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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number 000-28187
OFFICIAL PAYMENTS CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 52-2190781
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Three Landmark Square
Stamford, CT 06901-2501
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(Address of principal executive offices) (Zip Code)
(203) 356-4200
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(Registrant's telephone number, including area code)
2333 San Ramon Valley Boulevard, Suite 450, San Ramon, CA 94583
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(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No___
As of May 4, 2000, 21,337,820 shares of the registrant's common
stock were issued and outstanding.
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OFFICIAL PAYMENTS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
ITEM PAGE NUMBER
- ---------- -----------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements.................................. 3
Condensed Balance Sheets as of March 31, 2000
December 31, 1999................................... 3
Condensed Statements of Operations for the three-
month periods ended March 31, 2000 and 1999......... 4
Condensed Statements of Cash Flows for the three-month
periods ended March 31, 2000 and 1999............... 5
Notes to the Condensed Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................... 17
PART II: OTHER INFORMATION
Item 1. Legal Proceedings..................................... 18
Item 2. Changes in Securities and Use of Proceeds............. 18
Item 3. Defaults Upon Senior Securities....................... 18
Item 4. Submission of Matters to a Vote of Security
Holders............................................... 18
Item 5. Other Information..................................... 18
Item 6. Exhibits and Reports on Form 8-K...................... 19
Signatures.......................................................... 20
Index to Exhibits
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OFFICIAL PAYMENTS CORPORATION
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
ASSETS
Current assets:
Cash ............................................. $ 1,613 $ 1,643
Short-term investments............................ 72,230 78,871
Accounts receivable, net.......................... 1,014 1,135
Prepaid expenses.................................. 1,135 465
Other current assets.............................. 395 384
-------- ---------
Total current assets............................ 76,387 82,498
Property and equipment, net......................... 4,261 1,802
Other assets........................................ 289 -
--------- ---------
Total assets.................................... $ 80,937 $ 84,300
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 479 $ 176
Accrued expenses.................................. 2,854 1,901
Deferred revenue.................................. 89 65
Current portion of notes payable and capital lease
obligations.................................... 218 206
--------- ---------
Total current liabilities....................... 3,640 2,348
Notes payable and capital lease obligations......... 372 391
--------- ---------
Total liabilities............................... 4,012 2,739
--------- ---------
Stockholders' equity:
Common stock, $.01 par value; 150,000,000 shares
authorized; 21,337,820 and 21,262,820 shares
issued and outstanding as of March 31, 2000
and December 31, 1999, respectively............. 213 213
Additional paid-in capital........................ 128,823 127,707
Deferred stock-based compensation................. (31,767) (34,964)
Accumulated deficit............................... (20,344) (11,395)
--------- ---------
Stockholders' equity...................... 76,925 81,561
--------- ---------
Total liabilities and stockholders' equity.... $ 80,937 $ 84,300
========= =========
See accompanying notes to condensed financial statements.
OFFICIAL PAYMENTS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2000 1999
---------- ----------
Revenues:
Transaction fees.................................. $ 1,656 $ 728
Other revenues.................................... 168 102
--------- ---------
Total revenues................................ 1,824 830
--------- ---------
Cost of revenues:
Cost of transaction fees.......................... 946 181
Cost of transaction fees to related party......... 487 206
Cost of other revenues............................ 77 19
--------- ---------
Total cost of revenues........................ 1,510 406
--------- ---------
Gross profit........................................ 314 424
--------- ---------
Operating expenses:
Sales and marketing............................... 4,446 175
Development costs................................. 482 140
General and administrative........................ 5,234 196
Depreciation and amortization..................... 190 37
Allocated expenses from related party............. 45 -
--------- ---------
Total operating expenses...................... 10,397 548
--------- ---------
Loss from operations................................ (10,083) (124)
Other income, net................................... 1,134 3
---------- ---------
Net loss............................................ $ (8,949) $ (121)
========== ==========
Basic and diluted net loss per share................ $ (0.42) $ (0.01)
========== ==========
Shares used in computing basic and diluted
net loss per share............................... 21,303 15,000
========== ==========
See accompanying notes to condensed financial statements.
OFFICIAL PAYMENTS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2000 1999
---------- ----------
Cash flow used in operating activities:
Net loss.......................................... $ (8,949) $ (121)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization................ 190 37
Amortization of deferred stock-based
compensation................................. 3,197 -
Changes in operating assets and liabilities
Accounts receivable, net..................... 121 105
Prepaid expenses and other current assets.... (970) (20)
Accounts payable and accrued expenses........ 1,256 (333)
Deferred revenue............................. 24 (7)
---------- ----------
Net cash used in operating activities...... (5,131) (339)
---------- ----------
Cash flows provided by (used in) investing activities:
Proceeds from sale of short-term investments...... 6,641 -
Capital expenditures.............................. (2,619) (135)
---------- -----------
Net cash provided by (used in) investing
activities.............................. 4,022 (135)
---------- -----------
Cash flow provided by (used in) financing activities:
Proceeds from exercise of stock options........... 1,116 -
Repayment of notes payable and capital leases..... (37) (32)
---------- -----------
Net cash provided by (used in) financing
activities.............................. 1,079 (32)
---------- -----------
Net decrease in cash................................ (30) (506)
Cash at the beginning of the period................. 1,643 631
---------- -----------
Cash at the end of the period....................... $ 1,613 $ 125
Supplement disclosure of noncash activity:
Cash paid for interest.............................. $ 6 $ 11
========== ===========
Assets acquired through capital leases.............. $ 30 $ 13
========== ============
Cash paid for income taxes.......................... $ 83 $ -
========== ============
See accompanying notes to condensed financial statements.
OFFICIAL PAYMENTS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Official Payments Corporation was formed as U.S. Audiotex, LLC, a
California limited liability company (the "LLC"), on June 26, 1996. U.S.
Audiotex Corporation, a Delaware corporation (the "Company"), was formed on
August 24, 1999. Effective September 30, 1999, the LLC merged with and into
the Company. On October 20, 1999, the Company changed its name to "Official
Payments Corporation". The Company provides credit card payment options for
consumers to pay personal federal and state income taxes, sales and use
taxes, property taxes and fines for traffic violations and parking
citations.
The Company's business model is unproven and evolving and it is
difficult to evaluate the Company's business. The use of credit cards to
make payments to government agencies is relatively new and evolving.
Because the Company has only a limited operating history, it is difficult
to evaluate its business and prospects and the risks, expenses and
difficulties that the Company may face in implementing its business model.
The Company's success will depend on maintaining its relationship with the
Internal Revenue Services (IRS) and on developing additional relationships
with state and local government agencies. There are no assurances that the
Company will be able to develop new relationships or maintain existing
relationships, and the failure to do so could have a material and adverse
effect on the business, operating results and financial condition of the
Company.
BASIS OF PRESENTATION
The accompanying condensed financial statements as of March 31, 2000
and December 31, 1999, and the three months ended March 31, 2000 and 1999,
are unaudited. The unaudited interim condensed financial statements have
been prepared on the same basis as the annual financial statements, and in
the opinion of management, reflect all adjustments necessary to present
fairly the Company's financial position, results of operations and cash
flows as of March 31, 2000 and for the three months ended March 31, 2000
and 1999. These adjustments are of a normal, recurring nature. These
condensed financial statements and notes thereto are unaudited and should
be read in conjunction with the Company's audited financial statements and
related notes included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999. The results for the three months ended March
31, 2000 are not necessarily indicative of the expected results for the
year ending December 31, 2000. Certain prior period balances have been
reclassified to conform to the current period presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported results of operations during the
reporting period. Actual results could differ from those estimates.
INVESTMENTS
As of March 31, 2000, the Company had short-term investments of $72.2
million. The Company classifies its short-term investments as
"available-for-sale." Financial instruments classified as short-term
investments include government securities and commercial paper, with
maturity dates of less than three months at the date of acquisition. Such
short-term investments are recorded at fair value based on quoted market
prices, with unrealized gains and losses recorded as other comprehensive
income (loss) until realized. At March 31, 2000, no comprehensive income
(loss) was reported, as the fair value of the Company's short-term
investments equaled the quoted market prices.
COMPREHENSIVE INCOME (LOSS)
The Company has no components of other comprehensive income (loss).
STOCK-BASED COMPENSATION
The Company uses the intrinsic value method to account for all of its
employee stock-based compensation plans. Expense associated with
stock-based compensation is being amortized on a straight-line basis over
the vesting period of the individual award consistent with the method
described in Accounting Principles Board (APB) Opinion No. 25.
REVENUE RECOGNITION
Transaction fees are derived from convenience fees paid by consumers
for credit card payment services provided by the Company. Convenience fees
are charged based on the amount of the payment processed and the type of
payment. Transaction fees are recognized in the month the services are
provided.
Other revenues consist of the sale of customized systems which include
software licenses, implementation services, training and post contract
support related to these system sales. As vendor specific objective
evidence does not exist for each element of the contract, revenues are
recognized, under the completed contract method, upon customer acceptance
of the software which occurs after installation of the system and the
completion of training. Maintenance revenues are deferred based on vendor
specific objective evidence and recognized ratably over the contractual
term of the maintenance agreement, generally one year.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. Such costs are
included in sales and marketing expense and totaled approximately $3.2
million and $7,000 for the three months ended March 31, 2000 and 1999,
respectively.
Note 2. NET LOSS PER SHARE
Basic net loss per share is computed using the weighted-average number
of outstanding shares of common stock. Diluted net loss per share is
computed using the weighted-average number of shares of common stock
outstanding and, when dilutive, potential common shares from options to
purchase common stock using the treasury stock method.
The following table presents the calculation of basic and diluted net
loss per share (in thousands, except share and per share data):
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2000 1999
-------- --------
Net loss......................................... $ ( 8,949) $ (121)
------------ ------------
Weighted-average shares used in computing basic
and diluted net loss per common share.......... 21,303,000 15,000,000
============ ============
Basic and diluted net loss per common share...... $ (0.42) $ (0.01)
============ ============
Basic and diluted net loss per share are computed using the
weighted-average number of outstanding shares of common stock. Net loss per
share for the three months ended March 31, 2000 does not include the effect
of approximately 6,495,000 stock options with a weighted-average exercise
price of $6.94 per share because their effects are anti-dilutive. There
were no common stock equivalents outstanding as of March 31, 1999.
Note 3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
MARCH 31, DECEMBER 31,
-----------------------------------
2000 1999
-------- --------
Computer equipment.............................. $ 4,430 $ 1,836
Furniture and fixtures.......................... 540 485
--------- ---------
4,970 2,321
Less accumulated depreciation and amortization.. 709 519
--------- ---------
$ 4,261 $ 1,802
========= =========
Note 4. AMORTIZATION OF DEFERRED STOCK-BASED COMPENSATION
Amortization of deferred stock-based compensation consists of the
following (in thousands):
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2000 1999
-------- --------
Sales and marketing............................. $ 249 $ -
Development costs............................... - -
General and administrative...................... 2,948 -
--------- ---------
$ 3,197 $ -
========= =========
Note 5. OTHER INCOME, NET
Other income, net, consists of the following (in thousands):
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2000 1999
-------- --------
Interest income................................. $ 1,140 $ 4
Interest expense................................ (12) (11)
Other income, net .............................. 6 10
--------- ---------
$ 1,134 $ 3
========= =========
Note 6. SEGMENT INFORMATION
The Company adopted the provisions of SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, in fiscal 1999. SFAS No.
131 supercedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, and establishes standards for reporting 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 operates in a single operating segment. The Chief
Executive Officer (CEO) has been identified as the Chief Operating Decision
Maker because he has final authority over resource allocation decisions and
performance assessment. The CEO reviews financial information by
disaggregated information about revenues by product for purposes of making
operating decisions and assessing financial performance. The financial
information reviewed by the CEO is consistent with the information
presented in the accompanying statements of operations.
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2000 1999
-------- --------
Revenues by product are Transaction fees:
Federal.................................... $ 522 $ 114
State...................................... 283 22
Local...................................... 851 592
Other revenues............................. 168 102
-------- --------
Total revenues............................. $ 1,824 $ 830
======== ========
Note 7. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial
statements. In March 2000, the SEC issued Staff Accounting Bulletin No.
101A (SAB 101A), Amendment: Revenue Recognition in Financial Statements.
SAB 101A delays the implementation date of SAB 101 for registrants with
fiscal years that begin between December 16, 1999 and March 15, 2000. The
Company will adopt SAB 101 as required in the second quarter of 2000 and is
evaluating the effect that such adoption may have on its results of
operations and financial position.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25 (FIN 44). FIN 44
clarifies the application of APB Opinion No. 25 and, among other issues,
clarifies the following: the definition of an employee for purposes of
applying APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; the accounting consequences of various
modifications to the terms of previously fixed stock options or awards; and
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in
FIN 44 cover specific events that occurred after either December 15, 1998
or January 12, 2000. The Company will adopt FIN 44 as required in the second
quarter of 2000 and is evaluating the effect that such adoption may have on
its results of operations and financial position.
Note 8. SUBSEQUENT EVENTS
In April 2000, the Company entered into a sale-leaseback agreement for
$1 million in interactive voice response telephone system (IVR) equipment.
The sale-leaseback transaction did not result in any profit or loss for the
Company because the selling price of the equipment was equal to the cost on
the closing date of the agreement. The leased equipment will be accounted
for as a capital lease, in accordance with SFAS No. 13, Accounting for
Leases.
In April 2000, after discussion by the Company's board of directors,
Brian W. Nocco, the Company's Chief Financial Officer left the Company to
pursue other opportunities. In accordance with the terms of Mr. Nocco's
employment agreement, the Company is required to accelerate the vesting of
Mr. Nocco's stock options granted in August, September, and November of
1999. As a result, the Company expects to incur a one-time non-cash
compensation expense of approximately $3.7 million during the second
quarter of 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information in this report contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and section 21E of the Securities Exchange Act of 1934, as
amended. Any statements contained herein that are not statements of
historical facts may be deemed to be forward-looking statements. For
example, words such as "may", "will", "should", "estimates", "predicts",
"potential", "continue", "strategy", "believes", "anticipates", "plans",
"expects", "intends", and similar expressions are intended to identify
forward-looking statements. Such statements are based upon the current
economic environment and current expectations that involve risks and
uncertainties, including, but not limited to statements regarding the
Company's competitive position, expected operating and financial
performance, business model and expected growth of electronic payments to
government entities. All forward-looking statements included in this report
are based upon information available to the Company as of the date hereof.
You are cautioned that these statements are not guarantees of future
performance. The Company's actual results and the timing of certain events
may differ significantly than those anticipated in, or caused by, any
forward-looking statements as a result of certain risks and uncertainties,
including, without limitation, the general economic and business
conditions, major systems failures, constraints in capacity, rapid
technological changes, ability to retain existing government contracts and
enter into new government contracts, competitive nature of the market in
which the Company competes, the early stages of development of the
Company's products, and the lack of widespread market acceptance of the
Company's products. A more complete description of these and other risks
and uncertainties associated with the Company's business can be found in
the Company's filings with the United States Securities and Exchange
Commission, including its Annual Report on Form 10-K for the year ended
December 31, 1999. The Company does not undertake any obligation to update
publicly any forward-looking statement, whether as a result of new
information, future events or otherwise.
Overview
Official Payments Corporation is the leading provider of electronic
payment options to government entities enabling consumers to use their
credit cards to pay, by internet or the telephone, personal federal and
state income taxes, sales and use taxes, property taxes and fines for
traffic violations and parking citations. The Company's interactive
toll-free telephone number, 1-888-2PAY-TAXSM, allows customers to make
payments and receive certain customer service information. The Company's
website, at www.8882paytax.comSMand at www.officialpayments.comSM,
currently allow consumers to make certain payments through the Internet.
The Company's revenues consist primarily of convenience fees, which
are transaction fees paid by consumers for using our credit card payment
services. For processing personal federal and state income tax payments and
property tax payments, the convenience fee charged is a percentage of the
payment amount. For processing fines for traffic violations and parking
citations, a fixed amount is charged per ticket. The Company also derives a
small amount of other revenues from sales of its systems to government
entities and other miscellaneous fees such as for maintenance and
consulting. In these cases, revenues for software systems sales are
recognized upon installation based on vendor-specific objective evidence
and revenues for maintenance are recognized ratably over the service period
based on vendor-specific objective evidence. Consulting revenues are
recognized as the services are performed.
The Company's contract with the IRS currently accounts for a
significant portion of the Company's revenue. As of January 2000, the
Company offered its services for the balance-due and extension payment of
personal federal income taxes due on April 17, 2000 and estimated tax
payments for the 2000 tax year. In the three months ended March 31, 2000,
convenience fees from tax payments to the IRS accounted for approximately
29% of the Company's total revenues. The Company expects that percentage to
increase significantly during the second quarter and throughout fiscal year
2000. The IRS has selected the Company to provide electronic payment
services with respect to balance-due and extension tax payments for the
2000 tax year, as well as estimated tax payments for the 2001 tax year
(with the IRS having the option to renew the Company's services for an
additional year). If the IRS does not continue to select the Company to
perform this service in subsequent years, the business, operating results
and financial position of the Company would be materially and adversely
affected.
The Company's primary cost of revenues are the merchant discount fee
paid to its credit card processors, which is a certain percentage of the
total amount paid by the consumer, depending on the credit card used and
the type of transaction. The Company also incurs telecommunications costs
through its telephone conduit. Although there are no telecommunications
costs associated with payments made through the Internet conduit, the
Company pays a third party license fee per completed transaction for
certain technology used in the Internet conduit.
Processing fines for traffic violations and parking citations produces
a higher gross margin than processing income tax and property tax payments
because the convenience fee as a percentage of fines processed is
significantly higher.
Operating expenses include sales and marketing expenses, development
costs, general and administrative expenses, depreciation and amortization,
and allocated expenses from a related party. One of the largest components
of these expenses was the amortization of deferred stock-based
compensation, which amounted to $3.2 million in the quarter ending March
31, 2000. Sales and marketing expenses consist primarily of advertising
expenses and salaries and commissions for sales and marketing personnel.
Development costs consist primarily of salaries for engineering personnel
and development cost for the Company's customer service application.
General and administrative expenses consist primarily of salaries for
executive, finance, customer service and administrative personnel.
The Company has incurred significant losses since inception and
expects to continue to incur losses for the foreseeable future. As of March
31, 2000, the Company had an accumulated deficit of approximately $20.3
million. The Company recorded on its balance sheet a deferred stock-based
compensation expense totaling $42.9 million in the third and fourth
quarters of 1999. This deferred charge consists of an amount of $10.0
million, representing the guaranteed value of options granted to Thomas R.
Evans, the Company's Chairman and Chief Executive Officer, and an amount of
$32.9 million, representing the estimated value of the common stock
underlying options granted to certain other officers and employees of the
Company in August, September and November of 1999 in excess of the exercise
price of those options. The $10.0 million deferred charge related to Mr.
Evans' options and $28.4 million of deferred charges related to new options
granted to other officers and employees is being amortized, on a
straight-line basis, over a three-year vesting period, beginning in the
third quarter of 1999. $4.5 million of expenses related to options granted
to other officers and employees of the Company were expensed upon
completion of its initial public offering on November 29, 1999. See Note 4
to the Company's December 31, 1999 audited financial statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods illustrated, certain
statements of operations data expressed as a percentage of total revenues.
The data has been derived from the unaudited financial statements contained
in this report, which in management's opinion, have been prepared on
substantially the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial information for the
periods presented. The operating results for any period should not be
considered indicative of the results for any future period. This
information should be read in conjunction with the financial statements
included in this report, as well as the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999.
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2000 1999
-------- --------
STATEMENT OF OPERATIONS DATA:
Revenues:
Transaction fees................................... 91% 88%
Other revenues..................................... 9 12
------ ------
Total revenues................................. 100 100
------ ------
Cost of revenues:
Cost of transaction fees........................... 52 22
Cost of transaction fees to related party.......... 27 25
Cost of other revenues............................. 4 2
------ ------
Total cost of revenues......................... 83 49
------ ------
Gross profit......................................... 17 51
------ ------
Operating expenses:
Sales and marketing................................ 244 21
Development costs.................................. 26 17
General and administrative......................... 287 24
Depreciation and amortization...................... 11 4
Allocated expenses from related party.............. 2 -
------ -------
Total operating expenses....................... 570 66
------ -------
Income (loss) from operations........................ (553) (15)
Other income (expense), net.......................... 62 0
------ -------
Net income (loss).................................... (491)% (15)%
======= =======
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
REVENUES
Total Revenues. Total revenues increased $994,000 to $1.8 million for
the three months ended March 31, 2000 from $830,000 for the three
months ended March 31, 1999, an increase of 120%. This increase is
primarily attributable to increases in revenues generated from
processing personal federal and state income tax payments and property
tax payments.
Federal Transaction Fees. Revenues from processing federal payments
are solely related to federal income tax payments for balance-due,
extension, and estimated payments. Federal transaction fees increased
$408,000 to $522,000 for the three months ended March 31, 2000 from
$114,000 for the three months ended March 31, 1999, an increase of
358%. For the three months ended March 31, 2000, the Company processed
approximately 10,700 transactions totaling $18.4 million, compared to
approximately 3,300 transactions totaling $4.4 million for the three
months ended March 31, 1999. The Company believes the increase in
revenue from the comparable period in 1999 is primarily the result of
increased advertising by the Company, the IRS, and participating
credit card companies, as well as the new processing of extension and
estimated federal tax payments. On average, the Company charged a 2.8%
convenience fee based upon the dollar amount of the IRS payment for
processing personal federal income taxes during the three months ended
March 31, 2000, as compared to a 2.6% convenience fee in the three
months ended March 31, 1999. Federal transaction fees represented 29%
of total revenues for the three months ended March 31, 2000 compared
to 14% of total revenues for the three months ended March 31, 1999.
State Transaction Fees. Revenues from processing state payments are
related to state income tax payments for balance-due, estimated and
extension personal taxes and sales and use taxes to the states of
California, New Jersey, Illinois, Connecticut, Oklahoma, Minnesota and
the District of Columbia. State revenues increased $261,000 to
$283,000 for the three months ended March 31, 2000 from $22,000 for
the three months ended March 31, 1999, an increase of 1,186%. For the
three months ended March 31, 2000, we processed approximately 7,600
transactions totaling $9.6 million, compared to approximately 1,000
transactions totaling $782,000 for the three months ended March 31,
1999. The increase in revenues is primarily related to additional
state contracts and additional payment services and options provided
to existing state contracts. The Company only processed tax payments
for the state of California during the three months ended March 31,
1999. On average, the Company charged a 2.9% convenience fee based
upon the dollar amount of the payment for processing state income and
sales and use taxes during the three months ended March 31, 2000, as
compared to a 2.8% convenience fee in the three months ended March 31,
1999. State transaction fees represented 15% of total revenues for the
three months ended March 31, 2000 compared to 3% of total revenues for
the three months ended March 31, 1999.
Local Transaction Fees. Revenues from processing local payments
consist of property taxes, traffic violations, parking citations, fax
filing, and utility payments. Local revenues increased $259,000 to
$851,000 for the three months ended March 31, 2000 from $592,000 for
the three months ended March 31, 1999, an increase of 44%. For the
three months ended March 31, 2000, we processed approximately 106,400
transactions totaling $23.2 million, compared to approximately 75,800
transactions totaling $16.9 million for the three months ended March
31, 1999. Revenues from processing property tax payments increased
$165,000 to $322,000 for the three months ended March 31, 2000 from
$157,000 for the three months ended March 31, 1999, an increase of
105%. Revenues from processing fines for traffic violations increased
$42,000 to $320,000 for the three months ended March 31, 2000 from
$278,000 for the three months ended March 31, 1999, an increase of
15%. Revenues from processing fines for parking citations increased
$35,000 to $99,000 for the three months ended March 31, 2000 from
$64,000 for the three months ended March 31, 1999, an increase of 55%.
Revenues from other transaction fees increased $17,000 to $110,000 for
the three months ended March 31, 2000 from $93,000 for the three
months ended March 31, 1999, an increase of 18%. The increase in local
transaction fees is primarily attributable to the increase in property
tax, moving violation, and parking citation clients subsequent to
March 31, 1999. Local transaction fees represented 47% of total
revenues for the three months ended March 31, 2000 compared to 71% of
total revenues for the three months ended March 31, 1999.
Other Revenues. Other revenues consist of system sales, maintenance,
and consulting revenues. Other revenues increased $66,000 to $168,000
for the three months ended March 31, 2000 from $102,000 for the three
months ended March 31, 1999. Other revenues represented 9% of total
revenues for the three months ended March 31, 2000 compared to 12% of
total revenues for the three months ended March 31, 1999.
COST OF REVENUES
Cost of Transaction Fees. Cost of transaction fees increased $1.0
million to $1.4 million for the three months ended March 31, 2000 from
$387,000 for the three months ended March 31, 1999, an increase of
270%. The largest component of cost of transaction fees, merchant
discount fees, increased $651,000 to $982,000 for the three months
ended March 31, 2000 from $331,000 for the three months ended March
31, 1999, an increase of 197%. The cost of telecommunication charges
for the Company's toll-free interactive telephone system increased
$349,000 to $395,000 for the three months ended March 31, 2000 from
$46,000 for the three months ended March 31, 1999, an increase of
759%. Other cost of transaction fees increased $46,000 to $56,000 for
the three months ended March 31, 2000 from $10,000 for the three
months ended March 31, 1999. Cost of transaction fees was 79% of total
revenues for the three months ended March 31, 2000, compared to 47%
for the three months ended March 31, 1999. The increase in cost of
transaction fees is due to primarily one-time telecommunication costs
incurred during the recent period in preparation for the anticipated
higher volume of federal and state tax payments during the first two
weeks in April 2000 and higher volume of federal income tax payments
processed, which has a lower gross profit margin than other services
provided.
Cost of Other Revenues. Cost of other revenues increased $58,000 to
$77,000 for the three months ended March 31, 2000 from $19,000 for the
three months ended March 31, 1999. The increase in other revenues is
primarily attributable to the equipment cost of the sold systems in
the three months ended March 31, 2000.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased $4.3
million to $4.4 million for the three months ended March 31, 2000 from
$175,000 for the three months ended March 31, 1999. This increase is
primarily attributable to a $3.2 million advertising campaign to
promote the Company's federal tax payment services and increase brand
awareness. The increase is also attributable to amortization of
$249,000 for deferred stock-based compensation for options to purchase
shares of the Company's common stock at exercise prices below their
fair market value at the date of grant which were granted to the
Company's sales and marketing employees in August, September, and
November 1999. The increase in sales and marketing personnel from
March 31, 1999 to March 31, 2000 and sales commission payables also
contributed to the increase in sales and marketing expenses. Sales and
marketing expenses represented 244% of total revenues for the three
months ended March 31, 2000 compared to 21% for the three months ended
March 31, 1999.
Development Costs. Development costs increased $342,000 to $482,000
for the three months ended March 31, 2000 from $140,000 for the three
months ended March 31, 1999. The increase is primarily attributable
the increase in engineering personnel from March 31, 1999 to March 31,
2000 and additional consultants contracted during the recent quarter
to develop the Company's customer service application. Development
costs represented 26% of total revenues for the three months ended
March 31, 2000 compared to 17% for the three months ended March 31,
1999.
General and Administrative. General and administrative expenses
increased $5.0 million to $5.2 million for the three months ended
March 31, 2000 from $196,000 for the three months ended March 31,
1999. This increase is primarily attributable to amortization expense
of $2.9 million for deferred stock-based compensation for options to
purchase shares of the Company's common stock at exercise prices below
their fair market value at the date of grant which were granted to the
Company's general and administrative employees in August, September,
and November 1999. The increase is also attributable to the increase
in customer service activities in preparation for the anticipated
higher volume of federal and state tax payments during the first two
weeks of April 2000. Salary and travel expenses for the Company's
general and administrative employees also increased due to the
increase in headcount from March 31, 1999 to March 31, 2000. General
and administrative expenses represented 287% of total revenues for the
three months ended March 31, 2000 compared to 24% for the three months
ended March 31, 1999.
Depreciation and Amortization. Depreciation and amortization increased
$153,000 to $190,000 for the three months ended March 31, 2000 from
$37,000 for the three months ended March 31, 1999. The increase is
primarily related to an increase in IVR equipment purchased during the
recent period in preparation for the anticipated higher volume of
federal and state tax payments during the first two weeks of April
2000. During the Company's peak processing period in April 2000, the
Company's maximum utilization of its IVR system capacity was
approximately 10%, and acccordingly, the Company believes that its IVR
system capacity is sufficient to meet its transactional requirements
for the foreseeable future and accommodate the expected growth in its
business. Depreciation and amortization represented 11% of total
revenues for the three months ended March 31, 2000 compared to 4% for
the three months ended March 31, 1999.
Allocated Expenses from Related Party. Related party expense was
$45,000 for the three months ended March 31, 2000. Imperial Bank, a
California chartered bank and wholly owned subsidiary of Imperial
Bancorp, is the beneficial owner of approximately 56% of the
outstanding stock of the Company and charges the Company for human
resource and other services, including payroll processing and benefits
administration. The Company did not utilize Imperial Bank's services
during the three months ended March 31, 1999.
OTHER INCOME, NET
Other income, net consists of interest income, interest expense and
other non-operating expenses. Other income, net increased to $1.1 million
for the three months ended March 31, 2000 from $3,000 for the three months
ended March 31, 1999. This increase is directly related to higher interest
income resulting from higher average cash balances during the recent
period, as compared to the first quarter of fiscal year 1999.
INCOME TAXES
The Company incurred operating losses during the period of its
incorporation from September 30, 1999 through March 31, 2000. The Company
has recorded a valuation allowance for the full amount of net deferred tax
assets, as the future realization of the tax benefit is not currently
likely. During 1998, Official Payments was a California limited liability
company. Therefore, all tax operating losses were used by the members of
the limited liability company on their respective corporate tax returns.
LIQUIDITY AND CAPITAL RESOURCES
In November 1999, the Company completed the initial public offering of
its common stock and realized net proceeds from the offering of
approximately $78.7 million. Prior to the offering the Company had financed
its operations through private sales of common stock, with net proceeds of
$1.2 million, and through bank and shareholder loans. As of March 31, 2000,
the Company had $73.8 million in cash and investments, and $72.7 million in
working capital.
Net cash used in operating activities was $5.1 million and $339,000 for
the three months ended March 31, 2000 and 1999, respectively. The cash used
in operating activities for the three months ended March 31, 2000 was
primarily the result of the Company's net loss offset by non-cash operating
expenses (such as amortization of deferred stock-based compensation and
depreciation) and an increase in accounts payable and accrued expenses. The
cash used in operating activities for the three months ended March 31, 1999
was primarily the result of the Company's net loss and a decrease in
accounts payable and accrued expenses.
Net cash provided from investing activities was $4.0 million for the
three months ended March 31, 2000. Cash provided from investing activities
primarily reflects the sale of short-term investments, offset by property
and equipment purchases during that period. Net cash used in investing
activities was $135,000 for the three months ended March 31, 1999. Cash
used in investing activities primarily reflects purchases of property and
equipment during that period.
Net cash provided by financing activities was $1.1 million for the three
months ended March 31, 2000. The cash generated in the recent period was
primarily related to the exercise of stock options by one of the Company's
directors (although the shares of the Company's common stock so purchased
remain subject to a right of repurchase by the Company in accordance with
the terms of the Company's 1999 Stock Incentive Plan). Net cash used in
financing activities was $32,000 for the three months ended March 31, 1999.
The cash used in the three months ended March 31, 1999, was primarily
related to the repayment of notes payable and capital lease obligations.
The Company expects to experience growth in its operating costs for the
foreseeable future in order to execute its business plan, particularly in
the areas of web development costs and sales and marketing. The Company
also expects to incur expenses to enhance and staff the new corporate
headquarters in Stamford, Connecticut. As a result, the Company estimates
that these operating costs, as well as other planned expenditures, will
constitute a significant use of cash. The Company believes that the current
cash resources will be sufficient to meet its working capital and capital
expenditures for the foreseeable future.
YEAR 2000 IMPACT
As of the date of this filing, the Company has not incurred any
significant business disruptions as a result of Year 2000 issues. However,
while no such occurrence has developed, Year 2000 issues that may arise
related to key suppliers and service providers may not become apparent
immediately. We have received assurances of Year 2000 compliance from key
suppliers. The Company has received assurances from key service providers
such as financial institutions and Imperial Bank (which provides
transaction processing services and various employee benefits services for
the Company) as to their Year 2000 readiness. The Company will continue to
monitor its own systems and business partners to identify and address any
potential risk situations related to the Year 2000. No assurance can be
provided that the Company will not be adversely affected by these suppliers
and service providers due to noncompliance in the future.
SEASONALITY AND FLUCTUATION OF QUARTERLY RESULTS
The Company has generally experienced fiscal quarter over fiscal quarter
revenue growth with some seasonal fluctuations, primarily in the second and
fourth quarters. This fiscal quarter-over-fiscal 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 relate primarily to an increase in convenience fees from
processing property tax payments, which are generally collected twice a
year - in April and December. The sharp increase in revenues in the second
quarter is due to processing personal federal and state income tax payments
in the month of April. We expect that results for the second quarter of
future years will continue to be impacted by the April 15th deadline for
paying personal federal and state income taxes.
Since the Company does not process balance-due and extension personal
federal income tax payments in the third quarter, revenues in that quarter
are expected to be lower than in the second quarter.
The Company anticipates that its operating expenses will continue to
increase due to the expansion of its sales force in order to obtain
additional state and municipal clients and the continuous marketing
campaign to make consumer users aware of its electronic payment option. If
revenues in any quarter do not increase correspondingly with increases in
expenses, the Company's results for that quarter would be materially and
adversely affected. In addition, as of March 31, 2000, the Company had
$31.8 million in deferred stock-based compensation. The Company intends to
amortize this amount on a straight-line basis over the remaining of the
three-year vesting period.
For the foregoing reasons, the Company believes that comparisons of
its quarterly operating results are not necessarily meaningful and that its
operating results in any particular quarter should not be relied upon as
necessarily indicative of future performance. In addition, it is possible
that in some future quarters the Company's operating results will be below
the expectations of research analyst and investors, and in that case, the
price of the Company's common stock is likely to decline.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company does
not use derivative financial instruments in its investment portfolio. The
primary objective of the Company's investment activities is to preserve
principal while maximizing yields without significantly increasing risk.
This is accomplished by investing in widely diversified investments,
consisting primarily of investment grade securities. Due to the nature of
the Company's investments, the Company believes that there is no material
risk exposure. All investments are carried at market value, which
approximates cost.
The table below represents principal amounts and related
weighted-average interest rates by year of maturity for the Company's
investment portfolio.
FY2000 FY2001 FY2002 FY2003 FY2004 Thereafter Total
------ ------ ------ ------ ------ ---------- -------
Money market fund
and cash $ 1,613 $ - $ - $ - $ - $ - $ 1,613
Average interest
Rate 5.05% 0.00% 0.00% 0.00% 0.00% 0.00%
Investments $ 72,230 $ - $ - $ - $ - $ - $ 72,230
Average interest
rate 6.10% 0.00% 0.00% 0.00% 0.00% 0.00%
-------- ------- ------- ------- ------- -------- --------
Total cash and
investments $ 73,843 $ - $ - $ - $ - $ - $ 73,843
======== ======= ====== ======= ======= ======== ========
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company currently is not involved in any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 29, 1999, the Company completed the initial public offering
of its common stock. The managing underwriters in the offering were
Donaldson, Lufkin, & Jenrette, CIBC World Markets and DLJdirect Inc. The
shares of the common stock sold in the offering were registered under the
Securities Act of 1933, as amended, on a Registration Statement on Form S-1
(No. 333-87325). The Securities and Exchange Commission declared the
Registration Statement effective on November 22, 1999.
The offering commenced on November 23, 1999 and was completed on
November 29, 1999 after the Company had sold all of the 5,750,000 shares of
common stock registered under the Registration Statement (including 750,000
shares sold in connection with the exercise of the underwriters'
over-allotment option). The initial public offering price was $15.00 per
share, resulting in gross proceeds from the initial public offering of
$86.2 million.
The Company paid a total of $6.0 million in underwriting discounts and
commissions and approximately $1.5 million has been incurred for costs and
expenses related to the offering. None of the costs and expenses related to
the offering were paid directly or indirectly to any director or officer of
the Company or their associates, persons owning 10 percent or more of any
class of equity securities of the Company or an affiliate of the Company.
After deducting the underwriting discounts and commissions and the
offering expenses, the estimated net proceeds to the Company from the
offering were approximately $78.7 million. The net offering proceeds have
been used to make the following payments: approximately $2.9 million for
the purchase and installation of computer equipment to expand transaction
processing capabilities; approximately $3.2 million for direct marketing
and promotional activities; approximately $100,000 for the build-out of the
Company's new headquarters offices in Stamford, Connecticut; and
approximately $200,000 for general corporate purposes. None of these costs
or expenses were paid directly or indirectly to any director or officer of
the Company or their associates, persons owning 10 percent or more of any
class of equity securities of the Company or an affiliate of the Company.
In the future, the Company may also use a portion of its net proceeds to
acquire or invest in businesses, technologies, products or services (which
amount has not been specifically allocated as of the date hereof). Unused
proceeds are invested in short-term investments.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the three months ended March 31, 2000, there were no matters
submitted to a vote of security holders through a solicitation of proxies
or otherwise.
ITEM 5. OTHER INFORMATION
On April 25, 2000, the Company's board of directors approved an
amendment to the Company's 1999 Stock Incentive Plan (the "Plan") which
permits the Compensation Committee of the board of directors to grant
options to purchase the Company's common stock to consultants and other
independent advisors to the Company, in addition to the Company's key
employees and directors (who were the only potential option recipients
previously provided for under the Plan). The board of directors determined
that it is in the best interest of the Company and its stockholders to have
another tool, if necessary, to strengthen the mutuality of interests
between the Company and important independent advisors to the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Contract between Internal Revenue Service and the Company,
dated as of March 3, 2000.
10.2 1999 Stock Incentive Plan, as amended
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No current reports on Form 8-K were filed during the quarter
covered by this report.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant has caused this report to be signed on its behalf by the
undersigned, there unto duly authorized.
OFFICIAL PAYMENTS CORPORATION
May 12, 2000 By: /s/ Thomas R. Evans
----------------------------
Thomas R. Evans
Chairman of the Board and Chief
Executive Officer
May 12, 2000 By: /s/ Hyunjin F. Lerner
-----------------------------
Hyunjin F. Lerner
Controller (Chief Accounting Officer)
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- -------- -----------
10.1 Contract between Internal Revenue Service and the
Company, dated as of March 3, 2000
10.2 1999 Stock Incentive Plan, as amended
27.1 Financial Data Schedule