card payment
services to their constituents. While many government entities have initiatives
or legislative mandates in place to foster the
5
growth of electronic payments, our business, operating results and financial
condition would suffer if there were a reduction in these initiatives.
Traditionally, individuals and small businesses have made substantially all
payments to government entities by check or money order. We are providing our
payment services through our IVR telephone conduit and have developed and will
continue to expand the availability of our Internet conduit. However, we cannot
assure you that we will be successful in attracting additional consumers to use
our IVR and Internet conduits to make their payments to our government clients.
The lack of meaningful growth in the market for credit card payments to
government entities could have a material adverse effect on our business,
operating results and financial condition.
If consumers are unwilling to pay convenience fees for our services, or we are
unable to charge such fees, our business model will fail.
Our business model is based on our ability to charge convenience fees in
connection with our credit card payment processing services. Consumers pay a
convenience fee in addition to their required government payment in order to
use our credit card payment option. If consumers are not receptive to paying a
convenience fee, demand for our services will decline or fail to grow, which
could jeopardize the implementation of our business plan and would have a
material and adverse effect on our business, operating results and financial
condition.
Credit card association rules governing the use of Visa/(R)/ and
MasterCard/(R)/ at merchant locations generally prohibit merchants from charging
a convenience fee for cardholder purchases. We and Imperial Bank, our majority
stockholder, have worked with these credit card associations to permit
convenience fees for credit card payments for government services and taxes. We
cannot assure you that credit card association rules will continue to allow us
to charge convenience fees. To date, Visa/(R)/ permits a convenience fee but
only if it is a flat amount for a particular government service and will not
allow fees that are variable in amount depending on the kind of service provided
or the amount involved. If our ability to charge convenience fees is limited or
eliminated, our business, operating results and financial condition would be
materially and adversely affected.
The IRS currently accounts for 71% of our revenues, and the loss of the IRS as
a client would harm our business.
In the first six months of 1999, convenience fees from payments to the IRS
accounted for approximately 71% of our total revenues. We are currently in
negotiations with the IRS regarding the renewal of our contract for the 1999
tax year. For the 2000 tax year, we will be required to respond to an IRS
request for proposal for electronic payment services for us to continue to
provide our services. We expect that the IRS will select one or more electronic
payment service providers for the 2000 tax year within the next several months.
If the IRS does not renew our contract or accept our proposal, our business,
operating results and financial condition would be materially and adversely
affected.
Most of our contracts with government clients are not exclusive or long-term
contracts and, as a result, large government clients may terminate their
relationships with us on short notice.
Most of our agreements with government clients are non-exclusive, short-term
contracts or memoranda of understanding and can be terminated without cause on
short notice (generally 30 to 90 days). In addition, a government client may
choose not to renew its contract with us or may not choose our proposal in
response to a government request for proposal. If one of our larger existing
government clients chooses to terminate its contract or memorandum of
understanding with us, or does not choose our proposal, our business, operating
results and financial condition could be materially and adversely affected.
Increased competition in the market for payment services to government entities
could materially and adversely affect our business.
Our credit card payment services face competitive pressures from various
card issuing banks for Visa/(R)/ and MasterCard/(R)/, which send out checks that
function as cash advances and can be used for payments to government entities.
In addition, a number of data and bill processing companies have the technical
capability and other resources to commence providing credit card payment
services, and have indicated an intent to do so.
6
Increased competition from other providers of payment options to government
entities could have a material and adverse effect on our business, operating
results and financial condition.
Many of our current and potential competitors have significantly greater
financial, marketing, technical, sales, and customer support and other
resources than we do. In addition, some of these competitors may be able to
devote greater resources to the development, promotion and sale of their
services, adopt more aggressive pricing strategies and devote substantially
more resources to the development of technology and systems than we will be
able to devote or adopt. Increased competition may result in lower operating
margins and loss of market share. We may not be able to compete successfully
against current and future competitors, and competitive pressures could have a
material and adverse effect on our business, operating results and financial
condition.
If our services do not function as designed, we may incur significant
liability.
Our electronic payment services are designed to provide payment management
functions and to limit our government clients' risk of fraud or loss in
effecting transactions with their constituents. As electronic services become
more critical to our government clients, there is the potential for significant
liability claims for the processing of fraudulent or erroneous transactions. In
addition, defects or programming errors in the software we use could cause
service interruptions. Our services depend on complex software that is both
internally developed and licensed from third parties. Although we conduct
extensive testing, complex software may contain defects or programming errors,
or may not properly interface with third party systems, particularly when first
introduced or when new versions are released. We encountered an incident where
a date coding error in a newly introduced program resulted in certain
transactions being posted incorrectly. The incident has been resolved to the
satisfaction of all parties concerned. However, to the extent that defects or
errors are undetected before introduction or release, and cannot be resolved
satisfactorily or in a timely manner, our business could suffer. If a liability
claim or claims were brought against us, even if not successful, their defense
would likely be time-consuming and costly and could damage our reputation. Any
such liability or claim could have a material and adverse effect on our
business, operating results and financial condition.
If our system security is breached, our business and reputation could suffer.
Our failure to prevent system security breaches could have a material and
adverse effect on our business, operating results and financial condition. A
fundamental requirement for electronic payment services is the secure
transmission of confidential information over public communication networks.
Third parties may attempt to breach our system security or that of our
government clients or consumer users. If they are successful, we may be liable
to our government clients or consumer users for any damages resulting from a
breach in our system security, and any breach could harm our reputation. We may
be required to expend significant capital and other resources to license
additional encryption and other technologies to protect against system security
breaches or to alleviate problems caused by any such breaches.
If our systems fail, we may not be able to provide adequate service, and our
business could be damaged.
Our success depends on the efficient and uninterrupted operation of our
computer and communications systems. The majority of our computer and
communications systems are located in San Ramon and San Francisco, California.
Our systems and operations are vulnerable to damage or interruption from:
. telecommunication failures;
. power loss;
. earthquakes, fires or floods;
. computer viruses;
. physical and electronic break-ins; and
. acts of sabotage, vandalism and similar events.
7
Any failure of our systems could impede the timely processing of consumer
user payments and other data and the day-to-day management of our business.
Despite any precautions we take, a natural disaster or other unanticipated
problem that leads to the corruption or loss of data at our facilities could
result in an interruption of our services. Service interruptions could have a
material and adverse effect on our reputation, business, operating results and
financial condition and would have a significant adverse effect if they
occurred on or near April 15.
A constraint in our capacity to process transactions would materially and
adversely affect our business.
Capacity constraints may cause unanticipated system disruptions, impair
quality and lower the level of our service, all of which could have a material
and adverse effect on our business, operating results and financial condition.
Although we believe that we have sufficiently expanded our system capacity to
accommodate expected additional personal federal income tax payments and our
other anticipated growth, we cannot assure you that we will not suffer capacity
constraints caused by a sharp increase in the use of our services. Due to the
large number of tax payments made in March and early April, there is an
increased risk that we will suffer a capacity constraint during that period,
which would have an adverse effect on our business, operating results and
financial condition.
If we fail to respond to rapid technological change, our business will suffer.
The electronic payment industry is characterized by rapid technological
change. If we cannot adapt or respond in a cost-effective and timely manner to
technological changes, our business, operating results and financial condition
will be materially and adversely affected, and our technology and systems, and
thus our services, could be rendered obsolete. The development of our
technologies and necessary service enhancements entails significant technical
and business risks and requires substantial lead-time and expenditures. We may
not be able to keep pace with the latest technological developments,
successfully identify and meet the demands of our government clients and
consumer users, use new technologies effectively, or adapt our services to
emerging industry standards or to our government clients' or consumer users'
requirements.
Our operating results may fluctuate significantly from quarter to quarter,
which may negatively impact our stock price.
We believe our quarterly operating results will fluctuate significantly in
the future as a result of a variety of factors, many of which are outside of
our control. These factors include:
. the seasonality of our business, which is due primarily to the fact that
the majority of federal and state personal income tax payments is being
made on or near April 15 and to the fact that property tax payments are
made only once or twice per year in most jurisdictions;
. the amount and timing of costs related to our sales and marketing
efforts and other initiatives; and
. our ability to upgrade, enhance and maintain our systems and
infrastructure in a timely and cost-effective manner.
Because of these factors, we believe that comparisons of our quarterly
operating results are not necessarily meaningful. In addition, it is possible
that in some future quarters our operating results will be below the
expectations of research analysts and investors, in which case the price of our
common stock is likely to decline. See the "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Seasonality and
Fluctuation of Quarterly Results" section of this prospectus.
If government clients and credit card issuers cease to publicize our services,
consumer use of our services may slow, and we would suffer a large increase in
advertising costs.
Currently, our government clients and credit card issuers provide most of
the publicity for our services, without any cost to us. If these entities cease
to publicize our services, or charge us for this publicity, our
8
advertising costs will increase substantially, which could have a material and
adverse effect on our business, operating results and financial condition. Our
government clients and credit card issuers have no obligation to continue to
provide this publicity, and we cannot assure you that they will continue to do
so. In addition, the government clients may publicize other services, including
those of our competitors.
To grow our business, we must successfully expand our sales and marketing and
other staff and capabilities, but if we fail to effectively manage our internal
growth our business will be materially and adversely affected.
We are currently experiencing a period of rapid expansion. In order to
manage our expected growth, accommodate our needs and take advantage of new
opportunities in our market, we will need to attract additional key personnel
in the near future. We also will need to expand our sales and marketing,
technical, finance, administrative, systems and operations staff. This
expansion involves a number of risks, including:
. our ability to hire and retain qualified personnel in a competitive
environment; and
. our ability to successfully integrate new personnel with our existing
personnel.
We cannot assure you that our current and planned personnel levels, systems,
procedures and controls will be adequate to support our future operations. If
inadequate, we may not be able to exploit existing and potential strategic
relationships and market opportunities. Any delays or difficulties we encounter
could impair our ability to attract new, and enhance our relationships with
existing government clients and consumer users. If we are unsuccessful in
hiring, integrating and retaining new personnel, or unable to effectively
manage our internal growth, our business, operating results and financial
condition could be materially and adversely affected.
A number of members of our management team have little experience working
together; we depend on a few key employees.
Our future success will depend upon the continued service of key management
and technical personnel. Thomas Evans, our Chairman and Chief Executive
Officer, joined us in August 1999. Given his limited experience with our
business and other members of management, it is possible that Mr. Evans may not
integrate well into our business. The failure of key personnel to integrate
well would have a material and adverse effect on our business, operating
results and financial condition.
We currently do not maintain key man life insurance policies on any of our
employees. We do not have employment agreements with any of our employees,
other than Thomas Evans and Kenneth Stern. The loss of the services of any of
our key employees or our inability to hire and retain additional key employees
would have a material and adverse effect on our business, operating results and
financial condition.
If we do not adequately address year 2000 issues, we may incur significant
costs and our business could suffer.
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot reliably
distinguish dates beginning on January 1, 2000 from dates prior to the year
2000. Many of these computer systems and software products may need to be
upgraded or replaced in order to correctly process dates beginning in 2000. The
failure to correct any year 2000 issues in the software and computer systems
used for our services could materially and adversely affect our business,
operating results and financial condition.
We rely on interfacing with computer hardware and software provided by third
parties that may not be year 2000 compliant. Currently, these third parties
primarily consist of our government clients. For many of these government
clients, we have installed our systems onto their computer networks. As our
Internet roll-out continues, these third parties will include our consumer
users, who will access our services through their own computer systems. The
failure of third party hardware or software to properly process dates for the
year 2000
9
and any failure by these third parties to resolve any year 2000 issues they may
have could cause us to incur unanticipated expenses. These expenses could have
a material adverse effect on our business, operating results and financial
condition.
We believe that we have identified substantially all local installations at
our government clients' sites that require remediation to be year 2000
compliant. We are currently remediating those identified local installations.
If we are unable to properly remediate all local installations requiring
remediation, or complete such remediation in a timely manner, our government
clients will experience year 2000 problems, which could expose us to liability
and damage our reputation and result in a material and adverse effect on our
business, operating results and financial condition.
Additionally, to the extent that year 2000 issues have a negative impact on
consumer users and undermine the public's faith in the Internet as a medium for
the exchange of information and commerce, growth of Internet commerce could
slow, which in turn could materially and adversely affect our business. See the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Readiness" section of this prospectus.
We may not be able to protect our intellectual property rights, or we may
infringe on the rights of others.
We protect our intellectual property rights through a combination of
trademark, service mark, copyright and trade secrets laws. We cannot assure
you, however, that the steps we have taken to protect our intellectual property
rights will be adequate to deter misappropriation of those rights. We do not
have any proprietary technology or patent protections. In addition, we cannot
be certain that our services do not infringe on valid patents, copyrights and
intellectual property rights held by third parties. We may be subject to legal
proceedings and claims from time to time in the ordinary course of our
business, including claims of alleged infringement of the intellectual property
rights of third parties. Intellectual property litigation is expensive and
time-consuming and could divert our management's attention away from running
our business.
We may not be able to license technologies from third parties on favorable
terms, and we may not be able to utilize these technologies successfully.
We intend to continue to license technology from third parties, including
our Web server and encryption technology. Our business is evolving, and we may
need to license additional technologies to remain competitive or adequately
protect the security of our systems. We may not be able to license these
technologies on commercially reasonable terms or at all. In addition, we may
fail to successfully integrate any licensed technology into our services. These
third party licenses may fail to generate revenues sufficient to offset
associated acquisition and maintenance costs, or may divert our resources from
the development of our own proprietary technology. Our inability to obtain any
of these licenses could delay product and service development until equivalent
technology can be identified, licensed and integrated. Any such delays in
services could cause our business and operating results to suffer.
If our relationship with credit card issuers or associations changes or
terminates, our business could be materially and adversely affected.
Termination of our member service provider registrations or our status as a
certified processor of credit cards, or any changes in the rules of the credit
card associations that limit our ability to provide processing and marketing
services, could have a material adverse effect on our business, operating
results and financial condition. As a nonbank processor, in order to process
credit card transactions, we must be sponsored by a financial institution that
is a principal member of a credit card association. Through Imperial Bank, our
majority stockholder, we are registered with Visa(R) and MasterCard(R) as a
certified processor and member service provider. See the "Certain Relationships
and Related Transactions" section of this prospectus. We are a merchant agent
for American Express(R). Our status in each association and with American
Express(R) depends on
10
our compliance with their standards, which may change and may vary from
association to association, and could be suspended or terminated if we are
unable to comply. We cannot assure you that the credit card associations will
maintain our registrations or keep their current rules in effect. Additionally,
some of the member financial institutions that set the rules for each credit
card association are our or Imperial Bank's competitors, and may help effect
rules that are less favorable to us.
Our failure to successfully integrate any future acquisitions could strain our
managerial, operational and financial resources.
As part of our business strategy, we intend to pursue opportunistic
acquisitions that would provide additional technologies, products, services or
experienced personnel. Acquisitions present a number of potential risks that
could have a material and adverse effect on our business, operating results and
financial condition, including:
. difficulty in assimilating the acquired company's personnel, operations
and technologies;
. entrance into markets in which we have limited or no prior experience;
. the potential loss of key employees of the acquired company;
. the distraction of our management's attention from other business
concerns; and
. the potentially dilutive issuance of our common stock, the use of
significant amounts of cash or the incurrence of substantial amounts of
debt.
Risks Related to Our Industry
If the growth in the use and capacity of the Internet does not continue, or the
Internet is not secure, our business could suffer.
The growth of our business would be materially and adversely affected if
Internet usage does not continue to grow rapidly. Internet usage may be
inhibited for a number of reasons, including:
. concerns about the security of confidential information;
. lack of reliability and ease of access;
. lack of cost-effective, high-speed service;
. inconsistent quality and interruption of service;
. inadequate network infrastructure; and
. adoption of onerous laws or governmental regulations.
The Internet infrastructure may not be able to support the demands placed on
it by increased usage and its performance and reliability may decline. Internet
Web sites have experienced interruptions and delays in their service as a
result of outages occurring throughout the Internet network infrastructure. If
these outages or delays occur frequently in the future, Internet usage, as well
as the use of our Internet payment service, could grow more slowly than
projected or decline. In addition, because a number of our services involve the
transfer of confidential information, our business, operating results and
financial condition could be materially and adversely affected if Internet
users significantly reduce their use of the Internet due to security concerns.
Government regulation could cause our business to suffer.
Our management believes that we are not required to be licensed by the
Federal Reserve Board, or other federal or state agencies that regulate or
monitor banks or other types of providers of electronic commerce services. We
cannot assure you that a federal or state agency will not attempt, either now
or in the future, to
11
require that providers of services like ours be licensed. This would impede our
ability to do business in the areas within the regulator's jurisdiction.
In conducting several aspects of our business, we are subject to various
laws and regulations relating to commercial transactions generally, such as the
Uniform Commercial Code. We are also subject to the electronic fund transfer
rules embodied in Regulation E issued by the Federal Reserve Board. Given the
expansion of the electronic commerce market, it is possible that the Federal
Reserve Board might revise Regulation E or adopt new rules for electronic fund
transfers affecting users other than consumers. It is possible that Congress or
individual states could enact laws regulating the electronic commerce market.
If enacted, these laws, rules and regulations could be imposed on our business
and industry and could have a material and adverse effect on our business,
operating results and financial condition.
We are subject to federal and state banking laws and regulations because of
Imperial Bank's ownership of our stock. In order to allow Imperial Bank to
comply with applicable laws and regulations, we are restricted from entering
into certain business activities. These restrictions limit our discretion in
operating our business. We cannot assure you that the banking laws and
regulations will not be amended, replaced or construed differently, the effect
of which could materially and adversely affect our business, operating results
and financial condition. See the "Business--Regulatory Matters" and "Certain
Relationships and Related Transactions" sections of this prospectus.
If there are changes in tax laws, our revenues could decrease and our business
could suffer.
Congress, as well as individual states and municipalities, regularly
consider a wide array of tax proposals. Certain of these tax proposals may
result in a reduction of federal, state or local tax rates, collection of a
greater percentage of taxes through withholding or other changes that could
result in a decrease in the number and amount of payments that consumer users
have to make directly to a government entity. In addition, some of these
proposals may result in taxation of credit card perquisites, such as frequent
flyer miles. If any of these proposals were to be passed, it may reduce the
number and amount of tax payments effected through our services and the dollar
amount of our revenue derived from the convenience fees charged to consumer
users. If enacted, these laws could have a material and adverse effect on our
business, operating results and financial condition.
If there is a general economic downturn, the amount of income tax paid could
decrease and, as a result, our business could suffer.
Income taxes are dependent on the amount of income earned by tax paying
citizens. A significant economic downturn could reduce the per capita income of
citizens, and thus reduce the amount of income tax payments consumer users have
to make to a government entity, which may reduce our revenues from convenience
fees. If the United States experiences an economic downturn, it could have a
material and adverse effect on our business, operating results and financial
condition.
Risks Related to This Offering
Our directors, executive officers and principal stockholders will be able to
exert significant influence over us.
After this offering, our directors, executive officers and our current
stockholders, Imperial Bank and Beranson Holdings, Inc., will beneficially own
approximately % of our outstanding common stock (or % if the underwriters
exercise their over-allotment option in full). These stockholders, if they vote
together, will be able to exercise significant influence over all matters
requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may also delay or prevent a change in control of us or discourage a potential
acquirer from attempting to obtain control of us, any of which could have an
adverse effect on the market price of our common stock. See the "Management"
and "Principal Stockholders" sections of this prospectus.
12
The tangible book value of our common stock is substantially lower than the
offering price, resulting in immediate and substantial dilution to you.
The initial public offering price will be substantially higher than the
tangible book value per share of our outstanding common stock. If you purchase
our common stock in this offering, the shares you buy will experience an
immediate and substantial dilution in tangible book value per share. The shares
of common stock owned by the existing stockholders will experience a material
increase in the tangible book value per share. The dilution to investors in
this offering will be approximately $ per share. As a result, if we were to
distribute our tangible assets to our stockholders immediately following this
offering, purchasers of shares of common stock in this offering would receive
less than the amount paid for such shares. See the "Dilution" section of this
prospectus.
Anti-takeover provisions in our charter and Delaware law could inhibit others
from acquiring us, which could adversely affect the market price of our common
stock.
Some of the provisions of our certificate of incorporation, bylaws and
Delaware law could, together or separately:
. discourage potential acquisition proposals;
. delay or prevent a change in control; and
. limit the price that investors may be willing to pay in the future for
shares of our common stock.
In particular, our certificate of incorporation and bylaws provide, among
other things, that stockholders may not take actions by written consent, that
special meetings of stockholders may only be called by a majority of our board
of directors or by our Chairman and that a supermajority vote (80%) of our
stockholders is required for the removal of our directors, the adoption,
amendment or repeal of our bylaws and the consummation of certain business
combinations with any related person. We are also subject to Section 203 of the
Delaware General Corporation Law which generally prohibits a Delaware
corporation from engaging in any of a broad range of business combinations with
any interested stockholder (as defined in the statute) for a period of three
years following the date on which the stockholder became an interested
stockholder.
Our stock has not been publicly traded before and there may be volatility in
our stock price.
Prior to this offering, there has been no public market for our common
stock. We cannot predict the extent to which investor interest will lead to the
development of an active and liquid trading market. The initial public offering
price for the shares will be determined by negotiations between us and the
representatives of the underwriters and may not be indicative of the market
price of the common stock that will prevail in the trading market. See the
"Underwriting" section of this prospectus. The market price of the common stock
may decline below the initial public offering price. In recent years, the
securities markets have experienced substantial volatility in prevailing price
levels that is unrelated or disproportionate to the operating performance of
individual companies. The market prices of the securities of Internet-related
companies have been especially volatile. Some companies that have had volatile
stock prices have been subject to securities class action suits filed against
them. If a suit were to be filed against us, regardless of the outcome, it
could result in substantial costs and a diversion of our management's attention
and resources. This could have a material adverse effect on our business,
operating results and financial condition.
Management has broad discretion as to the use of proceeds from this offering.
Our management will have broad discretion with respect to the use of
proceeds from this offering. Most of the proceeds from this offering will be
used for expenses of the business, such as hiring sales and marketing
personnel, repayment of stockholder loans and general working capital. You will
be relying on the judgment of our management about these uses. See the "Use of
Proceeds" section of this prospectus. If we do not use the proceeds of this
offering beneficially, our business, operating results and financial condition
could be materially and adversely affected.
13
There may be an adverse effect on the market price of our stock as a result of
shares being available for sale in the future.
Sales of a substantial amount of our common stock in the public market, or
the perception that these sales may occur, could adversely affect the
prevailing market price of our common stock. This could also impair our ability
to raise additional capital through the sale of our equity securities. After
this offering, we will have shares of common stock outstanding, or
shares if the underwriters exercise their over-allotment option in full. Of
these shares, the shares sold in this offering will be freely tradable, except
for shares purchased by any of our affiliates, which will be subject to the
limitations of Rule 144 under the Securities Act. The remaining shares are
"restricted securities," and will become eligible for sale in the public market
at various times after days after the date of this prospectus, subject to
the limitations and other conditions of Rule 144 under the Securities Act. In
addition, in connection with this offering, holders of all shares of restricted
securities and options to purchase our common stock have agreed not to sell the
shares of common stock they now own or acquire upon exercise of such options
without the prior written consent of Donaldson, Lufkin & Jenrette for a period
of 180 days from the date of this prospectus. See the "Shares Eligible for
Future Sale" section of this prospectus.
14
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve substantial
risks and uncertainties. You can identify these statements by forward-looking
words such as "may," "will," "expect," "anticipate," "believe," "estimate" and
"continue" or similar words. You should read statements that contain these
words carefully because they discuss our future expectations, contain
projections of our future results of operations or of our financial condition
or state other "forward-looking" information. We believe that it is important
to communicate our future expectations to our investors. However, there may be
events in the future that we are not able to accurately predict or control. The
factors listed in the sections entitled "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as any cautionary language in this prospectus, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. Before you
invest in our common stock, you should be aware that the occurrence of the
events described in the "Risk Factors" section and the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section and
elsewhere in this prospectus could have a material adverse effect on our
business, operating results and financial condition.
15
USE OF PROCEEDS
We will receive approximately $ million in net proceeds from the sale of
the shares of common stock we are offering. If the underwriters exercise their
over-allotment option in full, our net proceeds will be approximately $
million. Net proceeds is what we expect to receive after paying underwriting
discounts and commissions and estimated offering expenses. For the purpose of
estimating net proceeds, we are assuming that the initial public offering price
will be $ per share (the midpoint of the range set forth on the cover page
of this prospectus).
We expect to use approximately $2.8 million of the net proceeds to repay the
outstanding balance of the advances available to us by our stockholders to fund
our operations through December 31, 2000. These advances are evidenced by
promissory notes bearing interest at a floating rate equal to Imperial Bank's
prime rate plus 2% per year. We expect that the outstanding balance of the
promissory notes will increase as a result of additional advances made to us by
our stockholders during the period from September 1, 1999 to the closing of
this offering. For a more detailed discussion, please see the "Certain
Relationships and Related Transactions" section of this prospectus.
We intend to use the balance of the net proceeds for working capital and
general corporate purposes, including developing new payment and Internet
services, increasing our sales and marketing staff and capabilities and making
acquisitions. While we expect to evaluate potential acquisitions from time to
time, we have no present understandings, commitments or agreements with respect
to any acquisitions.
DIVIDEND POLICY
We have neither declared nor paid any cash dividends on our common stock. We
do not anticipate paying any cash dividends for the foreseeable future. Any
future determination as to the payment of dividends will be at the discretion
of our board of directors.
16
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
. on an actual basis;
. the sale of shares of common stock in this offering at an assumed
offering price of $ per share (the midpoint of the range set forth on
the cover page of this prospectus), less underwriting discounts and
commissions and estimated offering expenses.
You should read the following table in conjunction with the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section of this prospectus and our financial statements and related notes
included elsewhere in this prospectus.
As of June 30, 1999
----------------------
Actual As Adjusted
(In thousands)
Cash and cash equivalents............................... $ 249 $
========= =========
Debt:
Notes payable and capital lease obligations........... $ 238 $
Notes payable to related party........................ 500
Stockholders' equity:
Common stock, $0.01 par value; 50,000,000 shares
authorized; 5,000,000 shares issued and outstanding,
as of June 30, 1999; shares issued and
outstanding, as adjusted ............................ 50
Additional paid-in capital............................ 1,128
Retained earnings (deficit)........................... (1,053)
--------- ---------
Total stockholders' equity ......................... 125
--------- ---------
Total capitalization.............................. $ 863 $
========= =========
17
DILUTION
Our net tangible book value as of June 30, 1999 was $125,000, or less than
$0.03 per share, based on 5,000,000 shares of common stock outstanding. Net
tangible book value per share represents the amount of our total tangible
assets less total liabilities, divided by the total number of shares of common
stock outstanding at June 30, 1999.
Our net tangible book value as of June 30, 1999 would have been $
million, or $ . per share, after giving effect to the sale of the shares of
common stock in this offering at an assumed initial public offering price of
$ per share (the midpoint of the range set forth on the cover page of this
prospectus), less the underwriting discounts and commissions and estimated
offering expenses payable by us. This represents an immediate increase in the
net tangible book value of $ . per share to our existing stockholders and an
immediate dilution of $ . per share to new investors purchasing shares of
common stock in this offering. The following table illustrates this per share
dilution:
Initial public offering price per share...................... $
Net tangible book value per share as of June 30, 1999...... $0.025
Increase in net tangible book value per share attributable
to new stockholders.......................................
------
Net tangible book value after this offering..................
----
Dilution per share to new stockholders....................... $
====
The following table summarizes, as of June 30, 1999, the number of shares of
common stock we have sold, the total consideration paid to us and the average
price per share paid to us by existing stockholders and by the investors
purchasing shares of common stock in this offering, before deducting
underwriting discounts and commissions and estimated offering expenses:
Shares Total Average
Purchased Consideration Price
-------------- -------------- -------
Per
Number Percent Amount Percent Share
Existing stockholders...................... 5,000 % $1,600 % $0.32
New stockholders...........................
----- ------ ------ ------ -----
Total.................................. 100.0% $ 100.0% $
===== ====== ====== ====== =====
In the event that we issue additional shares of common stock in the future,
purchasers of common stock in this offering may experience further dilution.
The tables above assume no exercise of stock options outstanding on ,
1999. Options to purchase shares of common stock, having a weighted
average exercise price of $ per share, were outstanding as of ,
1999. When and if these options are exercised, new stockholders will experience
further dilution.
18
SELECTED FINANCIAL DATA
The following selected historical financial data for each of the years in
the three year period ended December 31, 1998 and the six-month period ended
June 30, 1999 and as of December 31, 1996, 1997, 1998 and June 30, 1999 have
been derived from our financial statements, which have been audited by KPMG
LLP, our independent auditors and are included elsewhere in this prospectus.
The results of operations for the year ended December 31, 1995 and 1996
includes the results of operations of our predecessor company for the period
from January 1, 1995 to June 26, 1996. The selected financial data as of
December 31, 1995 and June 30, 1998 and for the year ended December 31, 1995
and the six months ended June 30, 1998 have been derived from our unaudited
financial statements, which include, in the opinion of our management, all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of financial position and results of
operations for that period and at that date. The results of operations for the
six months ended June 30, 1999 are not necessarily indicative of results to be
expected for any future period. The information set forth below should be read
along with the financial statements and the related notes included elsewhere in
this prospectus and the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of this prospectus.
Year Ended Six Months
December 31, Ended June 30,
----------------------------------- ----------------
1995 1996(1) 1997 1998 1998 1999
(In thousands, except per share data)
Statements of Operations
Data:
Revenues:
Transaction fees........ $ 102 $ 351 $ 935 $2,076 $ 794 $ 5,975
Other revenues.......... 559 435 267 293 105 138
----- ------ ------ ------ ------- -------
Total revenues...... 661 786 1,202 2,369 899 6,113
Total cost of revenues:
Cost of transaction
fees................... 24 221 412 1,009 361 4,818
Cost of other
revenues............... 63 84 284 71 11 21
----- ------ ------ ------ ------- -------
Total cost of
revenues........... 87 305 696 1,080 372 4,839
----- ------ ------ ------ ------- -------
Gross profit............. 574 481 506 1,289 527 1,274
Operating expenses:
Sales and marketing..... 236 222 330 356 198 435
Development costs....... 113 238 206 608 282 320
General and
administrative......... 673 306 466 595 225 549
----- ------ ------ ------ ------- -------
Total operating
expenses........... 1,022 766 1,002 1,559 705 1,304
----- ------ ------ ------ ------- -------
Income (loss) from
operations.............. (448) (285) (496) (270) (178) (30)
Other income (expense),
net..................... (8) (38) (6) (55) (22) (29)
----- ------ ------ ------ ------- -------
Net income (loss)........ $(456) $ (323) $ (502) $ (325) $ (200) $ (59)
===== ====== ====== ====== ======= =======
Basic and diluted net
income (loss) per
share................... $ -- $(0.03)(2) $(0.10) $(0.07) $(0.04) $ (0.01)
===== ====== ====== ====== ======= =======
Shares used in computing
basic and diluted net
income (loss) per
share................... -- 5,000 5,000 5,000 5,000 5,000
===== ====== ====== ====== ======= =======
Balance Sheet Data:
Cash and cash
equivalents............. $ 44 $ 221 $ 182 $ 631 $ 440 $ 249
Working capital
(deficit)............... 64 (60) (221) 392 111 55
Total assets............. 584 695 764 1,747 1,173 2,028
Total debt including
current portion......... 383 476 389 810 739 1,283
Stockholders' equity
(deficit)............... 141 (11) (91) 184 (291) 125
- --------
(1) Includes the results of operations of the predecessor company for the
period from January 1, 1996 to June 26, 1996.
(2) Basic and diluted net income (loss) per share excludes the net income
(loss) of $(156,000) of the predecessor company for the period from January
1, 1996 to June 26, 1996.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements relating to
future events or our future financial performance which involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, those set forth under the "Risk Factors" and
"Business" sections of this prospectus.
Overview
We are the leading provider of electronic payment options to government
entities enabling consumers to use their credit cards to pay, by telephone or
through the Internet, personal federal and state income taxes, sales and use
taxes, property taxes and fines for traffic violations and parking citations.
The use of credit cards to make payments to government entities is relatively
new and evolving. We commenced our current operations on June 26, 1996,
initially offering our credit card payment services for the payment of fines
for traffic violations, parking citations and property taxes. We currently
offer these services to over 400 municipalities. In January 1999, we signed a
credit card payment contract with the IRS and we began providing our services
for the balance-due payment of personal federal income taxes. We started
providing services for the payment of personal state income taxes in California
in January 1999, in New Jersey in March 1999 and in the District of Columbia in
July 1999. Consumers can make payments through our toll-free IVR system. Since
August 1999, consumers have also been able to make certain payments through our
Web site, www.8882paytax.com.
Our predecessor company was originally founded in 1986 as a provider of
interactive voice response applications for the classified advertising
industry. In July 1996, our predecessor company made the decision to
discontinue those operations to focus on our current business. In April 1997,
our predecessor company sold those operations.
Our revenues consist primarily of transaction revenues derived from
convenience fees paid by consumers for using our credit card payment services.
Our convenience fees ranged from 2.4% to 9.0% of the amount paid to government
entities in the first six months of 1999, depending on the type and size of the
payment. We also derive a small amount of other revenues from sales of our
systems to government entities and other miscellaneous fees such as for
maintenance and consulting. Revenues are recognized as the services are
performed and upon installation of the software and system sales.
Our primary cost of revenues is merchant discount fees paid to our credit
card processors, which, in the first six months of 1999, ranged from 2.1% to
2.6% of the total amount paid by the consumer, depending on the credit card
used and the type of transaction. We also incur telecommunications costs of
approximately $0.50 per completed transaction through our IVR conduit. Although
there are no telecommunications costs associated with payments made through our
Internet conduit, we pay a third party license fee of $0.15 per completed
transaction for certain technology used in our Internet conduit. We may also
pay referral fees for transactions completed as a result of referrals by third
parties.
Operating expenses include sales and marketing expenses, development costs,
and general and administrative expenses. Sales and marketing expenses consist
primarily of salaries and commissions for sales and marketing personnel. We
expect to significantly increase our sales, marketing, advertising, customer
service and new customer implementation expenditures during the next twelve
months. We believe these expenditures will enable us to increase the number of
consumers that use our electronic payment services and grow our government
client base. Development costs consist primarily of salaries for engineering
personnel and depreciation of computer equipment used to enhance our IVR system
and develop our Internet services. We expense our development costs as they are
incurred. We expect to significantly increase our development costs in the
future as we enhance our Internet conduit and develop new service offerings.
This increase will primarily relate to the hiring of additional employees
performing technical support and computer programming functions.
20
General and administrative expenses consist primarily of salaries for
executive, accounting and administrative personnel. We also expect general and
administrative expenses to increase significantly as we continue to hire
additional members of our management team.
We have incurred significant losses since our inception and we expect to
continue to incur losses for the foreseeable future. As of June 30, 1999, we
had an accumulated deficit of approximately $1.1 million. We will record on our
balance sheet a deferred stock compensation expense totaling $12.9 million in
the third quarter of 1999. This expense consists of an amount of $10 million,
representing the guaranteed value of the options granted to Thomas R. Evans,
our Chairman and Chief Executive Officer, and an amount of $2.9 million,
representing the estimated value of the common stock underlying options we
granted to certain of our other officers and employees in August 1999 and the
exercise price of those options. The total amount of this expense will increase
as a result of additional options that we will grant prior to the completion of
this offering. The $10 million expense related to Mr. Evans' options will be
amortized, using a straight-line method, over a three-year period, starting in
the third quarter of 1999. The $2.9 million expense related to options granted
to our other officers will be expensed over 12 months upon completion of this
offering or sooner. See the "Management--1999 Stock Incentive Plan" and
"Management--Employment Agreements" sections of this prospectus and Note 8 to
our financial statements.
Significant Government Contracts
Our agreements with our government clients are non-exclusive and short-term,
and can generally be terminated without cause on short notice (in most cases 30
to 90 days). Under these agreements, we provide our services at no charge to
our government clients and we pay the credit card discount and transaction
fees.
In January 1999, we entered into an agreement with the IRS to provide credit
card payment services for the balance-due payment of personal federal income
taxes. The initial agreement will expire in October 1999, and we are currently
in negotiations with the IRS to renew our contract. Under the draft renewal
agreement we would provide:
. access to our services for balance-due payments from January 14, 2000 to
October 16, 2000;
. access to our services for extension payments from January 14, 2000 to
April 17, 2000; and
. access to our services for estimated payments from March 1, 2000 to
January 31, 2001.
Under the terms of the agreement and the draft renewal agreement, we must
comply with certain availability, access and reporting requirements.
In November 1998, we entered into an agreement with Novus Services, Inc. by
which we assumed Novus' obligations under its contract with the California
Franchise Tax Board to provide credit card payment services for balance-due
personal state income taxes. The term of the agreement is indefinite.
In January 1999, we entered into a contract with the Division of Purchase
and Property of the State of New Jersey to provide credit card payment services
for balance-due and estimated personal state income taxes. The initial term of
the contract is two years, expiring in February 2001.
In December 1998, we entered into a contract with the Office of the Chief
Financial Officer of the District of Columbia to provide credit card payment
services for balance-due personal income taxes. The contract includes
provisions relating to the convenience fees we may charge, and any changes to
our fees must be approved by the District of Columbia. The initial term of the
contract is one year, expiring in December 1999, and the District of Columbia
has the option to extend the contract for periods of up to four additional
years.
21
Results of Operations
The following table sets forth, for the periods illustrated, certain
statements of operations data expressed as a percentage of total revenues:
As a Percentage of Revenues
---------------------------------------
Year Ended Six Months
December 31, Ended June 30,
------------------ ------------------
1996 1997 1998 1998 1999
Revenues:
Transaction fees................... 45 % 78 % 88 % 88 % 98 %
Other revenues..................... 55 22 12 12 2
--- --- --- ------- -------
Total revenues................... 100 100 100 100 100
Cost of revenues:
Cost of transaction fees........... 28 34 43 40 79
Cost of other revenues............. 11 24 3 1 0
--- --- --- ------- -------
Total cost of revenues........... 39 58 46 41 79
--- --- --- ------- -------
Gross profit......................... 61 42 54 59 21
Operating expenses:
Sales and marketing................ 28 27 15 22 7
Development costs.................. 30 17 26 31 5
General and administrative......... 39 39 25 25 9
--- --- --- ------- -------
Total operating expenses......... 97 83 66 78 21
--- --- --- ------- -------
Income (loss) from operations........ (36) (41) (12) (19) 0
Other income (expense), net.......... (5) (1) (2) (2) 0
--- --- --- ------- -------
Net income (loss).................... (41)% (42)% (14)% (21)% 0 %
=== === === ======= =======
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues
Total Revenues. Total revenues increased $5.2 million to $6.1 million for
the six months ended June 30, 1999 from $899,000 for the six months ended June
30, 1998, an increase of 580%. This increase is primarily attributable to
revenues generated from processing personal federal income tax payments as well
as increases in revenues from processing personal state income and property
taxes and fines for traffic violations and parking citations.
Personal federal income tax. Revenues from processing personal federal
income tax payments, a service we introduced on January 15, 1999, were $4.3
million for the six months ended June 30, 1999, representing 71% of our total
revenues. We processed approximately 45,100 transactions totaling $174 million
during this period.
Personal state income tax. Revenues from processing personal state income
tax payments, a service we introduced in January 1999 for California and in
March 1999 for New Jersey, were $173,000 for the six months ended June 30,
1999, representing 3% of our total revenues. We processed approximately 13,300
transactions totaling $6.0 million during this period.
Fines for traffic violations. Revenues from processing fines for traffic
violations increased $222,000 to $574,000 for the six months ended June 30,
1999 from $352,000 for the six months ended June 30, 1998, an increase of 63%.
For the six months ended June 30, 1999, we processed approximately 53,000
transactions totaling $7.8 million, compared to 33,700 transactions totaling
$4.7 million for the six months ended June 30, 1998. This increase is primarily
attributable to higher utilization rates and new local jurisdictions added
22
subsequent to June 30, 1998. As of June 30, 1999, we had 152 local government
clients for traffic violation payment services, compared to 91 as of June 30,
1998. Revenues from processing fines for traffic violations represented 9% of
total revenues for the six months ended June 30, 1999 compared to 39% for the
six months ended June 30, 1998.
Property taxes. Revenues from processing property tax payments increased
$333,000 to $557,000 for the six months ended June 30, 1999 from $224,000 for
the six months ended June 30, 1998, an increase of 149%. For the six months
ended June 30, 1999, we processed approximately 39,400 transactions totaling
$30.2 million, compared to 16,000 transactions totaling $14.8 million for the
six months ended June 30, 1998. This increase is primarily attributable to new
local jurisdictions added subsequent to June 30, 1998. As of June 30, 1999, we
had 112 local government clients for property tax payment services, compared to
32 as of June 30, 1998. Revenues from processing property tax payments
represented 9% of total revenues for the six months ended June 30, 1999
compared to 25% for the six months ended June 30, 1998.
Fines for parking citations. Revenues from processing fines for parking
citations increased $70,000 to $138,000 for the six months ended June 30, 1999
from $68,000 for the six months ended June 30, 1998, an increase of 103%. For
the six months ended June 30, 1999, we processed approximately 44,000
transactions totaling $1.5 million, compared to approximately 20,000
transactions totaling $638,000 for the six months ended June 30, 1998. This
increase is primarily attributable to one local jurisdiction being added in
July of 1998 and an increase in utilization rates. Revenues from processing
fines for parking citations represented 2% of total revenues for the six months
ended June 30, 1999 compared to 8% percent for the six months ended June 30,
1998.
Other transaction fees. Other transaction fees, which include revenues from
fax filing and processing payments to utilities, increased $50,000 to $200,000
for the six months ended June 30, 1999 from $150,000 for the six months ended
June 30, 1998, an increase of 33%.
Other revenues. Other revenues increased $33,000 to $138,000 for the six
months ended June 30, 1999 from $105,000 for the six months ended June 30,
1998, an increase of 31%.
Expenses
Cost of revenues. Cost of revenues increased $4.5 million to $4.8 million
for the six months ended June 30, 1999 from $372,000 for the six months ended
June 30, 1998, an increase of 1201%. The largest component of cost of revenues,
interchange fees, increased by $4.3 to $4.6 million for the six months ended
June 30, 1999 from $278,000 for the six months ended June 30, 1998, an increase
of 1546%. The cost of telephone charges for our toll-free IVR system increased
by $109,000 to $136,000 for the six months ended June 30, 1999 from $27,000 for
the six months ended June 30, 1998, an increase of 403%. Cost of revenues was
79% of total revenues for the six months ended June 30, 1999 compared to 41%
for the six months ended June 30, 1998. The increase is due to the lower gross
margins for federal income tax payment services as compared to other payment
services.
Sales and marketing expenses. Sales and marketing expenses increased
$237,000 to $435,000 for the six months ended June 30, 1999 compared to
$198,000 for the six months ended June 30, 1998. This increase was primarily
attributable to an increase in the number of sales and marketing personnel to
handle additional growth in business and in anticipation of future growth and
an increase in commission payments. Sales and marketing expenses represented 7%
of total revenues for the six months ended June 30, 1999 compared to 22% for
the six months ended June 30, 1998.
Development costs. Development costs increased $38,000 to $320,000 for the
six months ended June 30, 1999 compared to $282,000 for the six months ended
June 30, 1998. This increase was primarily attributable to an increase in the
number of engineering personnel. Development costs represented 5% of total
revenues for the six months ended June 30, 1999 compared to 31% for the six
months ended June 30, 1998.
23
General and administrative expenses. General and administrative expenses
increased $324,000 to $549,000 for the six months ended June 30, 1999 compared
to $225,000 for the six months ended June 30, 1998. This increase was primarily
attributable to an increase in the number of general and administrative
personnel. General and administrative expenses represented 9% of total revenues
for the six months ended June 30, 1999 compared to 25% for the six months ended
June 30, 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues
Total Revenues. Total revenues increased $1.2 million to $2.4 million for
the year ended December 31, 1998, from $1.2 million for the year ended December
31, 1997, an increase of 97%. This increase is primarily attributable to higher
revenues generated from processing a greater number of property tax payments
for existing and new clients.
Fines for traffic violations. Revenues from processing fines for traffic
violations increased $381,000 to $827,000 for the year ended December 31, 1998
from $446,000 for the year ended December 31, 1997, an increase of 85%. For the
year ended December 31, 1998, we processed 80,200 transactions totaling $11.4
million, compared to 36,400 transactions totaling $5.6 million for the year
ended December 31, 1997. This increase is primarily attributable to higher
utilization rates and new local jurisdictions being added throughout 1997 and
1998. As of December 31, 1998, we had 114 local government clients for traffic
violation payment services, compared to 52 as of December 31, 1997. Revenues
from processing fines for traffic violations represented 35% of total revenues
for the year ended December 31, 1998 compared to 37% for the year ended
December 31, 1997.
Property taxes. Revenues from processing property tax payments increased
$587,000 to $765,000 for the year ended December 31, 1998 from $178,000 for the
year ended December 31, 1997, an increase of 330%. For the year ended December
31, 1998, we processed 47,900 transactions totaling $46.2 million, compared to
14,400 transactions totaling $15.9 million for the year ended December 31,
1997. This increase is primarily attributable to higher utilization rates and
new local jurisdictions being added throughout 1997 and 1998. As of December
31, 1998, we had 73 local government clients for property tax payment services,
compared to 10 as of December 31, 1997. Revenues from processing property tax
payments represented 32% of total revenues for the year ended December 31, 1998
compared to 15% for the year ended December 31, 1997.
Fines for parking citations. Revenues from processing fines for parking
citations increased $52,000 to $157,000 for the year ended December 31, 1998
from $105,000 for the year ended December 31, 1997, an increase of 50%. For the
year ended December 31, 1998, we processed 48,800 transactions totaling $1.6
million, compared to 32,000 transactions totaling $1.1 million for the year
ended December 31, 1997. This increase is primarily attributable to higher
utilization rates at existing government clients in 1998 and one new local
government entity added in July 1998. Revenues from processing fines for
parking citations represented 7% of total revenues for the year ended December
31, 1998 compared to 9% for the year ended December 31, 1997.
Other transaction fees. Other transaction fees increased $121,000 to
$327,000 for the year ended December 31, 1998 from $206,000 for the year ended
December 31, 1997, an increase of 59%. This increase is primarily attributable
to additional utility and fax filing clients added during 1998. These revenues
represented 14% of total revenues for the year ended December 31, 1998 compared
to 17% for the year ended December 31, 1997.
Other revenues. Other revenues increased $27,000 to $293,000 for the year
ended December 31, 1998 from $267,000 for the year ended December 31, 1997, an
increase of 10%.
24
Expenses
Cost of revenues. Cost of revenues increased $384,000 to $1.1 million for
the year ended December 31, 1998 from $696,000 for the year ended December 31,
1997, an increase of 55%. Interchange fees increased by $554,000 to $825,000
for the year ended December 31, 1998 from $271,000 for the year ended December
31, 1997, an increase of 204%. Cost of telephone charges increased $43,000 to
$99,000 for the year ended December 31, 1998 from $56,000 for the year ended
December 31, 1997, an increase of 77%. These increases were primarily
attributable to the corresponding increase in revenue. Cost of revenues was 46%
of total revenues for the year ended December 31, 1998 compared to 58% for the
year ended December 31, 1997.
Sales and marketing expenses. Sales and marketing expenses increased $26,000
to $356,000 for the year ended December 31, 1998 compared to $330,000 for the
year ended December 31, 1997. Sales and marketing expenses represented 15% of
total revenues for the year ended December 31, 1998 compared to 27% for the
year ended December 31, 1997.
Development costs. Development costs increased $402,000 to $608,000 for the
year ended December 31, 1998 compared to $206,000 for the year ended December
31, 1997. This increase was primarily attributable to an increase in the number
of engineering personnel. Development costs represented 26% of total revenues
for the year ended December 31, 1998 compared to 17% for the year ended
December 31, 1997.
General and administrative expenses. General and administrative expenses
increased $129,000 to $595,000 for the year ended December 31, 1998 compared to
$466,000 for the year ended December 31, 1997. This increase was primarily due
to an increase in audit fees, higher depreciation expenses due to additional
capital expenditures and higher salary expenses from hiring additional support
staff. General and administrative expenses represented 25% of total revenues
for the year ended December 31, 1998 compared to 39% for the year ended
December 31, 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues
Total Revenues. Total revenues increased $416,000 to $1.2 million for the
year ended December 31, 1997 from $786,000 for the year ended December 31,
1996, an increase of 53%. This increase is primarily attributable to revenues
generated from processing property tax payments as well as increases in
revenues from processing fines for traffic violations and parking citations.
Fines for traffic violations. Revenues from processing fines for traffic
violations increased $181,000 to $446,000 for the year ended December 31, 1997
from $265,000 for the year ended December 31, 1996, an increase of 68%. For the
year ended December 31, 1997, we processed 36,400 transactions totaling $5.6
million, compared to 19,500 transactions totaling $2.9 million for the year
ended December 31, 1996. This increase is primarily attributable to higher
utilization rates and new local jurisdictions being added throughout 1996 and
1997. As of December 31, 1997 we had 52 local government clients, compared to
15 as of December 31, 1996. Revenues from processing fines for traffic
violations represented 37% of total revenues for the year ended December 31,
1997 compared to 34% for the year ended December 31, 1996.
Property taxes. Revenue from processing property tax payments increased
$172,000 to $178,000 for the year ended December 31, 1997 from $6,000 for the
year ended December 31, 1996, an increase of 2867%. For the year ended December
31, 1997, we processed 14,400 transactions totaling $15.9 million, compared to
123 transactions totaling $100,000 for the year ended December 31, 1996.
Revenues from processing property tax payments represented 15% of total
revenues for the year ended December 31, 1997, compared to 1% for the year
ended December 31, 1996.
Fines for parking citations. Revenues from processing fines for parking
citations increased $92,000 to $105,000 for the year ended December 31, 1997
from $13,000 for the year ended December 31, 1996, an increase of 708%. For the
year ended December 31, 1997, we processed 32,000 transactions totaling $1.1
25
million, compared to 1,250 transactions totaling $232,000 for the year ended
December 31, 1996. This increase is primarily attributable to additional
government clients added during 1997. Revenues from processing fines for
parking citations represented 9% of total revenues for the year ended December
31, 1997 compared to 2% for the year ended December 31, 1996.
Other transaction fees. Other transaction fees increased $139,000 to
$206,000 for the year ended December 31, 1997 from $67,000 for the year ended
December 31, 1996, an increase of 207%. This increase is primarily attributable
to additional utility and fax filing clients added during 1997. These revenues
represented 17% of total revenues for the year ended December 31, 1997 compared
to 9% for the year ended December 31, 1996.
Expenses
Other revenues. Other revenues decreased $168,000 to $267,000 for the year
ended December 31, 1997 from $435,000 for the year ended December 31, 1996, a
decrease of 39%.
Cost of revenues. Cost of revenues increased $391,0000 to $696,000 for the
year ended December 31, 1997 from $305,000 for the year ended December 31,
1996, an increase of 128%. Interchange fees increased by $202,000 to $271,000
for the year ended December 31, 1997 from $69,000 for the year ended December
31, 1996, an increase of 293%. Cost of other revenues increased $200,000 to
$284,000 for the year ended December 31, 1997 from $84,000 for the year ended
December 31, 1996, an increase of 238%. This increase was primarily
attributable to costs associated with system sales that occurred in 1997. Cost
of revenues was 58% of total revenues for the year ended December 31, 1997
compared to 39% for the year ended December 31, 1996.
Sales and marketing expenses. Sales and marketing expenses increased
$108,000 to $330,000 for the year ended December 31, 1997 compared to $222,000
for the year ended December 31, 1996. Sales and marketing expenses represented
27% of total revenues for the year ended December 31, 1997 compared to 28% for
the year ended December 31, 1996.
Development costs. Development costs decreased $32,000 to $206,000 for the
year ended December 31, 1997 compared to $238,000 for the year ended December
31, 1996. The decrease in development costs was primarily attributable to
capitalization of $200,000 in development costs in 1997 as a result of
establishing technological feasibility upon completion of a working model for
our software systems. Development costs represented 17% of total revenues for
the year ended December 31, 1997 compared to 30% for the year ended December
31, 1996.
General and administrative expenses. General and administrative expenses
increased $160,000 to $466,000 for the year ended December 31, 1997 compared to
$306,000 for the year ended December 31, 1996. This increase was primarily due
to an increase in salary expenses from hiring additional personnel. General and
administrative expenses represented 39% of total revenues for the years ended
December 31, 1997 and 1996.
26
Selected Unaudited Quarterly Results of Operations
The following tables set forth certain unaudited quarterly results of
operations data for the six quarters ended June 30, 1999, as well as the
percentage of our revenues represented by each item. We believe this data has
been prepared on substantially the same basis as the audited financial
statements contained in this prospectus, and all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts stated below for the fair presentation of the quarterly results of
operations. The quarterly results of operations data should be read along with
our audited financial statements and the related notes appearing elsewhere in
this prospectus. The operating results for any quarter are not necessarily
indicative of the operating results for future periods.
Three Months Ended
-----------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30,
1998 1998 1998 1998 1999 1999
(Dollars in thousands)
Revenues:
Transaction fees...... $ 287 $ 507 $ 492 $ 790 $ 728 $5,247
Other revenues........ 34 71 43 145 102 36
----- ----- ----- ----- ----- ------
Total revenues...... 321 578 535 935 830 5,283
Cost of revenues:
Cost of transaction
fees................. 108 253 232 416 421 4,397
Cost of other
revenues............. 7 4 2 58 19 2
----- ----- ----- ----- ----- ------
Total cost of
revenues........... 115 257 234 474 440 4,399
----- ----- ----- ----- ----- ------
Gross profit............ 206 321 301 461 390 884
Operating expenses:
Sales and marketing... 102 96 89 69 175 260
Development costs..... 119 163 193 133 140 180
General and
administrative....... 112 113 112 258 199 350
----- ----- ----- ----- ----- ------
Total operating
expenses........... 333 372 394 460 514 790
----- ----- ----- ----- ----- ------
Income (loss) from
operations............. (127) (51) (93) 1 (124) 94
Other income (expense),
net.................... (5) (17) (15) (18) 3 (32)
----- ----- ----- ----- ----- ------
Net income (loss)....... $(132) $ (68) $(108) $ (17) $(121) $ 62
===== ===== ===== ===== ===== ======
Revenues:
Transaction fees...... 89 % 88 % 92 % 84 % 88 % 99 %
Other revenues........ 11 12 8 16 12 1
----- ----- ----- ----- ----- ------
Total revenues...... 100 100 100 100 100 100
Cost of revenues:
Cost of transaction
fees................. 34 44 44 45 51 83
Other revenues........ 2 1 0 6 2 0
----- ----- ----- ----- ----- ------
Total cost of
revenues........... 36 45 44 51 53 83
----- ----- ----- ----- ----- ------
Gross profit............ 64 55 56 49 47 17
Operating expenses:
Sales and marketing... 32 17 17 7 21 5
Development costs..... 37 28 36 14 17 3
General and
administrative....... 35 19 21 28 24 7
----- ----- ----- ----- ----- ------
Total operating
expenses........... 104 64 74 49 62 15
----- ----- ----- ----- ----- ------
Income (loss) from
operations............. (40) (9) (18) 0 (15) 2
Other income (expense),
net.................... (1) (3) (3) (2) 0 (1)
----- ----- ----- ----- ----- ------
Net income (loss)....... (41)% (12)% (21)% (2)% (15)% 1 %
===== ===== ===== ===== ===== ======
27
Seasonality and Fluctuation of Quarterly Results
We have experienced quarter-to-quarter revenue growth with some seasonal
fluctuations in the second and fourth quarters of 1998 and the second quarter
of 1999. The quarter-to-quarter revenue growth is due to an increase in the
number of government clients and payment services and an increase in
utilization rates. The fluctuations in the second and fourth quarter of 1998
relate primarily to an increase in convenience fees from processing California
property tax payments, which are collected twice a year -- in April and
December. The sharp increase in revenues in the second quarter of 1999 is due
to processing personal federal income tax payments in April 1999. We expect
that results for the second quarter of future years will continue to be
impacted by the April 15 deadline for paying personal federal and state income
taxes.
Cost of revenues as a percentage of total revenues was significantly higher
in the second quarter of 1999 than in previous quarters as a result of
processing federal income tax payments, which have significantly lower margins
than other payment services. This is due to the fact that our convenience fee
is generally lower as a percentage of large government payments, such as income
taxes, while our primary cost of sales (merchant discount fees) are relatively
constant as a percentage of the government payment amount.
We anticipate that our operating expenses will continue to increase
significantly due to the anticipated expansion of our sales force in order to
obtain additional state and municipal clients, the marketing campaign to make
consumer users aware of our electronic payment option, and development and
implementation costs associated with our Internet service. If revenues in any
quarter do not increase correspondingly with increases in expenses, our results
for that quarter would be materially and adversely affected.
For the foregoing reasons, we believe that comparisons of our quarterly
operating results are not necessarily meaningful and that our operating results
in any particular quarter should not be relied upon as necessarily indicative
of future performance. In addition, it is possible that in some future quarters
our operating results will be below the expectations of research analysts and
investors, and in that case, the price of our common stock is likely to
decline.
Liquidity and Capital Resources
Historically, we have experienced operating losses during most periods. We
expect to continue to incur losses from operations for the foreseeable future.
Our working capital deficit was $60,000 at December 31, 1996. We had a working
capital deficit of $221,000 at December 31, 1997. In December 1998, there was a
capital contribution of $600,000 and our working capital was $392,000 at
December 31, 1998. At June 30, 1999, our working capital was $55,000.
Net cash used in operating activities was $509,000 for the six months ended
June 30, 1999. For the six months ended June 30, 1998, our operating activities
generated cash of $111,000. For the year ended December 31, 1998, 1997 and
1996, net cash used in operating activities were $245,000, $323,000 and
$425,000, respectively.
The cash used in operating activities for the six months ended June 30, 1999
was primarily due to an increase in accounts receivable and a decrease in
accounts payable. For the six months ended June 30, 1998, the cash provided by
operating activities was primarily attributable to a decrease in accounts
receivable. Cash used for operating activities for the years ended December 31,
1998, 1997 and 1996 were primarily the result of our net loss and an increase
in accounts receivable.
Net cash used in investing activities was $252,000 and $58,000 for the six
months ended June 30, 1999 and 1998 and $298,000 and $139,000 for the years
ended December 31, 1998 and 1997. This cash was used primarily for the purchase
of computer equipment and software.
28
Net cash provided by financing activities was $379,000 and $205,000 for the
six months ended June 30, 1999 and 1998 and $992,000, $423,000 and $581,000 for
the years ended December 31, 1998, 1997 and 1996. The cash generated in the six
months ended June 30, 1999 resulted from an advance we received from Imperial
Bank. The net cash generated in the six months ended June 30, 1998 was
primarily due to a loan we received from Beranson Holdings, Inc. The cash
generated in 1998, 1997 and 1996 was due to capital contributions by our
stockholders. As of June 30, 1999, we have the ability to borrow an additional
$1 million from our stockholders.
We believe that, based on our current business plan, the net proceeds from
this offering and existing cash equivalents will be sufficient to meet our
operating activities, capital expenditures and other obligations for at least
the next two years.
Year 2000 Readiness
Many currently installed computer systems and software products were coded
to accept and recognize only two-digit rather than four-digit entries to define
the applicable year. These systems may recognize a date using "00" as the year
1900 rather than the year 2000. As a result, computer systems and/or software
used by many companies, including our government clients and financial
institutions upon which we rely to perform our services, may need to be
upgraded to comply with year 2000 requirements. Those companies that do not
upgrade risk system failure and/or miscalculations that can cause disruptions
of normal business activities.
State of Readiness. We have completed our assessment of our service and
information technology systems. We believe that all of our mission critical
systems and a majority of our non-mission critical systems are year 2000
compliant. We have also completed our initial survey of the information systems
of our principal system vendors and service providers. Based on the oral
representations of these vendors and service providers, we believe that the
information technology systems of these third parties, as they relate to us, do
not pose significant operational issues. We have replaced those principal
vendors that have been unable to certify to us that their products are year
2000 compliant. Our assessment is on-going and will continue with respect to
all principal vendors and service providers with which we do business. In
addition, we do not believe that our embedded systems pose year 2000 concerns
because we believe that we have identified all of our software and hardware
that require year 2000 updates or modifications.
Costs. We currently anticipate that our total expenses for year 2000
compliance will be less than $100,000. As of June 30, 1999, we have spent
approximately $60,000 in personnel and other costs related to our year 2000
risk assessment and remediation efforts.
Risks. All of our installed systems have customized programming code, many
with date specific routines required by our government clients. If the host
system/database supporting the customized system changes due to year 2000
upgrades, we may incur a failure to our operating system. Based upon tests
conducted by our government clients, we believe these problems can be promptly
remedied. However, we cannot guarantee that the test cases represent all of the
possible year 2000 problems and that longer remedial periods will not be
required.
If a system failure occurs unrelated to coding, we believe we would be able
to rebuild the failed system in a timely manner. Should such a system failure
occur, we may need to rely on a large client to provide appropriate client
representation for customer relations and technology support services to assist
in fixing the problem. We cannot guarantee that our government clients will
provide this assistance or that we would be able to rebuild our system in the
anticipated time frame.
Contingency Plans. We have developed a contingency plan based on the use of
backup computer systems in the event a year 2000 problem occurs. We house both
our IVR and Internet processing systems in dual locations to provide complete
system redundancy. These facilities contain emergency power generators and
backup computer systems, which would be used in the event of failure due to a
year 2000 problem. Because each system has interchangeable power supplies and
hard drives, if we experience system failure, the redundant system is expected
to immediately assume the functions of the failed system without interruption
of service.
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Our contingency plan is periodically reviewed for adequacy with respect to
our client base as well as to determine whether any new products or services we
offer are consistent with our plan. Due to incremental increases in the use of
our services, we cannot guarantee that at any given time our contingency plan
adequately provides for the latest increase in use. Although our contingency
plan has been tested against various year 2000 problem scenarios, we cannot be
certain that we have provided for all contingencies, or that in the event of an
actual year 2000 problem, our backup system will operate as planned.
New Accounting Pronouncement
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. We must adopt SFAS No. 133 by July 1, 2001.
Our management does not believe the adoption of SFAS No. 133 will have a
material effect on our financial position.
In March 1998, the American Institute of Certified Accountants issued
Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use, or SOP 98-1. SOP 98-1 provides guidance
on accounting for computer software developed or obtained for internal use,
including the requirement to capitalize specified costs and amortization of
such costs. We adopted SOP 98-1 in January 1999. The adoption did not have a
material effect on our financial position or results of operations.
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BUSINESS
Company Overview
We are the leading provider of electronic payment options to government
entities enabling consumers to use their credit cards to pay, by telephone or
through the Internet, personal federal and state income taxes, sales and use
taxes, property taxes and fines for traffic violations and parking citations.
Our IVR toll-free telephone number, 1-888-2PAY-TAXSM, allows consumers to make
payments and receive certain customer service information. Our 8882paytax.com
Web site allows consumers to make certain payments, and we are working with our
existing government clients, including the IRS, to enable consumers to make
additional tax and other payments through the Internet. We are also enhancing
our Web site so that consumers will be able to print receipts, save their
personal data to facilitate future payments, obtain information regarding our
services and access additional tax and other information.
Our government clients include the IRS, the States of California and New
Jersey, the District of Columbia and over 400 municipalities. Our pilot program
for personal federal income taxes processed over 45,000 tax filings totaling
more than $174 million in payments to the IRS from January 15, 1999 to April
15, 1999. Based on IRS data, we had a 95% market share (based on dollar volume)
for credit card payments of personal federal income taxes in the first six
months of 1999. We also processed over 187,000 payments for our state and
municipal clients totaling $55 million in the first six months of 1999.
We combine expertise in facilitating credit card transactions, an Internet
focus and targeted marketing techniques to attract both government clients and
consumers to our services. Our services allow our government clients to provide
their constituents with user-friendly electronic payment options at no charge
to the government entity. Consumers who use our payment services pay us a
convenience fee that is added to their payment. We believe that consumers use
our services for the convenience, the payment flexibility and the perquisites
associated with paying by credit card.
Industry Background
Growth of Electronic Commerce and the Internet
Increased use of credit cards, automated teller machines, electronic fund
transfers and direct payroll deposits have automated, simplified and reduced
the costs of financial transactions for financial institutions and businesses
and their customers. Electronic commerce offers the potential to complete
financial transactions more quickly, with greater accuracy and at a lower cost
than traditional paper-based methods, and provides consumer users with added
convenience. Consumers now routinely perform financial transactions by
telephone, using an IVR system, and through the Internet.
The Internet has experienced rapid growth and has become an important tool
for global communications and commerce. International Data Corporation
estimates that there were 97 million Web users worldwide at the end of 1998 and
projects this number will increase to approximately 320 million by the end of
2002. Internet-based financial services, such as electronic brokerage and
banking, represent a significant portion of the electronic commerce market. The
attractiveness of Internet-based financial services stems in large part from
the speed and ease of conducting financial transactions over the Internet, as
well as the ability of the Internet user to access additional information. The
number of U.S. households using online banking is projected to grow from 7
million at the end of 1998 to more than 24 million by 2004, according to
Dataquest, Inc., a unit of Gartner Group, Inc. Dataquest, Inc. estimates that
approximately 57%, or about 13.7 million, of these households will be paying
their bills online by 2004.
Online communities on the Internet provide businesses an attractive means of
promoting and selling their products and services. As we facilitate Web-based
payments to government entities, we believe there are opportunities to offer
and cross-sell contextually compatible services with our payment services.
International
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Data Corporation estimates that commerce over the Internet will increase from
approximately $32 billion worldwide in 1998 to approximately $133 billion in
2000 and to $1 trillion by 2003. Online communities that allow businesses to
identify and reach specific audiences within a personalized context provide the
opportunity to increase advertising efficiency and improve the likelihood of
success for these businesses' advertising campaigns.
The Market for Payments to Government Entities
In addition to payments made automatically on behalf of consumers, such as
payroll withholding taxes, individuals and small businesses make a variety of
payments to government entities at the federal, state and local levels. These
payments have traditionally been made by mailing checks, obtaining money orders
or making payments in person.
. Federal Level. The IRS estimates that for the 1999 tax year, there will
be 128 million personal federal income tax filers making payments
totaling approximately $920 billion, a portion of which is remitted
through payroll withholding. Of these income tax filers, the IRS
estimates that there are approximately 21 million individuals who will
make full balance-due tax payments when filing their tax return and 8
million individuals who pay taxes when filing for extensions. Further,
there are expected to be an additional 41 million estimated tax payment
transactions made by individuals for the 1999 tax year. Based on IRS
data, we believe that payments for balance-due filers for the 1999 tax
year will be approximately $45 billion. For extension filers this amount
is approximately $206 billion and for estimated filers it is
approximately $162 billion. Accordingly, total payments for the 1999 tax
year are estimated to be approximately $414 billion.
. State Level. Based on U.S. Census data, personal state income tax
payments were approximately $160 billion for the 1998 tax year. Based on
our experience with respect to personal federal income tax payments, we
believe that approximately 45%, or $73 billion, of this total
constitutes balance-due, estimated and extension tax payments. Based on
U.S. Census data, state sales and use taxes paid by businesses totaled
approximately $155 billion for 1998, a portion of which is paid by small
businesses using checks or money orders. Fees collected by states for
motor vehicle licenses and registrations are estimated to have been
approximately $14 billion in 1998. Other state payments that could
potentially be made electronically include corporate fees and taxes,
professional license fees, employment withholding taxes and state
disability insurance payments made by individuals and businesses.
. Local Level. Based on U.S. Census data, local property taxes were
approximately $209 billion in 1996. Based on our experience in the
states where we accept credit card payments for such taxes, we estimate
approximately 50% of that amount is not already included with mortgage
payments. There are a substantial number of other payments to local
government entities that could be paid electronically. For example, we
estimate fines for traffic violations and parking citations to be in
excess of $5 billion annually.
Outsourcing Opportunity
Providing electronic payment options is an attractive goal for government
entities. Part of the IRS's stated strategy is to make electronic filing,
payment and communication so simple, inexpensive and trusted that taxpayers
will prefer these methods. Further, the IRS has stated that its goal is to
substantially increase taxpayer access to electronic filing, payment, and
communication products and services, and have 80% of all taxpayers file their
returns electronically by the year 2007. Electronic payments provide
significant benefits for government entities, including improved service, cost
savings, reduced paperwork and faster transaction processing.
Government entities may prefer to outsource electronic payment options
rather than provide such options themselves because they lack the expertise,
technical personnel and economies of scale necessary to implement and maintain
the required software and hardware systems. In addition, legislation prohibits
certain government entities from paying credit card payment processing fees
associated with accepting credit cards.
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In selecting a provider of outsourced credit card payment services, we
believe government entities consider the following:
. a provider's ability to offer these services at no cost to the
government entity;
. referrals from other government entities currently using a provider's
services;
. proven technology systems and implementation know-how;
. consumer usage of the provider's services;
. the greatest possible consumer reach through both Internet and telephone
conduits;
. a provider's relationships with financial institutions and credit card
companies; and
. flexibility in adapting to unique government procedures.
Our Solution
We are the leading provider of electronic payment options to government
entities enabling consumers to use their credit cards to pay, by telephone or
through the Internet, personal federal and state income taxes, sales and use
taxes, property taxes and fines for traffic violations and parking citations.
Our IVR toll-free number, 1-888-2PAY-TAX SM, allows consumers to make payments
and receive certain customer service information. Our 8882paytax.com Web site
allows consumers to make certain payments, and we are working with our existing
government clients, including the IRS, to allow consumers to make additional
payments, print receipts, save their personal data to facilitate future
payments, obtain information regarding our services and access additional tax
and other information.
Our pilot program for personal federal income taxes processed over 45,000
tax filings totaling more than $174 million in payments to the IRS from January
15, 1999 to April 15, 1999. Based on IRS data, we captured a 95% market share
(based on dollar volume) for credit card payments of personal federal income
taxes during the first six months of 1999. We also processed over 187,000
payments totaling $55 million during the first half of 1999 for our state and
municipal government clients.
Benefits to Consumer Users
. Convenience. Consumers can utilize our IVR telephone or Internet system
to make payments to government entities by credit card, eliminating the
need to mail checks, obtain money orders or make payments in person. As
we integrate the federal and our state clients' income tax payment
processes, consumers in those states will be able to pay their personal
federal and state income taxes in a single session. For some fines for
traffic violations and parking citations, consumers can also obtain
information about outstanding balances.
. Flexibility. By paying with credit cards, consumers gain the flexibility
to pay their credit card balances over time rather than when a
government obligation is due. This is an especially attractive option
for consumers who do not have sufficient funds when the government
payment is due.
. Perquisites. Consumers can take advantage of frequent flyer programs,
cash back arrangements or other benefits offered by credit card issuers.
Payments for government obligations can be substantial, allowing
consumer users to earn significant rewards.
Benefits to Government Clients
. Electronic Payment Option. Our services allow our government clients to
provide consumers with an electronic payment option, furthering their
goal of improving customer service, reducing paperwork and encouraging
the electronic filing of tax forms.
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. No Cost. We provide our electronic payment options to our government
clients at no charge.
. Electronic Posting. Credit card payments allow information to be posted
electronically to our government clients' existing systems, with real-
time authorizations and posting, including fraud checking, credit
availability and address verification.
. Ease of Implementation. Our services are designed to work with the
information system in place at our government clients and to require
minimal adaptation. For example, government entities do not have to be
Web-enabled to offer our Internet payment solutions to their
constituents.
Proven Track Record
We have successfully provided a secure credit card payment option to the
IRS, the states of California and New Jersey and the District of Columbia, as
well as over 400 municipalities. In the six months ended June 30, 1999, we
processed approximately $230 million in credit card payments to our government
clients.
Recognized and Trusted Brand Name
Most of our government clients list our IVR telephone number, 1-888-2PAY-
TAX SM, as a payment option on their billing statements, tax publications and
citations. The IRS has informed us that it plans to include our 1-888-2PAY-
TAX SM number on instruction booklets for Form 1040 for the 1999 tax year and
on the IRS Web site. We believe that by featuring us on their billing
statements and instruction booklets, government entities increase consumer
awareness of and confidence in our services. We intend to further increase our
brand awareness through advertising targeted towards consumer users. We believe
that once a consumer successfully uses our services to make a payment, the
consumer is more likely to use our service for future payments. According to a
study conducted for us by MSI International, a market research firm, among
consumers who had used our services, 89% of respondents stated that they plan
to use our services again.
Existing Relationships with Credit Card Issuers and Associations
We believe our existing relationships with the major credit card issuers and
associations will enable us to continue to provide electronic payment options
for a broadening array of payments to government entities. We currently process
payments using American Express(R), Visa(R), MasterCard(R) and the Discover(R)
card. Imperial Bank, our majority stockholder, is a long-standing member of the
Visa(R) and MasterCard(R) associations and processes transactions utilizing
those credit cards for us. We are a merchant agent for American Express(R),
eliminating the need for government entities to separately enter into contracts
with American Express.
Our Strategy
Our goal is to continue to be the leading provider of, and further develop
the market for, electronic payment services using credit cards to pay
government obligations. The following are key elements of our strategy.
Expand and Enhance Services for Personal Federal Income Tax Payments
In January 1999, we signed a credit card payment contract with the IRS to
provide our services for the balance-due payment of personal federal income
taxes. This has significantly increased our profile and greatly expanded
awareness of our 1-888-2PAY-TAX SM brand. The IRS has informed us that it plans
to add our 1-888-2PAY-TAX SM number on instruction booklets for Form 1040 for
the 1999 tax year and on the IRS Web site which, we believe, will further
expand consumers' awareness of our products and services. For the 1998 tax
year, we processed only balance-due income tax payments. By early 2000, we
expect to also process estimated and extension tax payments. We have a working
relationship with the IRS's Electronic Tax Administration division (ETA). In
1998, the ETA published A Strategy For Growth, a document detailing its
strategies through the year 2007, which features us as one of the ETA's
industry partners and describes our electronic payment options. Further, we are
working with the ETA to develop a series of additional products that are
consistent with their stated strategic objectives. The majority of these
products focus on electronic filing and payment integration of personal federal
and state income taxes.
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Leverage Our IRS Relationship to Obtain Additional State Government Clients
We are leveraging our IRS relationship to provide our services to additional
state government entities. Our efforts have been bolstered by the
recommendation of IRS officials of our services to state tax authorities. In
addition, IRS officials have encouraged states to use our existing IRS
agreement to expedite the contract approval process. We currently provide our
electronic payment conduit for income tax payments to the States of California
and New Jersey and the District of Columbia, which together accounted for 21%
of the personal state income tax market in the 1998 tax year. We are focusing
on establishing relationships with other states, the 9 largest of which
represented another 43% of the personal state income tax market in the 1998 tax
year. We are hiring new regional sales managers and sales account executives to
extend our coverage of state governments. A key element of our strategy for
obtaining personal state income tax accounts is the integration of the personal
federal and state income tax payment processes. According to a research study
conducted for us by MSI International among consumers who had used our personal
federal income tax payment services, 75% indicated that they would use our
services to make personal state income tax payments. Our integrated solution
allows consumers to pay their personal federal and state income taxes in a
single session, which should enhance consumer convenience and usage.
Competitors who do not currently provide services to the IRS will be unable to
offer this integrated service. Once we are providing personal income tax
payment services to a particular state, we will look for opportunities to
provide additional services covering sales and use tax payments, fees collected
by departments of motor vehicles and other payments for that state. For
example, we are currently providing services that allow small businesses in
California to remit their sales and use tax payments by credit card.
Leverage Our IRS and State Government Client Relationships to Obtain
Additional Municipal Clients
We currently provide services to over 400 municipal clients. We believe our
relationships with the IRS and state government entities provide an advantage
in helping us establish relationships with additional municipal clients. To
further our strategic marketing position, we are creating a geo-demographic
database of consumers who have already used our services. This database will be
used in the selling process to municipalities to show an existing base of
potential consumers in those municipalities. We are targeting municipal clients
through direct sales, telemarketing and targeted newsletters and other
mailings.
Internet Services Roll-out
In August 1999, we began providing our payment services through the
Internet. We intend to offer our Internet payment services to all of our
existing government clients within the next 6 to 12 months. In addition, all
new government clients will have the option to sign up for both our Internet
and IVR payment services.
Introduce New Services and Service Enhancements
In August 1999, we began processing credit card payments of sales and use
taxes for the State of California. By early 2000, we expect to begin processing
credit card payments of estimated and extension personal federal and state
income taxes. We seek to remain at the forefront of our industry by continuing
to develop additional and complementary services. We are exploring
opportunities to process other payments, such as motor vehicle registration
fees, state corporate fees and taxes, professional license fees, employment
withholding taxes and state disability insurance. We are also exploring
opportunities to provide direct debiting and other electronic fund transfer
features to consumers in the future.
Cross-Sell Related Services to Targeted Audiences
Individuals and small businesses who utilize our payment services can be
grouped into user communities distinguished by specific demographics and
psychographics. Because these customers are active online consumers, they
represent a valuable opportunity to expand our business by cross-selling other
related services.
35
For example, we may be able to facilitate the sale of consulting or other
related services to small businesses that use our services to pay sales taxes,
or the sale of automobile insurance or online driving school services to
consumers paying fines for moving violations.
Increase Brand Awareness and Consumer Use
We have relied on our government clients and credit card issuers, and will
continue to work with them, to publicize our services through government
publications and credit card billing inserts. In order to increase the number
of transactions we process, we intend to increase consumer awareness of our
credit card payment services through an advertising campaign. We expect to
increase our advertising spending with the proceeds of this offering. The
advertising campaign will focus on promoting our services for personal federal
and state income tax payments in March and early April. In addition, we plan to
advertise throughout the year at the local level to promote our payment
services for property taxes and fines for traffic violations and parking
citations.
Our marketing is also focused on promoting additional payment opportunities
to our existing consumers. We believe that once a consumer uses our system, he
or she is more likely to use our services to make other types of payments to
government entities. Our Web site will promote different types of payments that
can be made using our services. In addition, our Web site will invite consumer
users to save their personal data on our secured site to facilitate future
payments. We will use this data to identify and promote additional payment and
cross-selling opportunities.
Pursue Strategic Relationships and Acquisitions
We intend to pursue strategic relationships with electronic income tax
filing providers to offer our payment services to their customers, which would
allow their customers to file returns and pay taxes electronically. We also
plan to investigate and pursue relationships with Internet portals and other
Internet financial service providers in order to reach additional Internet
users. In addition, we may pursue opportunistic acquisitions that will enhance
our product offering and technical capabilities, including companies that
provide government client or consumer user products or services closely related
to ours.
Government Clients
As of September 1, 1999, we provide services to the IRS, the States of
California and New Jersey, the District of Columbia and over 400 municipal
government clients. The table below lists, as of September 1, 1999, our
existing government clients and the types of payments we process for those
clients.
Government Clients Payment Type
IRS Balance-due personal federal income taxes
California Balance-due personal state income taxes
Sales and use taxes
New Jersey Balance-due and estimated personal state income
taxes
District of Columbia Balance-due personal state income taxes
137 municipalities Property taxes
157 municipalities Fines for traffic violations
115 municipalities Fines for parking citations
81 municipalities Other services
Our Services
Our Telephone and Internet Conduits
Our consumers can choose to make certain payments by telephone, using our 1-
888-2PAY-TAX SM number, or over our 8882paytax.com Web site. We currently
provide a telephone conduit for payments to all of our government clients.
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We work with our government clients to develop the script for our fully
automated telephone conduits, which gather the necessary information in an
efficient, user-friendly manner. We continually update our IVR systems to
increase the ease of use of our services.
Our 8882paytax.com Web site allows consumers to make certain payments, and
we are working with our existing government clients, including the IRS, to
enable consumers to make additional payments. We are also enhancing our Web
site so that consumers will be able to obtain information regarding our
services, access additional information, print receipts and save their personal
data to facilitate future payments. With the growing acceptance of the Internet
and its use for effecting financial transactions traditionally conducted by
mail, telephone or in person, we believe many users will prefer to make
payments to our government clients through the Internet.
Credit Card Payment Services
For each payment type listed below, the following table sets forth the
payments we currently process and those we plan to begin processing within the
next 6 to 12 months.
Payment Type Current Services Planned Services
Personal federal income
taxes................... Balance-due payments Estimated taxes
Extension payments
Integrated payment of
personal
federal and state
income taxes
Personal state income
taxes................... Balance-due payments Extension payments
Estimated tax payments Integrated payment of
personal
federal and state
income taxes
Other state payments..... Sales and use taxes Business and professional
license fees
Property taxes........... Real estate and personal property
taxes and school district taxes
Fines for traffic
violations.............. Fines for speeding and other
traffic rule violations
Fines for parking
citations............... Fines for parking rule violations
Utilities/miscellaneous.. Water, electricity and gas bills
Other payments........... Corporate taxes and fees
Motor vehicle registration
fees
Public university tuition
and other fees
Building permit fees
Customized Systems
In addition to our electronic payment services, we design, install and
implement individual systems for municipal government clients. These systems
incorporate our electronic payment conduits and also provide connections
between databases to transfer information simultaneously. These products
include:
Property Tax System.... Provides information about real estate taxes,
including secured and unsecured taxes,
supplemental taxes, asset valuation and
exemptions, tax rates, special assessments and
redemptions.
Citation Processing
System................. Provides information about traffic violations,
including bail, due dates, traffic school, proof
of corrections, warrants and drivers license
holds.
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Parking System......... Provides information about parking citations,
including fines, tow-aways, restricted zones and
other infractions.
Automated Fax Filing... Allows attorneys and paralegals to fax documents
to courts and pay filing fees by credit card.
We also build and sell custom applications, such as a polling place locator
application, county social service inquiry system and additional government-
related applications. These systems are generally sold to the government entity
for a flat fee that covers our costs and provides significant margin.
Fee Structure
We charge consumer users a convenience fee to use our credit card services
for payments to government entities. For large payments, such as personal
federal and state income tax payments, we charge a convenience fee based on the
amount of the payment, which in the first six months of 1999 averaged
approximately 2.5% of the payment amount. For smaller payments, such as fines
for traffic violations and parking citations, we charge a fixed convenience fee
which in the first six months of 1999 averaged 8% of the amount due. The same
convenience fee is charged for payments made by telephone or through the
Internet. We currently accept American Express/(R)/, Visa/(R)/, MasterCard/(R)/
and the Discover/(R)/ card for most local payments. We currently accept American
Express/(R)/, MasterCard/(R)/ and the Discover/(R)/ card for federal and state
payments.
Sales and Marketing
Focus on Signing Additional Government Clients
We are leveraging our IRS relationship and our ability to offer the
integration of personal federal and state income tax payments to attract new
state government clients. Similarly, we will use our relationship with state
governments to obtain new municipal clients. We intend to make significant
additions to our sales and marketing staff and customer service infrastructure.
Specific account executives are dedicated to the IRS and each state government
client. We are targeting municipal clients through direct sales, telemarketing
and targeted newsletters and other mailings. In addition, we publish a
quarterly newsletter that announces our new services and government clients,
which is distributed to our existing and potential government clients. We will
continue to make presentations and operate booths at IRS tax conferences and
other government entity gatherings.
Focus on Increasing Utilization and Awareness
To date, our services have been publicized primarily by our government
clients and credit card issuers. Government publications and instruction
booklets have been used to present the payment option to potential consumer
users. For example, the IRS and state tax agencies have included our 1-888-2PAY-
TAX/SM/ phone number in selected tax publications distributed to individuals and
tax preparation professionals, and, in the first half of April 1999, the IRS
dedicated half of the home page on its Web site to promote the ability to pay
taxes by credit card using our services. The IRS has informed us that it plans
to include our 1-888-2PAY-TAX/SM/ number on instruction booklets for Form 1040
for the 1999 tax year. A significant number of municipalities have provided our
phone number as a payment alternative for fines for traffic violations and
parking citations. In addition, major credit card issuers have also promoted our
services because the government market represents an under-tapped market for
credit card utilization. Our systems have been promoted through mailing inserts
to all American Express/(R)/ and Discover/(R)/ cardholders, and a significant
number of MasterCard/(R)/ holders.
We intend to launch an advertising campaign targeted at consumer users to
broaden awareness of our electronic payment options. We will focus our campaign
on promoting use of our personal federal and state income tax payment services
during March and early April. In addition to increasing awareness for new
consumer users, we will also focus on promoting additional payment
opportunities to existing consumer users who have already used our services. We
believe these existing consumer users are more likely to use our services to
make other payments, and we will use our Web site to bring those services to
the attention of our customers.
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Leverage Existing Relationships
We have relationships with Bank of America, American National Bank
(Illinois), Union Bank of California, Sun Trust and Novus Services implement
systems for their government clients. For example, Novus Services was awarded
the contract to provide personal income tax payment services for the State of
California and subcontracted the implementation of the system to us. Our
product implementation model and revenues as a subcontractor are identical to a
directly contracted account. We will look for strategic opportunities to
provide services to government entities in conjunction with these and other
partners.
Our Operations and Technology
We provide complete electronic credit card payment services to government
entities. Our electronic payment conduits can perform all of the following
functions for our government clients:
. Capture unique identifiers for each transaction, such as citation
number, social security number, the consumer's identity and related
payment information.
. Perform real-time authorizations and postings, including fraud checking,
credit availability and address verification.
. Electronically create daily transaction files from all remote and local
systems.
. Compare the daily transaction files to credit card authorization
processor files ("mirror balancing system"). This validation process
assures credible data and reliable funds flow to government clients.
. Create a daily payment transaction activity report that is automatically
e-mailed or sent by facsimile to government clients.
. Create upload files from the mirror balancing system that are sent
electronically to government clients. These files are used by clients to
post payments to their internal systems.
[Graphic displaying transaction process for the payment of property tax]
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Our technological solutions and operations are focused on producing four
integrated results for our government clients and consumers: reliability,
security, audit capability and customer service/operational support. We
designed our technology and resulting operations around these core concepts.
Reliability
Our foremost service goal is reliability, which we seek to accomplish
through redundant hardware that provides disaster recovery and allows us to
implement seamless real-time backup and 100% system availability. Our Internet
payment servers are housed at Digex, Inc. facilities in Cupertino, California,
and in Beltsville, Maryland. The Cupertino site is our primary processing
location, containing a 72-hour capacity diesel generator. The Beltsville site
is expected to be able to instantly assume processing and provide 100% system
availability in the event the primary site is rendered inoperative.
Additionally, should we experience overloads due to unexpected volume
increases, our backup servers are designed to come into service without
interruption.
Our IVR systems have the same dual facility scheme as our Internet systems.
Our primary IVR authorization and processing facility is located in San Ramon,
California, where our computers have interchangeable power supplies and hard
drives so that if a system fails, the redundant systems should assume the
workload. We also maintain a backup facility in San Francisco, California, used
for disaster recovery and transaction overflows.
Transaction Security
We place a high priority on transaction security and fraud prevention. Our
goal is to maintain the confidentiality of all consumer credit card and related
information. For our Internet conduit delivery vehicle, we employ secured
socket layers for user security from the consumer's browser to our
8882paytax.com Web site. Taxpayer identity validations for credit card payments
are transmitted in an encrypted manner and are performed in accordance with
existing industry procedures.
We have several system functions that are designed to combat fraud. For
example, credit card authorizations are performed on-line and in real time. Our
system captures the cardholder's credit card account number, card expiration
date and billing statement mailing address and zip code, and requires the
cardholder to enter a three or four digit card verification code or card
verification value if it is present on the back of the card. Credit card
information is transmitted exclusively to the credit card processor. No one
outside of our system and the credit card processor's system receives the
information, including the IRS and other government clients.
Audit Capability
Our internally-developed mirror balancing system and reporting systems
provide us and our government clients with electronic audit capability. These
applications enable us to account for all transactions, to assure that data
transmissions to government clients are complete and reporting and update files
are accurate.
Customer Service
We provide automated customer service systems, such as the transaction
verification system, which allows consumers to confirm their transaction
posting. In addition, we employ customer service representatives who are
available to assist consumers with individual needs. We also provide a
"Frequently Asked Questions" feature on our Web site to answer common questions
that consumer users have. We intend to increase the number of customer service
representatives so that calls from consumers to our government clients or to
our credit card issuer partners relating to our services can be routed to us.
40
Competition
Alternative Payment Options
In addition to using our credit card payment services, consumer users have
the following payment options when making payments to government entities:
. Checks, money orders or cash. Payment by mailing checks, obtaining money
orders and paying in person are the traditional and currently the most
widely used methods for making payments to government entities.
. Credit card checks. Many of the issuing banks for Visa(R) and
MasterCard(R) distribute cash advance checks to their cardholders. In
March and early April, issuing banks generally promote the use of these
checks to pay taxes. Because these checks are treated as a cash advance,
they are generally a more expensive solution than our services. The
typical terms for a cash advance include a fee, and the advance starts
to accrue interest immediately at the issuing bank's applicable rate. In
addition, many issuing banks apply the consumer's payments to other less
expensive balances first. Moreover, cash advances typically do not
qualify for frequent flyer mileage programs or any other perquisites. In
contrast, payments made through our systems require a convenience fee,
but are treated as purchases subject to generally lower interest rates,
may not immediately accrue interest, and may qualify for various award
programs.
. Direct debit. Consumer users can arrange through their bank or otherwise
to have payments to government entities directly debited from their
checking or savings account. If arranged through the bank in which a
consumer user's checking or savings account is maintained, this service
is often provided free of charge.
Competing Providers of Credit Card Services for Payments to Government
Entities
In selecting a provider of outsourced electronic payment services, we
believe government entities consider the following:
. our ability to offer these services at no cost to the government entity;
. existing relationships and referrals from other government entities
currently using our services;
. our proven technology systems and implementation know-how;
. consumer usage of our services;
. the greatest possible consumer reach through both Internet and telephone
conduits;
. our relationships with financial institutions and credit card companies;
. our flexibility in adapting to unique government procedures;
. quality and convenience of our service;
. marketing and brand name recognition; and
. price of our services to consumers.
A limited number of competitors are currently involved in the market for
credit card payments to government entities. We believe we have a substantially
larger government client base, and have greater name recognition than our
primary competitors. There are, however, a number of larger credit card payment
and electronic commerce companies with similar technological capabilities, some
of which have greater resources than we do. We believe that the peculiarities
of the government market create barriers to entry and expansion that favor the
market leader. Our current competitors include the following:
. For personal federal income tax payments by credit card, we currently
have 100% market share for American Express(R) and MasterCard(R)
payments. The only current competitor is a joint development
41
effort by Intuit (TurboTax/(R)/) and Discover/(R)/ card, for which
Discover/(R)/ card (which had approximately 5% of the overall credit card
market, based on total payment volume in 1998) is the only credit card
accepted.
. Bank of America is the processing bank for a number of government
entities, which allows them to add processing services such as ours
without submitting to the standard request for proposal process. Bank of
America works with technology providers such as us to implement payment
systems. Bank of America also partners with Electronic Data
Systems/Phone Charge and Lockheed-IMS.
. National Information Consortium, Inc. provides Internet services for
government entities, and has indicated it intends to provide services to
government entities with respect to the payment of sales and use taxes.
Intellectual Property
We have registered the service marks 8882paytax.com/SM/, 1-888-2PAY-TAX/SM/
and US Audiotex/SM/. We protect our intellectual property rights through a
combination of trademark, service mark, copyright and trade secrets laws. We
cannot assure you that the steps we have taken to protect our intellectual
property rights, however, will be adequate to deter misappropriation of those
rights. We may not be able to detect unauthorized use of and take appropriate
steps to enforce our intellectual property rights. It may also be possible for
unauthorized third parties to copy certain portions of our proprietary
information or reverse engineer the proprietary information used in our
services.
In order to limit access to and disclosure of our proprietary information,
all of our employees are subject to confidentiality and invention assignment
arrangements, and we enter into nondisclosure agreements with third parties
that are material to our business.
Furthermore, we cannot assure you that third parties will not claim that we
have infringed upon their patents or other proprietary rights. We have been,
and from time to time we expect to be, subject to claims by third parties in
the ordinary course of business, including claims of alleged infringement of
service marks, trademarks, copyrights, patents and other intellectual property
rights of third parties. Although there has not been any litigation relating
to such claims to date, these claims and any resultant litigation would
subject us to significant liability for damages and could result in the
invalidation of our proprietary rights. In addition, even if we prevail, the
litigation could be time-consuming and expensive to defend and could result in
a diversion of our time and attention from our business, any of which could
materially and adversely affect our business, operating results and financial
condition. Any claims or litigation from third parties may also result in
limitations on our ability to use the service marks, trademarks and other
intellectual property subject to these claims or litigation, unless we enter
into agreements with the third parties. However, these agreements may be
unavailable on commercially reasonable terms, or not available at all.
We also intend to continue to license technology from third parties,
including our Web server and encryption technology. We cannot be certain that
these third-party content licenses will be available to us on commercially
reasonable terms or that we will be able to integrate the technology into our
products and services. These licenses may expose us to increased risks. See
the "Risk Factors" section of this prospectus.
Regulatory Matters
By virtue of Imperial Bank's ownership interest in us, and owing to the
nature of our business, we are subject to various regulatory requirements.
Imperial Bank is a California State chartered bank whose deposits are insured
by the Federal Deposit Insurance Corporation (FDIC). It is not a member bank
of the Federal Reserve System. Imperial Bank is subject to regulation and
supervision by the FDIC, as its primary federal regulator, as well as by the
California Department of Financial Institutions (the Department). Imperial
Bank, in turn, is a wholly owned subsidiary of Imperial Bancorp, a registered
bank holding company, which is subject to the provisions of the federal Bank
Holding Company Act of 1956, as amended (the BHC Act) and which is regulated
and supervised by the Board of Governors of the Federal Reserve System (the
Federal Reserve).
42
As long as Imperial Bank maintains a "controlling interest" in us (in
general, 25% or more common stock ownership), we will be subject to examination
and supervision by the FDIC as well as by the Department.
Section 24 of the Federal Deposit Insurance Act generally restricts and
prohibits insured state banks, such as Imperial Bank, and their subsidiaries
from engaging in activities and making types of investments that are not
permissible for national banks and their subsidiaries. The FDIC's regulations
under this statute define "activity permissible for a national bank" to include
any activity authorized for national banks under any statute, as well as
activities recognized as permissible for a national bank in regulations,
official circulars, bulletins, orders or written interpretations issued by the
Office of the Comptroller of the Currency (the OCC).
Our business involves processing payments by individuals to federal, state
and local governments pursuant to telephonic or electronic instruction. This
activity has long been recognized as part of or incidental to the business of
banking, and is permissible for a national bank and for majority owned
subsidiaries of national banks. The OCC has also broadly allowed national banks
to perform, provide, or deliver through electronic means and facilities any
activity, function, product or service that it is otherwise authorized to
perform, provide or deliver, and, in connection with such services, provide
certain amounts of unrelated services arising from excess capacity acquired or
developed in good faith for banking purposes. Such activities may be conducted
by national banks directly, as well as through majority owned subsidiaries of
national banks. Such activities may also be conducted through subsidiaries in
which the national bank holds less than 50% of the voting stock, provided,
among other things, the bank is able to prevent the subsidiary from engaging in
impermissible activities or may readily divest its ownership interest if the
subsidiary engages in such impermissible activities. Because we believe that
all of our current activities are permissible for national banks, we believe
this limitation has no effect on our business and upon Imperial Bank's
ownership interest in us at the present time.
For as long as Imperial Bank owns a voting equity interest in us which
equals 25% or more, or may otherwise be deemed by the regulatory authorities to
constitute "control", we will also be subject to certain California State and
federal statutes and regulations that apply to Imperial Bank. For example, we
will be required to limit any transactions we may have with "affiliates" of
Imperial Bank in the same manner as Imperial Bank must limit its transactions
with its affiliates. Among other things, all such dealings with affiliates must
be at arms' length.
We cannot guarantee that the banking laws will not be amended or construed
differently, or that new laws or regulations will not be adopted, the effect of
which could materially and adversely affect our business, operating results and
financial condition.
We are also subject to the laws and regulations relating to commercial
transactions generally, such as the Uniform Commercial Code, and to the
electronic fund transfer rules embodied in Regulation E issued by the Federal
Reserve. The Federal Reserve's Regulation E implements the Electronic Fund
Transfer Act, which was enacted in 1978. Regulation E protects consumers
engaging in electronic transfers, and sets forth basic rights, liabilities and
responsibilities of consumers who use electronic money services and of
financial institutions that offer these services. For us, Regulation E sets
forth disclosure and investigative procedures. For consumers, Regulation E
establishes procedures and time periods for reporting unauthorized use of
electronic money transfer services and limitations on the consumer's liability
if the notification procedures are followed within prescribed periods. Such
limitations on the consumer's liability may result in liability to us.
Given the expansion of the Internet commerce market, it is possible that the
Federal Reserve might revise Regulation E or adopt new rules for electronic
funds transfer affecting users other than consumers. Because of growth in the
Internet commerce market, Congress has held hearings on whether to regulate
providers of services and transactions in the Internet commerce market. It is
possible that Congress or individual states could enact laws regulating the
Internet commerce market. Initiatives are also pending in Congress which are
intended to protect individual privacy and would, among other things, regulate
the ability of financial institutions to use and share with affiliates and
unrelated third parties information concerning individuals developed in the
course of dealings with their customers, which is not currently subject to
regulation. If enacted, these laws, rules, and regulations could be imposed on
our business and industry and could have a
43
material adverse effect on our business, operating results and financial
condition. Federal, local and state laws and regulations may be adopted in the
future to address issues such as user privacy, pricing, online content
regulation, taxation and the characteristics and quality of online products and
services.
Any new law or regulation relating to the Internet could have a material and
adverse effect on our business, operating results and financial condition.
Legal Proceedings
We are currently not involved in any material legal proceedings.
Employees
As of September 1, 1999, we had 26 employees. None of our employees are
covered by collective bargaining agreements. We believe that our relations with
our employees are good.
Facilities
Our corporate headquarters are located in San Ramon, California, in a 7,500
square feet leased facility. Our annual rent is approximately $192,000. Our
lease expires in August 2005. In addition, we lease two facilities where our
back-up systems are located. We believe that our existing facilities are
adequate for our current needs and that suitable additional space will be
available, on acceptable terms, when needed.
44
MANAGEMENT
Executive Officers and Directors
The following table sets forth information about our executive officers,
directors and director nominees as of September 1, 1999:
Name Age Position
Thomas R. Evans.............. 45 Chairman and Chief Executive Officer
Kenneth Stern................ 51 President and Director
Steve Johnson................ 55 Senior Vice President, National Sales Manager
Debbie Soleta................ 36 Vice President, Finance
Brad Belton.................. 34 Vice President, Engineering
George L. Graziadio, Jr. .... 80 Director Nominee
Lee E. Mikles................ 43 Director Nominee
Thomas R. Evans has served as our Chairman and Chief Executive Officer since
August 1999. From April 1998 to May 1999, Mr. Evans was the president and chief
executive officer of Geocities, Inc., which was acquired by Yahoo! Inc. in May
1999. From 1991 to April 1998, Mr. Evans served as president and publisher of
U.S. News and World Report, a magazine that reports on domestic and
international current events. From January 1997 to April 1998, Mr. Evans also
served as president and publisher of The Atlantic Monthly, a magazine that
features articles on art, literature, politics and technology. In addition,
from May 1995 to April 1998, Mr. Evans served as president and publisher of
Fast Company, a magazine that showcases business people and ideas. From 1990 to
1991, Mr. Evans served as vice president, advertising director of U.S. News &
World Report. Mr. Evans received his B.S. degree in Business Administration
from Arizona State University.
Kenneth Stern, our founder, has served as President and Director since 1986,
and is responsible for our operations, product designs and sales support. From
1984 to 1986, Mr. Stern held a senior management position in software
development at Integral Systems. From 1976 to 1984, Mr. Stern was a programmer
at Tesseract Corporation. Mr. Stern received his B.S. degree in Human Relations
and Organizational Behavior from the University of San Francisco.
Steve Johnson has served as Senior Vice President, National Sales Manager
since 1998, and is responsible for our sales organization. Prior to joining us,
Mr. Johnson was the regional director of client relationships and business
development at Electronic Data Systems. Mr. Johnson received his B.S. degree in
Business Administration from the University of California, Berkeley and his
M.B.A. from San Jose State University.
Debbie Soleta has served as Vice President, Finance since 1992, and is
responsible for our accounting and overseeing our administrative staff. Ms.
Soleta also served as a director from January 1998 to August 1999. Prior to
joining us, Ms. Soleta was an accountant with a firm in Fremont, California,
from 1989 to 1991. Ms. Soleta received her B.A. degree in Commerce from Far
Eastern University in the Philippines.
Brad Belton joined us in November 1992 as Senior Software Engineer. Since
January 1994, he has served as Vice President, Engineering, and is responsible
for our database systems development. From 1988 to November 1992, Mr. Belton
held various positions with Zendex Corporation, a manufacturer of micro
controllers and computer equipment, including the position of senior software
engineer and manager. Mr. Belton received his B.S. degree in Software
Engineering from Oregon Institute of Technology.
George L. Graziadio, Jr. will join our board of directors upon completion of
this offering. Mr. Graziadio has been the chairman of the board, president and
chief executive officer of Imperial Bancorp. (NYSE-IMP), a bank holding
company, since 1969. Mr Graziadio is engaged as an owner or partner in many
other business activities, primarily in the real estate industry. He also
serves on the board of directors of various subsidiaries of Imperial Bancorp.,
including the board of directors of Imperial Bank, our majority stockholder. He
serves on the board of directors of Coastcast Corp. (NYSE-PAR), a manufacturer
of golf clubheads, orthopedic implants and surgical tools. Mr Graziadio is the
uncle of Lee E. Mikles, one of our director nominees.
45
Lee E. Mikles will join our board of directors upon completion of this
offering. Mr. Mikles is an investment advisor with Mikles/Miller Management
Inc., an investment management company. Mr. Mikles has been a director of
Imperial Bancorp. and its wholly-owned subsidiary, Imperial Bank, since 1996.
He also serves on the board of directors of Coastcast Corp., and Boss Holdings,
Inc., a diversified holding company with subsidiaries conducting operations in
the work glove and protective wear business and the pet supplies business. Mr.
Mikles is the nephew of George L. Graziadio, Jr., one of our director nominees.
Board of Directors and Committees
Our board of directors is composed of 7 members. Currently there are 5
vacancies. Within 30 days following the consummation of this offering, we
intend to fill those vacancies with individuals, including one individual
designated by Kenneth Stern, who will be neither our officers nor employees.
Within 30 days following the completion of this offering, our board of
directors will establish an Audit Committee and a Compensation Committee.
Effective upon their joining our board of directors, certain of our independent
directors will serve as the members of the Audit Committee and the Compensation
Committee. The Audit Committee's principal functions will include making
recommendations to our board of directors regarding the annual selection of our
independent auditors, reviewing the proposed scope of each annual audit and
reviewing the recommendations of our independent auditors resulting from the
audit of our consolidated financial statements. The Compensation Committee's
principal function will be to establish the compensation of our Chief Executive
Officer and other senior officers and to establish and administer our
compensation programs, including the grant of awards under our stock incentive
plan. See the "--1999 Stock Incentive Plan" section of this prospectus. Our
board of directors may at various times establish other committees to
facilitate the management of our company.
Director Compensation
Prior to this offering, directors received no compensation for their service
on our board of directors. Upon completion of this offering, directors who are
not our employees will receive an annual retainer of $ . Directors will
be reimbursed for out-of-pocket expenses incurred in connection with their
service as directors. In addition, each non-employee director is eligible to
receive awards pursuant to our 1999 Stock Incentive Plan. Directors who are our
officers or employees will not receive any additional compensation for their
services as directors. See the "--1999 Stock Incentive Plan" section of this
prospectus.
Executive Compensation
The following table sets forth information with respect to the compensation
earned during the year ended December 31, 1998 by our Chief Executive Officer
and our two other most highly compensated executive officers (collectively, the
Named Executive Officers):
Summary Compensation Table
Name and Principal Other
Position Salary(1) Compensation
Thomas Evans(2)......... $ -- $ --
Chairman and Chief
Executive Officer
144,000(/3/)
Kenneth Stern........... --
President
Steve Johnson........... 87,500(/4/) 3,700(/5/)
Senior Vice President,
National Sales Manager
- --------
(1) We did not pay any bonuses in 1998. Perquisites and other personal
benefits, securities and property did not exceed the lesser of $50,000 or
10% of the total annual salary and bonus reported for each of the Named
Executive Officers.
(2) Mr. Evans became our Chairman and Chief Executive Officer in August 1999.
His annual base salary is $200,000. Please see the "--Employment
Agreements" section of this prospectus for a detailed description of
Mr. Evans' employment agreement.
(3) Effective August 1999, Mr. Stern's annual base salary is $215,000. Please
see the "--Employment Agreements" section of this prospectus for a detailed
description of Mr. Stern's employment agreement.
(4) Mr. Johnson joined us in February 1998. His annual salary is $100,000.
(5) Represents commissions.
46
1999 Stock Incentive Plan
In August 1999, our board of directors adopted the 1999 Stock Incentive
Plan. We have reserved an aggregate of 2,300,000 shares of common stock for
issuance under the plan. The purpose of the plan is to promote our long-term
growth and profitability by providing individuals with incentives to improve
stockholder value and contribute to our growth and financial success, and by
enabling us to attract, retain and reward the best available persons for
positions of substantial responsibility. The plan provides for the grant of
both:
. non-qualified stock options; and
. incentive stock options within the meaning of Section 422 of the
Internal Revenue Code.
Participation in the plan is open to our key employees, officers and
directors. Key employees and officers may be granted incentive stock options
and non-qualified stock options. Directors who are not our employees may only
receive non-qualified stock options.
In August 1999, we granted a non-qualified stock option to Thomas Evans to
purchase up to 357,143 shares of our common stock at an exercise price of $4.00
per share. This option was granted to Mr. Evans pursuant to the terms of his
employment agreement. This option is exercisable immediately. However, all
shares issued to Mr. Evans will be non-transferable and subject to our right to
repurchase those shares at a price of $4.00 per share. We may exercise this
right at any time during the 30-day period following Mr. Evans' termination of
employment for reasons other than death, disability or a change in control. Our
repurchase right will expire with respect to one-third of the 357,143 option
shares on the first anniversary of the grant date. Thereafter, our right will
expire on a cumulative basis with respect to 9,921 shares per month on the last
day of each of the next 24 consecutive months. Further, upon completion of this
offering, we will grant Mr. Evans an additional option to acquire shares of our
common stock at an exercise price of $4.00 per share so that, when combined
with the option described above, Mr. Evans will have options to acquire such
number of shares of our common stock as is equal to an aggregate of five
percent (5%) of our common stock outstanding at that time, on a fully diluted
basis (including the options granted to Mr. Evans).
We have also granted non-qualified stock options to purchase 178,571 shares
of our common stock to the following individuals and groups:
Name Number of Shares
Kenneth Stern............................................
Steve Johnson............................................
All executive officers as a group (4 persons)............
All others (3 persons)...................................
All of the foregoing options are non-qualified stock options and have a term
of ten years. All options have an exercise price of $4.00 per share and will
vest on the date of this offering. Kenneth Stern has been delegated the
authority to grant, upon completion of this offering, these 7 and any other
employees selected by him additional options to acquire shares of our common
stock at an exercise price of $4.00 per share so that, when combined with the
options already granted, these 7 and any other employees selected by Mr. Stern
to receive options will have options to acquire such number of shares of our
common stock as is equal to an aggregate of two and one-half percent (2.5%) of
our common stock outstanding at that time, on a fully diluted basis (including
the options granted to these employees).
In addition, Mr. Stern has also been delegated the authority to grant, upon
completion of this offering, non-qualified stock options to any of our
employees to purchase shares of our common stock at an exercise price equal to
the initial public offering price so that they will have options to acquire
such number of shares of common stock as is equal to an aggregate of two and
one-half percent (2.5%) of our common stock outstanding at that time, on a
fully diluted basis (including the options granted to these employees).
47
The plan is administered by the compensation committee of our board of
directors. The compensation committee has the authority to:
. determine whether and to what extent incentive stock options and/or non-
qualified stock options will be granted to eligible key employees;
. select key employees and outside directors to whom options will be
granted;
. determine the number of shares of common stock to be covered by each
option granted;
. determine the exercise price, vesting schedule and all other terms and
conditions of stock options granted;
. determine the fair market value of a share of common stock on a given
date;
. provide that all shares of common stock received by an optionee upon the
exercise of a stock option prior to the consummation of this offering
shall be subject to a right of first refusal, which requires the option
holder to offer to us any shares that the option holder wishes to sell;
and
. amend the terms of any option, prospectively or retroactively, provided
that no amendment will impair the rights of the option holder without
his or her written consent.
For incentive stock options to qualify under Section 422 of the Internal
Revenue Code, they:
. must have an exercise price at least equal to fair market value on the
date of grant; and
. may not be exercisable more than ten years from the date of grant.
If any of our employees or any employee of our subsidiaries owns over 10% of
the combined voting power of all classes of our stock on the date of grant, the
incentive stock options granted to such employee:
. must have an exercise price not less than 110% of the fair market value;
and
. may not be exercisable more than five years from the date of grant.
The exercise price of any option may be paid:
. in cash;
. through a "cashless exercise";
. by tendering of shares of common stock;
. by a combination of cash and shares; or
. by any other means approved by the compensation committee.
Our board of directors may terminate, amend or modify the plan at any time,
except that all awards made prior to termination of the plan will remain in
effect until such awards have been satisfied or terminated in accordance with
the terms of the plan and such awards.
Employment Agreements
We have entered into an employment agreement with Thomas Evans, our Chairman
and Chief Executive Officer. The employment agreement provides for an annual
base salary of $200,000. In addition, under the terms of his agreement, Mr.
Evans will receive a one-time bonus of $500,000, $250,000 of which has been
paid to date, and $250,000 of which will be paid no later than the first
anniversary of the commencement of his employment with us. Mr. Evans was also
granted options to purchase 357,143 shares of our common stock at $4.00 per
share under the 1999 Stock Incentive Plan. We agreed to grant Mr. Evans
additional options under our 1999 Stock Incentive Plan at an exercise price of
$4.00 per share upon consummation of this offering so that, at that time, he
would hold options, including the initial grant of options to purchase 357,143
shares, to purchase shares of our common stock equal to an aggregate of 5% of
our common stock outstanding, on a fully diluted basis (including the options
granted to Mr. Evans). Under the terms of the employment agreement,
48
Imperial Bank has guaranteed that the value (as defined in the agreement) of
Mr. Evans' vested options will be worth $10,000,000 on or before the third
anniversary of the date of the agreement, or Imperial Bank will pay Mr. Evans
an amount equal to the difference between $10,000,000 and the highest value of
the vested options on or before the third anniversary. If Mr. Evans' employment
is terminated by us without "cause" or if he terminates his employment for
"good reason," including a "change in control" (as such terms are defined in
the agreement), we will be required to pay him his base salary and benefits for
one year, and all of his options will vest immediately. If Mr. Evans'
employment is terminated by us with cause, we will be required to pay him any
compensation, benefits or reimbursements accrued through the date of
termination. Mr. Evans' employment under the agreement may be terminated by us
on 30 days' notice without cause, or immediately upon notice with cause, and
may be terminated by Mr. Evans on 60 days' notice without good reason, or
immediately for good reason.
We have entered into an employment agreement with Kenneth Stern, pursuant to
which Mr. Stern has agreed to serve as our President and a member of our board
of directors until August 23, 2006. The employment agreement provides for an
annual base salary of $215,000 and a minimum annual bonus of $100,000. Mr.
Stern has the right to take early retirement at any time after the third
anniversary of thedate of the agreement, upon which we would be required to pay
him his base salary and bonus through August 23, 2006. If Mr. Stern's
employment is terminated by us without "cause" or if he terminates his
employment for "good reason" (as such terms are defined in the agreement), we
will be required to pay him his base salary and bonus through August 23, 2006,
and provide benefits through December 31, 2002 or for one year from the date of
termination, whichever is later. Additionally, Mr. Stern would be entitled to
retain his position as a director through August 23, 2006, provided that he and
Beranson Holdings, Inc. own or control an aggregate of 10% of our outstanding
common stock. If Mr. Stern's employment is terminated by us with cause, we will
be required to pay him any compensation, benefits or reimbursements accrued
through the date of termination. Mr. Stern's employment under the agreement may
be terminated by us on 30 days' notice without cause, or immediately upon
notice with cause, and may be terminated by Mr. Stern on 120 days' notice
without good reason, or immediately for good reason.
The employment agreements generally contain confidentiality provisions and
covenants not to compete during the term of employment and for one year after
termination of employment.
Compensation Committee Interlocks and Insider Participation
Prior to this offering, we have had no separate compensation committee or
other board committee performing equivalent functions. Upon filling the
vacancies on our board of directors, our board of directors will create a
Compensation Committee composed solely of outside directors. During the year
ended December 31, 1998, none of our executive officers served (i) as a member
of the compensation committee (or other board committee performing equivalent
functions or, in the absence of any such committee, the entire board of
directors) of another entity, one of whose executive officers served on our
board of directors, (ii) as a director of another entity, one of whose
executive officers served on our board of directors, or (iii) as a member of
the compensation committee (or other board committee performing equivalent
functions or, in the absence of any such committee, the entire board of
directors) of another entity, one of whose executive officers served as a
director of our company.
49
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our stockholders, Imperial Bank and Beranson Holdings, Inc., a company
affiliated with Kenneth Stern, our President, have from time to time made
advances to us to bridge temporary cash shortages and fund certain capital
expenditures, particularly purchases of equipment and other technology required
to support the expansion of our IRS and state income tax relationships. These
advances are evidenced by promissory notes bearing interest at a floating rate
equal to Imperial Bank's prime rate plus 2% per annum. The notes mature on the
earlier of December 31, 2000 or the date that is 30 days after the date of the
completion of our initial public offering. As of August 31, 1999, the aggregate
principal and interest accrued on these notes was $2.0 million. We expect to
repay the balance of the promissory notes, together with any further advances
made from September 1, 1999 to the closing of this offering and the interest
accrued thereon, from the net proceeds of this offering. We do not believe we
would have been able to obtain financing from an unaffiliated third party on
similar or more favorable terms.
In January 1998, in conjunction with Imperial Bank's purchase of 75% of
Beranson Holdings, Inc.'s interest in us, the stockholders loaned $500,000 to
us. This loan, together with $82,000 of accrued interest, was repaid in full on
August 24, 1999 with the financing discussed above.
Imperial Bank is one of 3 merchant banks we use to process credit card
transactions and perform traditional merchant credit card settlement services.
During the six months ended June 30, 1999, we paid Imperial Bank approximately
$1.3 million for performing these processing and settlement services. We
believe Imperial Bank is providing these services on terms no less favorable to
us than could be obtained from unaffiliated third parties. We expect that
Imperial Bank will continue to provide these services to us following this
offering.
Imperial Bank has provided human resource services and other assistance to
us. Such services and assistance include payroll processing and benefits
administration, including the administration of our 401(k) plan and other
benefit programs, and employee recruiting. During the six months ended June 30,
1999, we paid Imperial Bank a fee of $42,000 for these services. We believe
Imperial Bank is providing these services on terms no less favorable to us than
could be obtained from unaffiliated third parties. Upon completion of this
offering, Imperial Bank will no longer provide these services to us.
Imperial Bank and Beranson Holdings, Inc. have guaranteed the performance of
our obligations under two equipment leases. Upon completion of this offering,
we expect that Imperial Bank and U.S. Audiotex, Inc. will be released as the
guarantors of our lease obligations.
50
PRINCIPAL STOCKHOLDERS
This table sets forth information regarding the beneficial ownership of our
common stock as of September 1, 1999 by:
. each person known to us to own beneficially more than 5% of our
outstanding common stock;
. each of our directors;
. each of our executive officers listed in the summary compensation table
in the "Management" section of this prospectus; and
. all of our directors and executive officers as a group.
The calculations of the percentages in the following table are based on
5,000,000 shares of our common stock outstanding prior to the closing of this
offering, and shares outstanding immediately following the completion of
this offering. Unless otherwise noted, each of the persons listed below has
sole voting and investment power with respect to their shares.
Stockholder Name and Shares Beneficially Shares Beneficially
Address(/1/) Owned Prior to Offering Owned After Offering
- -------------------- --------------------------------- --------------------
Number Percentage Number Percentage
Imperial Bank........... 4,000,000 80.0% 4,000,000 %
Beranson Holdings,
Inc.(2)................ 1,000,000 20.0 1,000,000
Thomas R. Evans......... 357,143(3) 6.7
Kenneth Stern(2)........ 1,000,000 20.0
Steve Johnson...........
George L. Graziadio,
Jr. ...................
Lee E. Mikles...........
All executive officers
and directors as a
group..................
( persons)
- --------
(1) The address of Imperial Bank and Messrs. Graziadio and Mikles is c/o
Imperial Bank Building, 9920 South La Cienega Boulevard, Inglewood, CA
90301 and the address of Beranson Holdings, Inc. andMessrs. Evans, Stern
and Johnson is c/o U.S. Audiotex Corporation, 2333 San Ramon Valley
Boulevard, Suite 450 San Ramon, California 94583. Beranson Holdings, Inc.
is a company controlled by Mr. Stern's family. Accordingly, he is deemed to
beneficially own the shares of our common stock owned by Beranson Holdings,
Inc.
(2) Beranson Holdings, Inc. is a company controlled by Mr. Stern's family.
Accordingly, he is deemed to beneficially own the shares of our common
stock owned by Beranson Holdings, Inc.
(3) Consists of 357,143 shares of our common stock underlying presently
exercisable options.
51
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue up to 50,000,000 shares of common stock,
5,000,000 shares of which are issued and outstanding, held by two stockholders
of record. An additional 2,300,000 shares of common stock are issuable upon
exercise of outstanding stock options under our 1999 Stock Incentive Plan.
The following description provides a summary of the material rights and
limitations relating to ownership of our capital stock. For a complete legal
description of our capital stock, you should refer to our certificate of
incorporation and bylaws, copies of which are included as exhibits to the
registration statement of which this prospectus is a part.
Common Stock
Upon completion of this offering, there will be no preemptive, conversion,
subscription, redemption or repurchase rights associated with the shares of
common stock. Each holder of common stock is entitled to one vote for each
share owned of record on matters submitted to a vote of the stockholders.
Holders of common stock are not entitled to cumulative voting rights in the
election of directors. If we are liquidated, the holders of common stock are
entitled to participate ratably in the assets available for distribution after
satisfaction of all claims of our creditors.
The holders of common stock are entitled to receive ratably such dividends
as our board of directors, in its discretion, may declare out of funds legally
available therefor. Under the Delaware General Corporation Law (the DGCL),
dividends may be paid out of either (i) surplus as defined in the DGCL, or (ii)
net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. See the "Dividend Policy" section of this prospectus.
Certain Bylaw Provisions
Our bylaws provide that our board of directors will consist of not less than
3 nor more than 9 members. The exact number of directors constituting our board
can be fixed and changed from time to time by our board. The directors will be
elected at the annual meeting of stockholders or any special meeting of
stockholders and each director so elected will hold office until the next
annual meeting or until his successor is elected and qualified or until his
earlier resignation or removal. Our bylaws may be amended by the affirmative
vote of 80% of our stockholders or the affirmative vote of two-thirds of our
board of directors. See the "Risk Factors" section of this prospectus. The
foregoing summary of material provisions is qualified in its entirety by
reference to our bylaws, which are filed as an exhibit to the registration
statement of which this prospectus is a part.
Anti-Takeover Matters
Certain Provisions of the DGCL
Section 203 of the DGCL generally restricts a corporation from entering into
certain business combinations with an interested stockholder (defined as any
person or entity that is the beneficial owner of at least 15% of a
corporation's voting stock) or its affiliates, unless (i) the transaction is
approved by the board of directors of the corporation prior to the date such
person or entity became an interested stockholder; (ii) the interested
stockholder acquired 85% of the corporation's stock, excluding voting stock
owned by directors and officers and certain employee stock plans of the
corporation, in the same transaction in which the interested stockholder
exceeds 15%; or (iii) the business combination is approved by the board of
directors and by a vote of two-thirds of the outstanding voting stock not owned
by the interested stockholder. The DGCL provides that a corporation may elect
not to be governed by Section 203. At present, we do not intend to make such an
election and we intend to avail ourselves of the rights afforded by Section
203. The effect of Section 203 may be to render more difficult a change in
control of our company.
52
Certain Charter Provisions
Our certificate of incorporation provides that stockholders may not take
action by written consent, but only at a duly called annual or special meeting
of stockholders. Special meetings of our stockholders may be called only by
our Chairman or a majority of our directors. Our certificate of incorporation
also includes supermajority voting provisions. The affirmative vote of 80% of
our stockholders is required for the removal of our directors, the adoption,
amendment or repeal of our bylaws, and the consummation of certain business
combinations with any related person (defined as any person or entity who,
together with its affiliates, owns 10% of our voting stock). However, the
supermajority requirement will not apply to business combinations with related
persons if the combinations are approved by a majority of our directors, or if
our stockholders receive the requisite type and amount of consideration.
Limitation of Director and Officer Liability
Our certificate of incorporation and bylaws provide that, to the extent not
prohibited by law, we will indemnify any person who is or was made, or
threatened to be made, party to any threatened, pending or completed action,
suit or proceeding, by reason of the fact that such person is or was our
director or officer, or is or was serving in any capacity at our request for
any other corporation, partnership or other enterprise, against judgments,
fines, penalties, excise taxes, amounts paid in settlement costs, charges and
expenses (including attorneys' fees). Persons who are not directors or
officers of our company may be similarly indemnified in respect of service to
our company to the extent our board of directors at any time specifies such
persons are entitled to the benefits of the indemnification provisions
contained in our certificate of incorporation or bylaws. Our certificate of
incorporation provides for the elimination of personal liability to our
company or our stockholders for monetary damages for breach of fiduciary duty
as a director, except for (i) any breach of the director's duty of loyalty to
our company or our stockholders; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii)
certain unlawful dividends or redemptions as provided under Section 174 of the
DGCL; or (iv) any transaction from which the director derived an improper
personal benefit.
Transfer Agent
American Stock Transfer & Trust Company will be the transfer agent and
registrar for the common stock.
53
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our securities.
Upon completion of this offering, there will be shares of our common stock
outstanding (assuming no exercise of the Underwriters' over-allotment option or
options outstanding under our stock option plans). Of these shares, the
shares sold in this offering will be freely tradable without restriction or
further registration under the Securities Act, except that any shares purchased
by "affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act (Affiliates), may generally only be sold in compliance with the
limitations of Rule 144 described below.
Sales of Restricted Shares
The remaining shares of common stock are deemed "restricted securities"
under Rule 144. Upon expiration of the Lock-Up Agreements described below,
these shares of common stock will be available for sale in the public market,
subject to the provisions of Rule 144 under the Securities Act.
The Lock-Up Agreements provide that, for a period of 180 days after the date
of this prospectus, our stockholders prior to this offering will not sell,
offer, contract or grant any option to sell, pledge, transfer, establish an
open put equivalent position or otherwise dispose of any shares of common
stock, any options to purchase shares of common stock or any shares convertible
into or exchangeable for shares of common stock, owned directly by such persons
or with respect to which they have the power of disposition, without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a stockholder, including an Affiliate, who has
beneficially owned his or her restricted securities (as that term is defined in
Rule 144) for at least one year from the later of the date such securities were
acquired from us or (if applicable) the date they were acquired from one of our
Affiliates is entitled to sell, within any three-month period, a number of such
shares that does not exceed the greater of 1% of the then outstanding shares of
common stock ( shares immediately after this offering) or the average
weekly trading volume in the common stock during the four calendar weeks
preceding the date on which notice of such sale was filed under Rule 144,
provided certain requirements concerning availability of public information,
manner of sale and notice of sale are satisfied. In addition, under Rule
144(k), if a period of at least two years has elapsed between the later of the
date restricted securities were acquired from us or (if applicable) the date
they were acquired from one of our Affiliates, a stockholder who is not an
Affiliate of us at the time of sale and has not been an Affiliate of us for at
least three months prior to the sale is entitled to sell the shares immediately
without compliance with the foregoing requirements under Rule 144.
Securities issued in reliance on Rule 701 (such as shares of common stock
acquired pursuant to the exercise of certain options granted under our stock
option plan) are also restricted securities and, beginning 90 days after the
effective date of the registration statement of which this prospectus is a
part, may be sold by stockholders, other than our Affiliates subject only to
the manner of sale provisions of Rule 144 and by Affiliates under Rule 144
without compliance with its one-year holding period requirement.
Registration Rights
We have granted Imperial Bank and Beranson Holdings, Inc. the right to
demand, on four occasions and one occasion, respectively, that we register
their shares of our common stock. In addition, under the terms of the
registration rights agreements, if we propose to register any of our
securities, either for our own account or for the account of another
stockholder exercising registration rights, Imperial Bank and Beranson
Holdings, Inc. are entitled to notice of such registration and are entitled to
include their shares in such registration. Both the demand and the "piggy-back"
registration rights are subject to a number of conditions and limitations,
among them the right of the underwriters of any such registration to limit the
number of shares included in such
54
registration. We have agreed to pay the expenses associated with the
registration of Imperial Bank's and Beranson Holdings, Inc.'s shares of our
common stock, including the reasonable cost of legal counsel, not to exceed
$75,000 for each registration.
Options
We intend to file registration statements on Form S-8 under the Securities
Act to register all shares of common stock issuable under our 1999 Stock
Incentive Plan. Shares issued upon the exercise of stock options after the
effective date of the registration statements on Form S-8 will be eligible for
resale in the public market without restriction, subject to Rule 144
limitations applicable to Affiliates and the Lock-up Agreements noted above, if
applicable.
Effect of Sales of Shares
Prior to this offering, there has been no public market for our common
stock, and no prediction can be made as to the effect, if any, that market
sales of shares of common stock or the availability of shares for sale will
have on the market price of our common stock prevailing from time to time.
Nevertheless, sales of significant numbers of shares of our common stock in the
public market could adversely affect the market price of our common stock and
could impair our future ability to raise capital through an offering of our
equity securities.
55
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated , 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation and CIBC World Markets
Corp., have severally agreed to purchase from us the respective number of
shares of common stock set forth opposite their names below.
Number of
Underwriter Shares
Donaldson, Lufkin & Jenrette Securities Corporation.............
CIBC World Markets Corp.........................................
-----
Total.........................................................
=====
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered hereby are subject to approval by their counsel of certain legal
matters and to certain other conditions. The underwriters are obligated to
purchase and accept delivery of all the shares of common stock offered hereby
(other than those shares covered by the over-allotment option described below)
if any are purchased.
The underwriters initially propose to offer the shares of our common stock
in part directly to the public at the initial public offering price set forth
on the cover page of this prospectus and in part to certain dealers (including
the underwriters) at such price less a concession not in excess of $ per
share. The underwriters may allow, and such dealers may re-allow, to certain
other dealers a concession not in excess of $ per share. After the initial
offering of the common stock, the public offering price and other selling terms
may be changed by the representatives of the underwriters at any time without
notice. The underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and a member of the selling group, is facilitating the distribution
of the shares sold in the offering over the Internet. The underwriters have
agreed to allocate a limited number of shares to DLJdirect Inc. for sale to
brokerage account holders. DLJdirect Inc. will receive the same selling
concession that other dealers will receive in connection with sales of shares
over the Internet.
We have granted to the underwriters an option, exercisable within 30 days
after the date of this prospectus, to purchase, from time to time, in whole or
in part, up to an aggregate of additional shares of common stock at the
initial public offering price less underwriting discounts and commissions. The
underwriters may exercise such option solely to cover overallotments, if any,
made in connection with the offering. To the extent that the underwriters
exercise such option, each underwriter will become obligated, subject to
certain conditions, to purchase its pro rata portion of such additional shares
based on such underwriter's percentage underwriting commitment as indicated in
the preceding table.
56
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
that the underwriters may be required to make in respect thereof.
We and each of our executive officers, directors, stockholders and option
holders have agreed, subject to certain exceptions, not to:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock;
for a period of 180 days after the date of this prospectus without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation. In
addition, during such 180-day period, we have also agreed not to file any
registration statement with respect to, and each of our executive officers,
directors and certain of our stockholders has agreed not to make any demand
for, or exercise any right with respect to, the registration of any shares of
our common stock or any securities convertible into or exercisable or
exchangeable for common stock without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation. However, Donaldson, Lufkin & Jenrette
Securities Corporation may, in its sole discretion, release all or any portion
of the securities subject to the lock-up agreements. We have determined that if
the lock-up with respect to a significant number of shares has been waived,
whether with respect to a single stockholder or a number of stockholders, we
will review applicable securities laws and, if public disclosure would be
appropriate, disclose the waiver.
Prior to the offering, there has been no established trading market for our
common stock. The initial public offering price of the shares of our common
stock offered hereby was determined by negotiation among us and the
representatives of the underwriters. The factors considered in determining the
initial public offering price included the history of and the prospects for the
industry in which we compete, our past and present operations, our historical
results of operations, our prospects for future earnings, the recent market
prices of securities of generally comparable companies and the general
condition of the securities markets at the time of the offering.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
offered hereby in any jurisdiction where action for that purpose is required.
The shares of common stock offered hereby may not be offered or sold, directly
or indirectly, nor may this prospectus or any other offering material or
advertisements in connection with the offer and sale of any shares of common
stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons with this prospectus should inform
themselves about and observe any restrictions relating to the offering and the
distribution of this prospectus. This prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any shares of common stock offered
hereby in any jurisdiction in which such an offer or a solicitation is
unlawful.
In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of our common stock.
Specifically, the underwriters may overallot the offering, creating a syndicate
short position. The underwriters may bid for and stabilize the price of our
common stock. In addition, the underwriting syndicate may reclaim selling
concessions from syndicate members and selected dealers if they repurchase
previously distributed common stock in syndicate covering transactions, in
stabilizing transactions or otherwise. These activities may stabilize or
maintain the market price of our common stock above independent market levels.
The underwriters are not required to engage in these activities, and may end
any of these activities at any time.
57
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered by this
prospectus will be passed upon for us by Cadwalader, Wickersham & Taft, New
York, New York. Certain legal matters in connection with the offering will be
passed upon for the underwriters by Simpson Thacher & Bartlett, New York, New
York.
EXPERTS
The financial statements of U.S. Audiotex Corporation as of December 31,
1997, 1998, for the period from January 1, 1996 to June 26, 1996 of the
predecessor company and for the period from June 26, 1996 (inception) to
December 31, 1996 and for each of the years in the two-year period ended
December 31, 1998 and for the six-month period ended June 30, 1999 have been
included herein and in the Registration Statement in reliance upon the report
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the shares of common stock offered hereby. This prospectus does not
contain all the information set forth in the registration statement and the
exhibits and schedules thereto. For further information about us and the shares
offered by this prospectus, you should refer to the registration statement,
including the exhibits and schedules filed thereto. Statements contained in
this prospectus as to the contents of any agreement, contract or other document
referred to are qualified by and subject to the copy of such contract or other
document filed as an exhibit to the registration statement or such other
document. You may inspect a copy of the registration statement without charge
at the SEC's principal office in Washington, D.C. and obtain copies of all or
any part thereof upon payment of certain fees from the Public Reference Section
of the SEC at the SEC's principal office, 450 Fifth Street, N.W., Washington,
D.C. 20549, or at the Commission's Regional Offices in New York, located at 7
World Trade Center, Suite 1300, New York, New York 10048, or in Chicago,
located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The
SEC maintains an Internet site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. The SEC's World Wide Web address is www.sec.gov.
We intend to furnish holders of our common stock with annual reports
containing, among other information, audited financial statements certified by
an independent public accounting firm and quarterly reports containing
unaudited condensed financial information for the first three quarters of each
fiscal year. We intend to furnish such other reports as we may determine or as
may be required by law.
58
U.S. AUDIOTEX CORPORATION
Index to Financial Statements
Page
Independent Auditors' Report.............................................. F-2
Balance Sheets as of December 31, 1997, 1998 and June 30, 1999............ F-3
Statements of Operations for the period from January 1, 1996 to June 26,
1996 (predecessor company) and for the period from June 26, 1996
(inception) to December 31, 1996 and for the years ended December 31,
1997 and 1998 and for the six-month periods ended June 30, 1998
(unaudited) and 1999..................................................... F-4
Statements of Stockholders' Equity (Deficit) for the period from January
1, 1996 to June 26, 1996 (predecessor company) and for the period from
June 26, 1996 (inception) to December 31, 1996 and for the years ended
December 31, 1997 and 1998 and for the six-month period ended June 30,
1999..................................................................... F-5
Statements of Cash Flows for the period from January 1, 1996 to June 26,
1996 (predecessor company) and for the period from June 26, 1996
(inception) to December 31, 1996 and for the years ended December 31,
1997 and 1998 and for the six-month periods ended June 30, 1998
(unaudited) and 1999..................................................... F-6
Notes to Financial Statements............................................. F-7
F-1
The Board of Directors
U.S. Audiotex Corporation:
When the recapitalization, which includes the merger of U.S. Audiotex LLC
into U.S. Audiotex Corporation, referred to in Note 8 to the financial
statements has been consummated, we will be in a position to issue the
following report.
KPMG LLP
San Francisco, California
September 17, 1999
FORM OF INDEPENDENT AUDITORS' REPORT
The Board of Directors
U.S. Audiotex Corporation:
We have audited the accompanying balance sheets of U.S. Audiotex Corporation
as of December 31, 1997 and 1998 and June 30, 1999, and the related statements
of operations, stockholders' equity (deficit) and cash flows for the period
from January 1, 1996 to June 26, 1996 (predecessor company) and for the period
from June 26, 1996 (inception) to December 31, 1996 and for each of the years
in the two-year period ended December 31, 1998 and the six-month period ended
June 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of U.S. Audiotex Corporation
as of December 31, 1997, 1998 and June 30, 1999, and the results of its
operations and cash flows for the period from January 1, 1996 to June 26, 1996
(predecessor company) and for the period from June 26, 1996 (inception) to
December 31, 1996 and for each of the years in the two-year period ended
December 31, 1998 and the six-month period ended June 30, 1999, in conformity
with generally accepted accounting principles.
San Francisco, California
August 12, 1999, except note
which is as of September , 1999
F-2
U.S. AUDIOTEX CORPORATION
BALANCE SHEETS
(In thousands, except share and per share data)
December 31, June 30,
------------- --------
1997 1998 1999
ASSETS
Current assets:
Cash and cash equivalents............................. $ 182 $ 631 $ 249
Accounts receivable................................... 265 554 505
Receivable from related parties....................... 12 -- --
Prepaid expenses and other current assets............. 54 29 26
Receivable from U.S. Treasury......................... -- -- 440
----- ------ -------
Total current assets............................... 513 1,214 1,220
Property and equipment, net............................ 251 533 797
Other assets........................................... -- -- 11
----- ------ -------
Total assets....................................... $ 764 $1,747 $ 2,028
===== ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses................. $ 404 $ 654 $ 487
Deferred revenue...................................... 62 99 133
Current portion of notes payable and capital lease
obligations.......................................... 268 69 105
Advance from related party............................ -- -- 440
----- ------ -------
Total current liabilities.......................... 734 822 1,165
Notes payable and capital lease obligations............ 121 241 238
Notes payable to related party......................... -- 500 500
----- ------ -------
Total liabilities.................................. 855 1,563 1,903
----- ------ -------
Commitments and contingencies
Stockholders' equity (deficit):
Common Stock, $0.01 par value; 50,000,000 shares
authorized; 5,000,000, shares issued and outstanding
as of December 31, 1997, 1998 and June 30, 1999,
respectively........................................ 50 50 50
Additional paid-in capital........................... 528 1,128 1,128
Accumulated earnings (deficit)....................... (669) (994) (1,053)
----- ------ -------
Stockholders' equity (deficit)..................... (91) 184 125
----- ------ -------
Total liabilities and stockholders' equity
(deficit)......................................... $ 764 $1,747 $ 2,028
===== ====== =======
See accompanying notes to financial statements.
F-3
U.S. AUDIOTEX CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Period
Period from
from June 26,
January 1, 1996
1996 (inception) Year ended Six months ended
to to December 31, June 30,
June 26, December 31, -------------- ------------------
1996 1996 1997 1998 1998 1999
(the Predecessor) (unaudited)
Revenues:
Transaction fees...................................... $ 111 $ 240 $ 935 $2,076 $ 794 $5,975
Other revenues ....................................... 201 234 267 293 105 138
----- ------ ------ ------ ------ ------
Total revenues...................................... 312 474 1,202 2,369 899 6,113
Cost of revenues:
Cost of transaction fees.............................. 28 193 412 1,009 361 4,818
Cost of other revenues................................ 40 44 284 71 11 21
----- ------ ------ ------ ------ ------
Total cost of revenues.............................. 68 237 696 1,080 372 4,839
----- ------ ------ ------ ------ ------
Gross profit............................................ 244 237 506 1,289 527 1,274
Operating expenses:
Sales and marketing................................... 107 115 330 356 198 435
Development costs..................................... 114 124 206 608 282 320
General and administrative............................ 148 158 466 595 225 549
----- ------ ------ ------ ------ ------
Total operating expenses............................ 369 397 1,002 1,559 705 1,304
----- ------ ------ ------ ------ ------
Income (loss) from operations........................... (125) (160) (496) (270) (178) (30)
Other income (expense), net............................. (31) (7) (6) (55) (22) (29)
----- ------ ------ ------ ------ ------
Net income (loss)................................... $(156) $ (167) $ (502) $ (325) $ (200) $ (59)
===== ====== ====== ====== ====== ======
Basic and diluted net income (loss) per share........... $ -- $(0.03) $(0.10) $(0.07) $(0.04) $(0.01)
===== ====== ====== ====== ====== ======
Shares used in basic and diluted net income (loss) per
share.................................................. -- 5,000 5,000 5,000 5,000 5,000
===== ====== ====== ====== ====== ======
See accompanying notes to financial statements.
F-4
U.S. AUDIOTEX CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Period from June 26, 1996 (inception) to December 31, 1996 and the years ended
December 31, 1997 and 1998 and for the six-month period ended June 30, 1999
(In thousands)
Note Total
Common stock Additional receivable Retained stockholders'
------------ paid-in from equity equity
Shares Amount capital stockholder (deficit) (deficit)
Balance as of June 26,
1996................... -- $-- $ -- $ -- $ -- $--
Issuance of common stock
for cash and assets and
liabilities assumed.... 5,000 50 606 (500) -- 156
Net income (loss)....... -- -- -- -- (167) (167)
----- ---- ------ ----- ------- ----
Balance as of December
31, 1996............... 5,000 50 606 (500) (167) (11)
Distribution of note
receivable to
stockholder............ -- -- (98) -- -- (98)
Collection of note
receivable............. -- -- -- 500 -- 500
Services performed by
stockholders........... -- -- 20 -- -- 20
Net income (loss) ...... -- -- -- -- (502) (502)
----- ---- ------ ----- ------- ----
Balance as of December
31, 1997............... 5,000 50 528 -- (669) (91)
Capital contribution.... -- -- 600 -- -- 600
Net income (loss) ...... -- -- -- -- (325) (325)
----- ---- ------ ----- ------- ----
Balance as of December
31, 1998............... 5,000 50 1,128 -- (994) 184
Net income (loss) ...... -- -- -- -- (59) (59)
----- ---- ------ ----- ------- ----
Balance as of June 30,
1999................... 5,000 $ 50 $1,128 $ -- $(1,053) $125
===== ==== ====== ===== ======= ====
See accompanying notes to financial statements.
F-5
U.S. AUDIOTEX CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
Period from
Period from June 26, 1996 Year ended
January 1, (Inception) December Six months ended
1996 to June to 31, June 30,
26, December 31, ------------ -----------------
1996 1996 1997 1998 1998 1999
(Predecessor (unaudited)
Company)
Cash flows provided by (used in) operating activities:
Net income (loss)............................................. $(156) $(167) $(502) $(325) $(200) $ (59)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization................................ 3 14 29 57 22 82
Changes in operating assets and liabilities:
Accounts receivable......................................... (51) (76) (101) (289) 115 49
Prepaid expenses and other current assets................... 40 12 (35) 25 15 (8)
Receivable from U.S. Treasury............................... -- -- -- -- -- (440)
Accounts payable and accrued expenses....................... 4 90 255 250 140 (167)
Deferred revenue............................................ (74) (64) 31 37 19 34
----- ----- ----- ----- ----- -----
Net cash provided by (used in) operating activities........ (234) (191) (323) (245) 111 (509)
----- ----- ----- ----- ----- -----
Cash flows provided by (used in) investing activities--capital
expenditures.................................................. (43) (63) (139) (298) (58) (252)
----- ----- ----- ----- ----- -----
Cash flows provided by (used in) financing activities:
Capital contribution ......................................... -- 500 -- 600 -- --
Repayment of bank loans....................................... 119 (38) (77) (108) (295) (61)
Collection of note receivable from stockholder................ -- -- 500 -- -- --
Related party payable......................................... -- -- -- 500 500 440
----- ----- ----- ----- ----- -----
Net cash provided by (used in) financing activities........ 119 462 423 992 205 379
----- ----- ----- ----- ----- -----
(Decrease) increase in cash and cash equivalents............... (158) 208 (39) 449 258 (382)
Cash and cash equivalents at beginning of period............... 171 13 221 182 182 631
----- ----- ----- ----- ----- -----
Cash and cash equivalents at end of period..................... $ 13 $ 221 $ 182 $ 631 $ 440 $ 249
===== ===== ===== ===== ===== =====
Supplemental disclosure of noncash activity:
Assets acquired through capital leases........................ $ -- $ -- $ -- $ 41 $ 3 $ 94
===== ===== ===== ===== ===== =====
Services performed by stockholders............................ $ -- $ -- $ 20 $ -- $ -- $ --
===== ===== ===== ===== ===== =====
See accompanying notes to financial statements.
F-6
U.S. AUDIOTEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and June 30, 1999
(1) Description of Business and Summary of Significant Accounting Policies
(a) The Company
U.S. Audiotex Corporation (the Company) was formed on June 26, 1996 as a
California limited liability company. The Company provides credit card payment
options for consumers to pay personal federal and state income taxes, sales and
use taxes, property taxes and fines for traffic violations and parking
citations.
On June 26, 1996, Beranson Holdings, Inc., (the Predecessor) a company
wholly owned by the Company's president, contributed net liabilities of
$344,000 to the Company in exchange for an 80% interest in the Company. These
assets and liabilities were recorded at the historical basis of the
Predecessor..The Predecessor also had a business which collected revenues from
interactive voice response classified advertisements. The formation of the
Company excluded this operation of the Predecessor so revenues and net loss
from this business activity totaling $752,000 and $14,000, respectively for the
year ended December 31, 1996 have not been included in the financial statements
of the Company. The activities of Beranson Holdings, Inc. for the first six
months of 1996 related to the credit card payment business have been presented
in the financial statements of the Company.
(b) Unaudited Interim Financial Information
The financial information for six months ended June 30, 1998 is unaudited,
but includes all adjustments (consisting only of normal recurring adjustments)
which the Company considers necessary for the fair presentation of the
financial position at such dates and the operations and cash flows for the
periods then ended. Operating results for the six months ended June 30, 1999
are audited, but are not necessarily indicative of results which may be
expected for the entire year.
(c) Cash and Cash Equivalents
The company considers cash on hand, deposits in bank, certificates of
deposits, and short-term marketable securities with original maturities of less
than 90 days to be cash equivalents.
(d) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets, generally three to five years.
(e) Revenue Recognition
The Company recognizes the revenues from transaction fees in the month the
services are rendered. Other revenues consist of the sale of software licenses,
and maintenance and consulting revenues related to these software sales.
Revenues from software license sales and consulting fees charged on
installation arrangements are recognized upon customer acceptance of the
systems. Maintenance revenues are deferred and recognized ratably over the
contractual period of the license agreement, generally one year.
(f) Development Costs
Development costs associated with new products and enhancements to existing
software products are expensed as incurred until technological feasibility is
established upon completion of a working model. To date, the Company's software
development has been completed concurrent with the establishment of
technological feasibility, and, accordingly, $200,000 has been capitalized. The
Company amortizes this cost over the estimated useful life of three years.
F-7
U.S. AUDIOTEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and June 30, 1999
(g) Concentration of Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of accounts receivable. The
Company performs ongoing credit evaluations of its clients and generally does
not require collateral. Uncollectible accounts have been insignificant to date.
The Company had one customer that accounted for 22% of accounts receivable at
December 31, 1997 and none that account for greater than 10% of accounts
receivable at December 31, 1998 and June 30, 1999.
In the six-month period ended June 30, 1999 transaction fees from IRS
payments accounted for 71% of total revenues. The Company's agreement with the
IRS covers credit card payments for 1998 tax returns filed during the 1999
filing season. The agreement is in effect through October 14, 1999 and is
renewable for an additional one-year period by mutual consent of both parties.
In 1999 certain payments to the U.S. Treasury were duplicated which resulted
in an overpayment totaling $440,000. The Internal Revenue Service has
acknowledged this overpayment and has agreed to reimburse the Company.
(h) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(i) Fair Value of Financial Instruments
The fair values of the Company's cash, cash equivalents, accounts
receivable, accounts payable approximate their carrying values due to their
short maturity. The fair value of amounts due to related parties is not readily
determinable.
(j) Accounting for Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of their carrying amount or fair value
less cost to sell.
(k) Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted-average
number of outstanding shares of common stock and, when dilutive, potential
shares of options and warrants to purchase common stock using the treasury
stock method. Diluted net income (loss) per share is computed using the
weighted-average number of shares of common stock and, when dilutive, potential
shares of options and warrants to purchase common stock using the treasury
stock method outstanding.
F-8
U.S. AUDIOTEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and June 30, 1999
(l) Comprehensive Income (Loss)
The Company has no components of other comprehensive income (loss), and
accordingly, the comprehensive income (loss) is the same as net income (loss)
for all periods presented.
(m) Recent Accounting Pronouncements
The FASB recently issued Statement of Financial Accounting Standards (SFAS)
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. The Company must adopt SFAS No. 133 by July
1, 2001. Management does not believe the adoption of SFAS No. 133 will have a
material effect on the financial position of the Company.
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position 98--1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use or SOP 98-1. SOP 98-1 establishes the accounting for
costs of software products developed or purchased for internal use, including
when such costs should be capitalized. The adoption of SOP 98-1 in 1998 did not
have a material affect on our financial position or results of operations.
(n) Advertising Expense
The cost of advertising is expensed as incurred. Such costs are included in
selling and marketing expense and totaled approximately $6,000, $28,000,
$28,000 and $52,000 for the years ended December 31, 1996, 1997, 1998 and the
six-month period ended June 30, 1999.
(2) Related Party Transactions
Notes receivable (payable) from/to related parties is as follows:
December 31, June 30,
-------------- --------
1997 1998 1999
(In thousands)
Advances to an officer........................... $ 11 $ -- $ --
Amount due from Beranson Holdings, Inc........... 1 -- --
Advances from Imperial Bank...................... -- -- (440)
Note payable to stockholders..................... -- (500) (500)
----- ------- -----
$ 12 $ (500) $(940)
===== ======= =====
On June 26 1996 the net liabilities (see footnote 1) contributed by the
Predecessor included a note receivable of $98,000 from Kenneth Stern, the sole
shareholder of the Predecessor. In 1997 the note was distributed to Kenneth
Stern and the Company recorded a distribution to stockholders of $98,000.
During the period from June 26, 1996 to December 31, 1996 the Company
allocated approximately $16,000 of its general and administrative expenses to
Beranson Holdings, Inc.
Imperial Bank and Beranson Holdings, Inc., a company affiliated with our
President, have from time to time made advances to fund certain capital
expenditures. These advances are evidenced by promissory notes bearing interest
at a floating rate equal to Imperial Bank's prime rate (7.75% as of June 30,
1999) plus 2% per annum. As of June 30, 1999, the principal and interest
accrued on such notes was $500,000 and approximately $50,000, respectively.
Principal and accrued interest of approximately $558,000 was paid on August 24,
1998 and was refinanced with new notes to stockholder due December 31, 2000
(see note 8).
F-9
U.S. AUDIOTEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and June 30, 1999
Imperial Bank is one of 3 merchant banks used to process credit card
transactions and perform traditional merchant credit card settlement services.
During the six months ended June 30, 1999, the Company paid Imperial Bank
approximately $1.3 million for performing these processing and settlement
services.
Imperial Bank assisted the Company in recruiting a member of the Company's
senior management team during the year ended December 31, 1997. These services
were valued at $20,000 and recorded as a capital contribution in the financial
statements for the year ended December 31, 1997. Imperial Bank provides human
resource services including payroll processing and benefits administration.
During the six months ended June 30, 1999, the Company paid Imperial Bank a
fee of $42,000 for these services.
In April 1999, the Company borrowed $440,000 from Imperial Bank to assist
in its working capital needs.
(3) Property and Equipment
Property and equipment are summarized as follows:
December 31,
------------- June 30,
1997 1998 1999
(In thousands)
Computer equipment................................. $ 456 $ 768 $1,020
Furniture and fixtures............................. 38 66 160
------ ------ ------
494 834 1,180
Less accumulated depreciation and amortization..... 243 301 383
------ ------ ------
$ 251 $ 533 $ 797
====== ====== ======
Property and equipment recorded under capital leases was approximately $24,000
and $64,000 and $127,000 as of December 31, 1997, 1998 and June 30, 1999,
respectively, with related accumulated amortization of approximately $11,000,
$20,000 and $30,000, respectively.
(4) Debt and other commitments
The Company has a credit facility with a third party bank which consists of
a $500,000 line of credit and a term loan due May 2001 with an original
principal amount of $250,000. The borrowings bear interest at the bank's prime
rate of 7.75% as of December 31, 1998 plus 1.50%. The Company also leases
certain equipment under capital leases, extending through 2000.
Notes payable were as follows:
December 31,
------------- June 30,
1997 1998 1999
(In thousands)
Line of credit..................................... $ 208 $ 151 $ 127
Term loan.......................................... 171 121 96
Capital lease obligation........................... 10 38 120
------ ------ ------
389 310 343
Less current portion............................... 268 69 105
------ ------ ------
Long-term notes payable............................ $ 121 $ 241 $ 238
====== ====== ======
The Company leases its facility and certain equipment under operating
leases, extending through 1999.
The Company is in compliance with all financial covenants under this debt
and other commitments as of June 30, 1999.
F-10
U.S. AUDIOTEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and June 30, 1999
Future minimum debt and capital leases payments as of June 30, 1999 were as
follows (in thousands):
1999................................................................ $105
2000................................................................ 112
2001................................................................ 100
2002 and thereafter................................................. 26
----
Total future minimum debt and capital leases payments............. $343
====
Future minimum lease payments under noncancelable operating leases as of
June 30, 1999 were as follows (in thousands):
Years ending December 31:
1999................................................................. $19
2000 and thereafter.................................................. 26
---
Total future minimum lease payments under operating leases......... $45
===
Rental expense under operating leases for the years ended December 31, 1997
and 1998 was $64,000 and $75,000, respectively.
(5) Stockholders' Equity (Deficit)
On January 23, 1998, Imperial Bank purchased 3 million shares of common
stock or 75% of the Predecessor's 4 million shares of common stock in the
Company for $3,010,000. In addition, Imperial Ventures, a wholly owned
subsidiary of Imperial Bank, transferred its 1 million shares of common stock
in the Company to Imperial Bank.
As of December 31, 1998, Imperial Bank and the Predecessor are the holders
of 80% and 20% of the Company's common stock, respectively.
(6) Income Taxes
As of December 31, 1998 the Company had no federal or Californian net
operating loss carryforwards. As of December 31, 1998 the Company has no
federal or Californian research and development credit carryforwards for tax
purposes. All tax operating losses to date have been used by the members of
U.S. Audiotex, LLC on their personal tax returns. As of June 30, 1999 the
Company has deferred tax assets of $19,000. The Company has recorded a
valuation allowance on its deferred tax assets due to the uncertainty of
future realization of such amounts.
(7) Segment Information
The Company has adopted the provisions of SFAS No. 131, Disclosure About
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards for the reporting by public business enterprises of information
about operating segments, products and services, geographic areas, and major
customers. The method for determining which information to report is based on
the way that management organizes the operating segments within the Company
for making operating decisions and assessing financial performance.
The Company's chief operating decision-maker is considered to be the
Company's President. The President reviews financial information by
disaggregated information about revenues by product for purposes of making
operating decisions and assessing financial performance. The financial
information reviewed by the President is consistent with the information
presented in the accompanying statements of operations. Therefore, the Company
operates in a single operating segment.
F-11
U.S. AUDIOTEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and June 30, 1999
Six Months
Ended June
Year ended 30,
------------------- ------------
1996 1997 1998 1998 1999
(In thousands)
Revenues by product are:
Transaction fees:
Federal income tax.......................... $ -- $ -- $ -- $ -- $4,333
Moving violations........................... 265 446 827 352 574
Parking citations........................... 13 105 157 68 138
Property taxes.............................. 6 178 765 224 557
State income taxes.......................... -- -- -- -- 173
Fax filing.................................. 40 120 192 93 105
Service bureau-utilities.................... 27 86 135 57 95
Other revenues:
System sales................................ 363 166 115 16 83
Maintenance & consulting.................... 72 101 178 89 55
----- ------ ------ ----- ------
Total revenues............................... $ 786 $1,202 $2,369 $ 899 $6,113
===== ====== ====== ===== ======
No single customer accounted for greater than 10% of revenues in any period
reported.
(8) Subsequent Events
(a) Recapitalization
On August 24, 1999, the Company issued 800 shares of common stock to
Imperial Bank for an aggregate consideration of $8.00 and 200 shares of common
stock to Beranson Holdings, Inc. for an aggregate consideration of $2.00. In
connection with the merger of U.S. Audiotex, LLC into U.S. Audiotex
Corporation, a Delaware Corporation, the limited liability company interests of
Imperial Bank and Beranson Holdings in U.S. Audiotex, LLC will be exchanged for
3,999,200 and 999,200 shares of the Company's common stock, respectively.
(b) Initial Public Offering (Unaudited)
On September 15, 1999, our Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission permitting
us to sell shares of our common stock in connection with a proposed IPO.
(c) Stock Incentive Plan
The Board of Directors adopted the 1999 Stock Incentive Plan (the Incentive
Plan) on August 24, 1999. The Incentive Plan provides for the grant of
nonstatutory stock options to employees or outside directors. A total of
2,3000,000 shares of our common stock are reserved for issuance under the
Incentive Plan, 300,000 of which are available for grants to outside directors.
Options granted under the Incentive Plan may be designated as qualified or
nonqualified at the discretion of our Board of Directors, with exercise prices
for incentive stock options of not less than the fair value of the underlying
stock at the date of grant. Options granted under the plan vest annually over a
maximum five year period and expire ten years from the date of grant.
F-12
U.S. AUDIOTEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and June 30, 1999
The Company will use the intrinsic value method to account for the Incentive
Plan. Accordingly, compensation cost will be recognized for stock options when,
on the date of grant, the current market value of the underlying common stock
exceeds the exercise price of the stock options at the date of grant. In August
1999, the Company recorded deferred compensation expense of approximately $13
million for options granted to employees to purchase 535,714 shares of our
common stock at an exercise price of $4.00 per share.
(d) Stock Split
On , 1999 our Board of Directors authorized a for split of all
of the outstanding shares of the Company's common stock which will be effective
prior to the completion of the Company's initial public offering.
(e) Stockholder Guarantees
In June 1999, the stockholders of the Company agreed to loan the Company
$2.8 million in working capital which will be payable on the earlier of the
date that is 30 days following the IPO date or December 31, 2000. On August 24,
1999, the Company received advances of approximately $1.3 million from the
stockholders which bears interest at 2% above prime and which will be repaid
from the proceeds of the Company's initial public offering.
(f) Employment Agreements
In August 1999, the Company entered into an employment agreement with Thomas
R. Evans, the Chairman and Chief Executive Officer. The employment agreement as
amended as of September 14, 1999 provides for an annual base salary of $200,000
and a one-time bonus of $500,000. Mr. Evans was granted options to purchase
357,143 shares of common stock at $4.00 per share. The Company may exercise
this right at any time during the 30-day period following Mr. Evans'
termination of employment for reasons other than death, disability or a change
in control. The Company's repurchase right will expire with respect to one-
third of the 357,143 option shares on the first anniversary of the grant date.
Thereafter, the Company's right will expire on a cumulative basis with respect
to 9,921 shares per month on the last day of each of the next 24 consecutive
months. Further, upon completion of this offering, the Company will grant Mr.
Evans an additional option to acquire shares of the Company's common stock at
an exercise price of $4.00 per share so that, when combined with the option
described above, Mr. Evans will have options to acquire such number of shares
of the Company's common stock as is equal to an aggregate of five percent (5%)
of the Company's common stock outstanding at that time, on a fully diluted
basis (including the options granted to Mr. Evans). Under the terms of the
employment agreement, Imperial Bank has guaranteed that the value (as defined
in the agreement) of Mr. Evans' vested options will be worth $10,000,000 on or
before the third anniversary of the date of the agreement, or Imperial Bank
will pay Mr. Evans an amount equal to the difference between $10,000,000 and
the highest value of the vested options on or before the third anniversary.
In August 1999, the Company entered into an employment agreement with
Kenneth Stern, pursuant to which Mr. Stern has agreed to serve as the Company's
President and a member of the board of directors until August 23, 2006. The
employment agreement provides for an annual base salary of $215,000 and a
minimum annual bonus of $100,000. Mr. Stern has the right to take early
retirement at any time after the third anniversary of the date of the
agreement, upon which the Company would be required to pay him his base salary
and bonus through August 23, 2006.
F-13
[U.S. AUDIOTEX Logo]
Shares of common stock
----------------------
PROSPECTUS
----------------------
Donaldson, Lufkin & Jenrette
CIBC World Markets
----------------------
The undersigned is facilitating Internet distribution:
DLJdirect Inc.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representation as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of U.S.
Audiotex Corporation have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all dealers that
effect transactions in these shares of common stock may be required to deliver
a prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the expenses in connection with this
Registration Statement. The Company will pay all expenses of the offering. All
of such expenses are estimates, other than the filing fees payable to the
Securities and Exchange Commission, National Association of Securities Dealers,
Inc. ("NASD") and the Nasdaq National Market.
Securities and Exchange Commission Filing Fee................... $16,680
NASD Filing Fee................................................. 6,500
Nasdaq National Market Listing Fee.............................. *
Printing Fees and Expenses...................................... *
Legal Fees and Expenses......................................... *
Directors' and Officers' Insurance Premium...................... *
Accounting Fees and Expenses.................................... *
Blue Sky Fees and Expenses...................................... *
Miscellaneous................................................... *
-------
Total......................................................... $ *
=======
- --------
* To be completed in an amendment.
Item 14. Indemnification of Directors and Officers
Subsection (a) of Section 145 of the General Corporation Law of Delaware
(the "DGCL") empowers a corporation to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
complete action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and, with respect to any criminal action
or proceeding, had no cause to believe his conduct was unlawful.
Subsection (b) of Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of
the corporation to procure a judgment in its favor by reason of the fact that
such person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, except that no indemnification may be
made in respect to any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit was
brought shall determine that despite the adjudication of liability such person
is fairly and reasonably entitled to indemnity for such expenses which the
court shall deem proper.
Section 145 of the DGCL further provides that to the extent a director,
officer, employee or agent of a corporation has been successful in the defense
of any action, suit or proceeding referred to in subsections (a) and (b) or in
the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred
by him in connection therewith; that indemnification or advancement of expenses
provided for by Section 145 shall not be deemed exclusive of any
II-1
other rights to which the indemnified party may be entitled; and empowers the
corporation to purchase and maintain insurance on behalf of a director,
officer, employee or agent of the corporation against any liability asserted
against him or incurred by him in any such capacity or arising out of his
status as such whether or not the corporation would have the power to
indemnify him against such liabilities under Section 145.
Our certificate of incorporation provides that no director, or person
serving on a committee of the board of directors, shall be personally liable
to us or our stockholders for monetary damages for breach of fiduciary duty as
a director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the DGCL; or
. for any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that we must indemnify our directors, officers and
employees against any liability incurred in connection with any proceeding in
which they may be involved as a party or otherwise, by reason of the fact that
he or she is or was a director, officer, employee, or agent of us, or is or
was serving at our request as a director, officer, employee, agent, fiduciary
or trustee of another corporation, partnership, joint venture, trust, employee
benefit plan, or other entity or enterprise, except:
. to the extent that such indemnification against a particular liability
is expressly prohibited by applicable law;
. for a breach of such person's duty of loyalty to us or our stockholders;
. for acts or omission not in good faith;
. for intentional misconduct or a knowing violation of law; or
. for any transaction resulting in receipt by such person of an improper
personal benefit.
Such indemnification may include advances of expenses prior to the final
disposition of such proceeding.
Item 15. Recent Sales of Unregistered Securities
On August 24, 1999, we issued 800 shares of our common stock to Imperial
Bank for an aggregate consideration of $8.00 and 200 shares of common stock to
Beranson Holdings, Inc. for an aggregate consideration of $2.00. In connection
with the merger of U.S. Audiotex, LLC into us, which merger we expect to
effect as of September 30, 1999, the limited liability company interests of
Imperial Bank and Beranson Holdings, Inc. in U.S. Audiotex, LLC will be
exchanged for 3,999,200 and 999,200 shares of our common stock, respectively.
II-2
Item 16. Exhibits and Financial Statement Schedule
(a) Exhibits.
Exhibit
No. Description
------- -----------
1.1 --Form of Underwriting Agreement.*
3.1 --Certificate of Incorporation of the Registrant.
3.2 --Bylaws of the Registrant.
4.1 --Common Stock Specimen.*
5.1 --Opinion of Cadwalader, Wickersham & Taft.*
10.1 --Amended Employment Agreement, dated as of September 14, 1999, by and
among U.S. Audiotex Corporation, Imperial Bank and Thomas R. Evans.
10.2 --Employment Agreement, dated August 24, 1999, between U.S. Audiotex
Corporation and Kenneth Stern.
10.3 --1999 Stock Incentive Plan.
10.4 --Stockholders Agreement, dated August 24, 1999, by and among U.S.
Audiotex Corporation, U.S. Audiotex, Inc. and Imperial Bank.
10.5 --Electronic Tax Administration Memorandum of Agreement between the
Internal Revenue Service and U.S. Audiotex, LLC.
10.6 --Contract between U.S. Audiotex, LLC and the Office of the Chief
Financial Officer of the District of Columbia with an award date of
December 22, 1998.*
10.7 --Term contract between the New Jersey Division of Purchase and
Property and U.S. Audiotex, LLC, together with related Response to
Request for Proposal.*
23.1 --Consent of Cadwalader, Wickersham & Taft (included in Exhibit 5.1).*
23.2 --Consent of KPMG LLP.
24.1 --Power of Attorney (included on signature page).
27.1 --Financial Data Schedule.
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* To be filed by amendment.
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or the notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Ramon, State of
California, on September 17, 1999.
U.S. AUDIOTEX CORPORATION
By: /s/ Thomas R. Evans
----------------------------------
Thomas R. Evans
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas R. Evans and Kenneth Stern, and each of
them, such person's true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for such person and in such person's
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform such and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as such person might
or could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents, or any of them, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on September , 1999
Signature Title
/s/ Thomas R. Evans
- ------------------------------------- Chairman and Chief Executive Officer
Thomas R. Evans
/s/ Kenneth Stern
- ------------------------------------- President and a director
Kenneth Stern
II-4
Exhibit
No. Description Page
------- ----------- ----
1.1 --Form of Underwriting Agreement.*
3.1 --Certificate of Incorporation of the Registrant.
3.2 --Bylaws of the Registrant.
4.1 --Common Stock Specimen.*
5.1 --Opinion of Cadwalader, Wickersham & Taft.*
10.1 --Amended Employment Agreement, dated as of September 14, 1999,
by and among U.S. Audiotex Corporation, Imperial Bank and
Thomas R. Evans.
10.2 --Employment Agreement, dated August 24, 1999, between U.S.
Audiotex Corporation and Kenneth Stern.
10.3 --1999 Stock Incentive Plan.
10.4 --Stockholders Agreement, dated August 24, 1999, by and among
U.S. Audiotex Corporation, U.S. Audiotex, Inc. and Imperial
Bank.
10.5 --Electronic Tax Administration Memorandum of Agreement between
the Internal Revenue Service and U.S. Audiotex, LLC.
10.6 --Contract between U.S. Audiotex, LLC and the Office of the
Chief Financial Officer of the District of Columbia with an
award date of December 22, 1998.*
10.7 --Term contract between the New Jersey Division of Purchase and
Property and U.S. Audiotex, LLC, together with related
Response to Request for Proposal.*
23.1 --Consent of Cadwalader, Wickersham & Taft (included in Exhibit
5.1).*
23.2 --Consent of KPMG LLP.
24.1 --Power of Attorney (included on signature page).
27.1 --Financial Data Schedule.
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* To be filed by amendment.