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, 2001
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 (Zip Code)
offices)
Registrant's Telephone Number, Including Area Code (203) 356-4200
--------------
____________________________________N/A_______________________________________
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 9, 2001, 21,978,115 shares of the registrant's common
stock were issued and outstanding.
==============================================================================
OFFICIAL PAYMENTS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
TABLE OF CONTENTS
ITEM PAGE NUMBER
- ---------- ----------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements.................................. 3
Condensed Balance Sheets as of March 31, 2001 and
December 31, 2000..................................... 3
Condensed Statements of Operations for the three
month periods ended March 31, 2001 and 2000........... 4
Condensed Statements of Cash Flows for the three
month periods ended March 31, 2001 and 2000........... 5
Notes to the Condensed Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................... 15
PART II: OTHER INFORMATION
Item 1. Legal Proceedings......................................... 16
Item 2. Changes in Securities and Use of Proceeds................. 16
Item 3. Defaults Upon Senior Securities........................... 16
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 16
Item 5. Other Information......................................... 16
Item 6. Exhibits and Reports on Form 8-K.......................... 17
Signatures.............................................................. 18
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OFFICIAL PAYMENTS CORPORATION
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2001 2000
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash ............................................. $ 8,915 $ 3,783
Short-term investments............................ 58,000 62,115
Accounts receivable, net.......................... 917 2,210
Prepaid expenses and other current assets......... 433 600
-------- --------
Total current assets............................ 68,265 68,708
Property and equipment, net......................... 8,327 7,511
Other assets........................................ 44 44
-------- --------
Total assets.................................... $ 76,636 $ 76,263
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 265 $ 1,023
Accrued merchant discount fees.................... 1,220 1,123
Accrued payroll and severance..................... 461 454
Accrued expenses.................................. 3,311 2,536
Funds due to government clients................... 5,521 1,425
Deferred revenues................................. 37 65
Current portion of capital lease obligations...... 576 580
-------- --------
Total current liabilities....................... 11,391 7,206
Long-term portion of capital lease obligations...... 482 604
-------- --------
Total liabilities............................... 11,873 7,810
-------- --------
Stockholders' equity:
Common stock, $.01 par value; 150,000,000 shares
authorized; 21,978,115 and 21,505,770 shares
issued and outstanding as of March 31, 2001
and December 31, 2000, respectively............. 220 215
Additional paid-in capital........................ 130,111 129,473
Deferred stock-based compensation................. - (19,803)
Accumulated deficit............................... (65,568) (41,432)
-------- --------
Stockholders' equity...................... 64,763 68,453
-------- --------
Total liabilities and stockholders' equity.... $ 76,636 $ 76,263
======== ========
See accompanying notes to unaudited condensed financial statements.
OFFICIAL PAYMENTS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
--------------------------------
2001 2000
---------- ----------
Revenues:
Transaction fees.......................................... $ 3,474 $1,656
Other revenues............................................ 28 168
-------- --------
Total revenues........................................ 3,502 1,824
-------- --------
Cost of revenues:
Cost of transaction fees ................................. 1,869 946
Cost of transaction fees to related party................. 930 487
Cost of other revenues ................................... 6 77
-------- --------
Total cost of revenues................................... 2,805 1,510
-------- --------
Gross profit................................................ 697 314
-------- --------
Operating expenses:
Sales and marketing...................................... 2,380 4,197
Development costs........................................ 1,039 482
General and administrative............................... 2,105 2,331
Depreciation and amortization............................ 454 190
Amortization of deferred stock-based compensation ....... 19,803 3,197
-------- --------
Total operating expenses................................ 25,781 10,397
-------- --------
Loss from operations........................................ (25,084) (10,083)
Interest and other income, net.............................. 949 1,134
-------- --------
Net loss.................................................... $(24,135) $ (8,949)
======== ========
Basic and diluted net loss per share........................ $ (1.10) $ (0.42)
======== ========
Weighted average shares used in computing basic and diluted
net loss per share............. .......................... 21,846 21,303
======== =======
See accompanying notes to unaudited condensed financial statements.
OFFICIAL PAYMENTS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2001 2000
---------- ----------
Cash flows used in operating activities:
Net loss............................................. $ (24,135) $ (8,949)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization................... 454 190
Amortization of deferred stock-based
compensation................................. 19,803 3,197
Changes in operating assets and liabilities
Accounts receivable, net........................ 1,294 121
Prepaid expenses and other assets............... 166 (970)
Accounts payable and accrued expenses........... (655) 1,259
Funds due to government clients................. 4,871 ( 3)
Deferred revenues............................... (28) 24
-------- --------
Net cash provided by (used in) operating
activities................................. 1,770 (5,131)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments, net............. 4,115 6,641
Capital expenditures................................. (1,270) (2,619)
-------- --------
Net cash provided by investing activities..... 2,845 4,022
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options, net......... 643 1,116
Payments of capital lease obligations................ ( 126) ( 37)
-------- --------
Net cash provided by financing activities..... 517 1,079
-------- --------
Net Increase/(decrease) in cash........................ 5,132 (30)
Cash at the beginning of the period.................... 3,783 1,643
-------- --------
Cash at the end of the period.......................... $ 8,915 $ 1,613
======== ========
Supplemental disclosure of noncash activity:
Cash paid for interest................................. $ 32 $ 6
======== ========
Assets acquired through capital leases................. $ - $ 30
======== ========
Cash paid for taxes.................................... $ 24 $ 83
======== ========
See accompanying notes to unaudited condensed financial statements.
OFFICIAL PAYMENTS CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Official Payments Corporation (the "Company") is a leading provider of
electronic payment options to government entities, enabling consumers to
use their credit cards and "pin-less" debit cards to pay, by the Internet
or the telephone, personal federal and state income taxes, sales and use
taxes, property taxes, tuition payments, motor vehicle fees, fines for
traffic violations and parking citations and other government-imposed taxes
and fees. The Company commenced operations on June 26, 1996, initially
offering its credit card payment services for the payment of fines for
traffic violations and parking citations and property taxes. In 1998, the
Company signed a contract with the Internal Revenue Service ("IRS") and in
1999 began providing its services for the balance-due payment of personal
federal incomes taxes. In 2000, the Company extended its contract with the
IRS, adding two additional payment services, extension and estimated
personal federal income taxes. For the 2001 tax filing season, the IRS
further extended its contract with the Company, authorizing the Company to
add an internet payment option to its existing automated interactive voice
response telephone ("IVR") payment option for balance-due, extension, and
estimated personal federal income taxes.
BASIS OF PRESENTATION
The accompanying condensed financial statements as of March 31, 2001 and
the three months ended March 31, 2001 and 2000, are unaudited. The
condensed balance sheet at December 31, 2000 has been derived from audited
financial statements at that date. 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, 2001 and for the three
months ended March 31, 2001 and 2000. 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, 2000. The results for
the three months ended March 31, 2001 are not necessarily indicative of the
expected results for the year ending December 31, 2001. 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 accounting
principles generally accepted in the United States of America requires
management of the Company 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.
SHORT-TERM INVESTMENTS
As of March 31, 2001, the Company had short-term investments of $58.0
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 a
Standard and Poor's rating of A-1 or better), with maturity dates of
generally less than nine months. Such short-term investments are recorded
at fair value based on quoted market prices, with unrealized gains and
losses, which are de minimus for all periods presented, recorded (net of
tax) as a separate component of stockholders' equity.
COMPREHENSIVE INCOME (LOSS)
The Company has no components of other comprehensive income (loss).
STOCK-BASED COMPENSATION
In the third and fourth quarter of 1999, the Company recorded on its
balance sheet an amount representing the intrinsic value of the common
stock underlying options granted to certain officers and employees of the
Company in August, September, and November of 1999 in excess of the
exercise prices of those options.
In the second quarter of 2000, the Company recorded on its balance
sheet deferred stock-based compensation totaling $633,000 representing the
fair value of restricted shares of common stock granted to employees as
performance-based awards and also in replacement of, and in exchange for
cancelled, unvested stock options with exercise prices in excess of the
current market value at the time of grant.
In the first quarter of 2001, the Company fully amortized the $19.8
million deferred stock-based compensation for employee stock options and
restricted shares of common stock that became fully vested, pursuant to the
terms of the Company's stock incentive plans, as a result of Comerica
Incorporated's acquisition of Imperial Bancorp, the parent of the Company's
majority controlling stockholder, which constituted a change of control of
the Company. Prior to the Comerica/Imperial transaction, the Company
expected to amortize the deferred stock-based compensation charge over the
next six consecutive quarters through the second quarter of 2002.
REVENUE RECOGNITION
The Company's revenues are derived primarily 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 government obligation being paid. Revenues are recognized
in the period in which the services are provided. The revenues are
presented net of a provision for convenience fees when the collection of
the amount is not reasonably assured but is estimated and established in
the period in which the services are provided.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. Such costs are
included in sales and marketing expense on the condensed statement of
operations and totaled approximately $1.4 million and $3.2 million for the
three months ended March 31,2001 and 2000, respectively.
The Company has entered into cooperative advertising agreements with
two of its credit card partners, where such credit card companies have
contributed an aggregate of $515,000 to the Company for use in the
Company's 2001 advertising campaign. The Company considers these funds as a
reimbursement of costs incurred and nets the proceeds against sales and
marketing expenses as incurred.
Note 2. NET LOSS PER SHARE
Net loss per share is computed in accordance with SFAS No. 128,
"Earnings per Share". Under the provisions of SFAS No. 128, basic net loss
per share is computed by dividing the net loss for the period by the
weighted-average number of outstanding shares of common stock during the
period. Diluted net loss per share is computed using the weighted-average
number of shares of common stock outstanding and, when dilutive, potential
common shares from options to purchase common stock using the treasury
stock method.
Net loss per share for the three months ended March 31, 2001 and 2000
does not include the effect of 4,422,278 and 6,495,000 options to purchase
common stock with a weighted average exercise price of $1.55 and $6.94 per
share, respectively, because the effects are anti-dilutive.
Note 3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
MARCH 31, DECEMBER 31,
------------------------------
2001 2000
-------- --------
Computer equipment........................................ $ 6,311 $ 6,242
Web site development...................................... 3,958 2,757
Furniture and fixtures.................................... 747 747
-------- ---------
11,016 9,746
Less accumulated depreciation and amortization............ 2,689 2,235
-------- --------
$ 8,327 $ 7,511
======== ========
Certain computer equipment, software and office equipment are recorded
under capital leases that aggregated $1,588,000 and $665,000 as of March
31, 2001 and 2000, respectively. Accumulated amortization on the assets
recorded under capital leases aggregated $639,000 and $110,000 as of March
31, 2001 and 2000, respectively. Depreciation and amortization expense was
$454,000 and $190,000 as of March 31, 2001 and 2000, respectively, which
included amortization expense for assets under capital leases of $125,000
and $48,000 as of March 31, 2001 and 2000, respectively.
Note 4. AMORTIZATION OF DEFERRED STOCK-BASED COMPENSATION
Deferred stock-based compensation included as a component of
stockholders equity is non-cash and has been presented as a separate
component of operating expenses in the Company's statement of operations.
The following table shows the costs (in thousands) of such charges as
allocated to sales and marketing, development costs and general and
administrative expenses, which allocation is based on the functional
responsibilities of the underlying employees, consists of the following:
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
-------- --------
Sales and marketing.................................................. $ 1,872 $ 249
Development costs.................................................... 53 -
General and administrative........................................... 17,878 2,948
---------- ----------
$ 19,803 $ 3,197
========== ===========
During the first quarter of 2001, the Company fully amortized the
remaining $19.8 million of deferred stock-based compensation for employee
stock options that became fully vested as a result of Comerica
Incorporated's acquisition of Imperial Bancorp, the parent of the Company's
majority controlling stockholder, which constituted a change in control of
the Company.
Note 5. INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net, consists of the following (in
thousands):
THREE MONTHS ENDED MARCH 31
-------------------------------
2001 2000
---------- ----------
Interest income.................................................... $ 1,006 $ 1,140
Interest expense................................................... ( 32) (12)
Other income (expenses), net....................................... ( 25) 6
--------- --------
$ 949 $ 1,134
========= ========
Note 6. SEGMENT INFORMATION
The Company operates in a single operating segment within the United
States of America. 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
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
condensed statements of operations.
THREE MONTHS ENDED MARCH 31,
-------------------------------
2001 2000
---------- ----------
Revenues by product are Transaction fees:
Federal....................................................... $ 1,641 $ 522
State......................................................... 485 283
Local......................................................... 1,348 851
Other revenues.................................................. 28 168
-------- --------
Total revenues.................................................. $ 3,502 1,824
======== ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information in this report contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and section 21E of the Securities Exchange Act of 1934, as
amended. Any statements contained herein that are not statements of
historical facts may be deemed to be forward-looking statements. For
example, words such as "may", "will", "should", "estimates", "predicts",
"potential", "continue", "strategy", "believes", "anticipates", "plans",
"expects", "intends", and similar expressions are intended to identify
forward-looking statements. Such statements are based upon the current
economic environment and current expectations that involve risks and
uncertainties, including, but not limited to statements regarding the
Company's competitive position, expected operating and financial
performance, business model and expected growth of electronic payments to
government entities. All forward-looking statements included in this report
are based upon information available to the Company as of the date hereof.
You are cautioned that these statements are not guarantees of future
performance. The Company's actual results and the timing of certain events
may differ significantly from those anticipated in, or caused by, any
forward-looking statements as a result of certain risks and uncertainties,
including, without limitation, 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, pricing pressures, changes in laws and regulations (including
changes in the ability or predisposition of government entities to accept
directly payments by credit card, the continued 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, 2000. 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
The Company is a leading provider of electronic payment options to
government entities, enabling consumers to use their credit cards and
"pin-less" debit cards to pay, by the Internet or the telephone, personal
federal and state income taxes, sales and use taxes, property taxes,
tuition payments, motor vehicles fees, fines for traffic violations and
parking citations and other government-imposed taxes and fees. As of March
31, 2001, the Company offered approximately 1,287 services to approximately
807 government entities, including the IRS for whom the Company accepted
via the Internet and telephone balance due and estimated tax payments for
the 2000 tax year, as well as estimated payments for the 2001 tax year. The
Company's contract with the IRS had an initial one-year term, with the IRS
having the option to renew the contract for one additional year. The IRS
exercised this renewal option in March 2001.
As of March 31, 2001, the Company was providing its payment services
to the District of Columbia, as well as the states of Alabama, California,
Connecticut, Illinois, Kansas, Maryland, Minnesota, New Jersey, New York,
Ohio, Oklahoma, Virginia, and Wisconsin. In addition, as of March 31, 2001,
the Company had entered into agreements to provide, and was working to
implement, its services for the following states: Arkansas, Iowa,
Mississippi, Washington and West Virginia.
The Company's revenues consist primarily of convenience fees, which
are transaction fees paid by consumers for using the Company's credit card
payment services. For processing many payments (including, personal federal
and state income tax payments, sales and use tax payments and property tax
payments), the amount of the convenience fee charged varies based on the
specific amount of the government obligation. For processing other types of
payments (including, fines for traffic violations and parking citations),
the amount of the convenience fee charged is fixed, regardless of the
specific amount of the government obligation. Total revenues have increased
significantly since the Company started providing services in January 1999
for personal federal income tax payments.
In the three months ended March 31, 2001, convenience fees from tax
payments to the IRS accounted for approximately 47% of the Company's total
revenues.
The Company's primary cost of revenues is the merchant discount fees
paid to its credit card processors, which is a function of the total amount
paid by the consumer, the specific credit card used and the type of
transaction. The Company also incurs telecommunications costs and IVR
license royalty fees through its telephone conduit and third party
technology license fees for payments completed via the Company's Internet
conduit.
Processing fines for traffic violations and parking citations produces
a higher gross margin than processing income tax, sales and use 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 expenses, and
amortization of deferred stock-based compensation. The largest component of
these expenses, amortization of deferred stock-based compensation, amounted
to approximately $19.8 million for the three months ending March 31,2001.
The company completely amortized the deferred stock-based compensation for
employee stock options that became fully vested as a result of Comerica
Incorporated's acquisition of Imperial Bancorp, the parent of the Company's
majority controlling stockholder, which constituted a change of control of
the Company.
Sales and marketing expenses consist primarily of advertising expenses
and salaries and commissions for sales and marketing personnel. Development
costs consist primarily of salaries for engineering personnel. General and
administrative expenses consist primarily of salaries and other
compensation expense 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, 2001, the Company had an accumulated deficit of approximately $65.6
million.
RECENT EVENTS
For a discussion of material events involving the Company since
December 31, 2000 to the date of this filing, see the section entitled
"Recent Events" under Item 7 ("Management's Discussion and Analysis of
Financial Condition and Results of Operations") of the Company's Annual
Report on Form 10-K for the year ended December 31, 2000 filed with the
Securities and Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth, for the periods illustrated, certain
statement 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, 2000.
STATEMENT OF OPERATIONS DATA:
THREE MONTHS ENDED MARCH 31,
------------------------------
2001 2000
---------- ----------
Revenues:
Transaction fees.............................................. 99% 91%
Other revenues............................................... 1 9
--------- -------
Total revenues.......................................... 100 100
--------- -------
Cost of revenues:
Cost of transaction fees...................................... 53 52
Cost of transaction fees to related party..................... 27 27
Cost of other revenues........................................ - 4
-------- --------
Total cost of revenues....................................... 80 83
-------- --------
Gross profit..................................................... 20 17
-------- --------
Operating expenses:
Sales and marketing............................................ 68 230
Development costs.............................................. 30 27
General and administrative..................................... 60 128
Depreciation and amortization.................................. 13 10
Amortization of deferred stock-based compensation.............. 565 175
-------- --------
Total operating expenses................... ................. 736 570
-------- --------
Loss from operations............................................. (716) (553)
Other income, net................................................ 27 62
-------- --------
Net loss......................................................... (689)% (491)%
======== ========
COMPARISON OF THE THREE MONTHS ENDED MARCH 31,2001 AND 2000
REVENUES
Total Revenues. Total revenues increased $1.7 million to $3.5 million
for the three months ended March 31, 2001 from $1.8 million for the
three months ended March 31, 2000, an increase of 92%. This increase
is primarily attributable to increases in revenues generated from
processing federal income tax payments for balance-due, extension and
estimated payments, state income and sales and use tax payments and
revenues from processing local payments. The increase can also be
attributed to revenues generated from additional payment options added
to the Company's existing IRS contract, and additional state and local
clients added during years 2000 and 2001 which resulted in increases
in revenue from processing state and local property taxes.
Federal Transaction Fees. Federal transaction revenues consist of fees
earned in connection with processing payments related to personal
federal balance due, extension and estimated income taxes. Federal
transaction fees increased $ 1.1 million to $1.6 million for the three
months ended March 31, 2001 from $522,000 for the three months ended
March 31,2000, an increase of 211%. The increase in revenues is
primarily attributable to the first-time processing of estimated
income tax payments that are due on January 15th of every year and
overall increase in balance due payments that were processed by the
Company. For the three months ended March 31, 2001, the Company
processed approximately 19,000 transactions totaling $64.7 million,
compared to approximately 11,000 transactions totaling $18.5 million
for the three months ended March 31,2000. On average, during the three
months ended March 31, 2001, the Company charged consumers a
convenience fee equal to 2.5% of the dollar amount of the IRS payment.
Federal transaction fees represented 47% of total revenues for the
three months ended March 31, 2001.
State Transaction Fees. Revenues from processing state payments are
related to state income tax payments for balance-due and estimated
personal taxes to the states of Alabama, Arkansas, California,
Connecticut, District of Columbia, Illinois, Kansas, Maryland,
Minnesota, New Jersey, New York, Ohio, Oklahoma, Virginia, Washington,
Wisconsin and West Virginia. State transaction fees increased $202,000
to $485,000 for the three months ended March 31, 2001 from $283,000
for the three months ended March 31, 2000, an increase of 71%. For the
three months ended March 31, 2001, the Company processed approximately
16,300 transactions totaling $18.7 million, compared to approximately
8,000 transactions totaling $9.6 million for the three months ended
March 31, 2000. The increase in revenues is primarily related to
additional state contracts and additional payment services and options
provided to existing state clients. The Company processed income tax
payments for thirteen states (and the District of Columbia) during the
three months ended March 31, 2001, as compared to six states (and the
District of Columbia) during the three months ended March 31, 2000. On
average, during the three months ended March 31, 2001, the Company
charged consumers a convenience fee equal to 2.6% of the dollar amount
of the payment for processing state income and sales and use taxes, as
compared to a 2.9% convenience fee in the three months ended March 31,
2000. State transaction fees represented 14% of total revenues for the
three months ended March 31, 2001 compared to 16% of total revenues
for the three months ended March 31, 2000.
Local Transaction Fees. Revenues from processing local payments
consist of property taxes, traffic violations, parking citations, fax
filing, and utility payments. Local transaction fees increased
$499,000 to $1.35 million for the three months ended March 31, 2001
from $ 851,000 for the three months ended March 31, 2000, an increase
of 59%. For the three months ended March 31, 2001, the Company
processed approximately 133,300 transactions totaling $29.1 million,
compared to approximately 106,400 transactions totaling $23.2 million
for the three months ended March 31, 2000. Revenues from processing
property tax payments increased $292,000 to $614,000 for the three
months ended March 31, 2001 from $322,000 for the three months ended
March 31, 2000, an increase of 91%. Revenues from processing fines for
traffic violations increased $54,000 to $374,000 for the three months
ended March 31, 2001 from $320,000 for the three months ended March
31, 2000, an increase of 17%. Revenues from processing fines for
parking citations increased $47,700 to $146,700 for the three months
ended March 31, 2001 from $99,000 for the three months ended March 31,
2000, an increase of 48%. Revenues from other transaction fees
increased $77,000 to $187,000 for the three months ended March 31,
2001 from $110,000 for the three months ended March 31, 2000, an
increase of 70%. The additional property tax, moving violation, and
parking citation clients and increased brand awareness contributed to
the increase in local transaction fees. Local transaction fees
represented 39% of total revenues for the three months ended March 31,
2001 compared to 47% of total revenues for the three months ended
March 31, 2000.
Other Revenues. Other revenues during the three months ended March 31,
2001 consist of maintenance and consulting revenues. Other revenues
decreased $140,000 to $28,000 for the three months ended March 31,
2001 from $168,000 for the three months ended March 31, 2000. The
decrease in other revenues is due primarily to the sale of no
stand-alone systems during the first quarter of 2001, as compared to
the sale of two systems during the first quarter of 2000. Other
revenues represented 1% and 99% of total revenues for the three months
ended March 31, 2001 and March 31, 2000, respectively.
COST OF REVENUES
Cost of Transaction Fees. Cost of transaction fees increased $1.4
million to $2.8 million for the three months ended March 31, 2001 from
$1.4 million for the three months ended March 31, 2000, an increase of
100%. The largest component of cost of transaction fees, merchant
discount fees, increased $1.5 million to $2.5 million for the three
months ended March 31, 2001 from $982,000 for the three months ended
March 31, 2000, an increase of 153%. The cost of telecommunication
charges for the Company's IVR system decreased $132,000 to $263,000
for the three months ended March 31,2001 from $395,000 for the three
months ended March 31, 2000, a decrease of 33%. Other cost of
transaction fees decreased $14,500 to $41,500 for the three months
ended March 31, 2001 from $56,000 for the three months ended March 31,
2000. Cost of transaction fees was 80% of total revenues for the three
months ended March 31, 2001, compared to 79% for the three months
ended March 31, 2000.
Cost of Other Revenues. Cost of other revenues decreased $71,000 to
$6,000 for the three months ended March 31,2001 from $77,000 for the
three months ended March 31, 2000. The decrease is primarily due to
the sale of no stand-alone systems during the first quarter of 2001,
as compared to the sale of two systems during the first quarter of
2000.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses decreased $1.8
million to $2.4 million for the three months ended March 31, 2001 from
$4.2 million for the three months ended March 31, 2000. This was
primarily a result of a decrease in advertising expense of $1.8
million from $3.2 million for the three months ended March 31,2000 to
$1.4 million for the three months ended March 31, 2001. Sales and
marketing expenses represented 68% of total revenues for the three
months ended March 31, 2001 compared to 230% for the three months
ended March 31, 2000.
Development Costs. Development costs increased $557,000 to $ 1.0
million for the three months ended March 31, 2001 from $482,000 for
the three months ended March 31, 2000. The increase is primarily
attributable to the increase in engineering personnel and related
salary costs. Development costs represented 30% of total revenues for
the three months ended March 31, 2001 compared to 27% for the three
months ended March 31, 2000.
General and Administrative. General and administrative expenses
decreased $226,000 to $2.1 million for the three months ended March
31, 2001 from $2.3 million for the three months ended March 31, 2000.
General and administrative expenses represented 60% of total revenues
for the three months ended March 31, 2001 compared to 128% for the
three months ended March 31, 2000.
Depreciation and Amortization. Depreciation and amortization increased
$264,000 to $454,000 for the three months ended March 31, 2001 from
$190,000 for the three months ended March 31, 2000. The increase is
primarily related to an increase in IVR equipment purchased during the
first quarter of 2000 to allow for the processing of a higher volume
of federal and state tax payments. The increase is also related to the
additional office equipment and furniture and fixtures purchased
during the Company's move to its new headquarters in Stamford,
Connecticut and the expansion of its office in San Ramon, California.
Depreciation and amortization represented 13% of total revenues for
the three months ended March 31, 2001 compared to 10% for the three
months ended March 31, 2000.
Amortization of deferred stock-based compensation. Amortization of
deferred stock-based compensation increased $16.6 million to $19.8
million for the three months ended March 31, 2001 from $3.2 million
for the three months ended March 31, 2000. The increase is primarily
caused by the full amortization of the $19.8 million deferred
stock-based compensation for employee stock options that became fully
vested as a result of Comerica Incorporated's acquisition of Imperial
Bancorp, the parent of the Company's majority controlling stockholder,
which constituted a change in control of the Company. Prior to the
Comerica/Imperial transaction, the Company expected to amortize the
deferred stock-based compensation charge over the next six consecutive
quarters through the second quarter of 2002. Amortization of deferred
stock-based compensation represented 565% of total revenues for the
three months ended March 31, 2001 compared to 175% for the three
months ended March 31, 2000.
OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of interest income, interest
expense and other non-operating expenses. Other income, net, decreased by
$185,000 to $949,000 for the three months ended March 31, 2001 compared to
$1.1 million in other income, net for the three months ended March 31,
2000. This decrease is directly related to lower interest income resulting
from lower average cash balances during the recent period, as compared to
the first quarter of fiscal year 2000.
INCOME TAXES
The Company has incurred operating losses during the period from its
incorporation on September 30, 1999 through March 31, 2001. The Company has
recorded a valuation allowance for the full amount of net deferred tax
assets, since the future realization of the tax benefit is not assured.
Prior to September 30, 1999, the Company 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, 2001,
the Company had $66.9 million in cash and investments, and $ 56.9 million
in working capital.
Net cash provided by (used in) in operating activities was $1.8 million
and ($5.1) million for the three months ended March 31, 2001 and 2000,
respectively. The cash provided by operating activities for the three
months ended March 31, 2001 was primarily attributable to the Company's net
loss offset by non-cash operating expenses (such as amortization of
deferred stock-based compensation and depreciation) and a decrease in
accounts receivable, and an increase in funds due to government clients.
The cash used in operating activities for the three months ended March 31,
2000 was primarily attributable to the Company's net loss offset by
non-cash operating expenses (such as amortization of deferred stock-based
compensation and depreciation) and an increase in accounts payable and
accrued expenses.
Net cash provided from investing activities was $2.8 million and $4.0
million for the three months ended March 31, 2001 and 2000, respectively.
The Company increased its capital expenditures to continue building out its
Internet platform. This was offset by the sale of short-term investments.
In 2000, the Company increased its IVR equipment purchases to add
significant capacity to handle the higher volume of federal and state tax
payments in April 2000 and future periods. These expenditures were offset
by the sale of short-term investments during the three months ended March
31, 2000.
Net cash provided by financing activities was $.5 million and $1.1
million for the three months ended March 31, 2001 and 2000, respectively.
The cash generated in the three months ended March 31, 2001 was primarily
related to the exercise of stock options. The cash generated in the first
three month ended March 31, 2000 was primarily related to the exercise of
stock options by one of the Company's directors. These cash inflows were
offset by the repayment of capital lease obligations.
The Company believes that the current cash resources will be sufficient
to meet its working capital and capital expenditures for the next two
years.
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 quarter. The 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 large increase in revenues in the
second quarter is due to processing personal federal and state balance due
income tax payments in the month of April. The Company expects 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. In
addition, the Company's revenues are also impacted by the timing of federal
and state estimated personal income tax payments (which are made quarterly)
and local property tax payments (which are made only once or twice per year
in many jurisdictions).
The Company expects that its operating expenses will continue to
increase as a result of increased personnel, marketing, technological and
other infrastructure costs associated with the anticipated growth in the
Company's government client base and transaction volume. However, the rate
of increase of such expenses is currently expected to decline as the
Company's infrastructure becomes more fully developed. If revenues in any
quarter do not increase corresponding with increases in operating expenses,
the Company's results for that quarter would be materially and adversely
affected.
For the foregoing reasons, the Company believes that comparisons of
its quarterly operating results are not necessarily meaningful and that the
Company's 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.
FY2001 FY2002 FY2003 FY2004 FY2005 Thereafter Total
------ ------ ------ ------ ------ ---------- -------
Money market fund
and cash $ 8,915 $ - $ - $ - $ - $ - $ 8,915
Average interest
Rate 5.65% 0.00% 0.00% 0.00% 0.00% 0.00%
Investments $ 58,000 $ $ - $ - $ - $ - $58,000
Average interest
rate 5.48% 0.00% 0.00% 0.00% 0.00% 0.00%
------- ------ ------- ------ ------- -------- --------
Total cash and
investments $ 66,915 $ - $ - $ - $ - $ - $66,915
======= ====== ======= ====== ======= ======== ========
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company currently is not involved in any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 29, 1999, the Company completed the initial public offering
of its common stock. The managing underwriters in the offering were
Donaldson, Lufkin, & Jenrette, CIBC World Markets and DLJdirect Inc. The
shares of the common stock sold in the offering were registered under the
Securities Act of 1933, as amended, on a Registration Statement on Form S-1
(No. 333-87325). The Securities and Exchange Commission declared the
Registration Statement effective on November 22, 1999.
The offering commenced on November 23, 1999 and was completed on
November 29, 1999 after the Company had sold all of the 5,750,000 shares of
common stock registered under the Registration Statement (including 750,000
shares sold in connection with the exercise of the underwriters'
over-allotment option). The initial public offering price was $15.00 per
share, resulting in gross proceeds from the initial public offering of
$86.2 million.
The Company paid a total of $6.0 million in underwriting discounts and
commissions and approximately $1.5 million has been incurred for costs and
expenses related to the offering. None of the costs and expenses related to
the offering were paid directly or indirectly to any director or officer of
the Company or their associates, persons owning 10 percent or more of any
class of equity securities of the Company or an affiliate of the Company.
After deducting the underwriting discounts and commissions and the
offering expenses, the estimated net proceeds to the Company from the
offering were approximately $78.7 million. The net offering proceeds have
been used to make the following payments: approximately $2.0 million for
the purchase and installation of computer equipment to expand transaction
processing capabilities; approximately $4.0 million to add capacity, new
features and additional security and privacy measures to its Web site;
approximately $1.5 million for the build-out of the Company's headquarters
in Stamford, Connecticut and expansion of its leased office space in San
Ramon, California; and approximately $6.6 million for direct marketing and
promotional activities. Except for $135,000 and $151,000 paid to Imperial
Bank in 2000 and 1999, respectively, for the provision of certain general
administrative services, 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 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, 2001, there were no matters
submitted to a vote of security holders through a solicitation of proxies
or otherwise.
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On February 16, 2001, the Company filed a Current Report on Form
8-K to report the date and record date for its 2001 Annual Meeting
of Stockholders, as well as to specify various deadlines for
submitting stockholder proposals at such meeting.
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 14, 2001 By: /s/ Thomas R. Evans
----------------------------
Thomas R. Evans
Chairman of the Board and Chief Executive
Officer
May 14, 2001 By: /s/ Edward J. DiMaria
---------------------------
Edward J. DiMaria
Chief Financial Officer