UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 No.)
Three Landmark Square
Stamford, CT 06901-2501
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (203) 356-4200
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____________________________________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 November 7, 2001, 21,981,615 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 SEPTEMBER 30, 2001
TABLE OF CONTENTS
ITEM PAGE NUMBER
- ---------- ----------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements............................................ 3
Condensed Balance Sheets as of September 30, 2001 and
December 31, 2000........................................... 3
Condensed Statements of Operations for the three and nine-month periods
ended September 30, 2001 and 2000........................... 4
Condensed Statements of Cash Flows for the nine-
month periods ended September 30, 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.................................................... 18
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................................ 19
Item 4. Submission of Matters to a Vote of Security
Holders........................................................ 19
Item 5. Other Information.............................................. 19
Item 6. Exhibits and Reports on Form 8-K............................... 19
Signatures................................................................... 20
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OFFICIAL PAYMENTS CORPORATION
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
September 30, December 31,
2001 2000
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash ............................................. $ 2,553 $ 3,783
Short-term investments............................ 49,413 62,115
Accounts receivable, net.......................... 2,599 2,210
Prepaid expenses and other current assets......... 262 600
-------- --------
Total current assets............................. 54,827 68,708
Property and equipment, net......................... 9,049 7,511
Other assets........................................ 44 44
-------- --------
Total assets.................................... $ 63,920 $ 76,263
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............. $ 5,893 $ 6,561
Deferred revenues................................. 149 65
Current portion of capital lease obligations...... 555 580
-------- --------
Total current liabilities....................... 6,597 7,206
Long-term portion of capital lease obligations...... 285 604
-------- --------
Total liabilities............................... 6,882 7,810
-------- --------
Stockholders' equity:
Common stock, $.01 par value; 150,000,000 shares authorized; 21,981,615 and
21,505,770 shares issued and outstanding as of September 30, 2001 and
December 31, 2000, respectively................. 220 215
Additional paid-in capital........................ 130,127 129,473
Deferred stock-based compensation................. - (19,803)
Accumulated deficit............................... (73,309) (41,432)
-------- --------
Stockholders' equity...................... 57,038 68,453
-------- --------
Total liabilities and stockholders' equity.... $ 63,920 $ 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 September 30, Nine Months Ended September 30,
--------------------------- ---------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net revenues..................... $ 3,878 $ 3,414 $ 27,164 $ 22,953
Cost and expenses:
Cost of revenues............... 3,106 2,683 23,128 18,445
Sales and marketing ........... 1,052 1,343 5,934 8,144
Development costs.............. 1,100 705 3,196 1,709
General and administrative .... 2,323 2,547 6,850 7,632
Depreciation................... 947 410 2,308 1,029
Amortization of deferred
stock-based compensation..... - 2,970 19,803 9,154
Severance and other related
charges...................... - - - 4,140
-------- -------- -------- --------
Total cost and expenses........ 8,528 10,658 61,219 50,253
-------- -------- -------- --------
Loss from operations............. (4,650) (7,244) (34,055) (27,300)
Other income, net................ 519 1,168 2,179 3,347
-------- -------- -------- --------
Net loss......................... $(4,131) $ (6,076) $(31,876) $(23,953)
======== ======== ======== ========
Basic and diluted net loss per-
share......................... $ (0.19) $ (0.28) $ (1.45) $ (1.12)
======== ======== ======== ========
Weighted average shares used in
computing basic and diluted
net loss per share............ 21,982 21,495 21,936 21,392
======== ======== ======== ========
See accompanying notes to unaudited condensed financial statements.
OFFICIAL PAYMENTS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended September 30,
-------------------------------
2001 2000
-------- --------
Cash flows used in operating activities:
Net loss............................................. $ (31,876) $ (23,953)
from operating activities:
Depreciation.................................... 2,308 1,029
Amortization of deferred stock-based
compensation................................. 19,803 12,770
Changes in operating assets and liabilities
Accounts receivable, net........................ (389) 44
Prepaid expenses and other assets............... 338 151
Accounts payable and accrued expenses........... (668) 3,539
Deferred revenues............................... 84 45
-------- --------
Net cash used in operating activities.................. (10,400) (6,375)
-------- --------
Cash flows from investing activities:
Proceeds from sale of short-term investments, net ... 12,702 8,544
Capital expenditures................................. (3,846) (4,970)
-------- --------
Net cash provided by investing activities.............. 8,856 3,574
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options, net......... 658 1,202
Borrowings on sale-leaseback agreement............... - 968
Repayment of notes payable and capital leases........ (344) (300)
-------- --------
Net cash provided by financing activities..... 314 1,870
-------- --------
Net decrease in cash................................... (1,230) (931)
Cash at the beginning of the period.................... 3,783 1,643
-------- --------
Cash at the end of the period.......................... $ 2,553 $ 712
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest................................. $ 89 $ 278
======== ========
Assets acquired through capital leases................. $ - $ 998
======== ========
Cash paid for taxes.................................... $ 137 $ 37
======== ========
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 September 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. On
August 1, 2001, the Company announced that the IRS further expanded the scope
of its agreement with the Company to include two additional credit card
payment categories: current-year delinquent tax payments and installment tax
payments. Commencing on May 1, 2002, individual taxpayers who receive
delinquent balance-due return payment notices from the IRS for taxes owed for
tax year 2001 will have the option of using the Company's services to make
such payments. In addition, beginning January 2002, individual taxpayers who
have installment agreements with the IRS for tax years 1998 though 2001 will
be able to use the Company's services to make their installment payments by
credit card. Comerica Incorporated, a financial holding company, was the
beneficial owner of approximately 55% of the outstanding common stock of the
Company as of November 7, 2001.
BASIS OF PRESENTATION
The accompanying condensed financial statements as of September 30, 2001
and the three and nine months ended September 30, 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 September 30, 2001 and for the
three and nine months ended September 30, 2001 and 2000 and for the nine
months ended September 30, 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
and nine months ended September 30, 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 September 30, 2001, the Company had short-term investments of $49.4
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 twelve 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 quarters 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 quarterly 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
sales and return allowance made 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 $21,000 and $91,000 for the three months ended September
30, 2001 and 2000 and $2.5 million and $4.9 million for the nine months ended
September 30, 2001 and 2000, respectively.
During the year 2000, the Company entered into cooperative advertising
agreements with two of its credit card partners, where such credit card
companies contributed an aggregate of $515,000 to the Company for use in the
Company's 2001 advertising campaign. The Company considered these funds to be
a reimbursement of costs incurred and netted the proceeds against sales and
marketing expenses as incurred during the second quarter of 2001.
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 does not include the effect of approximately 4,147,111
and 5,059,423 options to purchase common stock with a weighted average
exercise price of $1.33 and $1.72 per share for the three months ended
September 30, 2001 and 2000, respectively, and approximately 4,463,778 and
6,457,779 options to purchase common stock with a weighted average exercise
price of $1.54 and $4.57 per share for the nine months ended September 30,
2001 and 2000, respectively, because the effects are anti-dilutive.
Note 3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
September 30, December 31,
2001 2000
-------- --------
Computer equipment..................................... $ 6,731 $ 6,242
Technological development.............................. 6,085 2,757
Furniture and fixtures................................. 803 747
-------- --------
13,619 9,746
Less: accumulated depreciation......................... 4,570 2,235
-------- --------
$ 9,049 $ 7,511
======== ========
The Company has adopted Statement of Position ("SOP") 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use,"
which requires that certain costs for the development of internally used
software be capitalized, including costs of coding, software configuration,
upgrades and enhancements. The estimated useful life is three years for
computer equipment and technological development; and five years for furniture
and fixture and IVR systems. As of September 30, 2001 and December 31, 2000,
the Company capitalized approximately $6.1 million and $2.8 million,
respectively, of its internally developed web site.
Certain computer equipment, software and office equipment are recorded
under capital leases that aggregated $1,588,000 as of September 30, 2001 and
2000. Accumulated depreciation on the assets recorded under capital leases
aggregated $889,000 and $388,000 as of September 30, 2001 and 2000,
respectively. Depreciation expense was $2.3 million and $1.0 million for the
nine months ended September 30, 2001 and 2000, respectively, which included
depreciation expense for assets under capital leases of $376,000 and $326,000
for the nine months ended September 30, 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, when amortized, as a separate
component of operating expense 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:
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Sales and marketing........... $ - $ 318 $ 1,872 $ 833
Development costs............. - 38 53 48
General and administrative.... - 2,614 17,878 8,273
-------- -------- -------- --------
$ - $ 2,970 $ 19,803 $ 9,154
======== ======== ======== ========
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. OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of the following (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Interest income.............. $ 541 $ 1,200 $ 2,282 $ 3,615
Interest expense............. (26) (42) (89) (283)
Other income (expenses), net. 4 10 (14) 15
-------- -------- -------- --------
$ 519 $ 1,168 $ 2,179 $ 3,347
======== ======== ======== ========
Note 6. CONCENTRATION OF REVENUES
For the three and nine months ended September 30, 2001, convenience fees
from tax payments to the IRS accounted for approximately 45% and 70% of the
Company's total revenues, respectively, compared to approximately 53% and 76%
for the three and nine months ended September 30, 2000, respectively. The
Company's current agreement with the IRS (which expires in January 2003)
authorizes the Company to collect credit card payments for balance due,
estimated and extension taxes and, beginning in 2002, current-year delinquent
tax and installment tax payments.
Note 7. 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues by product:
Federal............... $ 1,748 $ 1,831 $ 18,984 $ 17,416
State................. 598 401 3,465 2,003
Local................. 1,532 1,182 4,715 3,534
-------- -------- -------- --------
Total revenues.......... $ 3,878 $ 3,414 $ 27,164 $ 22,953
======== ======== ======== ========
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 "2000 Form 10-K"). 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 September 30,
2001, the Company offered approximately 1,662 services to approximately 991
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 most recent contract with the IRS had an initial one-year
term, with the IRS having the option to renew the contract for one additional
year (i.e., through January 2003). The IRS exercised this renewal option in
March 2001. On August 1, 2001, the Company announced that the IRS further
expanded the scope of its agreement with the Company to include two additional
credit card payment categories: current-year delinquent tax payments and
installment tax payments. In the three and nine months ended September 30,
2001, convenience fees from tax payments to the IRS accounted for
approximately 45% and 70% of the Company's total revenues. If the IRS does not
continue to select the Company's services in subsequent years, the business,
operating results and financial condition of the Company would be materially
and adversely affected.
As of September 30, 2001, the Company was providing its payment services
to the District of Columbia, as well as the states of Alabama, California,
Connecticut, Illinois, Iowa, Kansas, Maryland, Minnesota, Mississippi, New
Jersey, New York, Ohio, Oklahoma, Virginia, Washington and Wisconsin. In
addition, as of September 30, 2001, the Company had entered into agreements to
provide its services for the following states: Arkansas and West Virginia.
Also, in late October 2001, the Company signed an agreement with the Indiana
Department of Revenue to provide its services through the IVR for the
collection of individual income tax and past due tax payments.
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.
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.
Other operating expenses include sales and marketing expenses,
development costs, general and administrative expenses, depreciation expenses,
amortization of deferred stock-based compensation, and severance and other
related charges. The largest component of these expenses, amortization of
deferred stock-based compensation, amounted to approximately $19.8 million for
the nine months ending September 30, 2001. In January 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. The Company recognizes
that further reductions in its operating losses are contingent upon its
ability to increase consumer adoption rates of its services and to obtain
lower merchant discount fees charged by the credit card companies. In
addition, the Company is continuing to examine additional ways to improve the
Company's internal operating efficiencies in order to reduce costs.
As of September 30, 2001, the Company had an accumulated deficit of
approximately $73.3 million.
RECENT EVENTS
In October 2001, the Company signed an agreement with the Indiana
Department of Revenue to provide its services through the IVR for the
collection of individual income tax and past due tax payments.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2001, the Company adopted Financial Accounting Standards
Board Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which requires all derivatives to be recorded on the balance
sheet at fair value. The Company's adoption of this Statement did not have any
effect on its financial position or results of operations.
In July 2001, the Financial Accounting Standards Board issued Statement
No. 141, "Business Combinations" (FAS 141), and Statement No. 142, "Goodwill
and Other Intangible Assets" (FAS 142). FAS 141 requires the purchase method
of accounting to be used for all business combinations initiated after June
30, 2001. Use of the pooling-of-interests method is prohibited. FAS 141 also
provides new criteria to determine whether an acquired intangible asset should
be recognized separately from goodwill.
Upon adoption of FAS 142, amortization of existing goodwill would cease
and the remaining book value would be tested for impairment at least annually
at the reporting unit level using a new two-step impairment test. Amortization
of goodwill recorded on equity investments would also cease, but this embedded
goodwill will continue to be tested for impairment under current accounting
rules for equity investments. In addition, the Company would have adjustments
to the equity in net income of affiliates line item to reflect the impact of
adopting these new Statements on the operations of equity investments. The
Company will adopt both Statements on January 1, 2002 and the Company does not
have any goodwill as of September 30, 2001. The Company does not expect the
adoption of these Statements to have a material effect on its financial
position or results of operations.
In October 2001, the Financial Accounting Standards Board issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (FAS 144). This Statement establishes a single accounting model, based
on the framework established in FAS 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" for long-lived
assets to be disposed of by sale, whether previously held and used or newly
acquired and broadens the presentation of discontinued operations to include
more disposed transactions. The provisions of FAS 144 are effective for
financial statements issued for fiscal years beginning after December 15,
2001. The Company is currently calculating the impact of FAS 144.
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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- -------------------------------
2001 2000 2001 2000
------- ------- ------- -------
Net revenues................... 100% 100% 100% 100%
Cost and expenses:
Cost of revenues............. 80 78 85 80
Sales and marketing.......... 27 39 22 36
Development costs............ 28 21 12 7
General and administrative... 60 75 25 33
Depreciation................. 25 12 8 5
Amortization of deferred
stock-based compensation.. - 87 73 40
Severance and other related
charges................... - - - 18
------- ------- ------- -------
Total costs and expenses.. 220 312 225 219
------- ------- ------- -------
Loss from operations........... (120) (212) (125) (119)
Other income, net.............. 13 34 8 15
------- ------- ------- -------
Net loss....................... (107)% (178)% (117)% (104)%
======= ======= ======= =======
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
REVENUES
Total Net Revenues. Total net revenues increased $464,000 to $3.9 million
for the three months ended September 30, 2001 from $3.4 million for the
three months ended September 30, 2000, an increase of 14%. This increase
is primarily attributable to two factors. First, compared to the year
prior period, the Company processed an increased amount of state income
and sales and use tax payments and local payments, such as property
taxes. Second, additional state and local clients and services added by
the Company between September 30, 2000 and September 30, 2001, resulted
in increased revenues from the processing of additional state and local
taxes. These two factors were partially offset by a decrease in the
average convenience fee rate charged for federal and state income and
sales and use taxes compared to the year prior period.
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 decreased $83,000 to $1.7 million for the three months ended
September 30, 2001 from $1.8 million for the three months ended September
30, 2000, a decrease of 5%. The decrease in revenues is primarily
attributable to a decrease of 10% in the average convenience fee rate
charged from 2.77% of the dollar amount processed for the three months
ended September 30, 2000 to 2.48% for the three months ended September
30, 2001, even though the total number of payments processed increased 7%
over the prior year period. For the three months ended September 30,
2001, the Company processed approximately 20,000 transactions totaling
$70.5 million, compared to approximately 18,000 transactions totaling
$66.0 million for the three months ended September 30, 2000. Federal
transaction fees represented 45% of total revenues for the three months
ended September 30, 2001 compared to 53% of total revenues for the three
months ended September 30, 2000.
State Transaction Fees. Revenues from processing state payments are
primarily related to state income tax payments for balance-due,
extension, and estimated personal income taxes and sales and use tax
payments to the District of Columbia and the states of Alabama,
California, Connecticut, Illinois, Iowa, Kansas, Maryland, Minnesota,
Mississippi, New Jersey, New York, Ohio, Oklahoma, Virginia, Washington
and Wisconsin. State transaction fees increased $197,000 to $598,000 for
the three months ended September 30, 2001 from $401,000 for the three
months ended September 30, 2000, an increase of 49%. For the three months
ended September 30, 2001, the Company processed approximately 21,000
transactions totaling $23.0 million, compared to approximately 10,000
transactions totaling $12.7 million for the three months ended September
30, 2000. The increase in revenues is primarily related to growth in
existing government client collections, additional state contracts, and
additional payment services provided to existing state clients. The
Company processed income tax payments for 16 states (and the District of
Columbia) during the three months ended September 30, 2001, as compared
to seven states (and the District of Columbia) during the three months
ended September 30, 2000. On average, during the three months ended
September 30, 2001, the Company charged consumers a convenience fee equal
to 2.60% of the dollar amount of the payment for processing state income
and sales and use taxes, as compared to a 3.15% convenience fee in the
three months ended September 30, 2000, a decrease of 17%. State
transaction fees represented 15% of total revenues for the three months
ended September 30, 2001 compared to 12% of total revenues for the three
months ended September 30, 2000.
Local Transaction Fees. Revenues from processing local payments consist
of property taxes, traffic violations, parking citations, fax filing,
utility payments, and other miscellaneous payments. Local transaction
fees increased $227,000 to $1.4 million for the three months ended
September 30, 2001 from $1.1 million for the three months ended September
30, 2000, an increase of 21%. For the three months ended September 30,
2001, the Company processed approximately 160,000 transactions totaling
$36.5 million, compared to approximately 136,000 transactions totaling
$34.1 million for the three months ended September 30, 2000. Revenues
from processing property tax payments increased $85,000 to $642,000 for
the three months ended September 30, 2001 from $557,000 for the three
months ended September 30, 2000, an increase of 15%. Revenues from
processing fines for traffic violations increased $51,000 to $414,000 for
the three months ended September 30, 2001 from $363,000 for the three
months ended September 30, 2000, an increase of 14%. Revenues from
processing fines for parking citations increased $12,000 to $123,000 for
the three months ended September 30, 2001 from $111,000 for the three
months ended September 30, 2000, an increase of 11%. Revenues from other
transaction fees increased $79,000 to $199,000 for the three months ended
September 30, 2001 from $120,000 for the three months ended September 30,
2000, an increase of 66%. Additional property tax, moving violation, and
parking citation clients and growth in existing government client
collections contributed to the increase in local transaction fees. Local
transaction fees represented 40% of total revenues for the three months
ended September 30, 2001 compared to 35% of total revenues for the three
months ended September 30, 2000.
COST AND EXPENSES
Cost of Revenues. Cost of revenues increased $423,000 to $3.1 million for
the three months ended September 30, 2001 from $2.7 million for the three
months ended September 30, 2000, an increase of 16%. The largest
component of cost of revenues, merchant discount fees, increased $436,000
to $2.8 million for the three months ended September 30, 2001 from $2.3
million for the three months ended September 30, 2000, an increase of
19%. The cost of Internet and telecommunication charges for the Company's
Internet and IVR systems decreased $59,000 to $234,000 for the three
months ended September 30, 2001 from $293,000 for the three months ended
September 30, 2000, a decrease of 20%. The decrease is primarily
attributable to lower rates negotiated with one of the Company's
telecommunications carriers and a higher percentage of transactions
processed through the Company's Internet platform, which involves a lower
cost per transaction than the IVR. Other cost of transaction fees
decreased $2,000 to $38,000 for the three months ended September 30, 2001
from $40,000 for the three months ended September 30, 2000. Cost of
revenues was 80% of total revenues for the three months ended September
30, 2001, compared to 78% for the three months ended September 30, 2000.
Sales and Marketing. Sales and marketing expenses decreased $291,000 to
$1.0 million for the three months ended September 30, 2001 from $1.3
million for the three months ended September 30, 2000. This decrease was
primarily a result of decreases in both sales commissions and advertising
expenses. Sales and marketing expenses represented 27% of total revenues
for the three months ended September 30, 2001 compared to 39% for the
three months ended September 30, 2000.
Development Costs. Development costs increased $395,000 to $1.1 million
for the three months ended September 30, 2001 from $705,000 for the three
months ended September 30, 2000. The increase is primarily attributable
to the increase in engineering personnel and related salary costs.
Development costs represented 28% of total revenues for the three months
ended September 30, 2001 compared to 21% for the three months ended
September 30, 2000.
General and Administrative. General and administrative expenses decreased
$224,000 to $2.3 million for the three months ended September 30, 2001
from $2.5 million for the three months ended September 30, 2000. General
and administrative expenses represented 60% of total revenues for the
three months ended September 30, 2001 compared to 75% for the three
months ended September 30, 2000.
Depreciation. Depreciation and amortization increased $537,000 to
$947,000 for the three months ended September 30, 2001 from $410,000 for
the three months ended September 30, 2000. The increase is primarily
related to the purchase of computer equipment and software and
development expenses related to adding functionality to the Company's Web
site and IVR platform. Depreciation and amortization represented 25% of
total revenues for the three months ended September 30, 2001 compared to
12% for the three months ended September 30, 2000.
Amortization of deferred stock-based compensation. The Company did not
have any amortization of deferred stock-based compensation during the
quarter ended September 30, 2001 compared to $3.0 million for the three
months ended September 30, 2000. The Company fully amortized the
remaining $19.8 million of deferred stock-based compensation in January
2001, when employee stock options (for which the original expense charge
had been taken) became fully vested as a result of Comerica
Incorporated's acquisition of Imperial Bancorp, the parent of the
Company's majority controlling stockholder (thereby effectuating a change
in control of the Company). Prior to the Comerica/Imperial transaction,
the Company expected to amortize the deferred stock-based compensation
quarterly through the second quarter of 2002. Amortization of deferred
stock-based compensation represented 87% of total revenues for the three
months ended September 30, 2000.
OTHER INCOME, NET
Other income, net, consists of interest income, interest expense and
other non-operating expenses. Other income, net, decreased by $649,000 to
$519,000 for the three months ended September 30, 2001 compared to $1.2
million in other income, net for the three months ended September 30,
2000. This decrease is directly related to lower interest income
resulting from lower average cash balances and lower average interest
rate earned during the recent period, as compared to the third quarter of
fiscal year 2000.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
REVENUES
Total Net Revenues. Total net revenues increased $4.2 million to $27.2
million for the nine months ended September 30, 2001 from $23.0 million
for the nine months ended September 30, 2000, an increase of 18%. This
increase is primarily attributable to two factors. First, compared to the
year prior period, the Company processed an increased amount of federal
balance-due, extension and estimated income tax payments and state income
and sales and use tax payments. Second, additional state and local
clients and services added by the Company between September 30, 2000 and
September 30, 2001, resulted in increased revenues from the processing of
additional state and local taxes. These two factors were partially offset
by a decrease in the average convenience fee rate charged for federal and
state income and sales and use taxes compared to the year prior period.
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 $1.6 million to $19.0 million for the nine months ended
September 30, 2001 from $17.4 million for the nine months ended September
30, 2000, an increase of 9%. The increase in revenues is primarily
attributable to the growth in payments processed of 21% over the prior
year period. This was largely offset by a decrease of 10.0% in the
average convenience fee rate charged from 2.76% of the dollar amount
processed for the nine months ended September 30, 2000 to 2.49% for the
nine months ended September 30, 2001. For the nine months ended September
30, 2001, the Company processed approximately 218,000 transactions
totaling $762.8 million, compared to approximately 193,000 transactions
totaling $630.2 million for the nine months ended September 30, 2000.
Federal transaction fees represented 70% of total revenues for the nine
months ended September 30, 2001 compared to 76% of total revenues for the
nine months ended September 30, 2000.
State Transaction Fees. Revenues from processing state payments are
primarily related to state income tax payments for balance-due,
extension, and estimated personal income taxes and sales and use tax
payments to the District of Columbia and the states of Alabama,
California, Connecticut, Illinois, Iowa, Kansas, Maryland, Minnesota,
Mississippi, New Jersey, New York, Ohio, Oklahoma, Virginia, Washington,
and Wisconsin. State transaction fees increased $1.5 million to $3.5
million for the nine months ended September 30, 2001 from $2.0 million
for the nine months ended September 30, 2000, an increase of 73%. For the
nine months ended September 30, 2001, the Company processed approximately
120,000 transactions totaling $135.9 million, compared to approximately
55,000 transactions totaling $68.3 million for the nine months ended
September 30, 2000. The increase in revenues is primarily related to
growth in existing government client collections, additional state
contracts, and additional payment services and options provided to
existing state clients. The Company processed income tax payments for 16
states (and the District of Columbia) during the nine months ended
September 30, 2001, as compared to seven states (and the District of
Columbia) during the nine months ended September 30, 2000. On average,
during the nine months ended September 30, 2001, the Company charged
consumers a convenience fee equal to 2.55% of the dollar amount of the
payment for processing state income and sales and use taxes, as compared
to a 2.93% convenience fee in the nine months ended September 30, 2000, a
decrease of 13%. State transaction fees represented 13% of total revenues
for the nine months ended September 30, 2001 compared to 9% of total
revenues for the nine months ended September 30, 2000.
Local Transaction Fees. Revenues from processing local payments consist
of property taxes, traffic violations, parking citations, fax filing,
utility payments, and other miscellaneous payments. Local transaction
fees increased $1.1 million to $4.4 million for the nine months ended
September 30, 2001 from $3.3 million for the nine months ended September
30, 2000, an increase of 33%. For the nine months ended September 30,
2001, the Company processed approximately 490,000 transactions totaling
$138.5 million, compared to approximately 375,000 transactions totaling
$104.3 million for the nine months ended September 30, 2000. Revenues
from processing property tax payments increased $675,000 to $2.2 million
for the nine months ended September 30, 2001 from $1.6 million for the
nine months ended September 30, 2000, an increase of 43%. Revenues from
processing fines for traffic violations increased $124,000 to $1.2
million for the nine months ended September 30, 2001 from $1.0 million
for the nine months ended September 30, 2000, an increase of 12%.
Revenues from processing fines for parking citations increased $77,000 to
$395,000 for the nine months ended September 30, 2001 from $318,000 for
the nine months ended September 30, 2000, an increase of 24%. Revenues
from other transaction fees increased $293,000 to $648,000 for the nine
months ended September 30, 2001 from $355,000 for the nine months ended
September 30, 2000, an increase of 83%. Additional property tax, moving
violation, and parking citation clients and growth in existing government
client collections contributed to the increase in local transaction fees.
Local transaction fees represented 17% of total revenues for the nine
months ended September 30, 2001 compared to 15% of total revenues for the
nine months ended September 30, 2000.
COST AND EXPENSES
Cost of Revenues. Cost of revenues increased $4.7 million to $23.1
million for the nine months ended September 30, 2001 from $18.4 million
for the nine months ended September 30, 2000, an increase of 25%. The
largest component of cost of revenues, merchant discount fees, increased
$5.2 million to $22.1 million for the nine months ended September 30,
2001 from $16.9 million for the nine months ended September 30, 2000, an
increase of 30%. The cost of Internet and telecommunication charges for
the Company's Internet and IVR systems decreased $382,000 to $824,000 for
the nine months ended September 30, 2001 from $1.2 million for the nine
months ended September 30, 2000, a decrease of 32%. The decrease is
primarily attributable to lower rates negotiated with one of the
Company's telecommunications carriers, one time installation charges that
were incurred in February 2000, and a higher percentage of transactions
processed through the Company's Internet platform, which involves a lower
cost per transaction than the IVR. Other cost of transaction fees
decreased $53,000 to $160,000 for the nine months ended September 30,
2001 from $213,000 for the nine months ended September 30, 2000. Cost of
revenues was 85% of total revenues for the nine months ended September
30, 2001, compared to 80% for the nine months ended September 30, 2000.
Sales and Marketing. Sales and marketing expenses decreased $2.2 million
to $5.9 million for the nine months ended September 30, 2001 from $8.1
million for the nine months ended September 30, 2000. This decrease was
primarily a result of a decrease in advertising expense of $2.4 million
from $4.9 million for the nine months ended September 30, 2000 to $2.5
million for the nine months ended September 30, 2001. A portion of this
decrease is due to the cooperative advertising agreement the Company
entered into with its credit card partners for an aggregate amount of
$515,000. In addition, sales commissions expense decreased compared to
the same period in 2000. Sales and marketing expenses represented 22% of
total revenues for the nine months ended September 30, 2001 compared to
36% for the nine months ended September 30, 2000.
Development Costs. Development costs increased $1.5 million to $3.2
million for the nine months ended September 30, 2001 from $1.7 million
for the nine months ended September 30, 2000. The increase is primarily
attributable to the increase in engineering personnel and related salary
costs. Development costs represented 12% of total revenues for the nine
months ended September 30, 2001 compared to 7% for the nine months ended
September 30, 2000.
General and Administrative. General and administrative expenses decreased
$782,000 to $6.9 million for the nine months ended September 30, 2001
from $7.6 million for the nine months ended September 30, 2000. General
and administrative expenses represented 25% of total revenues for the
nine months ended September 30, 2001 compared to 33% for the nine months
ended September 30, 2000.
Depreciation. Depreciation and amortization increased $1.3 million to
$2.3 million for the nine months ended September 30, 2001 from $1.0
million for the nine months ended September 30, 2000. The increase is
primarily related to the purchase of computer equipment and software and
development expenses in connection to adding functionality to the
Company's Web site and IVR platform. Depreciation and amortization
represented 8% of total revenues for the nine months ended September 30,
2001 compared to 5% for the nine months ended September 30, 2000.
Amortization of deferred stock-based compensation. Amortization of
deferred stock-based compensation increased $10.6 million to $19.8
million for the nine months ended September 30, 2001 from $9.2 million
for the nine months ended September 30, 2000. The increase is primarily
caused by the full amortization of the $19.8 million deferred stock-based
compensation for employee stock options (for which the original expense
charge had been taken) that became fully vested as a result of Comerica
Incorporated's acquisition of Imperial Bancorp, the parent of the
Company's majority controlling stockholder (thereby effectuating a change
in control of the Company). Prior to the Comerica/Imperial transaction,
the Company expected to amortize the deferred stock-based compensation
charge quarterly through the second quarter of 2002. Amortization of
deferred stock-based compensation represented 73% of total revenues for
the nine months ended September 30, 2001 compared to 40% for the nine
months ended September 30, 2000.
Severance and other related charges. The Company did not have any
severance and other related charges during the nine months ended
September 30, 2001 compared to $4.1 million for the nine months ended
September 30, 2000. The severance and other related charges during the
first half of 2000 related to the departure of the Company's former Chief
Financial Officer.
OTHER INCOME, NET
Other income, net, consists of interest income, interest expense and
other non-operating expenses. Other income, net, decreased by $1.1
million to $2.2 million for the nine months ended September 30, 2001
compared to $3.3 million in other income, net for the three months ended
September 30, 2000. This decrease is directly related to lower interest
income resulting from lower average cash balances and lower average
interest rate earned during the recent period, as compared to the first
three quarters of fiscal year 2000.
INCOME TAXES
The Company has incurred operating losses during the period from its
incorporation on September 30, 1999 through September 30, 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 September 30, 2001, the Company had
$52.0 million in cash and short term investments, and $48.2 million in working
capital.
Net cash used in operating activities was $10.4 million and $6.4 million
for the nine months ended September 30, 2001 and 2000, respectively. The cash
used by operating activities for the nine months ended September 30, 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), an increase in accounts receivable, and a decrease in accounts
payable and accrued expenses. The cash used in operating activities for the
nine months ended September 30, 2000 was primarily attributable to the
Company's net loss offset by non-cash operating expenses (such as amortization
of deferred stock-based compensation and depreciation) and an increase in
accounts payable and accrued expenses.
Net cash provided by investing activities was $8.9 million and $3.6 million
for the nine months ended September 30, 2001 and 2000, respectively. In 2001,
the Company increased its capital expenditures to continue building its
Internet platform to process federal, state and local payments via the
Internet. This was offset by the sale of short-term investments. In 2000, the
Company increased its IVR equipment purchases to add significant capacity to
process 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 nine months ended September 30, 2000.
Net cash provided by financing activities was $314,000 and $1.9 million for
the nine months ended September 30, 2001 and 2000, respectively. The cash
generated in the nine months ended September 30, 2001 was primarily related to
the exercise of stock options by the Company's former and current employees.
The cash generated in the first nine months ended September 30, 2000 was
primarily related to the exercise of stock options by one of the Company's
directors and borrowings against a sale-leaseback agreement for IVR equipment.
These cash inflows were offset by the repayment of capital lease obligations.
The Company believes that its current cash resources will be sufficient
to meet its working capital and capital expenditures for the next twelve
months. The Company has continued to incur operating expenses, which are not
classified as cost of revenues, as a result of increased marketing,
technological and other infrastructure costs associated with the growth in the
Company's government client base and transaction volume. Given the Company's
current product offerings and growth in government clients and services
consistent with past performance, such expenses are not expected to increase
significantly and may actually decrease in future quarters as the Company
realizes efficiencies from its operating infrastructure. However, if the
Company is unable to control the growth of such costs in any upcoming quarters
or if revenues in any quarter do not increase correspondingly with increases
in operating expenses, the Company's results for that quarter would be
materially and adversely affected. The Company is currently evaluating the
possibility of certain changes in its technological platform which management
believes, in the long-term, could materially reduce fixed operating expenses
and its use of cash, as well as improve efficiencies in the Company's data
management, client reporting and settlement operations. As part of this
evaluation, the Company is also examining other potential long-term
opportunities to reduce its internal operating costs and use of cash.
The Company's capital and liquidity requirements depend on, and may be
materially and adversely by numerous factors, including: consumer utilization
of its services (which may be affected by general changes in overall consumer
spending and general economic conditions), merchant discount fees charged by
credit card companies, economic conditions impacting the Company's revenue
generation, the resources that the Company devotes to developing, marketing,
selling and supporting its services, the resources the Company commits to
technological development and infrastructure and the cost of investment in
complementary businesses, technologies, or other strategic business
transactions. Other factors affecting the Company's business are described in
the 2000 Form 10-K under "ITEM 1. BUSINESS - Other Factors Affecting the
Company's Business."
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).
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
------ ------ ------ ------ ------ --------- ------
Cash $ 2,553 $ - $ - $ - $ - $ - $ 2,553
Average interest rate 0.21% 0.00% 0.00% 0.00% 0.00% 0.00%
Short-term Investments $39,027 $10,386 $ - $ - $ - $ - $49,413
Average interest rate 3.87% 3.98% 0.00% 0.00% 0.00% 0.00%
------ ------ ------ ------ ------ --------- ------
Total cash and
Investments $41,580 $10,386 $ - $ - $ - $ - $51,966
====== ====== ====== ====== ====== ========= ======
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 $6.1 million to add capacity, new features and
additional security and privacy measures to its Web site and IVR platform;
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 $8.1 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 September 30, 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
None
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OFFICIAL PAYMENTS CORPORATION
November 13, 2001 By: /s/ Thomas R. Evans
---------------------------
Thomas R. Evans
Chairman of the Board and
Chief Executive Officer
November 13, 2001 By: /s/ Edward J. DiMaria
---------------------------
Edward J. DiMaria
Chief Financial Officer