SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001
Commission file number 000-28187
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OFFICIAL PAYMENTS CORPORATION
(Exact name of Registrant as Specified in its Charter)
Delaware 52-2190781
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
Three Landmark Square
Stamford, Connecticut 06901-2501
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(Address of Principal Executive Offices including Zip Code)
(203) 356-4200
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
As of March 25, 2002, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was approximately
$29,037,287 based upon the average of the high and low prices of the Common
Stock as reported on The Nasdaq National Market on such date. All executive
officers and directors of the registrant have been deemed, solely for the
purpose of the foregoing calculation, to be "affiliates" of the registrant.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of March 25, 2002, the Registrant had outstanding 22,222,651
shares of Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be
mailed to stockholders in connection with the Company's 2002 Annual Meeting
of Stockholders to be held on May 7, 2002 are incorporated by reference
into Part III hereof.
OFFICIAL PAYMENTS CORPORATION
FORM 10-K
DECEMBER 31, 2001
TABLE OF CONTENTS
Item Page Number
PART I
1. Business.................................................................................................3
2. Properties..............................................................................................22
3. Legal Proceedings.......................................................................................23
4. Submission of Matters to a Vote of Security Holders.....................................................23
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................................................23
6. Selected Financial Data.................................................................................25
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................................................26
7A. Quantitative and Qualitative Disclosures About Market Risk..............................................38
8. Financial Statements and Supplementary Data.............................................................39
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................................................39
PART III
10. Directors and Executive Officers of the Registrant......................................................39
11. Executive Compensation..................................................................................39
12. Security Ownership of Certain Beneficial Owners and
Management.........................................................................................39
13. Certain Relationships and Related Transactions..........................................................39
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........................................40
Signatures.......................................................................................................41
Index to Exhibits
PART I
ITEM 1. BUSINESS
Official Payments Corporation (the "Company" or "Official
Payments") is a leading provider of electronic payment options to
government entities. The Company's systems enable consumers to use their
credit cards and "pin-less" debit cards to pay, through the Internet or by
telephone, federal and state income taxes, sales and use taxes, real estate
and personal property taxes, tuition payments, utility payments, motor
vehicles fees, fines for traffic violations and parking citations and other
government- imposed taxes and fees. In 2001 the Company processed an
aggregate of approximately $1.2 billion of such payments. The Company's
Internet Web site (www.officialpayments.com) and interactive toll-free
telephone number (1-800-2PAY-TAX(sm)) enable consumers to access payment
information, make payments and receive certain customer service
information. References in this document to the Company's provision of
"credit card" payment services shall be deemed to include provision of
electronic payment services for pin-less debit cards bearing the American
Express(R), Visa(R) or MasterCard(R) logos.
The Company's predecessor business (U.S. Audiotex, LLC) commenced
operations in June 1996 and was merged into the Company in September 1999,
following the Company's incorporation in Delaware in August 1999. In
October 1999, the Company changed its name from U.S. Audiotex Corporation
to Official Payments Corporation. The Company's principal executive offices
are located at Three Landmark Square, Stamford, Connecticut 06901. Comerica
Incorporated, a financial holding company ("Comerica"), is the record owner
of approximately 54% of the outstanding common stock of the Company.
Comerica obtained this ownership interest upon its January 2001 acquisition
of Imperial Bancorp (the parent of Imperial Bank, which was then the holder
of the majority interest in the Company).
Services
Clients
In 1998, the Company signed a contract with the Internal Revenue
Service (the "IRS") to provide its services for the payment by credit card
via telephone of personal federal "balance due" income taxes in 1999. In
2000, the Company began processing estimated and extension tax payments, as
well. In 2000, the Company entered into a contract with the IRS for an
initial one-year term (2001), which the IRS subsequently renewed for an
additional year (2002). That contract authorized the Company to collect
credit card payments via its Internet platform, as well as by telephone. In
August 2001, the Company announced that the IRS had further expanded the
scope of its agreement with the Company to include two additional payment
categories beginning in 2002: current-year delinquent tax payments and
installment agreement tax payments. The Company is an industry partner of
the IRS's Electronic Tax Administration division. In 2001 and 2002, the IRS
has included Official Payments' toll-free telephone number and Web site
address in the instruction booklets for Form 1040 and on Forms 1040ES and
4868.
In the fall of 2001, the Company responded to the IRS's Request
for Proposals to enter into a new contract to provide electronic credit
card payment services for federal tax payments in 2003, with the IRS having
the option to renew such contract for up to four additional one-year terms
through 2007. The Company is currently awaiting the IRS's decision pursuant
to this request for proposals.
As of December 31, 2001, Official Payments was processing, or had
recently entered into agreements (including, subcontractor agreements as
discussed below) to process, payments for the District of Columbia and 20
state governments including Alabama, Arkansas, California, Connecticut,
Illinois, Indiana, Iowa, Kansas, Maryland, Minnesota, Mississippi, New
Jersey, New York, Ohio, Oklahoma, Rhode Island, Virginia, Washington, West
Virginia and Wisconsin. In the first quarter of 2002, Official Payments
entered into a similar agreement with the Commonwealth of Pennsylvania. In
addition, as of December 31, 2001, the Company had entered into agreements
with 1,155 counties and municipalities in all 50 states. The highest
concentrations of local government entities serviced by the Company are in
California, Michigan, Texas, Virginia and Washington.
The Company also has relationships with a number of its processing
banks to provide its services for their government clients. For example,
Discover Financial Services and First Data Merchant Services were awarded
the contract to provide personal income tax payment services for the State
of California and subcontracted the provision of taxpayer services through
IVR and Internet platforms to the Company. The Company has similar
arrangements with Fifth Third Bank (Ohio), National Processing Company, LLC
(Illinois) and Paymentech L.L.C. (Kansas).
The table below lists, as of March 1, 2002, the Company's existing
federal and state government clients and the types of payments it processes
or has contracted to process for those clients. Based on publically
available data, as well as information furnished to the Company by its
government clients, the Company currently estimates that the Company's
maximum aggregate dollar collection opportunity for all of the payments
types for which it has been authorized by its federal, state and local
government clients to collect payments by credit card is approximately
$403.3 billion (which includes an increase in collection opportunity of
approximately $10.4 billion since January 1, 2002).
Table of Clients
and Payment Balance Install- With- Sales
Types Accepted Due Estimate Extension Delinquent ment holding & Use Corporate Other
FEDERAL
Internal Revenue Service x x x x x
STATE
Alabama x x x x
Arkansas x x x
California x x x x x x
Connecticut x x x
District of Columbia x x x x
Illinois x x x x x
Indiana x x
Iowa x
Kansas x x x x x x x
Maryland x x x x
Minnesota x x x x
Mississippi x x
New Jersey x x x x x x x x
New York x x x
Ohio x x x x x
Oklahoma x x x x x x
Pennsylvania x x x x x x
Rhode Island x x x x x x x
Virginia x x x x
Washington x
West Virginia x
Wisconsin x x x x x
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LOCAL
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1,170 Counties and Municipalities Real estate & personal property tax
Traffic violations & parking citations
Utility bills & other payments
Electronic payments often provide significant benefits for
government entities, including improved service, cost savings, reduced
paperwork, fraud and error reduction and faster transaction processing.
Government entities may prefer to outsource electronic payment options
rather than provide these options themselves because they lack the
expertise, technical personnel and economies of scale necessary to
implement and maintain the required software and hardware systems. In
addition, legislation prohibits some government entities from paying credit
card payment processing fees associated with accepting credit cards.
Most of the Company's agreements with government clients can be
terminated by the respective government client without cause on short
notice (generally 30 to 90 days). In addition, a government client may
choose not to renew its contract with the Company or may not choose the
Company's proposal in response to a request for proposals to perform
additional services or the existing service in subsequent time periods. If
one of the Company's larger existing government clients (such as the IRS)
chooses to terminate its contract or memorandum of understanding with the
Company, the business, operating results and financial condition of the
Company could be materially and adversely affected.
The Company has recently begun offering its credit card payment
services to non-governmental entities (e.g., non-government owned
utilities, private universities, etc.) who may have a need for such
services and wish to realize similar benefits as the Company's government
clients. The Company expects to provide such services for its first
non-governmental client (a utility) in April 2002. While the Company's
business has only involved government clients to date, references in this
document to "client" shall be deemed to apply to non-governmental clients,
as appropriate.
Credit Card Processing
The Company currently processes payments made by individuals or
businesses using the American Express(R) Card, MasterCard(R), Visa(R) card
and the Discover(R) Card. Comerica Bank-California (a wholly owned
subsidiary of Comerica), American National Bank, Centura Bank, First Data
Corporation's alliance partners, Fifth Third Bank, Michigan National Bank,
National City Bank, Wells Fargo Bank and Union Bank of California, in
addition to other processing banks used by the Company, are all
long-standing members of the Visa and MasterCard associations and process
transactions utilizing those credit cards for the Company. Official
Payments is a merchant agent for American Express, eliminating the need for
its clients to enter into separate contracts with American Express. In
addition, the Company is authorized by Discover Financial Services, Inc. to
accept Discover Card transactions.
All four credit card associations and organizations with whom the
Company does business allow for convenience fees to be charged to
cardholders as long as a cardholder receives added convenience from the
service provided. All of these card associations (except for Visa with
respect to payments for certain local government and non-government
obligations) allow for a variable fee schedule according to which the
amount of the fee changes depending on the amount charged.
Consumer Payment Conduits and Fee Structure
Depending upon the specific desires of the Company's clients,
consumers can make credit card payments to the Company's clients through
the Company's Web site at www.officialpayments.com and/or by using the
1-800-2PAY-TAX(sm) telephone number.
The Company's secure Web site currently allows consumers to make
all federal, state, county and municipal payments for its clients that want
to offer this service. Consumers enter payment-related information on the
Company's Web site. Once this payment data is entered, the systems seek
approval of the transaction from the credit card processing network and, if
the approval is obtained, the payment is processed. Upon completion of the
payment, the consumer receives a transaction confirmation number.
Official Payments works with its government clients to develop the
script for its fully automated telephone conduit. Payment and other
information for the interactive voice response telephone system ("IVR") is
received from consumers who respond to voice prompts by pressing touch-tone
buttons on their telephones. Once the convenience fee and other necessary
information is conveyed to and confirmed by the consumer, approval is
sought from the credit card processing network and the payment is
processed. As with the Internet, upon completion of the payment, the
consumer receives a transaction confirmation number. Taxpayers without
touch-tone telephone service may make their payments with the assistance of
one of the Company's customer service representatives.
In 2001, the Company upgraded its Internet platform, which
included adding the following features: a convenience fee calculator,
optional e-mail confirmation of transactions, a multiple password-
protected payment verification capability, a user registration function, a
comprehensive "frequently asked questions" section, and the capabilities
for consumers to make multiple payments per transaction session and search
for products by zip code.
Consumers who use the Company's credit card payment services
obtain the convenience of being able to make payments to government and
other entities by credit card, eliminating the need to mail checks, obtain
money orders or make payments in person. In addition, they gain the cash
management flexibility to pay their credit card balances over time rather
than when a specific obligation is due and may be able to take advantage of
frequent flyer, cash-back or other rewards programs offered by their credit
card issuers for which they are enrolled and eligible.
Revenues and Operations
Operations
The Company's technological solutions and operations are focused
primarily on producing four integrated results for its clients and
consumers: reliability, security, audit capability and customer
service/operational support. In designing its operations and technology
around these core concepts, the Company believes it provides its government
and non-government clients with a value-added payment solution resulting in
improved efficiencies and potential cost-savings.
Reliability. The Company's foremost service goal is reliability,
which it seeks to accomplish through redundant hardware that provides
disaster prevention and recovery and allows it to implement seamless
real-time backup and 99.99% system availability. Currently, the Company's
primary Internet hosting facility is housed at Digex, Inc. facilities in
San Jose, California. This Digex site is the Company's primary processing
location, offering redundancy for power, telecommunications, servers and
applications. The Company's San Ramon operations center serves as a backup
site in the event the Digex facility is rendered inoperative.
The Company's interactive telephone systems have the same dual
facility scheme as its Internet systems. The Company's primary interactive
telephone authorization and processing facility is located at the Company's
operations center in San Ramon, California, where its servers have "hot
swappable" power supplies and hard drives so that if a system fails, the
redundant systems will assume the workload. Official Payments also
maintains a backup facility in Stockton, California, used for disaster
prevention and recovery and transaction volume overflows.
The Company is in the process of consolidating its IVR and
Internet hosting environments, while maintaining appropriate back-up
facilities. This action involves the replacement of the Company's internal
data center that houses the IVR platform with an outsourced facility,
thereby resulting in lower future IVR operating costs.
The Company believes that it has designed its Internet and IVR
platforms to have sufficient excess capacity even with respect to the
heaviest transaction volume associated with the Company's busiest day
(April 15th).
Security. The Company places a high priority on transaction
security, fraud prevention and maintaining the confidentiality of all
consumer credit card and related billing information. For its Internet
conduit delivery vehicle, the Company employs secured socket layers for
user security from the consumer's browser to the Company's Web site.
Consumer identity validations for credit card payments are transmitted in
an encrypted manner and are performed in accordance with existing industry
procedures.
The Company has several system functions and network architectural
failsafes that are designed to combat fraud. For example, credit card
authorizations are performed on-line and in real time. Credit card
information is transmitted exclusively to the credit card processor. No one
outside of the Company's system and the credit card processor's system
receives the credit card information, including the IRS and other
government clients.
In addition, the Company has installed systems and procedures to
protect the physical security of its facilities, computer system and
network against environmental hazards, negligence or intentional malicious
actions by individuals, and has implemented information management
procedures to protect and back-up critical transaction data.
The Company's systems and procedures were examined by an
independent third-party technology consultant on behalf of the IRS in
November 2001 and were determined to comply with the IRS's standards
regarding systems penetration, reliability, security and privacy.
Audit Capability. The Company's proprietary mirror balancing
system (which is used for many of its government clients) and its reporting
systems provide Official Payments and its government and other clients with
electronic audit capability. These applications enable the Company to
account for all transactions, ensure that data transmissions to clients are
complete and that files are updated accurately. In addition, the Company
provides consumers audit capability by using a dual-authorization process
for the majority of its transactions, whereby the primary obligation and
convenience fee are authorized and processed separately and appear as
separate charges on the taxpayer's credit card statement.
Customer Service. The Company believes that a critical component
of ensuring consumer satisfaction with its services is providing
outstanding customer service. Official Payments provides automated customer
service systems, which, among other things, allow consumers to verify their
transactions. In addition, the Company provides trained customer service
representatives to assist consumers and representatives of the Company's
government clients with individual needs via telephone or e-mail. The
Company also provides a "Frequently Asked Questions" feature on its Web
site to answer common questions asked by consumers.
Revenues
The Company generally provides its services without charge to the
authorizing government or other entity. The Company generates revenues
primarily from charging consumers a convenience fee for using its services.
For many payments, such as personal federal and state income tax payments
and local real estate and personal property tax payments, Official Payments
charges a convenience fee based on the amount of the payment. For other
payments, such as fines for traffic violations and parking citations,
Official Payments charges a fixed convenience fee. The same type
convenience fee applies to payments made through the Internet or by
telephone. In the majority of transactions, the financial institution
processing the credit card transaction forwards the convenience fee to the
Company and transmits the tax payment to the respective government entity.
For the 2001, 2000 and 1999 fiscal years, convenience fees from
payments to the IRS accounted for approximately 63%, 69% and 49% of the
Company's total revenues, respectively; convenience fees from payments to
state agencies accounted for approximately 13%, 10% and 6% of the Company's
total revenues, respectively; and convenience fees from payments to county
and municipal agencies accounted for approximately 23%, 21% and 42% of the
Company's total revenues, respectively.
For more detailed information concerning the Company's revenues
from external customers, see "NOTES TO FINANCIAL STATEMENTS-Footnote No. 6
("Segment Information").
Seasonality
The Company's revenue generally reflects the seasonality of its
business, which is due primarily to the fact that the majority of federal
and state personal balance due income tax payments are made in early to
mid-April, federal and state estimated personal income tax payments are
made quarterly and local real estate and personal property tax payments are
made only once or twice per year in many jurisdictions.
Competition
Alternative Payment Options
In addition to using the Company's credit card payment services,
consumer users have the following payment options when making payments to
both government and non-government entities:
o Checks, money orders or cash. Payment by mailing checks,
obtaining money orders and paying in person are the
traditional and currently the most widely used methods
for making payments to government and certain large
non-government entities (such as utilities).
o Credit card checks. Many of the issuing banks for Visa
and MasterCard distribute cash advance checks to their
cardholders. In March and early April, issuing banks
generally promote the use of these checks to pay taxes.
Because these checks are treated as a cash advance, they
may be a more expensive solution than the Company's
services. The typical terms for a cash advance include a
one-time fee, and the advance starts to accrue interest
immediately at the issuing bank's applicable rate. In
addition, many issuing banks apply the consumer's
payments to other less expensive balances first.
Moreover, cash advances typically do not qualify for
frequent flyer mileage programs or any other perquisites.
In contrast, payments made through the Company's systems
require a convenience fee, but are treated as purchases
subject to generally lower interest rates, may not
immediately accrue interest, and may qualify for various
award programs.
o Direct debit/Electronic Checks. Consumer users can
arrange through their bank or otherwise to have payments
to governments, utilities and other entities directly
debited from their checking or savings account. If
arranged through the bank in which a consumer user's
checking or savings account is maintained, this service
is often provided free of charge.
Competing Providers of Electronic Credit Card Payment Services
In selecting a provider of outsourced electronic payment services,
the Company believes entities consider the following:
o the Company's ability to offer these services without a
charge to that entity;
o the Company's existing client relationships and referrals
from government entities currently using the Company's
services;
o the Company's proven technology systems;
o the Company's ability to offer integrated federal, state
and local government payment options;
o established consumer usage of the Company's services;
o the Company's experience in implementing its services for
new clients efficiently and expeditiously;
o the greatest possible consumer reach through both
Internet and telephone conduits;
o the Company's relationships with financial institutions
and credit card companies;
o the Company's flexibility in adapting to unique client
procedures;
o quality and convenience of the Company's service;
o marketing and brand name recognition; and
o price of the Company's services to consumers.
A number of competitors currently provide credit card payment
services for making payments to government entities (both on a convenience
fee and non-convenience fee basis to the consumer). The Company believes it
has a larger government client base and greater name recognition than its
competitors. There are a number of larger credit card payment and
electronic commerce companies with similar technological capabilities who
may become potential competitors of the Company, some of whom have greater
resources than the Company. However, at this time, the Company believes
that its large government client base increasingly enables it (unlike its
competitors) to offer consumers the convenience of not just making credit
card payments for federal taxes, but also for a variety of state and local
obligations, as well. The Company believes that the competitive landscape
is similar with respect to the recently-initiated offering of its
electronic credit card payment services to non-governmental entities (such
as non-government owned utilities and private universities).
According to data made available to the Company by the IRS, for
the first three quarters of 2001 the Company processed 80% of all credit
card payments for personal federal income taxes (constituting 89% of the
total federal tax dollars paid by credit card in 2001), while PhoneCharge,
Inc. and the alliance between Intuit, Inc. (TurboTax) and Discover
Financial Services, Inc. processed in the aggregate the remaining 20% of
such transactions (constituting 11% of the federal tax dollars paid by
credit card in 2001, respectively). As of the date of this report, the IRS
had not made available to the Company the market share data for the fourth
quarter of 2001. Beginning with balance due payments in 2001, the IRS
permitted software developers and credit card processing companies who
offer an integrated personal federal income tax filing and payment program
to compete against the Company (and similar stand-alone payment processors)
without the need to enter into a formal contract with the IRS, subject to
their compliance with certain technical processing requirements. To the
Company's knowledge, as of the date of this report, the Company's alliance
with Jackson Hewitt, Inc. and the Discover/Intuit alliance are the only
such integrated personal federal income tax filing and electronic payment
programs. The Company also had an integrated filing and electronic payment
program with OrrTax Software Inc. in 2001, which is not being continued in
2002.
Except as set forth below in this paragraph, with respect to all
of the states and counties and municipalities for whom the Company provides
its credit card payment services, the Company believes it is the only
provider of such services for the tax and other government payment programs
in which it is involved. In New York there is one other authorized service
provider to collect credit card payments for state income taxes. In
Indiana, the Company is authorized to collect credit card payments for
state income taxes through the IVR, and another service provider is
authorized to provide similar services through the Internet.
Intellectual Property
The Company protects its intellectual property rights through a
combination of trademark, service mark, copyright and trade secrets laws.
No assurance can be given that the steps taken to protect the Company's
intellectual property rights, however, will be adequate to deter
misappropriation of those rights. The Company may not be able to detect
unauthorized use of and take appropriate steps to enforce its intellectual
property rights. It may also be possible for unauthorized third parties to
copy certain portions of the Company's proprietary information or reverse
engineer the proprietary information used in the Company's services.
In order to limit access to and disclosure of the Company's
proprietary information, all of the Company's employees are subject to
confidentiality and invention assignment arrangements, and the Company
enters into nondisclosure agreements with third parties that are material
to its business.
The Company intends to continue to obtain certain technological
services from third-party providers on an outsourced basis, including the
hosting of its Internet operations and content for the investor relations
and press releases sections of its Web site. The Company cannot be certain
that these third-party services will continue to be available to it on
commercially reasonable terms or that it will be able to integrate them in
a cost-effective manner into the Company's products and services.
The Company licenses its base interactive telephone hardware and
software systems from Alliance Systems Incorporated, which manufactures the
hardware and provides the operating system and other development tools that
the Company uses. An additional license was acquired from Artisoft Inc. to
allow the Company to develop its interactive telephone applications. The
Company also licenses patented technology for its IVR system from A2D,
L.P., and pays a royalty to this patent holder for each call to the IVR.
The Company has purchased security certificates from Verisign, Inc. which
enable the Company to provide a high level of data encryption with respect
to its Internet platform. Finally, the Company obtained separate licenses
from CyberSource Corp. and CyberCash, Inc. for credit card processing
software with respect to its government clients that are supported on the
Company's Internet payment platform and IVR payment platform, respectively.
Research and Development
The Company's current business operations began in June 1996,
offering only the IVR platform for consumer use. The Company continues to
provide enhancements to the IVR payment platform on an ongoing basis. The
Company introduced the Internet payment platform in August 1999 and
significantly upgraded this platform in January 2001. Total development
costs were $4.3 million and $3.0 million for the fiscal years ended
December 31, 2001 and 2000, respectively.
For the fiscal years ended December 31, 2001 and 2000, the Company
capitalized approximately $3.7 million and $2.7 million, respectively, for
costs related to the development of new products and enhancements to
existing software products where technical feasibility was established.
Corporate Restructuring
In November 2001, the Board of Directors approved and the Company
initiated a restructuring plan to reduce certain of the Company's operating
expenses. The restructuring plan includes a reduction in marketing,
administrative and telephony costs, the involuntary termination of 44
employees, and the consolidation of certain facilities. Concurrently, the
Company abandoned certain IVR equipment. For more details on the corporate
restructuring, see "NOTES TO FINANCIAL STATEMENTS- No. 8 ("Restructuring
and Asset Abandonment").
Growth Strategy
The Company's goal is to continue to be the leading provider of,
and further develop the market for, electronic payment services to pay
government obligations, as well as non-government obligations. The
following are key elements of this strategy.
Leverage IRS Relationship to Obtain Additional State Government Clients
The Company is leveraging its IRS relationship to provide services
to additional state government entities. These efforts have been bolstered
by the fact that the IRS has publicly endorsed the concept of joint federal
and state payments either via telephone or the Internet or through
electronic filing. The Company currently provides, or has recently signed
contracts to provide, its electronic payment services to 21 state
governments and the District of Columbia, which experience the Company
seeks to promote in establishing relationships with other states. A key
element of the Company's strategy for obtaining personal state income tax
accounts is the integration of the federal and state personal income tax
payment processes. The Company's integrated solution allows consumers to
pay their federal and state personal income taxes in a single session,
which the Company believes should enhance consumer convenience and usage.
Competitors who do not currently provide services to the IRS will be unable
to offer this integrated service. Once the Company begins providing
services to a particular state, it seeks opportunities to provide
additional services for that state.
Leverage IRS and State Government Client Relationships to Obtain Additional
Local Clients
As of December 31, 2001, the Company provided services to 1,155
county and municipal clients. Its relationships with the IRS and state
government entities provide the Company an advantage in establishing
relationships with additional local clients. The Company identifies
potential county and municipal clients through direct sales, participation
in industry trade shows and conferences and targeted newsletters and other
mailings.
Offer Internet Services
In August 1999, the Company began providing credit card payment
services through the Internet. In addition to the Company's IVR payment
services, the Company now makes Internet payment services available as an
option to all of its existing government clients.
Introduce New Services and Service Enhancements
The Company seeks to remain at the forefront of its industry by
continuing to develop additional and complementary services. While the
Company's primary business to date has involved the collection of personal
income taxes, real estate and personal property taxes and parking/traffic
citations and fees, the Company also has experience in processing other
payments, such as business sales and taxes, professional license fees,
university tuition and utility bills. In fact, the Company has recently
begun offering its services to potential non-government clients (such as
non-government owned utilities and private universities). It continues to
explore other types of obligations for which it might provide its services
and opportunities to provide direct debiting and other electronic fund
transfer features to consumers in the future.
Increase Brand Awareness and Consumer Use
The Company has primarily relied on its government clients and
credit card issuers, and will continue to work with them, to publicize the
Company's services through government bills, publications and Web sites, as
well as credit card promotions and billing inserts. The Company arranges
use of these specific promotional devices with its government clients and
the credit card companies without charge to the Company. To supplement
these efforts, in 2001 the Company utilized its own newspaper, television
and radio advertising and public relations campaigns to increase consumer
awareness of the Company's services. The Company expects to use similar
methods to market its services in 2002. In connection with these
promotional campaigns, the Company has entered into cooperative advertising
arrangements with certain of its credit card partners and continues to work
with large credit card issuing banks to market the Company's services to
those bank's specific cardholders.
The Company's marketing is also focused on promoting additional
payment opportunities to its existing consumers. The Company believes that
once a consumer uses its system, s/he is more likely to use these services
to make other types of payments to government entities. The Company's Web
site and interactive telephone system promote different types of payments
that can be made using the Company's services.
Pursue Strategic Relationships and Acquisitions
The Company provides its payment services to customers of the
Jackson Hewitt(R) Tax Service. In the ordinary course of its business, the
Company investigates relationships with tax preparation services, tax
preparation software providers, electronic income tax filing providers,
Internet portals and other Internet financial service providers in order
potentially to reach additional customers.
The Company also has relationships with a number of its
processing banks to provide its services for their government clients. The
Company's product implementation model and revenues as a subcontractor are
identical to a directly contracted account. Official Payments routinely
seeks out additional strategic opportunities to provide services to
government entities in conjunction with these and other partners.
Regulatory Matters
By virtue of Comerica's ownership interest in the Company, and
owing to the nature of the Company's business, the Company may be subject
to various regulatory requirements. Comerica is a financial holding company
that is subject to supervision and regulation by the Federal Reserve Board
("FRB") under the Bank Holding Company Act of 1956, as amended. Subject to
certain exemptions, under the Act, Comerica and its non-bank subsidiaries
historically have been prohibited from engaging in activities other than
those of banking or managing or controlling banks, and from acquiring or
retaining direct or indirect ownership or control of voting shares of any
company which is not a bank or bank holding company whose activities the
FRB has not determined to be so closely related to banking as to be a
proper incident thereto. This provision has not prohibited Comerica's
ownership interest in the Company because the FRB has determined that the
types of activities in which the Company has engaged are so closely related
to banking as to be a proper incident thereto. Subject to certain
conditions, the Gramm-Leach-Bliley Act of 1999 expanded further the ability
of financial holding companies to hold equity interests in other companies.
For as long as Comerica owns a voting equity interest in the
Company which equals 25% or more, or may otherwise be deemed by the
regulatory authorities to constitute "control", the Company will also be
subject to certain state and federal statutes and regulations that apply to
Comerica. For example, the Company will be required to limit any
transactions it may have with "affiliates" of Comerica in the same manner
as Comerica must limit its transactions with its affiliates. Among other
things, all such dealings with affiliates must be at arms' length.
There is no guarantee that the financial holding company laws will
not be amended or construed differently, or that new laws or regulations
will not be adopted, the effect of which could materially and adversely
affect the Company's business, operating results and financial condition.
The Company is also subject to the laws and regulations relating
to commercial transactions generally, such as the Uniform Commercial Code,
and to the electronic fund transfer rules embodied in Regulation E issued
by the Federal Reserve. The Federal Reserve's Regulation E implements the
Electronic Fund Transfer Act, which was enacted in 1978. Regulation E
protects consumers engaging in electronic transfers, and sets forth basic
rights, liabilities and responsibilities of consumers who use electronic
money services and of financial institutions that offer these services. For
the Company, Regulation E sets forth disclosure and investigative
procedures. For consumers, Regulation E establishes procedures and time
periods for reporting unauthorized use of electronic money transfer
services and limitations on the consumers' liability if the notification
procedures are followed within prescribed periods. These limitations on the
consumers' liability may result in liability to the Company.
Given the expansion of the Internet commerce market, it is
possible that the Federal Reserve might revise Regulation E or adopt new
rules for electronic funds transfers affecting users other than consumers.
Because of growth in the Internet commerce market, Congress has held
hearings on whether to regulate providers of services and transactions in
the Internet commerce market. It is possible that Congress or individual
states could enact laws regulating the Internet commerce market. The
privacy provisions of the Gramm-Leach-Bliley Act prohibit financial
institutions from disclosing to unaffiliated third parties nonpublic
personal information regarding consumers, subject to certain exceptions,
and require those institutions to develop and disclose consumer privacy
policies. Federal agencies are developing regulations that implement this
new privacy law. In addition, a number of state legislatures are
considering their own consumer privacy laws, which may be more stringent
than the federal provisions. If enacted, these laws, rules and regulations
could be imposed on the Company's business and industry and could have a
material adverse effect on the Company's business, operating results and
financial condition. Federal, local and state laws and regulations may be
adopted in the future to address issues such as user privacy, pricing,
online content regulation, taxation and the characteristics and quality of
online products and services.
Any new law or regulation relating to the Internet could have a
material and adverse effect on the Company's business, operating results
and financial condition.
Forward-Looking Information
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. Such statements are based upon the current economic environment
and current expectations that involve risks and uncertainties, and you are
cautioned that these statements are not guarantees of future performance.
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.
The Company's actual results and the timing of certain events may differ
significantly from the results discussed in the forward-looking statement.
Factors that might cause or contribute to such a discrepancy include, but
are not limited to, those discussed below in the section entitled "Other
Factors Affecting the Company's Business" and in "ITEM 7: MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,"
as well as the risks discussed in the Company's other Securities and
Exchange Commission ("SEC") filings.
Recent Events
In March 2002, the Company received authorization from Visa U.S.A.
Inc. and began accepting Visa cards for payment of federal and state income
taxes pursuant to its respective agreements with the IRS and its state
government clients. Prior to this time, Visa had not permitted the Company
to accept Visa card payments for federal and state taxes because of Visa's
policy against variable convenience fees.
In March 2002, in accordance with the Company's bylaws, the
Company's board of directors approved a resolution to decrease the size of
the board from nine directors to seven directors. Following the death in
January 2002 of Kenneth Stern, a director and the Company's founder and
former president, and the resignation (for personal reasons) of Vernon
Loucks Jr. from the board in August 2001, the board had two directorship
vacancies.
In late January 2002, the Company entered into an agreement with
the Commonwealth of Pennsylvania which authorizes the Company to collect
credit card payments for Pennsylvania personal income taxes.
Employees
As of December 31, 2001, the Company had a total of 68 employees.
None of these employees is represented by a collective bargaining
agreement, nor has the Company experienced any work stoppage. The Company
considers its relations with employees to be good.
Other Factors Affecting the Company's Business
In addition to other information in this Form 10-K, the following
factors should be carefully considered in evaluating the Company and its
business because such factors currently may have a significant impact on
the Company's business, operating results and financial condition. As a
result of the factors set forth below and elsewhere in this Form 10-K, and
the risks discussed in the Company's other Securities and Exchange
Commission filings, actual results could differ materially from those
projected in any forward-looking statements.
Risks Related to the Company's Business
The Company has a history of losses and expects to continue to incur
losses.
The Company has incurred net losses of approximately $82.8 million
for the period from its inception on June 26, 1996 to December 31, 2001.
The Company expects to incur losses from operations for the foreseeable
future.
The Company has expended significant resources on developing its
customer service, engineering, sales and marketing staffs and enhancing the
capabilities of its Internet and IVR platforms. As a result of these
expenditures and its normal course operating expenses, the Company will
need to increase significantly its revenues to achieve and maintain
profitability. If the Company's revenues do not increase sufficiently, the
operating results and financial condition of the Company would be
materially and adversely affected.
Because the Company's business model is continuing to evolve, it is
difficult to evaluate the Company's business.
The use of credit cards to make payments to government agencies is
still relatively new and evolving. To date, the Company's business has
consisted primarily of providing credit card payment options for the
payment of balance due federal and state personal income taxes, real estate
and personal property taxes and fines for traffic violations and parking
citations. Because the Company has only a limited operating history, it is
difficult to evaluate its business and prospects and the risks, expenses
and difficulties that the Company may face in implementing its business
model. The Company's success will depend on maintaining its relationship
with the IRS and on maintaining existing, and developing additional,
relationships with state and local government agencies, especially state
taxing authorities, and their respective constituents. There are no
assurances that the Company will be able to develop new relationships or
maintain existing relationships, and the failure to do so could have a
material and adverse effect on the business, operating results and
financial condition of the Company.
The Company's future growth depends, in large part, on the acceptance of
its payment systems as a method for making payments to government entities.
The Company works with government entities to allow it to provide
electronic credit card payment services to the government entities'
constituents. While many government entities have initiatives or
legislative mandates in place to foster the growth of electronic payments,
the business, operating results and financial condition of the Company
would suffer if there were a reduction in these initiatives. Traditionally,
individuals and small businesses have made substantially all payments to
government entities by check or money order. The Company is providing its
payment services through its Internet and IVR platforms. However, there are
no assurances that the Company will be successful in attracting enough
additional consumers to use its Internet and interactive telephone conduits
to make their payments to the Company's government clients. The lack of
meaningful growth in the market for electronic credit card payments to
government entities could have a material and adverse effect on the business,
operating results and financial condition of the Company.
If consumers are unwilling to pay convenience fees for the Company's
services, the Company's current business model will fail.
The Company's current business model is based on consumers'
willingness to pay a convenience fee in addition to their required
government or other payment for the use of the Company's credit card
payment option. Among other factors, this willingness to pay convenience
fees may be adversely impacted by a general economic downturn. If consumers
are not receptive to paying a convenience fee, demand for the Company's
services will decline or fail to grow, which could jeopardize the Company's
business and would have a material and adverse effect on the operating
results and financial condition of the Company.
If credit card associations change their rules and do not allow the Company
to charge convenience fees, operating results of the Company would be
materially and adversely affected.
Credit card association rules governing the use of Visa and
MasterCard at merchant locations generally prohibit merchants from charging
a convenience fee for cardholder purchases. The Company and its clients
have worked with these credit card associations to permit convenience fees
to be charged for electronic credit card payments for government services
and taxes and certain other obligations. If the Company's ability to charge
convenience fees is limited or eliminated, the business, operating results
and financial condition of the Company would be materially and adversely
affected.
If credit card issuers eliminate, or reduce the value of rewards
obtainable under, their respective rewards programs, or if cardholders'
desire to accumulate such rewards decreases in general, the operating
results of the Company could be materially and adversely affected.
The Company believes that a significant benefit to many taxpayers
using its services is the opportunity to accumulate valuable rewards (e.g.,
airline frequent flyer miles) in various rewards programs administered by
issuers of credit cards. If credit card issuers eliminate, or reduce the
value of awards obtainable by cardholders under, these rewards programs, or
if cardholders' desire to accumulate airline frequent flyer miles or other
rewards decreases in general, consumer use of the Company's services may
decrease and, if a large number of credit card holders are affected, the
Company's operating results could be materially and adversely affected.
The IRS currently accounts for a significant portion of the Company's
revenues, and the loss of the IRS as a client, or a decrease in IRS-related
transactions because of increased competition from other IRS-authorized
service providers, would materially and adversely impact the Company's
operating results.
In the year ended December 31, 2001, convenience fees from
payments to the IRS accounted for approximately 63% of the Company's total
revenues. The IRS has selected the Company to provide electronic credit
card payment services with respect to balance due, extension, estimated,
balance due notice and installment agreement personal income taxes through
January 23, 2003. However, the Company's existing contract with the IRS
allows the IRS to terminate the Company's services at any time for the
IRS's convenience. In addition, as of the date of this Form 10-K and after
having responded to the IRS's Request for Proposals, the Company is
awaiting the IRS's decision regarding the award of a contract to provide
electronic credit card payment services for federal tax payments in 2003
(with the IRS having the option to renew such contract for up to four
additional one-year terms through 2007). If the IRS does not continue to
select the Company to perform its service in the future, or if the IRS
authorizes additional service providers to perform this service, the
business, operating results and financial condition of the Company would be
materially and adversely affected.
Most of the Company's client agreements do not ensure that the Company will
be a given client's exclusive provider of electronic credit card payment
services and such agreements may generally be terminated on short notice by
the client.
Most of the Company's agreements with its clients (including the
IRS) can be terminated by the respective client without cause on short
notice, generally 30 to 90 days. In addition, a client may choose not to
renew its contract with the Company or may not choose the Company's
proposal in response to that entity's request for proposals. If one of the
Company's larger existing government clients chooses to terminate its
contract or memorandum of understanding with the Company, or does not
choose the Company's proposal, the business, operating results and
financial condition of the Company could be materially and adversely
affected.
Increased competition in the electronic credit card payments market
(particularly with respect to payment services to government entities)
could result in lower operating margins and decreased market share.
The Company's credit card payment services face competitive
pressures from various card- issuing banks for Visa and MasterCard, which
send out checks that function as cash advances and can be used for payments
to governmental and other entities. In addition, a number of data and bill
processing companies have the technical capability and other resources to
commence providing credit card payment services, and have indicated an
intent to do so. Increased competition from other providers of payment
options to governmental and other entities could have a material and
adverse effect on the business, operating results and financial condition
of the Company.
Many of the Company's current and potential competitors have
significantly greater financial, marketing, technical, sales, customer
support and other resources than the Company. In addition, some of these
competitors may be able to devote greater resources to the development,
promotion and sale of their services, adopt more aggressive pricing
strategies and devote substantially more resources to the development of
technology and systems than the Company will be able to devote or adopt.
Increased competition may result in lower operating margins and/or loss of
market share. The Company may not be able to compete successfully against
current and future competitors, and competitive pressures could have a
material and adverse effect on the business, operating results and
financial condition of the Company.
If the Company's services do not function as designed, the Company may
incur significant liability for the processing of fraudulent or erroneous
transactions.
The Company's electronic credit card payment services are designed
to provide payment management functions and to limit its clients' risk of
fraud or loss in effecting transactions with their constituents. As
electronic services become more critical to the Company's clients, there is
the potential for significant liability claims for the processing of
fraudulent or erroneous transactions. In addition, defects or programming
errors in the software the Company uses could cause service interruptions.
The Company's services depend on hardware, software and supporting
infrastructure that is both internally developed, purchased and/or licensed
from third parties. Although the Company conducts extensive testing,
software may contain defects or programming errors, or may not properly
interface with third party systems, particularly when first introduced or
when new versions are released. In addition, the Company many experience
disruptions in service from third-party providers. To the extent that
defects or errors are undetected in the future and cannot be resolved
satisfactorily or in a timely manner, the Company's business could suffer.
If a liability claim or claims were brought against the Company, even if
not successful, their defense would likely be time consuming and costly and
could damage the Company's reputation. Any such liability or claim could
have a material and adverse effect on the business, operating results and
financial condition of the Company.
If the Company's system security is breached, it may be liable to
government clients and consumer users for damages resulting from the
breach.
The Company's failure to prevent system security breaches could
have a material and adverse effect on the business, operating results and
financial condition of the Company. A fundamental requirement for
electronic payment services is the secure transmission of confidential
information over public communication networks. Third parties may attempt
to breach the Company's system security or that of the Company's clients or
consumer users. If they are successful, the Company may be liable to its
clients or consumer users for any damages resulting from a breach in the
Company's system security, and any breach could harm the Company's
reputation. The Company may be required to expend significant capital and
other resources to license additional encryption and other technologies to
protect against system security breaches or to alleviate problems caused by
any such breaches.
If the Company's systems fail, it may not be able to provide adequate
service, and the Company's operations could be damaged.
The Company's success depends on the efficient and uninterrupted
operation of its payment platforms and communications systems. The majority
of the Company's payment platforms and communications systems are located
in San Ramon, San Jose and Stockton, California. Although the Company has
developed contingency plans and redundancies for its systems, the Company's
systems and operations are vulnerable to damage or interruption from:
o telecommunication failures;
o power loss;
o earthquakes, fires or floods;
o computer viruses;
o physical and electronic break-ins;
o interruption or failure of service from third-party
providers (e.g., Internet hosting provider); and
o acts of sabotage, vandalism and similar events.
Any failure of the Company's systems could impede the timely
processing of consumer user payments and other data and the day-to-day
management of the business. Despite any precautions the Company takes, a
natural disaster or other unanticipated problem that leads to the
corruption or loss of data at the Company's facilities could result in an
interruption of services. Service interruptions could have a material and
adverse effect on the reputation, business, operating results and financial
condition of the Company and would have a significant adverse effect if
they occurred during the spring federal and state tax season.
A constraint in the Company's capacity to process transactions could impair
the quality and availability of the Company's service.
Capacity constraints may cause unanticipated system disruptions,
impair quality and lower the level of the Company's service, all of which
could have a material and adverse effect on the business, operating results
and financial condition of the Company. Although the Company believes that
it has sufficiently expanded its system capacity to accommodate expected
additional personal federal income tax payments and other anticipated
growth for the foreseeable future, there are no assurances that the Company
will not suffer capacity constraints caused by a sharp increase in the use
of its services. Due to the large number of tax payments made in March and
April, there is an increased risk that the Company will suffer a capacity
constraint during that period, which would have an adverse effect on the
business, operating results and financial condition of the Company.
If the Company fails to respond to rapid technological change, its systems
and services could be rendered obsolete.
The electronic payment industry is characterized by rapid
technological change. If the Company cannot adapt or respond in a
cost-effective and timely manner to technological changes, the business,
operating results and financial condition of the Company will be materially
and adversely affected, and the Company's technology and systems, and thus
its services, could be rendered obsolete. The development of the Company's
technologies and necessary service enhancements entails significant
technical and business risks and requires substantial lead-time and
expenditures. The Company may not be able to keep pace with the latest
technological developments, successfully identify and meet the demands of
its clients and consumer users, use new technologies effectively, or adapt
its services to emerging industry standards or to its clients' or consumer
users' requirements.
The Company's operating results may fluctuate significantly from quarter to
quarter, which may negatively impact the Company's stock price.
The Company believes its quarterly operating results will continue
to fluctuate significantly in the future as a result of a variety of
factors, many of which are outside of the Company's control. Among other
things, these factors include:
o the seasonality of the Company's business, which is due
primarily to the fact that the majority of federal and
state personal income tax payments are being made in
March and April and to the fact that real estate and
personal property tax payments are made only once or
twice per year in most jurisdictions;
o the amount and timing of costs related to the Company's
sales and marketing efforts and other initiatives; and
o the Company's ability to upgrade, enhance and maintain
its systems and infrastructure in a timely and
cost-effective manner.
Because of these factors, the Company believes that comparisons of
its quarterly operating results are not necessarily meaningful. In
addition, it is possible that in some future quarters the Company's
operating results will be below the expectations of research analysts and
investors, in which case the price of the Company common stock is likely to
decline.
If the Company's clients and credit card issuers cease to publicize the
Company's services or adversely change the manner in which they promote the
Company's services, consumer use of its services may slow, and the Company
may suffer a large increase in advertising costs.
Currently, the Company's government clients and credit card
issuers provide most of the publicity for its services, without any charge
to the Company. If clients cease to publicize the Company's services, or
charge the Company for this publicity, advertising costs will increase
substantially, which could have a material and adverse effect on the
business, operating results and financial condition of the Company. While
the Company endeavors in its agreements with its clients to require such
clients to undertake such advertising activities, many of the clients and
credit card issuers have no obligation to continue to provide this
publicity, and there are no assurances that they will continue to do so. In
addition, the clients may publicize other services, including those of its
competitors. For example, the IRS's 2001 Form 1040 instruction booklet and
Forms 1040ES and 4868 will list a competitor's name before the Company's
name in regard to providers of electronic credit card payment services,
whereas for the 2000 forms (i.e., payments made in 2001), the Company's
name was listed first.
If the Company does not effectively manage its internal growth, the Company
may not be able to expand its business.
There are no assurances that the Company's current and planned
personnel levels, systems, procedures and controls will be adequate to
support its future operations. If inadequate, the Company may not be able
to exploit existing and potential strategic relationships and market
opportunities. Any delays or difficulties the Company encounters could
impair its ability to attract new, and enhance its relationships with
existing, government clients, non-government clients and consumer users. If
the Company is unsuccessful in hiring, integrating and retaining personnel,
the business, operating results and financial condition of the Company
could be materially and adversely affected.
The Company depends on a relatively few number of key employees.
The Company currently does not maintain key man life insurance
policies on any of its employees. The loss of the services of any key
employees or the inability to hire and retain additional key employees
would have a material and adverse effect on the business, operating results
and financial condition of the Company.
The Company's obtains its principal liability insurance coverage under
master policies held by its majority stockholder, Comerica Incorporated,
which sharing arrangement may limit the insurance payments available to the
Company in a given instance if other covered Comerica entities also file
claims (whether or not for related events) under the same policy.
The Company's current insurance policies (including, its directors
and officers, general commercial and professional liability coverages)
requires the Company to share coverage with Comerica Incorporated and its
other subsidiaries. This program has enabled the Company to lower its
insurance premiums significantly from those it had paid for standalone
policies prior to November 2001. However, if a catastrophic or other
event(s) results in claims on a given liability policy being filed by
Comerica or its subsidiaries, the amount of coverage ultimately available
to the Company for a specific claim (whether or not related to the Comerica
claim(s)) may be limited. If the Company faces one or more material
liability claims for which its insurance coverage is insufficient to offset
the amount of the Company's ultimate liability, the Company's operating
results and financial condition would be materially and adversely affected.
The Company may not be able to protect its intellectual property rights,
which may result in damages to the Company, or the Company may infringe on
the rights of others, which may subject it to liability for damages caused
to third parties.
The Company protects its intellectual property rights through a
combination of trademark, service mark, copyright and trade secrets laws.
There are no assurances, however, that the steps the Company has taken to
protect its intellectual property rights will be adequate to deter
misappropriation of those rights. The Company does not have any proprietary
technology or patent protections. In the ordinary course of business, the
Company may be subject to claims by third parties, including claims of
alleged infringement of service marks, trademarks, copyrights, patents and
other intellectual property rights of third parties. Although there has not
been any litigation relating to such claims to date, these claims and any
resultant litigation could subject the Company to significant liability for
damages and could result in the invalidation of its proprietary rights. In
addition, even if the Company prevails, the litigation could be
time-consuming and expensive to defend and could result in a diversion of
time and attention from the business, any of which could materially and
adversely affect its business, operating results and financial condition.
Any claims or litigation from third parties may also result in limitations
on the ability of the Company to use the service marks, trademarks and
other intellectual property subject to these claims or litigation, unless
the Company enters into agreements with the third parties. However, these
agreements may be unavailable on commercially reasonable terms, or not
available at all.
The Company may not be able to license technologies (e.g., IVR and
encryption technologies) or obtain certain technological services (e.g.,
Internet hosting service) from third parties on favorable terms, and the
Company may not be able to utilize these technologies successfully.
The Company intends to continue to license technology from third
parties, including its Internet, IVR and encryption technology. In addition,
the Company intends to obtain certain technological services from third
parties on an outsourcing basis, including its Internet hosting operations.
The Company's business is continuing to evolve, and it may need to license,
or obtain through outsourcing, additional technologies to remain
competitive or adequately protect the security of its systems. The Company
may not be able to obtain these technologies on commercially reasonable
terms or at all. In addition, the Company may fail to successfully
integrate any licensed or outsourced technology into its services. The
third party licenses and/or outsourcing fees may fail to generate revenues
sufficient to offset associated acquisition and maintenance costs, or may
divert the Company's resources from the development of its own proprietary
technology. The Company's inability to obtain any of these licenses or
outsourcing services could delay product and service development until
equivalent technology can be identified, licensed and integrated. Any such
delays in services could cause the business and operating results of the
Company to suffer.
The Company substantially depends on the sponsorship of its processing
banks to maintain its status as a credit card member service provider; and
the Company's status in each credit card association could be suspended or
terminated if it cannot comply with standards or if the associations change
their membership rules.
Termination of the Company's member service provider registrations
or any changes in the rules of the credit card associations that limit the
Company's ability to provide processing and marketing services, could have
a material adverse effect on the business, operating results and financial
condition of the Company. As a nonbank processor, in order to process
credit card transactions, the Company must be authorized by American
Express and Discover Financial Services and be sponsored by a financial
institution that is a principal member of Visa and MasterCard. Through its
processing banks, the Company is registered with Visa and MasterCard as a
member service provider. The Company is a merchant agent for American
Express and is authorized to accept Discover Card transactions. The
Company's status in each association and with American Express and Discover
Financial Services depends on its compliance with their standards, which
may change and may vary from association to association, and could be
suspended or terminated if the Company is unable to comply. There are no
assurances that the credit card associations will maintain the Company's
registrations or authorizations or keep their current rules in effect.
Additionally, some of the member financial institutions that set the rules
for each credit card association are the Company's or its processing banks'
competitors, and may help effect rules that are less favorable to the
Company.
The Company's failure to successfully integrate any future acquisitions
could strain its managerial, operational and financial resources.
As part of the Company's business strategy, the Company may pursue
opportunistic acquisitions that would provide additional technologies,
products, services or experienced personnel. Acquisitions present a number
of potential risks that could have a material and adverse effect on the
business, operating results and financial condition of the Company,
including:
o difficulty in assimilating the acquired company's
personnel, operations and technologies;
o entrance into markets in which the Company has limited or
no prior experience;
o the potential loss of key employees of the acquired
company;
o the distraction of its management's attention from other
business concerns; and
o the potentially dilutive issuance of the Company's common
stock, the use of significant amounts of cash or the
incurrence of substantial amounts of debt.
Risks Related to the Company's Industry
If the growth in the use and capacity of the Internet does not continue, or
the Internet is not secure, the growth of the Company's business will be
negatively impacted.
The growth of the Company's business would be materially and
adversely affected if Internet usage does not continue to grow rapidly.
Internet usage may be inhibited for a number of reasons, including:
o concerns about the security of confidential information;
o lack of reliability and ease of access;
o lack of cost-effective, high-speed service;
o inconsistent quality and interruption of service;
o inadequate network infrastructure; and
o adoption of onerous laws or governmental regulations.
The Internet infrastructure may not be able to support the demands
placed on it by increased usage and its performance and reliability may
decline. Historically, Internet sites have occasionally experienced
interruptions and delays as a result of outages occurring throughout the
Internet network infrastructure. If these outages or delays occur
frequently in the future, Internet usage, as well as the use of the
Company's Internet platform, could grow more slowly than projected or
decline. In addition, because a number of the Company's services involve
the transfer of confidential information, the business, operating results
and financial condition of the Company could be materially and adversely
affected if Internet users significantly reduce their use of the Internet
due to security concerns.
The Company may become subject to Federal Reserve Board licensing laws,
expanded electronic fund transfer rules or more extensive credit card
acceptance laws, which could increase the Company's operating costs,
decrease its margins and/or restrict its business activities.
The Company's management believes that it is not required to be
licensed by the Federal Reserve Board, or other federal or state agencies
that regulate or monitor banks or other types of providers of electronic
commerce services. There are no assurances that a federal or state agency
will not attempt, either now or in the future, to require that providers of
services like the Company's be licensed. This would impede the Company's
ability to do business in the areas within the regulator's jurisdiction.
In conducting several aspects of the Company's business, the
Company is subject to various laws and regulations relating to commercial
transactions generally, such as the Uniform Commercial Code. The Company is
also subject to the electronic fund transfer rules embodied in Regulation E
issued by the Federal Reserve Board. Given the expansion of the electronic
commerce market, it is possible that the Federal Reserve Board might revise
Regulation E or adopt new rules for electronic fund transfers affecting
users other than consumers.
It is possible that Congress or individual states could enact laws
regulating the electronic commerce market, enabling government entities in
the affected jurisdictions to accept credit cards directly where they are
currently prohibited from doing so or limiting the convenience fees that
service providers can charge to accept and process credit card payments for
government obligations. If enacted, these laws, rules and regulations could
be imposed on the Company's business and industry and could have a material
and adverse effect on the business, operating results and financial
condition of the Company.
If there are changes in tax laws which decrease the amount, the methods or
the frequency of consumer tax payments, the Company's revenues could
decrease.
Congress, as well as individual states and municipalities,
regularly consider a wide array of tax proposals. These tax proposals may
result in a reduction of federal, state or local tax rates, collection of a
greater percentage of taxes through withholding or other changes that could
result in a decrease in the number and amount of payments that consumer
users have to make directly to a government entity. In addition, some of
these proposals may result in taxation of credit card perquisites, such as
frequent flyer miles. If any of these proposals were to be passed, it may
reduce the number and amount of tax payments effected through the Company's
services and the dollar amount of the Company's revenue derived from the
convenience fees charged to consumer users. If enacted, these laws could
have a material and adverse effect on the business, operating results and
financial condition of the Company.
If there is a general economic downturn, the amount of income tax paid
could decrease and/or consumers may be less willing to incur convenience
fees in connection with the Company's services, which, in both cases, would
reduce the Company's operating results.
Income taxes are dependent on the amount of income earned by tax
paying citizens. A significant economic downturn could reduce the per
capita income of citizens, and thus reduce the amount of income tax
payments consumer users have to make to a government entity, which may
reduce the Company's revenues from convenience fees. In addition, an
economic downturn may result in a reduction in consumer spending,
particularly for non-essential goods and services, which may result in a
reduction in consumers' use of the Company's services. If the United States
experiences an economic downturn, it could have a material and adverse
effect on the business, operating results and financial condition of the
Company.
ITEM 2. PROPERTIES
The Company's corporate headquarters (including its marketing and
finance operations) are located in Stamford, Connecticut in approximately
13,800 square feet of office space. The lease for this space expires in
2005. As part of the Company's corporate restructuring which began in
November 2001, the Company has eliminated the use of one floor
(constituting approximately 6,000 square feet) at its Stamford office. In
addition, many of the Company's technical and customer service personnel
are located in approximately 14,300 square feet of office space in San
Ramon, California. The lease for this space expires in 2005. The Company
expects to vacate a portion of the San Ramon office space by mid-2002 as
part of the corporate restructuring.
ITEM 3. LEGAL PROCEEDINGS
The Company currently is not involved in any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this
Annual Report on Form 10-K, there were no matters submitted to a vote of
security holders through a solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on The Nasdaq National Market
under the symbol "OPAY." The Company's initial public offering of stock
commenced on November 23, 1999 at $15.00 per share. The price range per
share reflected in the table below, is the highest and lowest sale price
for the Company's stock as reported by The Nasdaq National Market for the
fiscal quarters indicated. The Company has never declared or paid cash
dividends on its common stock. The Company presently intends to retain all
future earnings, if any, to finance future growth and, therefore, does not
anticipate paying any cash dividends in the foreseeable future.
High Low
--------------- ---------------
2000 First Quarter $55.00 $32.00
Second Quarter $42.50 $4.00
Third Quarter $10.72 $3.81
Fourth Quarter $10.00 $4.00
2001 First Quarter $9.88 $4.38
Second Quarter $7.13 $4.35
Third Quarter $5.30 $1.73
Fourth Quarter $3.95 $1.50
As of March 25, 2002, there were approximately 32 stockholders of
record of the Company's common stock, although the Company believes that
there is a significantly larger number of beneficial owners of its common
stock.
The Company commenced its initial public offering on November 23,
1999 and completed it on November 29, 1999, after selling all of the
5,750,000 shares of common stock registered under the corresponding
Registration Statement on Form S-1(No. 333-87325), 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 incurred approximately $1.5 million 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, in addition to general corporate purposes, to make the following
payments: approximately $2.3 million for the purchase and installation of
computer equipment to expand transaction processing capabilities;
approximately $6.5 million to add develop and add functionality to its Web
site; approximately $1.6 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 $8.2 million for
advertising, marketing and promotional activities. The Company paid
$135,000 and $151,000 to Imperial Bank (then the record holder of a
majority of the Company's outstanding common stock) in 2000 and 1999,
respectively, for the provision of certain general administrative services.
In 2001, in connection with the primary insurance coverage provided to the
Company by unaffiliated insurance companies as part of Comerica
Incorporated's master policies, the Company incurred $11,560 of premiums
payable to Comerica Assurance Ltd., another Comerica subsidiary, for
insurance on certain deductibles which otherwise would be payable by the
Company in the event of casualty losses under these master policies. (See
"ITEM 13-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"). Except as
described in the preceding sentence, none of the net offering proceeds have
been paid directly or indirectly to any director or officer of the Company
or their associates, persons owning 10% 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.
Sales of the Company's Common Stock Prior to its Initial Public Offering
On August 24, 1999, the Company issued 2,400 shares of its common
stock to Imperial Bank for a total consideration of $8.00 and 600 shares of
common stock to Beranson Holdings, Inc. for a total consideration of $2.00.
The Company relied on the exemption under Section 4(2) of the Securities
Act of 1933, as amended, because it was an offer made by an issuer not
involving a public offering. In connection with the merger of U.S.
Audiotex, LLC into the Company, which was effected as of September 30,
1999, the limited liability company interests of Imperial Bank and Beranson
Holdings, Inc. in U.S. Audiotex, LLC were exchanged for 11,997,600 and
2,999,400 shares of the Company's common stock, respectively. The merger
was an internal corporate reorganization solely involving the existing
members of U.S. Audiotex, LLC in order to convert the Company's corporate
form into a C- corporation in anticipation of its initial public offering.
On November 5, 1999, the Company sold 512,820 shares of its common stock to
E*TRADE Group, Inc. for $9.75 per share - resulting in total consideration
of $5 million. E*TRADE Group, Inc. is a sophisticated qualified
institutional buyer.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in
conjunction with the financial statements and the notes to the financial
statements and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," which are included elsewhere in this report.
Years Ended December 31,
2001 2000 1999 1998 1997
------------ ------------ ------------ ----------- -----------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net revenues.................................... $ 31,445 $ 26,084 $ 8,841 $ 2,369 $ 1,202
Cost and Expenses:
Cost of revenues........................... 26,364 20,907 6,345 1,028 669
Sales and marketing........................ 6,568 9,212 1,301 356 330
Development costs.......................... 4,344 2,953 1,032 608 206
General and administrative................. 8,811 10,042 2,692 590 463
Depreciation expenses...................... 3,368 1,716 288 57 30
Restructuring and asset abandonment........ 6,045 -- -- -- --
Amortization of deferred stock-based
compensation........................... 19,803 15,728 7,940 -- --
--------------------------------------------------------------
Total operating expenses.............. 75,303 60,558 19,598 2,639 1,698
--------------------------------------------------------------
Loss from operations............................ (43,858) (34,474) (10,757) (270) (496)
Other income (expense), net..................... 2,537 4,436 357 (55) (6)
--------------------------------------------------------------
Net loss........................................ $ (41,321) $ (30,038) $ (10,400) $ (325) $ (502)
==============================================================
Basic and diluted net loss per share............ $ (1.88) $ (1.40) $ (0.66) $ (0.02) $ (0.03)
==============================================================
Weighted-average shares used in computing basic
and diluted net loss per share.................. 21,948 21,421 15,677 15,000 15,000
==============================================================
BALANCE SHEET DATA:
Cash and short-term investments............ $ 49,130 $ 65,898 $ 80,825 $ 631 $ 182
Working capital (deficit).................. 42,842 61,502 80,150 392 (221)
Total assets............................... 59,847 76,263 84,300 1,747 764
Total debt including current portion....... 708 1,184 597 810 389
Stockholders' equity (deficit)............. 47,594 68,453 81,561 184 (91)
- ----------
See note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used to compute basic and diluted net
income (loss) per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition
and results of operations of the Company should be read in conjunction with
"Selected Financial Data" and the Company's financial statements and
related notes appearing elsewhere in this report. This discussion and
analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. The actual results may differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including but not limited to, the risks discussed in the
Company's other SEC filings.
Overview
Official Payments is a leading provider of electronic payment
options to government entities, enabling consumers to use their credit
cards to pay, through the Internet or by telephone, federal and state
income taxes, sales and use taxes, real estate and personal property taxes,
tuition payments, utility payments, motor vehicles fees, fines for traffic
violations and parking citations and other government- imposed taxes and
fees. The Company commenced current operations on June 26, 1996, initially
offering its credit card payment services for the payment of fines for
traffic violations, parking citations and real estate and personal property
taxes. As of December 31, 2001, the Company offered 1,988 services to 1,177
government entities. In 1998, the Company signed a credit card payment
contract with the Internal Revenue Service ("IRS") to provide its services
for the payment by telephone of personal federal "balance due" income taxes
in 1999. In 2000, the Company began processing estimated and extension tax
payments, as well. In 2000, the Company entered into a contract with the
IRS for an initial one-year term (2001), which the IRS subsequently renewed
for an additional year (2002). That contract authorized the Company to
collect credit card payments via its Internet platform, as well as by
telephone. In August 2001, the Company announced that the IRS had further
expanded the scope of its agreement with the Company to include two
additional payment categories beginning in 2002: current-year delinquent
tax payments and installment agreement tax payments. In the fall of 2001,
the Company responded to the IRS's Request for Proposals to enter into a
new contract to provide electronic credit card payment services for federal
tax payments in 2003, with the IRS having the option to renew such contract
for up to four additional one-year terms through 2007. The Company is
currently awaiting notification of the IRS's decision pursuant to this
request for proposals.
The Company began providing services for the payment of personal
state income taxes in California in December 1998. As of December 31, 2001,
the Company was providing, or had entered into contracts to provide (and
was in the process of implementing), its payment services for the District
of Columbia, as well as the states of Alabama, Arkansas, California,
Connecticut, Illinois, Indiana, Iowa, Kansas, Maryland, Minnesota,
Mississippi, New Jersey, New York, Ohio, Oklahoma, Rhode Island, Virginia,
Washington, West Virginia and Wisconsin. In the first quarter of 2002, the
Company entered into an agreement to provide its payment services for the
Commonwealth of Pennsylvania. For nearly all of these states, consumers can
make payments to these states through both the Company's interactive voice
response telephone ("IVR") system and Web site, except for Indiana and
Washington where the Company is only authorized to offer its services
through the IVR or Internet, respectively. In 2002, the Company has begun
offering its electronic payment services to non-governmental entities
(e.g., non- government owned utilities, private universities, etc.) who may
have a need for such services and wish to realize similar benefits as the
Company's government clients.
The Company's revenues consist primarily of convenience fees,
which are transaction fees paid by consumers for using its credit card
payment services. For the year ended December 31, 2001, the convenience
fees ranged from approximately 2.5% to 8.6% of the amount paid by the
consumer per transaction. For processing many payments (including, personal
federal and state income tax payments, sales and use tax payments and real
estate and personal property tax payments), the amount of the convenience
fee charged varies based on the specific amount of the underlying
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 underlying
obligation. Total revenues have increased significantly since the Company
started providing services in January 1999 for personal federal income tax
payments.
For the 2001 fiscal year, convenience fees from payments to the
IRS, state agencies and county and municipal agencies accounted for
approximately 63%, 13% and 23% of the Company's total revenues,
respectively.
The Company's primary cost of revenues are the merchant discount
fees paid to its credit card processors, which, during the year ended
December 31, 2001, ranged from approximately 1.5% to 3.0% of the total
government obligation paid by the consumer, depending on the credit card
used and the type of transaction. The Company also incurs variable
telecommunications costs and IVR license royalty fees. The Company's total
cost of revenues increased by 26% in 2001 compared to 2000, attributable in
large part to a 30% increase in the dollar volume of transactions processed
by the Company.
Processing fines for traffic violations and parking citations
produces a significantly higher gross margin than processing income tax,
sales and use tax and real estate and personal property tax payments
because the convenience fee as a percentage of fines processed is
significantly higher. The Company is endeavoring to increase its activity
in this higher margin business.
Operating expenses include cost of revenues, sales and marketing
expenses, development costs, general and administrative expenses,
depreciation expenses, restructuring charge and asset abandonment and
amortization of deferred stock-based compensation. One of the largest
component of these expenses was related to the amortization of deferred
stock compensation (a non-cash charge), which amounted to $19.8 million in
the year ended December 31, 2001. Sales and marketing expenses consist
primarily of advertising expenses and salaries and commissions for sales
and marketing personnel. Development costs consist primarily of salaries
for engineering personnel and consulting expenses relating to research and
development activities. General and administrative expenses consist
primarily of salaries and other compensation expenses for executive,
customer service, finance and administrative personnel.
The Company has incurred significant losses since inception and
expects to continue to incur losses for the foreseeable future. As of
December 31, 2001, the Company had an accumulated deficit of approximately
$82.8 million. Included as a component of the accumulated deficit is
approximately $42.9 million in non-cash charges taken over the past three
years for stock compensation. The $42.9 million was initially recorded on
the Company's balance sheet as a non-cash deferred charge to recognize the
value of stock options granted in the third and fourth quarters of 1999 to
certain officers and employees of the Company at exercise prices below the
value of the underlying common stock. Beginning in the third quarter of
1999, the deferred charge was being amortized over the three-year stock
option vesting period. However, as a result of the acceleration of options
under the Company's 1999 Stock Incentive Plan due to Comerica's acquisition
of Imperial Bancorp on January 30, 2001, the unamortized portion of this
charge was recognized by the Company in the first quarter of 2001.
The Company also recorded on its balance sheet deferred
stock-based compensation totaling $633,000 in the second quarter of 2000.
This deferred amount represented the fair market value of restricted shares
of common stock granted to employees as performance-based awards and also
in replacement of, and in exchange for, cancelled unvested stock options
with exercise prices in excess of the current market value. Beginning in
June 2000, this deferred amount was amortized on a straight-line basis over
a one-year vesting period. As a result of the acceleration of options under
the Company's 2000 Stock Incentive Plan due to Comerica's acquisition of
Imperial Bancorp, the unamortized portion of this amount was recognized by
the Company in the first quarter of 2001.
In addition, $4.5 million of deferred compensation related to
option grants to the Company's former Chief Financial Officer, Brian W.
Nocco, which were being amortized over a three-year vesting period
(beginning in the third quarter of 1999). Mr. Nocco's employment with the
Company terminated during the second quarter of 2000, and in connection
therewith and pursuant to Mr. Nocco's previously existing employment
contract, the vesting of a number of Mr. Nocco's options was accelerated
and the unamortized portion of the deferred stock-based compensation
relating to Mr. Nocco was recognized during the second quarter of 2000.
In November 2001, the Board of Directors approved and the Company
initiated a restructuring plan to reduce certain of the Company's operating
expenses. The restructuring plan includes a reduction in marketing,
administrative and telephony costs, the involuntary termination of 44
employees, and the consolidation of certain facilities. Concurrently, the
Company abandoned certain IVR equipment.
Recent Events
For a discussion of material events involving the Company during
the first fiscal quarter of 2002, see the section entitled "Recent Events"
in "ITEM 1: BUSINESS."
Critical Accounting Policies and Estimates
The following discussion and analysis of the Company's financial
condition and results of operations is based upon the Company's financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of
these financial statements requires the Company's management to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. Actual results may vary from these estimates under
different assumptions or conditions. On an ongoing basis, management
evaluates its estimates, including those related to the allowance for
doubtful accounts, estimated useful lives of property and equipment, and
the determination of restructuring obligations. These estimates are based
on historical experience, business practices and corporate policies,
contractual provisions and various other assumptions that are believed to
be reasonable under the circumstances.
The Company's management believes that the following critical
accounting policies affect the significant judgments and estimates used in
the preparation of the Company's financial statements.
The Company maintains an allowance for doubtful accounts,
reversals and chargebacks from consumers who used the Company's services,
estimated losses resulting from the inability of the Company's clients to
make payments and other adjustments and allowances. If the amount of
reversals and chargebacks increases or the financial condition of the
Company's clients were to deteriorate or if they were otherwise unable to
make payments to the Company, additional allowances will be required.
The Company recognized restructuring obligations for involuntary
termination benefits, which resulted from actions which were implemented
during the year ended December 31, 2001. If certain employees are not
involuntarily terminated, or severance amounts are modified, adjustments to
the established restructuring obligation may be required.
The Company recognized facility consolidation costs equal to the
portion of the gross obligations payable under existing contractual lease
terms from either December 31, 2001 (the date of vacancy, in the case of
the Company's Stamford, Connecticut facility), or the expected date the
facility will be consolidated (in the case of the Company's San Ramon,
California facility). Furthermore, based on uncertainties surrounding the
ability of the Company to sublease either facility, and the inability to
reasonably estimate any sublease income, the Company has determined that
the ability to realize sublease income is not probable and is not
estimable. If the Company is able to realize sublease income after
executing appropriate sublease arrangements, the facility closing costs may
require adjustment.
In addition, the Company establishes the estimated useful lives of
its equipment based on a number of factors, which are, in part, based on
management's assessment of the technological capabilities, possible
obsolescence, and general technological trends. If technology platforms
change, or the cost to purchase better technology decreases, the estimated
useful lives of the Company's equipment may require adjustment. The Company
has reduced its deferred tax assets to an amount that management reasonably
believes is more likely than not to be realized. In taking such action, the
Company has estimated future taxable losses in determining the valuation
allowance.
Results of Operations
The following table sets forth, for the periods illustrated,
certain statements of operations data expressed as a percentage of total
revenues. The data has been derived from the financial statements contained
in this report. The operating results for any period should not be
considered indicative of results for any future period. This information
should be read in conjunction with the financial statements included in
this report.
Years Ended December 31,
2001 2000 1999
----------------- -------------- -----------------
STATEMENT OF OPERATIONS DATA:
Net revenues......................................... 100% 100% 100%
Cost and Expenses:
Cost of revenues................................ 83 80 72
Sales and marketing............................. 21 36 15
Development costs............................... 14 11 12
General and administrative...................... 28 38 31
Depreciation expenses........................... 11 7 3
Restructuring and asset abandonment............. 19 - -
Amortization of deferred stock-based
compensation................................ 63 60 89
----------------- -------------- -----------------
Total operating expenses................... 239 232 222
----------------- -------------- -----------------
Loss from operations................................. (139) (132) (122)
Other income, net.................................... 8 17 4
----------------- -------------- -----------------
Net loss............................................. (131)% (115)% (118)%
================= ============== =================
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Revenues
Net Revenues. Net revenues increased $5.3 million to $31.4 million
for the year ended December 31, 2001 from $26.1 million for the
year ended December 31, 2000, an increase of 20%. This increase is
primarily attributable to revenues generated from additional
payment options added to the Company's existing IRS contract,
additional state and county/municipal ("local") clients added
during 2001 which resulted in increases in revenue from processing
state and local real estate and personal property taxes, and
increases in revenue associated with processing an increased
volume of transactions for existing government clients. The
Company processed $1.2 billion in government payments for the year
ended December 31, 2001 compared to $925 million for the year
ended December 31, 2000, an increase of 30%.
Federal Transaction Revenues. 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 $1.8 million to $19.7
million for the year ended December 31, 2001 from $18.0 million
for the year ended December 31, 2000, an increase of 9%. The
increase is also attributable to the increase in consumer
utilization of the Company's services from the prior fiscal year
but offset by decrease of convenience fee rate earned from an
average of 2.76% in 2000 to an average of 2.49% in 2001. Federal
transaction revenues represented 63% and 69% of total revenues for
the years ended December 31, 2001 and 2000, respectively.
The Company processed approximately 227,000 transactions totaling
$792.8 million during the year ended December 31, 2001 compared to
approximately 197,000 transactions totaling $650.7 million during
the year ended December 31, 2000.
State Transaction Revenues. State transaction revenues consist of
fees earned in connection with processing payments for balance
due, extension, estimated and delinquent personal state income
taxes, sales and use taxes, and other state fees on behalf of the
Company's state clients. State revenues increased $1.7 million to
$4.2 million for the year ended December 31, 2001 from $2.5
million for the year ended December 31, 2000, an increase of 68%.
The increase from the prior year is primarily due to the increase
in the number of clients and payment services added during the
2001 fiscal year. State transaction revenues represented 13% and
10% of total revenues for the years ended December 31, 2001 and
2000, respectively.
The Company processed approximately 139,800 state transactions
totaling $163.6 million during the year ended December 31, 2001
compared to 64,200 transactions totaling $84.8 million during the
prior fiscal year.
Local Transaction Revenues. Local transaction revenues consist of
fees earned in connection with processing payments for real estate
and personal property taxes, traffic violations, parking
citations, fax filing fees, and utility bills for the Company's
county and municipal clients. Local transaction revenues increased
$1.8 million to $7.2 million for the year ended December 31, 2001
from $5.4 million for the year ended December 31, 2000, an
increase of 33%. Revenues from processing real estate and personal
property tax payments increased $1.2 million to approximately $4.2
million for the year ended December 31, 2001 from $3.0 million for
the year ended December 31, 2000, an increase of 40%. The increase
is primarily attributable to an increase in the number of
transactions processed and new county and municipal clients added
during 2001. Revenues from processing fines for traffic
violations, moving violations and other transactions increased
$600,000 to $3.0 million for the year ended December 31, 2001 from
$2.4 million for the year ended December 31, 2000, an increase of
25%. The increase is primarily attributable to an increase in the
number of transactions processed and the addition of new county
and municipal clients in 2001. Local transaction revenues
represented 23% and 21% of total revenues for the years ended
December 31, 2001 and 2000, respectively.
The Company processed approximately 728,000 local transactions
totaling $248.0 million during the year ended December 31, 2001
compared to 572,000 transactions totaling $192.0 million during
the prior fiscal year.
Other Revenues. Other revenues increased $76,000 to $367,000 for
the year ended December 31, 2001 from $291,000 for the year ended
December 31, 2000, an increase of 26%.
Cost and Expenses
Cost of Revenues. Cost of revenues increased $5.5 million to $26.4
million for the year ended December 31, 2001 from $20.9 million
for the year ended December 31, 2000, an increase of 26%. The
largest component of cost of revenues, merchant discount fees,
increased $6.0 million to $25.0 million for the year ended
December 31, 2001 from $19.0 million for the year ended December
31, 2000, an increase of 32%. Since merchant discount fees are a
variable cost, this increase is largely attributable to the
additional transaction dollars processed by the Company in 2001.
The cost of telephone charges for the Company's IVR system
decreased $500,000 to $1.0 million for the year ended December 31,
2001 from $1.5 million for the year ended December 31, 2000, a
decrease of 33%. 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. Cost of revenues was 83% of total
revenues for the year ended December 31, 2001 compared to 80% for
the year ended December 31, 2000. Upon the Company's full
realization of the anticipated cost reductions associated with the
corporate restructuring initiated in November 2001, the Company
expects that its costs of revenues will decrease as a percentage
of revenues over the next 12-24 months.
Sales and Marketing. Sales and marketing expenses decreased $2.6
million to $6.6 million for the year ended December 31, 2001 from
$9.2 million for the year ended December 31, 2000, a decrease of
28%. This decrease was primarily a result of decreases in both
discretionary advertising expenses and sales commissions. Sales
and marketing expenses represented 21% of total revenues for the
year ended December 31, 2001 compared to 36% for the year ended
December 31, 2000.
Development Costs. Development costs increased $1.3 million to
$4.3 million for the year ended December 31, 2001 from $3.0
million for the year ended December 31, 2000, an increase of 43%.
The increase is primarily attributable to increased fees incurred
from the third-party provider of hosting facilities for the
Company's Internet platform. The increase is also attributable to
an increase in the number of engineering personnel resulting in an
increase in salary and other employee related costs. Development
costs represented 14% of total revenues for the year ended
December 31, 2001 compared to 11% for the year ended December 31,
2000.
General and Administrative. General and administrative expenses
decreased $1.2 million to $8.8 million for the year ended December
31, 2001 from $10.0 million for the year ended December 31, 2000,
a decrease of 12%. This decrease is attributable to a decrease of
approximately $700,000 in legal and consulting expenses incurred
in the year ended December 2001 compared to the year ended
December 31, 2000, as well as a decrease of approximately $500,000
in temporary customer service personnel during the peak April 2001
tax season compared to the April 2000 tax season. General and
administrative expenses represented 28% of total revenues for the
year ended December 31, 2001 compared to 38% for the year ended
December 31, 2000.
Depreciation Expenses. Depreciation expenses increased $1.7
million to $3.4 million for the year ended December 31, 2001 from
$1.7 million for the year ended December 31, 2000, an increase of
100%. The increase is primarily related to the purchase of
computer equipment and software and development expense related to
adding functionality to the Company's Web site. Depreciation
expenses represented 11% of total revenues for the year ended
December 31, 2001 compared to 7% for the year ended December 31,
2000.
Restructuring Charges and Asset Abandonment. In November 2001, the
Board of Directors approved and the Company initiated a
restructuring plan to reduce certain of the Company's operating
expenses. The restructuring plan includes a reduction in
marketing, administrative and telephony costs, the involuntary
termination of 44 employees, and the consolidation of certain
facilities. Concurrently, the Company abandoned certain IVR
equipment. Total costs associated with the restructuring and asset
abandonment amounted to $6.0 million for 2001. The Company did not
have any restructuring charges and assets abandonment for the year
ended December 31, 2000. Restructuring charges and asset
abandonment represented 19% of total revenues for the year ended
December 31, 2001.
Amortization of deferred stock-based compensation. Amortization of
deferred stock-based compensation increased $4.1 million to $19.8
million for the year ended December 31, 2001 from $15.7 million
for the year ended December 31, 2000, an increase of 26%. This
increase is primarily the result of recognizing the $19.8 million
in remaining 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 (thereby effectuating a
change in control of the Company). Prior to the Comerica/Imperial
transaction, the Company expected to amortize the remaining
deferred stock- based compensation charge quarterly through the
second quarter of 2002. Amortization of deferred stock-based
compensation represented 63% of total revenues for the year ended
December 31, 2001 compared to 60% for the year ended December 31,
2000.
Other Income, Net
Other income, net, decreased by $1.9 million to $2.5 million for
the year ended December 31, 2001 from $4.4 million for the year
ended December 31, 2000, a decrease of 43%. This decrease is
directly related to lower interest income resulting from lower
average cash balances maintained by the Company and a lower
average interest rate earned by the Company on such balances in
2001 compared to 2000.
Provision for Income Taxes
For federal income tax purposes, the Company has net operating
loss ("NOL") carryforwards of approximately $40.3 million and
$19.5 million for the year ended December 31, 2001 and 2000,
respectively, expiring in various years through 2021. The U.S. Tax
Reform Act of 1986 contains provisions that limit the NOL
carryforwards available to be used in any given year upon the
occurrence of certain events, including a significant change of
ownership. Management believes that the change in ownership
occurred in connection with Comerica Incorporated's acquisition of
Imperial Bancorp and, as a result, the ability of the Company to
utilize the NOL's to offset income in the future could be limited.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the
generation of future taxable income during periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning in making these assessments. Due
to the Company's operating losses, there is uncertainty
surrounding whether the Company will ultimately realize its
deferred tax assets. Prior to September 30, 1999, the Company was
a California limited liability company. Accordingly, all tax
operating losses prior to September 30, 1999 have been used by the
members of such limited liability company.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Revenues
Net Revenues. Net revenues increased $17.3 million to $26.1
million for the year ended December 31, 2000 from $8.8 million for
the year ended December 31, 1999, an increase of 195%. This
increase is primarily attributable to revenues generated from
additional payment options added to the Company's existing IRS
contract, and additional state and county/municipal ("local")
clients added during 2000 which resulted in increases in revenue
from processing state and local real estate and personal property
taxes. The Company processed $927 million in government
obligations in the year ended December 31, 2000 compared to $288
million in the year ended December 31, 1999, an increase of 222%.
Federal Transaction Revenues. 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 $13.7 million to $18.0
million for the year ended December 31, 2000 from $4.3 million for
the year ended December 31, 1999, an increase of 316%. The
increase in revenues is primarily related to the two new payment
services added during 2000: extension and estimated payments.
The Company only offered one payment service, balance due, during
the prior fiscal year. The increase is also attributable to the
increase in the utilization from the prior fiscal year. Federal
transaction revenues represented 69% and 49% of total revenues for
the years ended December 31, 2000 and 1999, respectively.
The Company processed approximately 197,000 federal transactions
totaling $650.7 million during the year ended December 31, 2000
compared to 44,800 transactions totaling $174.0 million during the
prior fiscal year for balance due payments.
State Transaction Revenues. State transaction revenues consist of
fees earned in connection with processing payments for balance
due, extension, estimated and delinquent personal state income
taxes, sales and use taxes, and other state fees on behalf of the
Company's state clients. State revenues increased $1.9 million to
$2.5 million for the year ended December 31, 2000 from $557,000
for the year ended December 31, 1999, an increase of 341%. The
increase from the prior year is primarily due to the increase in
the number of clients and payment services added during the 2000
fiscal year. State transaction revenues represented 10% and 6% of
total revenues for the years ended December 31, 2000 and 1999,
respectively.
The Company processed approximately 64,200 state transactions
totaling $84.8 million during the year ended December 31, 2000
compared to approximately 16,500 transactions totaling $15.7
million during the prior fiscal year.
Local Transaction Fees. Local transaction revenues consist of fees
earned in connection with processing payments for real estate and
personal property taxes, traffic violations, parking citations,
fax filing fees, and utility bills for the Company's county and
municipal clients. Local transaction revenues increased $1.7
million to $5.4 million for the year ended December 31, 2000 from
$3.7 million for the year ended December 31, 1999, an increase of
46%. Revenues from processing real estate and personal property
tax payments increased $1.2 million to approximately $3.0 million
for the year ended December 31, 2000 from $1.8 million for the
year ended December 31, 1999, an increase of 67%. The increase is
primarily attributable to an increase in the number of
transactions processed and new county and municipal clients added
during 2000. Revenues from processing fines for traffic
violations, moving violations and other transactions increased
$495,000 to $2.4 million for the year ended December 31, 2000 from
$1.9 million for the year ended December 31, 1999, an increase of
26%. The increase is primarily attributable to an increase in the
number of transactions processed. Local transaction revenues
represented 21% and 42% of total revenues for the years ended
December 31, 2000 and 1999, respectively.
The Company processed approximately 572,000 transactions totaling
$192.0 million during the year ended December 31, 2000 compared to
approximately 371,000 transactions totaling $97.0 million during
the prior fiscal year.
Other Revenues. Other revenues increased $42,000 to $291,000 for
the year ended December 31, 2000 from $249,000 for the year ended
December 31, 1999, an increase of 17%.
Cost and Expenses
Cost of Revenues. Cost of revenues increased $14.6 million to
$20.9 million for the year ended December 31, 2000 from $6.3
million for the year ended December 31, 1999, an increase of 232%.
The largest component of cost of transaction fees, merchant
discount fees, increased $13.2 million to $19.0 million for the
year ended December 31, 2000 from $5.8 million for the year ended
December 31, 1999, an increase of 228%. Since merchant discount
fees are a variable cost, this increase is largely attributable to
the additional transaction dollars processed by the Company in
2000. The cost of telephone charges for the Company's IVR system
increased $1.2 million to $1.5 million for the year ended December
31, 2000 from $318,000 for the year ended December 31, 1999, an
increase of 377%. These increases were due to the corresponding
increase in revenue. Cost of transaction fees was 80% of total
revenues for the year ended December 31, 2000 compared to 72% for
the year ended December 31, 1999. The increase is also
attributable to the increase in Internet costs from the prior
fiscal year, which is consistent with the increase in the number
of Internet transactions processed during the year ended December
31, 2000.
Sales and Marketing. Sales and marketing expenses increased $7.9
million to $9.2 million for the year ended December 31, 2000 from
$1.3 million for the year ended December 31, 1999, an increase of
608%. This increase is primarily attributable the Company's
discretionary advertising campaign for its payment services which
totaled $5.2 million for the year ended December 31, 2000.
Advertising expenses totaled $69,000 in the prior fiscal year. The
increase is also attributable to an increase in the number of
sales and marketing personnel to handle additional growth in
business and in anticipation of future growth. An increase in
commission payments to the Company's sales employees also
contributed to the increase in sales and marketing expenses from
the prior fiscal year. Sales and marketing expenses represented
36% of total revenues for the year ended December 31, 2000
compared to 15% for the year ended December 31, 1999.
Development Costs. Development costs increased $2.0 million to
$3.0 million for the year ended December 31, 2000 from $1.0
million for the year ended December 31, 1999, an increase of 200%.
The increase is primarily attributable to consultants hired during
the current fiscal year to assist in the testing and data
conversion of the Company's Web site. The increase is also
attributable to an increase in the number of engineering personnel
resulting in an increase in salary and other employee related
costs. Development costs represented 11% of total revenues for the
year ended December 31, 2000 compared to 12% for the year ended
December 31, 1999.
General and Administrative. General and administrative expenses
increased $7.3 million to $10.0 million for the year ended
December 31, 2000 from $2.7 million for the year ended December
31, 1999, an increase of 270%. This increase is primarily
attributable to the significant hiring of additional general and
administrative personnel, including customer service, finance and
corporate officers during the current fiscal year. This increase
is also attributable to the hiring of additional temporary
customer service personnel and the rental of temporary office
space in San Diego, California during the current 2000 peak
tax-filing season. The Company also expensed $522,000 for
severance, relocation and other contractual obligations paid to
the Company's former chief financial officer in connection with
the termination of his employment in 2000. General and
administrative expenses represented 38% of total revenues for the
year ended December 31, 2000 compared to 31% for the year ended
December 31, 1999.
Depreciation Expenses. Depreciation expenses increased $1.4
million to $1.7 million for the year ended December 31, 2000 from
$288,000 for the year ended December 31, 1999, an increase of
486%. The increase is primarily related to an increase in IVR
equipment purchased during the first quarter of 2000 in
preparation and handling of the 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 offices in San Ramon, California.
Amortization of deferred stock-based compensation. Amortization of
deferred stock-based compensation increased $7.8 million to $15.7
million for the year ended December 31, 2000 from $7.9 million for
the year ended December 31, 1999, an increase of 99%. This
increase is primarily attributable to a full year's amortization
of deferred stock-based compensation in 2000 (representing 60% of
total revenues for the year ended December 31, 2000) compared to a
partial year's amortization in 1999 (representing 89% of total
revenues for the year ended December 31, 1999).
Other Income, Net
Other income, net, which consists of interest income, interest
expense and other non- operating expenses, increased primarily due
to interest income resulting from investment of the proceeds from
the Company's initial public offering. Other income, net, increase
by $4.0 million to $4.4 million for the year ended December 31,
2000 from $357,000 for the year ended December 31, 1999. This
increase is directly related to higher interest income resulting
from higher average cash balances maintained by the Company in
2000 compared to 1999.
Provision for Income Taxes
For federal income tax purposes, the Company has net operating
loss ("NOL") carryforwards of approximately $19.5 million and $1.1
million for the year ended December 31, 2000 and 1999,
respectively, expiring in 2020 and 2019. The U.S. Tax Reform Act
of 1986 contains provisions that limit the NOL carryforwards
available to be used in any given year upon the occurrence of
certain events, including a significant change of ownership.
Management believes that a change in ownership occurred in
connection with Comerica Incorporated's acquisition of Imperial
Bancorp and, as a result, the ability of the Company to utilize
the NOL's to offset income in the future could be limited.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the
generation of future taxable income during periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning in making these assessments. Due
to the Company's operating losses, there is uncertainty
surrounding whether the Company will ultimately realize its
deferred tax assets. Prior to September 30, 1999, the Company was
a California limited liability company. Accordingly, all tax
operating losses prior to September 30, 1999 have been used by the
members of such limited liability company.
Liquidity and Capital Resources
In November 1999, the Company completed its initial public
offering and realized net proceeds of approximately $78.7 million and the
working capital was $80.2 million at December 31, 1999. As of December 31,
2000, the Company had $65.9 million in cash and short-term investments and
$61.5 in working capital. As of December 31, 2001, the Company had $49.1
million in cash and short-term investments and $42.8 million in working
capital.
Net cash used in operating activities was $12.7 million, $9.6
million and $2.1 million for the years ended December 31, 2001, 2000 and
1999. The cash used in operating activities for the years ended December
31, 2001, 2000 and 1999 was primarily the result of the Company's net loss
and increases in accounts receivable, offset by increases in accounts
payable, accrued expenses and restructuring obligations.
Net cash from investing activities was $12.3 million and $10.0
million for the year ended December 31, 2001 and 2000. Net cash used in
investing activities was $79.9 million for the year ended December 31,
1999. Cash from investing activities primarily reflect proceeds from the
sale of short-term investments, offset by purchases of property and
equipment during the year ended December 31, 2001 and 2000. The Company
used most of the proceeds from its initial public offering to purchase
short-term investments during the year ended December 31, 1999.
Net cash provided by financing activities was $183,000, $1.8
million and $83.0 million for the years ended December 31, 2001, 2000 and
1999. The cash generated in 2001 was primarily related to stock option
exercises. The cash generated in 2000 was primarily related to stock option
exercises and proceeds from a sale-leaseback transaction for IVR equipment.
The cash generated in 1999 was primarily related to the proceeds of the
Company's initial public offering and the sale of its common stock to
E*Trade Group, Inc. Cash generated in 1999 was partially offset by
repayments of bank loans, shareholder loans, and capital leases.
The Company believes that, based on its current business plan,
existing cash and investments will be sufficient to meet operating
activities, capital expenditures and other obligations for at least 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 generally. The larger revenues in the
second quarter are 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 15th 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 real estate and personal property tax payments (which are made
only once or twice per year in many jurisdictions).
Cost of revenues as a percentage of total revenues was
significantly higher in the second quarter than in other quarters as a
result of processing personal federal and state balance due income tax
payments, which have significantly lower margins than certain other payment
types. This is due to the fact that the convenience fee is generally lower
as a percentage of large government payments, such as income taxes, while
the primary cost of sales (i.e., merchant discount fees) is relatively
constant as a percentage of the payment amount.
In 2001, the Company spent $17.0 million for its operations and
capital expenditures. When the Company's restructuring is fully implemented
by the end of November 2002, the Company expects this level of annual
operating costs to be reduced significantly.
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 operating results will be below
the expectations of research analysts and investors, and in that case, the
price of the Company's common stock is likely to decline.
Obligations, Commitments and Contingencies
As of December 31, 2001, the contractual cash obligations of the
Company were as follows (in thousands):
2006 &
FY2002 FY2003 FY2004 FY2005 Thereafter Total
----------- ---------- ----------- ----------- ------------- ---------------
Capital Leases $ 543 $ 228 $ - $ - $ - $ 771
Minimum rental commitments 670 684 698 335 - 2,387
Restructuring obligations
excluding rental commitments 1,728 325 325 325 287 2,990
----------- ---------- ----------- ----------- ------------- ---------------
Total cash obligations $ 2,941 $ 1,237 $ 1,023 $ 660 $ 287 $ 6,148
=========== ========== =========== =========== ============= ===============
Of the $2.4 million of minimum rental commitments, the Company has
taken $1.1 million in future lease payments as part of its restructuring
charge in November 2001.
Related Party Transactions
In January 1998, Imperial Bank (the predecessor majority
stockholder of the Company) increased its ownership interest of U.S.
Audiotex LLC from 20% to 80% by purchasing a 60% membership interest, or
75% of Beranson Holdings, Inc.'s membership interest, from Beranson
Holdings, Inc. for $3,010,000, of which Imperial Bank immediately paid
$2,510,000 Beranson. Upon the Company's incorporation on August 24, 1999,
Imperial Bank paid the remaining $500,000 balance (and $82,000 of accrued
interest) to Beranson. U.S. Audiotex LLC was merged into the Company in
September 1999, with the Company being the surviving entity.
In 1999 Imperial Bank and Beranson Holdings, Inc. made advances to
the Company under lines of credit in the combined amount of $2.8 million
which bears interest at a floating rate equal to Imperial Bank's prime rate
plus 2% per annum. The Company repaid the balance of all amounts
outstanding, together with the accrued interest, prior to December 31,
1999.
Comerica Bank-California (the successor by merger to Imperial
Bank) is one of the merchant banks the Company uses to process credit card
transactions and perform merchant credit card settlement services. During
2001, 2000, and 1999, the Company paid Comerica Bank-California/Imperial
Bank approximately $8.2 million, $5.8 million, and $2.1 million,
respectively, for performing these processing and settlement services,
which represent 33%, 31%, and 33%, respectively, of the total merchant
discount fees paid by the Company during those periods.
Comerica Bank-California/Imperial Bank has provided other services
to the Company. These services included payroll processing, benefits
administration and employee recruiting. During the fiscal year ended
December 31, 2000, the Company paid Imperial a fee of $135,000 for these
services. The Company did not pay any fees to Comerica Bank-California/
Imperial for these services in 2001, because effective January 1, 2001, the
Company began administering its payroll processing and benefits programs
internally and through unaffiliated third-party vendors.
Comerica Bank-California guarantees the performance of the
Company's obligations under six equipment leases. These leases are
comprised of a master lease agreement with one lessor for five leases for
various furniture and computer equipment and a separate lease agreement for
network equipment. Comerica Bank-California will continue to guarantee the
six leases until the leases expire.
Starting in November 2001, the Company obtained its corporate
insurance as part of Comerica Incorporated's master policies, and pays its
allocated premiums for coverage to independent third-party carriers. In
addition, in 2001 the Company incurred $11,560 of premiums payable to
Comerica Assurance Ltd., another Comerica subsidiary, for insurance on
certain deductibles which otherwise would be payable by the Company in the
event of casualty losses under these master policies.
Bruce Nelson, one of the Company's directors, provided certain
consulting services in connection with the Company's marketing and
advertising campaigns and corporate positioning strategies, in
consideration for which the Company paid Mr. Nelson a $50,000 annual fee.
Effective October 2001, he was no longer providing these consulting
services.
Recent Accounting Pronouncements
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, there would
be 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 December 31, 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 will adopt FAS
144 for the fiscal year 2002 and does not expect that the adoption of this
statement will have a material effect on the Company's financial position
or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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 cash
and short-term investment portfolio.
FY2002 FY2003 FY2004 FY2005 FY2006 Thereafter Total
---------- ---------- --------- --------- --------- ------------ ----------
Cash $ 3,569 $ - $ - $ - $ - $ - $ 3,569
Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Short-term investments 45,561 - - - - - 45,561
Average interest rate 1.77% 0.00% 0.00% 0.00% 0.00% 0.00%
---------- ---------- --------- --------- --------- ------------ ----------
Total cash and investments $ 49,130 $ - $ - $ - $ - $ - $ 49,130
========== ========== ========= ========= ========= ============ ==========
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and the related notes thereto,
together with the Report of the Independent Auditors, are included or
incorporated by reference elsewhere herein. Reference is made to the "INDEX
TO FINANCIAL STATEMENTS" following the signature pages hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the sections entitled "ELECTION OF
DIRECTORS," "EXECUTIVE OFFICERS" and "SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE" in the Company's proxy statement for its Annual
Meeting of Stockholders to be held on May 7, 2002 and to be filed with the
Securities and Exchange Commission no later than 120 days after the close
of the 2001 fiscal year (the "Proxy Statement") is incorporated herein by
reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the
sections entitled "ELECTION OF DIRECTORS-Certain Information Concerning the
Board of Directors," "EXECUTIVE OFFICER COMPENSATION," and "COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" is incorporated herein by
reference in response to this item. Such information incorporated by
reference shall not be deemed to incorporate by reference specifically the
information referred to in Item 402(a)(8) of Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information contained in the Proxy Statement under the section
entitled "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT"
is incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Proxy Statement under the section
entitled "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" is incorporated
herein by reference in response to this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Page Number
Independent Auditors' Report............................................................ F-2
Balance Sheets as of December 31, 2001 and 2000......................................... F-3
Statements of Operations for the years ended December 31, 2001, 2000 and
1999........................................................................... F-4
Statements of Stockholders' Equity for the years ended December 31, 2001,
2000 and 1999.................................................................. F-5
Statements of Cash Flows for the years ended December 31, 2001, 2000 and
1999........................................................................... F-6
Notes to Financial Statements........................................................... F-7
2. Financial Statement Schedules
The following financial statement schedule of the Company for each
of the years ended December 31, 2001, 2000 and 1999 should be read
in conjunction with the Financial Statements, and related notes
thereto, of the Company.
Page Number
Schedule II--Valuation and Qualifying Accounts.......................................... S-1
Schedules other than the one listed above have been omitted since
they are either not required, not applicable, or the information
has otherwise been included.
3. Exhibits
The exhibits listed in the accompanying Index to Exhibits are
filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
On November 27, 2001, the Company filed a Current Report on Form 8-K
to announce its corporate restructuring.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this Form
10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: March 29, 2002
OFFICIAL PAYMENTS CORPORATION
By: /s/ Thomas R. Evans
-------------------------------
Thomas R. Evans
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
registrant and in the capacities indicated on March 29, 2002.
SIGNATURE TITLE
--------- -----
/s/ Thomas R. Evans Chairman of the Board and Chief
- ----------------------------------- Executive Officer
Thomas R. Evans
/s/ Edward J. DiMaria Chief Financial Officer
- ----------------------------------- (Principal Financial and Accounting
Edward J. DiMaria Officer)
/s/ Andrew Cohan Director
- -----------------------------------
Andrew Cohan
/s/ Christos M. Cotsakos Director
- -----------------------------------
Christos M. Cotsakos
Director
- -----------------------------------
George L. Graziadio, Jr.
/s/ John D. Lewis Director
- -----------------------------------
John D. Lewis
/s/ Lee E. Mikles Director
- -----------------------------------
Lee E. Mikles
/s/ Bruce Nelson Director
- -----------------------------------
Bruce Nelson
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- -------------------------- ---------------------------------------------------------------------
3.1 Certificate of Incorporation of the Registrant, incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1 (No. 333-87325), dated September 17, 1999.*
3.1.1 Certificate of Amendment to the Certificate of Incorporation of the
Registrant, filed as Exhibit 3.1.1 to Amendment No. 1 (dated
October 26, 1999) to the Company's Registration Statement on
Form S-1 (No. 333-87325).*
3.2 Bylaws of the Registrant, incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-1 (No. 333-
87325).*
4.1 Common Stock Specimen, incorporated by reference to Exhibit 4.1
to Amendment No. 4 (dated November 18, 1999) to the Company's
Registration Statement on Form S-1 (No. 333-87325).*
4.2 Stock Purchase Agreement dated as of November 3, 1999 between
Official Payments Corporation and E*TRADE Group, Inc, filed as
Exhibit 4.2 to Amendment No. 2 (dated November 5, 1999) to the
Company's Registration Statement on Form S-1 (No. 333-87325).*
4.2.2 Amendment No. 1 to Stock Purchase Agreement dated as of
November 8,1999 among Official Payments Corporation,
E*TRADE Group, Inc. and Imperial Bank, filed as Exhibit 4.2.2 to
Amendment No. 3 (dated November 16, 1999) to the Company's
Registration Statement on Form S-1 (No. 333-87325).*
4.3 Registration Rights Agreement dated as of October 15, 1999
between Imperial Bank and U.S. Audiotex Corporation, filed as
Exhibit 4.3 to Amendment No. 4 (dated November 18, 1999) to the
Company's Registration Statement on Form S-1 (No. 333-87325).*
4.4 Registration Rights Agreement dated as of October 15, 1999
between Beranson Holdings, Inc. and U.S. Audiotex Corporation,
filed as Exhibit 4.4 to Amendment No. 4 (dated November 18,
1999) to the Company's Registration Statement on Form S-1 (No.
333-87325).*
10.1 Amended Employment Agreement, dated as of September 14, 1999,
by and among U.S. Audiotex Corporation, Imperial Bank and
Thomas R. Evans, filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (No. 333-87325).*
10.2 Employment Agreement, dated August 24, 1999, between U.S.
Audiotex Corporation and Kenneth Stern, filed as Exhibit 10.2 to
the Company's Registration Statement on Form S-1 (No. 333-87325).*
10.3 1999 Stock Incentive Plan, as amended, filed as Exhibit 10.2 to
the Company's Form 10-Q for the period ended March 31, 2000.*
10.4 2000 Stock Incentive Plan, filed as Exhibit 4.4 to the
Company's Registration Statement on Form S-8, dated June 2,
2000.*
10.5 Contract, between Internal Revenue Service and the Company, filed
as Exhibit 10.1 to the Company's Form 10-Q for the period ended
March 31, 2000.*
10.6 Subcontract with Novus Services, Inc., dated November 30, 1998,
of the IVR Services Agreement with the California Franchise Tax
Board, incorporated by reference to Exhibit 10.8 to Amendment No.
1 (dated October 26, 1999) to the Company's Registration Statement
on Form S-1 (No. 333-87325).*
10.7 Processing Agreement, dated as of July 16, 1995, by and between
Imperial Bank and U.S. Audiotex LLC, incorporated by reference to
Exhibit 10.9 to Amendment No. 1 (dated October 26, 1999)to the
Company's Registration Statement on Form S-1 (No. 333-87325).*
10.8 Employment Agreement, dated September 30, 1999, between U.S.
Audiotex Corporation and Michael Presto, incorporated by
reference to Exhibit 10.12 to Amendment No. 2 (dated November
5, 1999) to the Company's Registration Statement on Form S-1
(No. 333-87325).*
10.9 Employment Agreement, dated September 30, 1999, between U.S.
Audiotex Corporation and Michael Barrett, incorporated by
reference to Exhibit 10.13 to Amendment No. 2 (dated November
5, 1999) to the Company's Registration Statement on Form S-1
(No. 333-87325).*
10.10 Employment Agreement, dated August 9, 2000, between Edward J.
DiMaria and Official Payments Corporation, filed as Exhibit 10.1 to
the Company's Form 10-Q for the period ended June 30, 2000.*
10.11 Severance Agreement, dated November 13, 2001, between Mitchell
H. Gordon and Official Payments Corporation.
23.1 Consent of KPMG LLP.
- -------------
* Previously filed
OFFICIAL PAYMENTS CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
Number
Independent Auditors' Report...................................................................... F-2
Balance Sheets as of December 31, 2001 and 2000................................................... F-3
Statements of Operations for the years ended December 31, 2001, 2000 and 1999..................... F-4
Statements of Stockholders' Equity for the years ended December 31, 2001, 2000
and 1999.......................................................................................... F-5
Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999..................... F-6
Notes to Financial Statements ................................................................... F-7
Schedule II-Valuation and Qualifying Accounts for the years ended December 31,
2001, 2000 and 1999............................................................................... S-1
Independent Auditors' Report
To The Board of Directors and Stockholders of
Official Payments Corporation:
We have audited the accompanying balance sheets of Official
Payments Corporation as of December 31, 2001 and 2000, and the related
statements of operations, stockholders' equity, and cash flows for each of
the years in the three-year period ended December 31, 2001. In connection
with our audit of the financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Official
Payments Corporation at December 31, 2001 and 2000, and the results of its
operations and its cash flows for each of the years in the three-year
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion,
the related financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
New York, New York
January 22, 2002
OFFICIAL PAYMENTS CORPORATION
BALANCE SHEETS
(in thousands, except share and per share data)
December 31, December 31,
2001 2000
----------------- ----------------
ASSETS
Current assets:
Cash.................................................. $ 3,569 $ 3,783
Short-term investments................................ 45,561 62,115
Accounts receivable, net of allowance for
doubtful accounts of $242 and $111 in 2001
and 2000...................................... 3,666 2,210
Prepaid expenses and other current assets............. 105 600
-------------- -------------
Total current assets............................. 52,901 68,708
Property and equipment, net................................ 6,902 7,511
Other assets 44 44
-------------- -------------
Total assets..................................... $ 59,847 $ 76,263
============== =============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable...................................... $ 3,323 $ 1,023
Accrued merchant discount fees........................ 1,775 1,123
Accrued payroll....................................... 274 454
Accrued expenses...................................... 2,106 4,026
Restructuring obligations............................. 2,038 --
Current portion of capital lease obligations.......... 543 580
-------------- -------------
Total current liabilities....................... 10,059 7,206
Long-term portion of capital lease obligations............. 165 604
Long-term restructuring obligations........................ 2,029 --
-------------- -------------
Total liabilities............................... 12,253 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
December
31, 2001 and 2000............................... 220 215
Additional paid-in capital........................... 130,127 129,473
Deferred stock compensation.......................... -- (19,803)
Accumulated deficit.................................. (82,753) (41,432)
-------------- -------------
Total stockholders' equity............... 47,594 68,453
-------------- -------------
Total liabilities and stockholders' equity.... $ 59,847 $ 76,263
============== =============
See accompanying notes to financial statements.
OFFICIAL PAYMENTS CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended December 31,
2001 2000 1999
-------------- --------------- ---------------
Net revenues....................................... $ 31,445 $ 26,084 $ 8,841
Cost and expenses:
Cost of revenues.............................. 26,364 20,907 6,345
Sales and marketing........................... 6,568 9,212 1,301
Development costs............................. 4,344 2,953 1,032
General and administrative.................... 8,811 10,042 2,692
Depreciation expenses......................... 3,368 1,716 288
Restructuring and asset abandonment........... 6,045 -- --
Amortization of deferred stock-based
compensation.............................. 19,803 15,728 7,940
------------- ------------- -------------
Total operating expenses................. 75,303 60,558 19,598
------------- ------------- -------------
Loss from operations............................... (43,858) (34,474) (10,757)
Other income, net.................................. 2,537 4,436 357
------------- ------------- -------------
Net loss........................................... $ (41,321) $ (30,038) $ (10,400)
============= ============= =============
Basic and diluted net loss per share............... $ (1.88) $ (1.40) $ (0.66)
============= ============= =============
Weighted-average shares used in computing
basic and diluted net loss per share............... 21,948 21,421 15,677
============= ============= =============
See accompanying notes to financial statements.
OFFICIAL PAYMENTS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Deferred Total
Common Stock Additional Stock Accumu- Stock-
----------------------- Paid-in Compen- lated holders'
Shares Amount Capital sation (Deficit) Equity
------------ ---------- ------------- ------------ -------------- ----------
Balance at December 31,
1998............................. 15,000 $ 150 $ 1,028 $ -- $ (994) $ 184
Deferred stock compensation...... -- -- 42,905 (42,905) -- --
Amortization of stock-based
compensation................. -- -- -- 7,940 -- 7,940
Services performed by stock
holder....................... -- -- 118 -- -- 118
Issuance of common stock......... 513 5 4,995 -- -- 5,000
IPO proceeds, net of issuance
costs of $7,532.............. 5,750 58 78,661 -- -- 78,719
Net loss......................... -- -- -- -- (10,400) (10,400)
------------ ---------- ------------- ------------ -------------- ------------
Balance at December 31,
1999............................. 21,263 213 127,707 (34,965) (11,394) 81,561
------------ ---------- ------------- ------------ -------------- ------------
Deferred stock compensation...... 128 1 565 (566) -- --
Amortization of stock-based
compensation................. -- -- -- 15,728 -- 15,728
Exercise of stock options........ 115 1 1,201 -- -- 1,202
Net loss......................... -- -- -- -- (30,038) (30,038)
---------- ---------- ------------- ------------ --------------- ------------
Balance at December 31,
2000............................. 21,506 215 129,473 (19,803) (41,432) 68,453
-----------------------------------------------------------------------------
Cancellation of restricted stock (1) -- (4) -- -- (4)
Amortization of stock-based
compensation...................... -- -- -- 19,803 -- 19,803
Exercise of stock options............. 477 5 658 -- -- 663
Net loss.............................. -- -- -- -- (41,321) (41,321)
---------- ---------- ------------- ------------ --------------- ------------
Balance at December 31, 2001.......... 21,982 $ 220 $130,127 $ -- $ (82,753) $ 47,594
========== ========== ============= ============ =============== ============
See accompanying notes to financial statements.
OFFICIAL PAYMENTS CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
------------------------------------------------
2001 2000 1999
-------------- -------------- ---------------
Operating Activities:
Net loss................................................ $ (41,321) $ (30,038) $ (10,400)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation................................. 3,368 1,716 288
Asset abandonment............................ 1,519 -- --
Bad debt expense............................. 57 59 47
Amortization of deferred stock-based
compensation.......................... 19,803 15,728 7,940
Services performed by related party.......... -- -- 118
Changes in operating assets and
liabilities:
Accounts receivable................... (1,513) (1,134) (628)
Prepaid expenses and other current assets 495 (106) (820)
Accounts payable and accrued merchant
discount fees, payroll and expenses 852 4,183 1,389
Current and long-term restructuring
obligations..................... 4,067 -- --
------------ ------------ ------------
Net cash used in operating
activities..................... (12,673) (9,592) (2,066)
Investing Activities:
Net (purchases) maturities of short-term
investments.................................... 16,554 17,067 (78,871)
Capital expenditures.................................... (4,278) (7,094) (1,054)
------------ ------------ ------------
Net cash provided by (used in)
investing activities............... 12,276 9,973 (79,925)
Financing Activities:
Proceeds from issuance of common stock.................. -- -- 83,719
Proceeds from stock option exercises.................... 658 1,202 --
Repayment of notes payable to related party............. -- -- (3,300)
Borrowing on sale-leaseback agreement................... -- 857 --
Notes payable to related party.......................... -- -- 2,800
Repayment of notes payable and capital leases........... (475) (300) (216)
------------ ------------ ------------
Net cash provided by financing
activities..................... 183 1,759 83,003
------------ ------------ ------------
Net increase (decrease) in cash........................ (214) 2,140 1,012
Cash at the beginning of the year....................... 3,783 1,643 631
------------ ------------ ------------
Cash at the end of the year............................. $ 3,569 $ 3,783 $ 1,643
============ ============ ============
Supplemental disclosure:
Interest paid............................... $ 112 $ 319 $ 185
Assets acquired through capital leases...... $ -- $ 968 $ 503
============ ============ ============
See accompanying notes to financial statements.
OFFICIAL PAYMENTS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Official Payments Corporation (the "Company" or "Official
Payments") is a leading provider of electronic payment options to
government entities, enabling consumers to use their credit cards to pay,
through the Internet or by telephone, personal federal and state income
taxes, sales and use taxes, real estate and personal property taxes,
tuition payments, motor vehicles fees, fines for traffic violations and
parking citations and other government-imposed taxes and fees. The Company
commenced current operations on June 26, 1996, initially offering its
credit card payment services for the payment of fines for traffic
violations, parking citations and real estate and personal property taxes.
In 1998, the Company signed a credit card payment contract with the IRS to
provide its services for the payment by telephone of personal federal
"balance due" income taxes in 1999. In 2000, the Company began processing
estimated and extension tax payments, as well. In 2000, the Company entered
into a contract with the IRS for an initial one-year term (2001), which the
IRS subsequently renewed for an additional year (2002). That contract
authorized the Company to collect credit card payments via its Internet
platform, as well as by telephone. In August 2001, the Company announced
that the IRS had further expanded the scope of its agreement with the
Company to include two additional payment categories beginning in 2002:
current- year delinquent tax payments and installment tax payments.
Comerica Incorporated, a financial holding company, is the record
owner of approximately 54% of the outstanding common stock of the Company.
Comerica obtained this ownership interest upon its January 2001 acquisition
of Imperial Bancorp (the parent of Imperial Bank, which was then the holder
of the majority interest in the Company).
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and reported results of operations during the
reporting period. Significant estimates embedded in the financial
statements include the allowance for sales returns, doubtful accounts,
restructuring obligations and facility consolidations. With respect to
estimating the allowance for doubtful accounts, management analyzes its
historical reversals and chargeback experience, the aging of accounts
receivable, customer and product specific factors and client credit
worthiness. In determining restructuring obligations, management considered
the number of individuals affected by the action, the expected date of
termination and agreed upon severance amount. In addition, for lease
termination obligations, management considered the actual or expected date
of termination and did not consider any possible sublease income since the
realization of sublease income is not probable and is not estimable.
Reclassification
Certain amounts in financial statements for prior years have been
reclassified to conform to the current year's presentation.
Cash and Restricted Cash
Cash consists of demand deposits and certificates of deposit with
original maturities of three months or less.
In December 1999, the Company entered into a letter of credit
agreement to secure a facilities operating lease for the corporate
headquarters located in Stamford, Connecticut. As part of this agreement,
the Company is required to hold a three-month certificate of deposit as a
form of security for the letter of credit. As of December 31, 2001, the
three-month certificate of deposit amounted to $151,430.
Short-Term Investments
As of December 31, 2001, the Company had short-term investments of
$45.6 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), mostly with remaining
maturity dates of less than twelve months. Such investments are recorded at
cost, which approximates fair value based on quoted market prices.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of cash and cash
equivalent, short-term investments and accounts receivable. The Company
performs ongoing credit evaluations of its clients and generally does not
require collateral. Uncollectible accounts have been insignificant to date.
The Company had one client that accounted for greater than 10% of accounts
receivable at December 31, 2001.
In the year ended December 31, 2001 and 2000, transaction fees
from IRS payments accounted for 63% and 69% of total revenues,
respectively.
Most of the Company's agreements with its clients (including the
IRS) can be terminated by the respective client without cause on short
notice, generally 30 to 90 days. In addition, a client may choose not to
renew its contract with the Company or may not choose the Company's
proposal in response to a request for proposals to perform additional
services or the existing service in subsequent time periods. If one of the
Company's larger existing government clients (such as the IRS) chooses to
terminate its contract or memorandum of understanding with the Company, the
business, operating results and financial condition of the Company could be
materially and adversely affected.
Internally Developed Software
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
internal use software should be capitalized, including the costs of coding,
software configuration, upgrades and enhancements. Upon completion of the
application and infrastructure development stage, the Company amortizes
these costs on a straight-line basis over an estimated useful life of three
years. In the 2001, 2000 and 1999 fiscal years, during the application and
infrastructure development stage, the Company capitalized approximately
$3.7 million, $2.8 million and $200,000 of internally developed software
costs, respectively. Virtually all of the costs that were capitalized
during 2001 and 2000 were for the development of the Company's Web site
that allows consumers to pay their taxes via the Internet. The net book
value of these costs is approximately $4.8 million, $2.9 million and
$94,000 as of December 31, 2001, 2000 and 1999, respectively.
Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is calculated using the straight-line method
over the estimated useful lives of the property and equipment, generally
three years for purchased software and office equipment and five years for
furniture and fixtures. Leasehold improvements are amortized using the
straight-line method over the shorter of the respective lease term or the
estimated useful life of the asset. Effective 2001, the Company revised
certain of its estimated lives for specific depreciable assets and
abandoned specific equipment that resulted in a $1.5 million increase in
the Company's net loss for the year ended December 31, 2001. The estimated
lives of certain equipment was decreased from five years to three years.
The Company revised these estimates after committing to certain upgrades to
its technical infrastructure.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," the Company periodically
evaluates its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of such assets may not
be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of any asset to future net cash flows
expected to be generated by the asset and the Company's terminal value. If
any assets are considered to be impaired, the impairment to be recognized
in the current period is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Since June 26,
1996 (inception) through December 31, 2001, no impairment losses have been
identified.
Restructuring Charge
Restructuring activities are accounted for in accordance with the
guidance provided by the Emerging Issues Task Force (EITF) in EITF Issue
No. 94-3 "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity" and the Securities and Exchange
Commission in SAB No. 100 "Restructuring and Impairment Charges." With
respect to the recognition of restructuring expenses, these two
pronouncements generally require management approval of the restructuring
plan, the determination of the employees to be terminated and communication
of the severance benefits arrangement to the employees. See "NOTES TO
FINANCIAL STATEMENTS- No. 8 ("Restructuring and Asset Abandonment").
Stock-Based Compensation
The Company uses the intrinsic value method of accounting for all
of its employee stock-based compensation plans. Expense associated with
stock-based compensation is being amortized on a straight- line basis over
the vesting period of the individual award consistent with the method
described in Accounting Principles Board (APB) Opinion No. 25.
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.
Comprehensive Income (Loss)
The Company has no material or significant components of other
comprehensive income (loss).
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 due is not reasonably assured but is estimated and established
in the period in which the services are provided.
In the normal course of business and with respect to certain
government clients, the Company collects tax payments in addition to the
convenience fees and then forwards the tax payments to the government
entities. The Company's obligation with respect to the tax payments totaled
$678,000 at December 31, 2001 and is included in Accounts Payable on the
accompanying balance sheet.
Advertising Expense
The cost of advertising is expensed as incurred. Such costs are
included in selling and marketing expense on the statement of operations
and totaled approximately $2.8 million, $5.2 million and $69,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.
In October 2001, the Company entered into a cooperative
advertising arrangement with one of the credit card companies pursuant to
which it received $350,000 from such company for use in the Company's 2002
April tax season advertising campaign. The Company will consider these
funds as a reimbursement of costs incurred and will net the proceeds
against sales and marketing expenses as incurred.
Accounting for Income Taxes
Income taxes are recorded using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carry-forwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is recorded
to reduce deferred tax assets reported if, based on the weight of the
available evidence, it is more likely than not that some portion or all of
the deferred tax asset will not be realized.
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 year ended December 31, 2001, 2000 and
1999 does not include the effect of 4,351,154, 4,870,423 and 6,146,743
options to purchase common stock with a weighted average exercise price of
$1.44, $1.51 and $4.66 per share, respectively, because the effects are
anti-dilutive.
Recent Accounting Pronouncements
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, there would
be 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 December 31, 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 will adopt FAS
144 for the fiscal year 2002 and does not expect that the adoption of this
statement will have a material effect on the Company's financial position
or results of operation.
2. Financial Statement Components
Property and Equipment
Property and equipment consisted of the following as of December
31 (in thousands):
2001 2000
------------ ------------
Computer equipment......................................... $ 6,771 $ 6,242
Purchased software development cost........................ 6,477 2,757
Furniture and fixtures..................................... 803 747
------------ ------------
14,051 9,746
Less: Accumulated depreciation and amortization:.......... 7,149 2,235
------------ ------------
$ 6,902 $ 7,511
============ ============
Certain computer equipment, software and office equipment are
recorded under capital leases that aggregated $1.6 million as of December
31, 2001 and 2000. Accumulated amortization on the assets recorded under
capital leases aggregated $1,015,000 and $513,000 as of December 31, 2001
and 2000, respectively. Depreciation expense was $3.4 million and $1.7
million as of December 31, 2001 and 2000, respectively, which includes
depreciation expense for assets under capital leases of $502,000 and
$452,000 as of December 31, 2001 and 2000, respectively.
Amortization of Stock-Based Compensation
Deferred stock-based compensation are non-cash and have been
presented as a separate component of operating expenses in the Company's
statement of operations. The following table shows the cost of such charges
as allocated to sales and marketing, development costs and general and
administrative expenses, which allocation (in thousands) is based on the
functional responsibilities of the underlying employees in the years ended
December 31:
2001 2000 1999
------------ ------------ -----------
Sales and marketing........................................ $ 1,872 $ 1,887 $ 2,250
Development costs.......................................... 53 85 1,089
General and administrative................................. 17,878 13,756 4,601
------------ ----------- -----------
$ 19,803 $ 15,728 $ 7,940
============ ============ ===========
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.
Other Income, Net
Other income, net, consists of the following (in thousands):
Years ended December 31,
----------------------------------------
2001 2000 1999
----------- ------------ ------------
Interest income............................................ $ 2,654 $ 4,749 $ 468
Interest expense........................................... (112) (319) (135)
Other income (expense)..................................... (5) 6 24
------------ ------------ ------------
$ 2,537 $ 4,436 $ 357
=========== ============ ============
3. Lease Obligations and Commitments
In April 2000, the Company entered into a sale-leaseback agreement
for approximately $968,000 of equipment. The sale-leaseback transaction did
not result in any profit or loss for the Company because the selling price
of the equipment was equal to the cost on the closing date of the
agreement. The term of the agreement is 36 months. The leased equipment was
accounted for as a capital lease, in accordance with SFAS No. 13,
"Accounting for Leases," and is included as computer equipment as of
December 31, 2001. The Company is in compliance with all financial
covenants under these leases as of December 31, 2001.
Future minimum capital lease payments as of December 31, 2001 were
as follows (in thousands):
Year ending December 31,
2002............................................... $ 543
2003............................................... 228
------------
Total minimum lease payments....................... 771
Less: Amount representing imputed
interest................................ 63
------------
Present value of minimum lease payments............ 708
Less: current portion............................. 543
------------
Minimum lease payments, less current portion....... $ 165
============
Future minimum lease payments under non-cancellable operating
leases, including space vacated, as of December 31, 2001 were as follows
(in thousands):
Year ending December 31,
2002............................................... $ 670
2003............................................... 684
2004............................................... 698
2005............................................... 335
Thereafter......................................... --
------------
Total minimum lease payments under
operating leases................................... $ 2,387
============
Rental expense under operating leases for the years ended December
31, 2001, 2000 and 1999 was $701,000, $556,000 and $206,000, respectively.
4. Stockholders' Equity
In January 1998, Imperial Bank (which has subsequently merged into
Comerica Bank-California) purchased nine million shares of the Company's
common stock from Beranson Holdings, Inc. for $3,010,000 (representing 75%
of the twelve million shares of common stock in the Company owned by
Beranson at that time). In addition, Imperial Ventures, a wholly owned
subsidiary of Imperial Bank, transferred its three million shares of the
Company's common stock to Imperial Bank.
Imperial Bank and Beranson Holdings were the holders of 80% and
20% of the Company's common stock, respectively, as of December 31, 1998.
In August 1999, the Company issued 2,400 shares of common stock to
Imperial Bank for an aggregate consideration of $8.00, and 600 shares of
common stock to Beranson Holdings for an aggregate consideration of $2.00.
In connection with the merger of U.S. Audiotex, LLC into U.S. Audiotex
Corporation, the limited liability company interests of Imperial Bank and
Beranson Holdings in U.S. Audiotex, LLC were exchanged for 11,997,600 and
2,999,400 shares of the Company's common stock, respectively. Share
information has been restated for all periods presented.
In November 1999, the Company sold to E*Trade Group, Inc.
(E*TRADE) 512,820 shares of common stock at a price of $9.75 per share, for
a total consideration of approximately $5 million.
On November 29, 1999, the Company completed the initial public
offering of its common stock. The Company sold 5,750,000 shares of common
stock, 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 for an aggregate 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 other
offering expenses. 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.
Stock Split
In October 1999, the Company's Board of Directors authorized a
three-for-one split of all the outstanding shares of the Company's common
stock. Shares and per share information has been restated for all periods
presented to give effect to this stock split.
1999 Stock Incentive Plan
The Company's Board of Directors adopted the 1999 Stock Incentive
Plan (the "1999 Plan") in August 1999. The 1999 Plan provides for the grant
of stock options to employees, outside directors, consultants or
independent advisors of the Company. A total of 7,650,000 shares of the
Company's common stock are reserved for issuance under the 1999 Plan,
900,000 of which are available for grants to outside directors.
Awards under the 1999 Plan are made at the discretion of the
Compensation Committee of the Company's Board of Directors or the Board of
Directors (in the case of awards made to outside directors). Options
granted under the 1999 Plan may be designated as incentive stock options or
non- qualified stock options at the discretion of the granting authority,
with exercise prices for incentive stock options of not less than the fair
value of the underlying stock at the date of grant. Options granted under
the 1999 Plan typically vest over a maximum three-year period and expire
ten years from the date of grant (provided the employee remains employed by
the Company). As of December 31, 2001, there were 6,244,711 non-forfeited
employee stock options and 428,750 non-forfeited outside director stock
options granted under the 1999 Plan and 976,539 shares were available for
future issuance.
2000 Stock Incentive Plan
The Company's Board of Directors adopted the 2000 Stock Incentive
Plan (the "2000 Plan") in June 2000. The 2000 Incentive Plan provides for
the grant of shares of restricted stock and non-qualified stock options to
employees (excluding the Company's directors and executive officers),
consultants and independent advisors. A total of 1,250,000 shares of the
Company's common stock are reserved for issuance under the 2000 Incentive
Plan.
Awards under the 2000 Plan are made at the discretion of the
Compensation Committee of the Company's Board of Directors. Options granted
under the 2000 Plan typically vest over a three-year period and expire ten
years from the date of grant (provided the employee remains employed by the
Company). As of December 31, 2001, there were 127,150 non-forfeited shares
of restricted stock and 755,504 non-forfeited stock options granted under
the 2000 Incentive Plan, and 367,346 shares were available for future
issuance.
Deferred Stock-Based Compensation
The Company uses the intrinsic value method to account for its
1999 and 2000 Incentive Plans. Accordingly, compensation cost is recognized
for stock options when, on the date of grant, the current market value of
the underlying common stock exceeds the exercise price of the stock options
at the date of grant. In the year ended December 31, 1999, the Company
recorded deferred compensation of approximately $42.9 million for options
granted to employees to purchase approximately 4,654,923 shares of the
Company's common stock. In the year ended December 31, 2000, the Company
recorded deferred compensation of approximately $633,000, representing the
fair value of restricted 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 fair market value of
the Company's common stock at the time of grant. Unamortized deferred
stock-based compensation recorded as a component of stockholders's equity
on the Company's balance sheets was $19.8 million at December 31, 2000 and
$34.9 million at December 31, 1999. During 2001, as a result of the
acceleration of options under the Company's 1999 Stock Incentive Plan due
to Comerica's acquisition of Imperial Bancorp on January 30, 2001, the
unamortized portion of this charge was recognized by the Company in the
first quarter of 2001.
A summary of the Company's stock plans are as follows for the year
ended December 31:
2001 2000 1999
------------------------------- ----------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ------------- ------------ ------------- ------------ -------------
Outstanding at the
beginning of the period........ 6,786,458 $5.02 6,150,743 $4.68 -- --
Granted at fair value ......... 893,000 $6.53 1,216,000 $18.68 1,495,820 $15.12
Granted at less than fair value -- -- -- -- 4,654,923 $1.33
Exercised...................... (476,645) $1.39 (115,000) $10.25 -- --
Cancelled...................... (365,493) $9.57 (465,285) $34.77 -- --
------------ ----------- ------------- ---------- ------------ -------
Outstanding at end of period... 6,837,320 $5.23 6,786,458 $5.02 6,150,743 $4.68
============ =========== ============= ========== ============ ======
Exercisable at end of period... 6,696,820 $5.24 3,039,424 $3.48 685,161 $1.33
============ =========== ============= ========== ============ =======
Weighted-average fair value of
options granted during the
period at fair value........... $5.73 $11.56 $9.72
Weighted-average fair value of
options granted during the
period at less than fair value.. -- -- $10.24
The following table summarizes information about stock options
outstanding and exercisable as of December 31, 2001:
Outstanding Exercisable
------------------------------------------------------ -------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number of Contractual Exercise Number of Exercise
Range of Exercise Prices Shares Life (Years) Price Shares Price
- ------------------------------- ----------------- --------------- -------------- -------------- -------------
$ 1.33 - $ 2.00.............. 4,152,111 7.72 $ 1.33 4,152,111 $1.33
$ 2.04 - $ 5.68.............. 368,373 8.96 $ 4.39 267,873 $4.61
$ 6.63 - $ 9.25.............. 1,024,798 8.91 $ 7.19 984,798 $7.19
$15.00 - $18.87................ 1,212,038 7.90 $15.03 1,212,038 $15.03
$30.00 - $45.00................ 80,000 8.13 $37.81 80,000 $37.81
----------------- --------------
6,837,320 8.00 $ 5.23 6,696,820 $ 5.24
================= ==============
Accounting for Stock-Based Compensation
The Company uses the intrinsic value-based method of accounting
for its employee stock-based compensation plans. Accordingly, no
compensation cost is recognized for any of its stock options when the
exercise price of each option equals or exceeds the fair value of the
underlying common stock as of the grant date for each stock option.
Had compensation cost been determined in accordance with the fair
value approach set forth by SFAS No. 123 for all of the Company's
stock-based compensation plans, net loss and net loss per share would have
been reduced to the following pro forma amounts (in thousands, except per
share data):
Years ended December 31,
-----------------------------------------------------
2001 2000 1999
---------------- ------------------ ---------------
Net loss:
As reported............................................. $ (41,321) $ (30,038) $ (10,400)
Pro forma............................................... $ (61,394) $ (35,132) $ (12,824)
Basic and diluted net loss per share:.......................
As reported............................................. $ (1.88) $ (1.40) $ (0.66)
Pro forma............................................... $ (2.80) $ (1.64) $ (0.82)
For all option grants that were granted prior to the Company's
initial public offering in November 1999, the fair value of these options
was determined using the minimum value method, which assumes no volatility,
and the following weighted-average assumptions: no dividend yield,
risk-free interest rate of 5%, and expected lives of 4 years. For the
remaining options granted in 1999 but subsequent to the Company's initial
public offering, the fair value of these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: zero dividend yield, expected volatility of
85%, risk-free interest rate of 5.00% and expected lives of 4 years. The
fair value for the options granted in 2000 was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: zero dividend yield, expected volatility of
100%, risk-free interest rate of 5.11%, and expected lives of 10 years. The
fair value for the options granted in 2001 was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: zero dividend yield, expected volatility of
89%, risk-free interest rate of 5.05%, and expected lives of 10 years.
5. Income Taxes
The 2001, 2000 and 1999 income tax expense differed from the
amounts computed by applying the federal income tax rate of 34% to pretax
income as a result of the following (in thousands):
12/31/01 12/31/00 12/31/99
------------------ ----------------- ------------------
Federal tax at statutory rate.............................. $ (14,049) $ (10,213) $ (3,536)
Increase in valuation allowance............................ 13,048 10,186 3,526
Stock compensation......................................... 1,018 -- --
Other...................................................... (17) 27 10
------------------ ----------------- ------------------
Total tax expense.......................................... $ -- $ -- $ --
================== ================= =======-=========
The types of temporary differences that give rise to significant
portions of the Company's deferred tax assets and liabilities are set out
below (in thousands):
12/31/01 12/31/00
----------------- -----------------
Deferred tax assets
Employee stock compensation................................................ $ 16,141 $ 6,485
Other non-deductible items................................................. 550 128
Restructuring charge....................................................... 1,721 -
Net operating loss and credit carry-forwards............................... 15,668 9,149
----------------- -----------------
Gross deferred tax assets..................................................... 34,080 15,762
Valuation allowance........................................................... (32,615) (15,721)
----------------- -----------------
Total deferred tax assets..................................................... 1,465 41
Deferred tax liabilities:
Plant and equipment......................................................... - (41)
Software development cost................................................... (1,465) -
----------------- -----------------
Total deferred tax liabilities................................................ (1,465) (41)
----------------- -----------------
Net deferred tax assets....................................................... $ - $ -
================= =================
For federal income tax purposes, the Company has net operating
loss ("NOL") carryforwards of approximately $40.3 million and $19.5 million
for the year ended December 31, 2001 and 2000, respectively, expiring in
various years through 2021. The U.S. Tax Reform Act of 1986 contains
provisions that limit the NOL carryforwards available to be used in any
given year upon the occurrence of certain events, including a significant
change of ownership. Management believes that a change in ownership
occurred in connection with Comerica's acquisition of Imperial Bancorp and,
as a result, the ability of the Company to utilize the NOL's to offset
income in the future could be limited.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning in making
these assessments. Due to the Company's operating losses, there is
uncertainty surrounding whether the Company will ultimately realize its
deferred tax assets.
Of the gross deferred tax assets of $34,080,000 existing on
December 31, 2001, subsequently recognized tax benefits, if any, in the
amount of approximately $832,000 will be applied directly to contributed
capital when realized. This amount relates to the tax effect of deductions
for stock options included in the Company's net operating loss
carryforward.
6. Segment Information
The Company operates in a single operating segment. The Chief
Executive Officer has been identified as the Chief Operating Decision Maker
because he has final authority over resource allocation decisions and
performance assessment. The Chief Executive Officer reviews financial
information by disaggregated revenues by product for purposes of making
operating decisions and assessing financial performance. The financial
information reviewed by the Chief Executive Officer is consistent with the
information presented in the accompanying statements of operations.
Years ended December 31,
--------------------------------------------
2001 2000 1999
------------- ------------- --------------
Revenues by product are:
Transaction fees:
Federal............................................. $ 19,727 $ 17,960 $ 4,343
State............................................... 4,162 2,481 557
Local............................................... 7,189 5,352 3,692
Other revenues........................................... 367 291 249
------------- ------------- --------------
Total revenues........................................... $ 31,445 $ 26,084 $ 8,841
============= ============= ==============
7. Related Party Transactions
In January 1998, Imperial Bank (the predecessor majority
stockholder of the Company) increased its ownership interest of U.S.
Audiotex LLC from 20% to 80% by purchasing a 60% membership interest, or
75% of Beranson Holdings, Inc.'s membership interest, from Beranson
Holdings, Inc. for $3,010,000, of which Imperial Bank immediately paid
$2,510,000 Beranson. Upon the Company's incorporation on August 24, 1999,
Imperial Bank paid the remaining $500,000 balance (and $82,000 of accrued
interest) to Beranson. U.S. Audiotex LLC was merged into the Company in
September 1999, with the Company being the surviving entity.
In 1999 Imperial Bank and Beranson Holdings, Inc. made advances to
the Company under lines of credit in the combined amount of $2.8 million
which bears interest at a floating rate equal to Imperial Bank's prime rate
plus 2% per annum. The Company repaid the balance of all amounts
outstanding, together with the accrued interest, prior to December 31,
1999.
Comerica Bank-California (the successor by merger to Imperial
Bank) is one of the merchant banks the Company uses to process credit card
transactions and perform merchant credit card settlement services. During
2001, 2000, and 1999, the Company paid Comerica Bank-California/Imperial
Bank approximately $8.2 million, $5.8 million, and $2.1 million,
respectively, for performing these processing and settlement services,
which represent 33%, 31%, and 33%, respectively, of the total merchant
discount fees paid by the Company during those periods.
Comerica Bank-California/Imperial Bank has provided other services
to the Company. These services included payroll processing, benefits
administration and employee recruiting. During the fiscal year ended
December 31, 2000, the Company paid Imperial a fee of $135,000 for these
services. The Company did not pay any fees to Comerica/Imperial Bank for
these services in 2001, because effective January 1, 2001, the Company
began administering its payroll processing and benefits programs internally
and through unaffiliated third-party vendors.
Comerica Bank-California guarantees the performance of the Company's
obligations under six equipment leases. These leases are comprised of a
master lease agreement with one lessor for five leases for various
furniture and computer equipment and a separate lease agreement for network
equipment. Comerica Bank-California will continue to guarantee the six leases
until the leases expire.
Starting in November 2001, the Company obtained its corporate
insurance as part of Comerica Incorporated's master policies, and pays its
allocated premiums for coverage to independent third-party carriers. In
addition, in 2001 the Company incurred $11,560 of premiums payable to
Comerica Assurance Ltd., another Comerica subsidiary, for insurance on
certain deductibles which otherwise would be payable by the Company in the
event of casualty losses under these master policies.
Bruce Nelson, one of the Company's directors, provided certain
consulting services in connection with the Company's marketing and
advertising campaigns and corporate positioning strategies, in
consideration for which the Company paid Mr. Nelson a $50,000 annual fee.
Effective October 2001, he was no longer providing these consulting
services.
8. Restructuring and Asset Abandonment
In November 2001, the Board of Directors approved and the Company
initiated a restructuring plan to reduce certain of the Company's operating
expenses. The restructuring plan includes a reduction in marketing,
administrative and telephony costs, an involuntary reduction of 44
employees , and the consolidation of certain facilities. Concurrently, the
Company abandoned certain IVR equipment.
The following table details restructuring and asset abandonment activities
through December 21, 2001 (in thousands).
Facility Restructuring
Employee Consoli- Contract Restructuring Asset & Asset
Separations dations Settlements Total Abandonment Abandonment
-------------- ------------- ------------- ---------------- --------------- ------------
Charged to operating
expense $ 2,817 $ 1,077 $ 632 $ 4,526 $ 1,519 $ 6,045
Cash paid (459) -- -- (459) -- (459)
Asset abandonment
applied -- -- -- -- (1,519) (1,519)
-------------- ------------- ------------- ---------------- --------------- -----------
Balance at December 31,
2001 $ 2,358 $ 1,077 $ 632 $ 4,067 $ -- $ 4,067
============== ============= ============= ================ =============== ===========
"Employee Separations" primarily includes the severance
compensation and benefits and associated payroll taxes accrued with respect
to the termination of 44 employees. As of December 31, 2001, the employment
for 33 of these employees had been terminated and included executive,
technical, and administrative personnel. For the year ended December 31,
2001, total accrued charges for severance and benefits amounted to $2.9
million, of which $459,000 was paid by fiscal year end.
"Facility Consolidations" is a result of the Company taking action
to consolidate its office spaces in Stamford, Connecticut and San Ramon,
California. Facility consolidation costs represent the contractual lease
obligation from the expected date the facility is to be vacated through the
end of the lease term. Given the recent vacancy rates of the commercial
rental real estate markets in Stamford and San Ramon, as well as the
configuration of the spaces vacated by the Company, the Company believes
that subleasing such space is not probable and that any sublease income
which may be realized is not estimable. The leases for both offices end in
mid-2005.
In the fourth quarter of 2001, the Company recognized an
infrequent charge of $1.5 million related to the abandonment of specific
equipment which has been taken out of its service. Furthermore, the Company
cancelled numerous contracts with its telecommunications service providers
and has accrued the maximum contractual obligations payable under the
related contract.
9. Severance
During the second quarter of 2000, the Company incurred
approximately $4.1 million in severance and other related charges in
conjunction with the departure of its former Chief Financial Officer, Brian
W. Nocco, which are included in general and administrative expenses on the
statement of operations. The largest of this expense was a non-cash
deferred stock-based compensation charge of $3.6 million, representing the
acceleration (in connection with the termination of Mr. Nocco's employment
and pursuant to the terms of his employment agreement with the Company) of
the vesting of stock options granted to Mr. Nocco in August, September and
November 1999 at exercise prices below the fair market value of the
Company's common stock at the date of grant. The remaining $522,000 is
attributable to severance, relocation and other contractual obligations
incurred in the second quarter of 2000.
10. Selected Quarterly Financial Data (unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ---------- ------------ ------------
Year 2001:
Net revenue............................................... $ 3,502 $ 19,784 $ 3,878 $ 4,281
Net loss.................................................. (24,135) (3,610) (4,131) (9,445)
Loss per share (Basic and diluted)........................ $ (1.10) $ (0.16) $ (0.19) $ (0.43)
Year 2000:
Net revenue............................................... $ 1,824 $ 17,715 $ 3,414 $ 3,131
Net loss.................................................. (8,949) (8,928) (6,076) (6,085)
Loss per share (Basic and diluted)........................ $ (0.42) $ (0.42) $ (0.28) $ (0.28)
Year 1999:
Net revenue............................................... $ 830 $ 5,283 $ 1,095 $ 1,633
Net income/(loss)......................................... (121) 61 (1,480) (8,860)
Net income/(loss) per share (Basic and diluted)........... $ (0.01) $ 0.00 $ (0.10) $ (0.50)
11. Subsequent Events (unaudited)
In the first quarter of 2002, the Company entered into cooperative
advertising arrangements with certain of the credit card companies,
pursuant to which it will receive from such companies a net amount of
$550,000 for use in the Company's 2002 April tax season advertising
campaign. The Company will consider these funds as a reimbursement of costs
incurred and will net the proceeds against sales and marketing expenses as
incurred.
OFFICIAL PAYMENTS CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 20001, 2000, AND 1999
Balance at Write-Offs Balance At End
Beginning of Costs and and of Classification
Classification Period Expenses Deductions Period
- -------------- -------------- ----------- ------------- ----------------
Year ended December 31, 2001 Allowance for
doubtful accounts.............................. $ 111,099 $ 212,802 $ (81,910) $ 241,991
Year ended December 31, 2000 Allowance for
doubtful accounts.............................. 52,000 59,099 -- 111,099
Year ended December 31, 1999 Allowance for
doubtful accounts.............................. 5,000 47,000 -- 52,000