-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GdStD0qN9bd8GKBmVcZDlijEcms/877b2On+iVA6dXrhZHeTIi5G26Gp9YBpoKz9 VBmvk6JlL2Fi+RK7H06A4Q== /in/edgar/work/20000811/0000950172-00-001452/0000950172-00-001452.txt : 20000921 0000950172-00-001452.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950172-00-001452 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OFFICIAL PAYMENTS CORP CENTRAL INDEX KEY: 0001094998 STANDARD INDUSTRIAL CLASSIFICATION: [7374 ] IRS NUMBER: 522190781 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28187 FILM NUMBER: 695146 BUSINESS ADDRESS: STREET 1: THREE LANDMARK SQUARE CITY: STAMFORD STATE: CT ZIP: 06901-2501 BUSINESS PHONE: 2033564200 MAIL ADDRESS: STREET 1: 2333 SAN RAMON VALLEY BOULEVARD STREET 2: SUITE 450 CITY: SAN RAMON STATE: CA ZIP: 94583 FORMER COMPANY: FORMER CONFORMED NAME: US AUDIOTEX CORP DATE OF NAME CHANGE: 19990914 10-Q 1 0001.txt =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ___________________ Commission File Number 000-28187 OFFICIAL PAYMENTS CORPORATION - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 52-2190781 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) Three Landmark Square Stamford, CT 06901-2501 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (203) 356-4200 - ------------------------------------------------------------------------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ As of August 3, 2000, 21,491,270 shares of the registrant's common stock were issued and outstanding. =============================================================================== OFFICIAL PAYMENTS CORPORATION FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000 TABLE OF CONTENTS ITEM PAGE NUMBER - ---------- ----------- PART I: FINANCIAL INFORMATION Item 1. Financial Statements...................................3 Condensed Balance Sheets as of June 30, 2000 and December 31, 1999...................................3 Condensed Statements of Operations for the three and six-month periods ended June 30, 2000 and 1999......4 Condensed Statements of Cash Flows for the six- month periods ended June 30, 2000 and 1999..........5 Notes to the Condensed Financial Statements............6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................11 Item 3. Quantitative and Qualitative Disclosures About Market Risk...........................................20 PART II: OTHER INFORMATION Item 1. Legal Proceedings.....................................21 Item 2. Changes in Securities and Use of Proceeds.............21 Item 3. Defaults Upon Senior Securities.......................21 Item 4. Submission of Matters to a Vote of Security Holders.............................................21 Item 5. Other Information.....................................21 Item 6. Exhibits and Reports on Form 8-K......................22 Signatures........................................................22 Index to Exhibits PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OFFICIAL PAYMENTS CORPORATION CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) JUNE 30, DECEMBER 31, 2000 1999 ------------- ------------ (Unaudited) ASSETS Current assets: Cash .............................................$ 2,445 $ 1,643 Short-term investments............................ 72,064 79,182 Accounts receivable, net.......................... 690 1,135 Prepaid expenses.................................. 276 465 Other current assets.............................. - 73 -------- -------- Total current assets............................ 75,475 82,498 Property and equipment, net......................... 5,388 1,802 Other assets........................................ 95 - -------- -------- Total assets....................................$ 80,958 $ 84,300 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................$ 396 $ 176 Accrued merchant discount fees.................... 1,298 419 Accrued payroll and severance..................... 1,546 551 Accrued expenses.................................. 1,559 931 Deferred revenue.................................. 109 65 Current portion of notes payable and capital lease obligations................................ 585 206 -------- -------- Total current liabilities....................... 5,493 2,348 Notes payable and capital lease obligations......... 818 391 -------- -------- Total liabilities............................... 6,311 2,739 -------- -------- Stockholders' equity: Common stock, $.01 par value; 150,000,000 shares authorized; 21,491,270 and 21,262,820 shares issued and outstanding as of June 30, 2000 and December 31, 1999, respectively................. 215 213 Additional paid-in capital........................ 129,500 127,707 Deferred stock-based compensation................. (25,797) (34,965) Accumulated deficit............................... (29,271) (11,394) --------- --------- Stockholders' equity...................... 74,647 81,561 --------- --------- Total liabilities and stockholders' equity.... $ 80,958 $ 84,300 ========= ========= See accompanying notes to condensed financial statements. OFFICIAL PAYMENTS CORPORATION CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------------------- ----------------------------------- 2000 1999 2000 1999 -------- ------- ---------- ---------- Revenues: Transaction fees.............. $ 17,648 $ 5,247 $ 19,304 $ 5,975 Other revenues............... 67 36 235 138 -------- -------- -------- -------- Total revenues........... 17,715 5,283 19,539 6,113 -------- -------- -------- -------- Cost of revenues: Cost of transaction fees...... 10,672 3,270 11,618 3,451 Cost of transaction fees to related party............. 3,558 1,087 4,045 1,293 Cost of other revenues........ 22 2 99 21 -------- -------- -------- -------- Total cost of revenues...... 14,252 4,359 15,762 4,765 -------- -------- -------- -------- Gross profit..................... 3,463 924 3,777 1,348 -------- -------- -------- -------- Operating expenses: Sales and marketing............ 2,870 259 7,316 434 Development costs.............. 532 179 1,014 319 General and administrative..... 9,547 347 14,781 543 Depreciation and amortization.. 429 45 619 82 Allocated expenses from related parties.......... 58 - 103 - -------- -------- -------- -------- Total operating expenses................... 13,436 830 23,833 1,378 -------- -------- -------- -------- (Loss) income from operations.... (9,973) 94 (20,056) (30) Interest and other income (expenses), net........ 1,045 (33) 2,179 (30) -------- -------- -------- -------- Net (loss) income................ $ (8,928) $ 61 $(17,877) $ (60) ========= ======== ======== ======== Basic and diluted net loss per share............ $ (0.42) $ 0.00 $ (0.84) $ 0.00 ========= ======== ========= ======== Shares used in computing basic and diluted net loss per share............. 21,376 15,000 21,339 15,000 ========= ======== ======== ========
See accompanying notes to condensed financial statements. OFFICIAL PAYMENTS CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ----------------------------------- 2000 1999 ---------- ---------- Cash flow used in operating activities: Net loss.......................................... $ (17,877) $ (60) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................ 619 82 Amortization of deferred stock-based compensation................................. 9,800 - Changes in operating assets and liabilities Accounts receivable.......................... 445 (391) Prepaid expenses and other assets............ 167 (8) Accounts payable and other accrued expenses.. 2,722 (167) Deferred revenue............................. 44 34 --------- -------- Net cash used in operating activities...... (4,080) (509) --------- -------- Cash flows provided by (used in) investing activities: Proceeds from sale of short-term investments...... 7,118 - Capital expenditures.............................. (4,175) (268) --------- -------- Net cash provided by (used in) investing activities.............................. 2,943 (268) --------- -------- Cash flow provided by financing activities: Proceeds from exercise of stock options, net...... 1,163 - Borrowings on sale-leaseback agreement............ 968 - Notes payable to related party.................... - 440 Repayment of notes payable and capital leases..... (192) (45) --------- -------- Net cash provided by financing activities.. 1,939 395 --------- -------- Net increase (decrease) in cash..................... 802 (382) Cash at the beginning of the period................. 1,643 631 --------- -------- Cash at the end of the period....................... $ 2,445 $ 249 Supplement disclosure of noncash activity: Cash paid for interest.............................. $ 221 $ 48 ========= ======== Assets acquired through capital leases.............. $ 998 $ 79 ========= ======== Cash paid for taxes................................. $ 103 $ 8 ========= ========
See accompanying notes to condensed financial statements. OFFICIAL PAYMENTS CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS Note 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY Official Payments Corporation was formed as U.S. Audiotex, LLC, a California limited liability company (the "LLC"), on June 26, 1996. U.S. Audiotex Corporation, a Delaware corporation (the "Company"), was formed on August 24, 1999. Effective September 30, 1999, the LLC merged with and into the Company. On October 20, 1999, the Company changed its name to "Official Payments Corporation". The Company provides credit card payment options for consumers to pay personal federal and state income taxes, sales and use taxes, property taxes and fines for traffic violations and parking citations. The Company has only a limited operating history, and it is difficult to evaluate its business and prospects and the risks, expenses and difficulties that the Company may face in implementing its business model. The Company's success will depend on maintaining its relationship with the Internal Revenue Services (IRS) and on developing additional relationships with state and local government agencies. There are no assurances that the Company will be able to develop new relationships or maintain existing relationships, and the failure to do so could have a material and adverse effect on the business, operating results and financial condition of the Company. BASIS OF PRESENTATION The accompanying condensed financial statements as of June 30, 2000 and December 31, 1999, and the three and six months ended June 30, 2000 and 1999, are unaudited. The unaudited interim condensed financial statements have been prepared on the same basis as the annual financial statements, and in the opinion of management, reflect all adjustments necessary to present fairly the Company's financial position, results of operations and cash flows as of June 30, 2000 and for the three and six months ended June 30, 2000 and 1999. These adjustments are of a normal, recurring nature. These condensed financial statements and notes thereto are unaudited and should be read in conjunction with the Company's audited financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. The results for the six months ended June 30, 2000 are not necessarily indicative of the expected results for the year ending December 31, 2000. Certain prior period balances have been reclassified to conform to the current period presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported results of operations during the reporting period. Actual results could differ from those estimates. INVESTMENTS As of June 30, 2000, the Company had short-term investments of $72.1 million. The Company classifies its short-term investments as "available-for-sale." Financial instruments classified as short-term investments include government securities and commercial paper, with maturity dates of less than three months at the date of acquisition. Such short-term investments are recorded at fair value based on quoted market prices, with unrealized gains and losses recorded as other comprehensive income (loss) until realized. As of June 30, 2000, no comprehensive income (loss) was reported, as the fair value of the Company's short-term investments equaled the quoted market prices. COMPREHENSIVE INCOME (LOSS) The Company has no components of other comprehensive income (loss). STOCK-BASED COMPENSATION In the third and fourth quarter of 1999, the Company recorded on its balance sheet a deferred charge representing the estimated fair value of the common stock underlying options granted to certain officers and employees of the Company in August, September, and November of 1999 in excess of the exercise prices of those options. The Company also recorded on its balance sheet a deferred stock-based compensation expense totaling $633,000 in the second quarter of 2000. This deferred charge 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. The deferred charge is being amortized, on a straight-line basis, over a one-year vesting period, which is consistent with the lapsing schedule of the restrictions placed on the common shares. See Note 1 to the Company's accompanying condensed financial statements. The Company uses the intrinsic value method to account for all of its employee stock-based compensation plans. Expense associated with stock-based compensation is being amortized on a straight-line basis over the vesting period of the individual award consistent with the method described in Accounting Principles Board (APB) Opinion No. 25 and FASB Interpretation No. 44. REVENUE RECOGNITION Transaction fees are derived from convenience fees paid by consumers for credit card payment services provided by the Company. Convenience fees are charged based on the amount of the payment processed and the type of payment. Transaction fees are recognized in the period the services are provided. Other revenues consist of the sale of customized systems which include software licenses, implementation services, training and post contract support related to these system sales. As vendor specific objective evidence does not exist for each element of the contract, revenues are recognized, under the completed contract method, upon customer acceptance of the software which occurs after installation of the system and the completion of training. Maintenance revenues are deferred based on vendor specific objective evidence and recognized ratably over the contractual term of the maintenance agreement, generally one year. ADVERTISING EXPENSE The cost of advertising is expensed as incurred. Such costs are included in sales and marketing expense and totaled approximately $1.6 million and $45,000 for the three months ended June 30, 2000 and 1999 respectively, and $4.8 million and $52,000 for the six months ended June 30, 2000 and 1999, respectively. Note 2. NET LOSS PER SHARE Basic and diluted net loss per share is computed using the weighted-average number of outstanding shares of common stock in 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. The following table presents the calculation of basic and diluted net loss per share (in thousands, except share and per share data):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------------------- ------------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Net (loss) income............. $ (8,928) $ 61 $ (17,877) $ (60) Weighted-average shares used in computing basic and diluted net loss per common share................ 21,376,000 15,000,000 21,339,000 15,000,000 ----------- ---------- ---------- ---------- Basic and diluted net loss per common share ........... $ (0.42) $ 0.00 $ (0.84) $ (0.00) ----------- ---------- ---------- ----------
Net loss per share for the three and six months ended June 30, 2000 does not include the effect of approximately 6,200,098 stock options with a weighted-average exercise price of $4.48 per share because their effects are anti-dilutive. There were no potentially dilutive common stock equivalents outstanding as of June 30, 1999. Note 3. PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands): JUNE 30, DECEMBER 31, --------------------------- 2000 1999 Computer equipment.............................. $ 5,505 $ 1,836 Furniture and fixtures.......................... 1,021 485 --------- --------- 6,526 2,321 Less accumulated depreciation and amortization.. 1,138 519 --------- --------- $ 5,388 $ 1,802 ======== ======== In April 2000, the Company entered into a sale-leaseback agreement for approximately $968,000 in interactive voice response system (IVR) equipment. The sale-leaseback transaction did not result in any profit or loss for the Company because the selling price of the equipment was equal to the cost on the closing date of the agreement. The 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 June 30, 2000. Note 4. AMORTIZATION OF DEFERRED STOCK-BASED COMPENSATION Amortization of deferred stock-based compensation consists of the following (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------------------- ------------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Sales and marketing............. $ 266 $ - $ 515 $ - Development costs............... 10 - 10 - General and administrative...... 6,327 - 9,275 - ---------- ---------- ---------- ---------- $ 6,603 $ - $ 9,800 $ - ========== ========== ========== ==========
Note 5. SEVERANCE AND OTHER RELATED CHARGES In the three month period ended June 30, 2000, as a requirement of generally accepted accounting principles, the Company incurred $4.1 million in severance and other related charges in conjunction with the departure of the former Chief Financial Officer, Brian W. Nocco, which are included in general and administrative expenses on the condensed statement of operations. The largest component of this expense was a non-cash deferred stock-based compensation charge, in accordance with generally accepted accounting principles, of $3.6 million, representing the acceleration of the vesting of options granted to Mr. Nocco in August, September, and November of 1999 at exercise prices below their fair market values at the dates of grant. The remaining $522,000 is attributable to severance, relocation, and other contractual obligations, required to be estimated and accrued for by generally accepted accounting principles, and is included in accrued payroll and severance on the condensed balance sheets. Note 6. INTEREST AND OTHER INCOME (EXPENSE), NET Other income (expense), net, consists of the following (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------------------- ------------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Interest income................. $ 1,275 $ 10 $ 2,415 $ 14 Interest expense................ (229) (37) (241) (48) Other income (expenses), net.... (1) (6) 5 4 ---------- ---------- ---------- ---------- $ 1,045 $ (33) $ 2,179 $ (30) ========== ========== ========== ==========
Note 7. SEGMENT INFORMATION The Company operates in a single operating segment within the United States. The Chief Executive Officer (CEO) has been identified as the Chief Operating Decision Maker because he has final authority over resource allocation decisions and performance assessment. The CEO reviews financial information by disaggregated information about revenues by product for purposes of making operating decisions and assessing financial performance. The financial information reviewed by the CEO is consistent with the information presented in the accompanying statements of operations.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------------------- ------------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Revenues by product are Transaction fees: Federal.................. $ 15,063 $ 4,228 $ 15,585 $ 4,342 State.................... 1,319 151 1,602 173 Local.................... 1,266 868 2,117 1,460 Other revenues............. 67 36 235 138 ---------- ---------- ---------- ---------- Total revenues............. $ 17,715 $ 5,283 $ 19,539 $ 6,113 ========== ========== ========== ==========
Note 8. RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. In March 2000, the SEC issued Staff Accounting Bulletin No. 101A (SAB 101A), Amendment: Revenue Recognition in Financial Statements. SAB 101A delayed for one fiscal quarter the implementation date of SAB 101 for registrants with fiscal years beginning between December 16, 1999 and March 31, 2000. In June 2000, the SEC issued Staff Accounting Bulletin No. 101B (SAB 101B), Second Amendment: Revenue Recognition in Financial Statements. SAB 101B delays the implementation of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The Company will adopt SAB 101 as required in the fourth quarter of 2000 and is evaluating the effect that such adoption may have on its results of operations and financial position. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133, which deferred the effective date of SFAS No. 133. In June 2000, the FASB issued SFAS No. 138, Accounting for Derivative Instruments and Certain Hedging Activities and amendment of FASB Statement No. 133, which amended the accounting and reporting standards of Statement 133 for certain derivative instruments and certain hedging activities. SFAS No. 133 and SFAS No. 138 are effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company will adopt SFAS No. 133 as required in the first quarter of 2001 and is evaluating the effect that such adoption may have on its results of operations and financial position. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. For example, words such as "may", "will", "should", "estimates", "predicts", "potential", "continue", "strategy", "believes", "anticipates", "plans", "expects", "intends", and similar expressions are intended to identify forward-looking statements. Such statements are based upon the current economic environment and current expectations that involve risks and uncertainties, including, but not limited to statements regarding the Company's competitive position, expected operating and financial performance, business model and expected growth of electronic payments to government entities. All forward-looking statements included in this report are based upon information available to the Company as of the date hereof. You are cautioned that these statements are not guarantees of future performance. The Company's actual results and the timing of certain events may differ significantly than those anticipated in, or caused by, any forward-looking statements as a result of certain risks and uncertainties, including, without limitation, the general economic and business conditions, major systems failures, constraints in capacity, rapid technological changes, ability to retain existing government contracts and enter into new government contracts, competitive nature of the market in which the Company competes, the early stages of development of the Company's products, and the lack of widespread market acceptance of the Company's products. A more complete description of these and other risks and uncertainties associated with the Company's business can be found in the Company's filings with the United States Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 1999. The Company does not undertake any obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise. Overview Official Payments Corporation is the leading provider of electronic payment options to government entities enabling consumers to use their credit cards to pay, by Internet or over the telephone, personal federal and state income taxes, sales and use taxes, property taxes and fines for traffic violations and parking citations. The Company's interactive toll-free telephone number, 1-888-2PAY-TAXSM, allows customers to make payments and receive certain customer service information. The Company's websites, at www.8882paytax.comSM and at www.officialpayments.comSM, currently allow consumers to make certain payments through the Internet. The Company's revenues consist primarily of convenience fees, which are transaction fees paid by consumers for using our credit card payment services. For processing personal federal and state income tax payments and property tax payments, the convenience fee charged is a percentage of the payment amount. For processing fines for traffic violations and parking citations, a fixed amount is charged per ticket. The Company also derives a small amount of other revenues from sales of its systems to government entities and other miscellaneous fees such as for maintenance and consulting. In these cases, revenues from software systems sales are recognized upon installation and completion of training, and revenues from maintenance are recognized ratably over the service period based on vendor-specific objective evidence. Consulting revenues are recognized as the services are performed. The Company's contract with the IRS currently accounts for a significant portion of the Company's revenues. The Company has offered its services for the balance-due and extension payment of personal federal income taxes due on April 17, 2000 (1999 tax year) and continues to offer its services for estimated tax payments for the 2000 tax year. In the six months ended June 30, 2000, convenience fees from tax payments to the IRS accounted for approximately 80% of the Company's total revenues. The IRS has selected the Company to provide electronic payment services with respect to balance-due and extension tax payments for the 2000 tax year, as well as estimated tax payments for the 2001 tax year (with the IRS having the option to renew the Company's services for an additional year). If the IRS does not continue to select the Company to perform these services in subsequent years, the business, operating results and financial position of the Company would be materially and adversely affected. The Company's primary cost of revenues is the merchant discount fee paid to its credit card processors, which is a function of the total amount paid by the consumer, depending on the credit card used and the type of transaction. The Company also incurs telecommunications costs through its telephone conduit. Processing fines for traffic violations and parking citations produces a higher gross margin than processing income tax and property tax payments because the convenience fee as a percentage of fines processed is significantly higher. Operating expenses include sales and marketing expenses, development costs, general and administrative expenses, depreciation and amortization, and allocated expenses from related parties. One of the largest components of these expenses was the amortization of deferred stock-based compensation, which amounted to $6.6 million and $9.8 million for the three and six months ending June 30, 2000. The amortization expense in the second quarter of 2000 includes a one-time $3.6 million non-cash deferred stock-based compensation charge for the Company's former Chief Financial Officer, Brian W. Nocco. 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 research and development expenses for the Company's customer service application. General and administrative expenses consist primarily of salaries for executive, finance, customer service and administrative personnel. The Company has incurred significant losses since inception and expects to continue to incur losses for the foreseeable future. As of June 30, 2000, the Company had an accumulated deficit of approximately $29.3 million. The Company recorded on its balance sheet a capital lease obligation totaling $968,000 in April 2000. 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 is being accounted for in accordance with SFAS No. 13, Accounting for Leases. The Company recorded on its balance sheet a deferred stock-based compensation expense totaling $42.9 million in the third and fourth quarters of 1999. This deferred charge consists of an amount of $10.0 million, representing the guaranteed value of options granted to Thomas R. Evans, the Company's Chairman and Chief Executive Officer, and an amount of $32.9 million, representing the estimated value of the common stock underlying options granted to certain other officers and employees of the Company in August, September and November of 1999 in excess of the exercise prices of those options. The $10.0 million deferred charge related to Mr. Evans' options and $23.9 million of deferred charges related to new options granted to other officers and employees is being amortized, on a straight-line basis, over a three-year vesting period, beginning in the third quarter of 1999. $4.5 million of expenses related to option grants to the Company's former Chief Financial Officer, Brian W. Nocco, which beginning in the third quarter of 1999, were being amortized over a three-year vesting period. Mr. Nocco's employment with the Company terminated during the second quarter of 2000, and in connection therewith, as required by generally accepted accounting principles, the Company accounted on its books for the acceleration of the vesting of the unamortized portion of the deferred stock-based compensation relating to Mr. Nocco during the second quarter of 2000. $4.5 million of expenses related to options granted to other officers and employees of the Company were expensed upon completion of its initial public offering on November 29, 1999. See Note 4 to the Company's December 31, 1999 audited financial statements. The Company also recorded on its balance sheet a deferred stock-based compensation expense totaling $633,000 in the second quarter of 2000. This deferred charge 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. The deferred charge is being amortized, on a straight-line basis, over a one-year vesting period, which is consistent with the lapsing schedule of the restrictions placed on the common shares. See Note 1 to the Company's accompanying condensed financial statements. At June 30, 2000, the amount of deferred stock-based compensation on the Company's balance sheet totaled $25.8 million. RESULTS OF OPERATIONS The following table sets forth, for the periods illustrated, certain statements of operations data expressed as a percentage of total revenues. The data has been derived from the unaudited financial statements contained in this report, which in management's opinion, have been prepared on substantially the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information for the periods presented. The operating results for any period should not be considered indicative of the results for any future period. This information should be read in conjunction with the financial statements included in this report, as well as the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. STATEMENT OF OPERATIONS DATA:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------------------- --------------------------------- 2000 1999 2000 1999 ---------- ---------- -------- -------- Revenues: Transaction fees.............. 100% 99% 99% 98% Other revenues............... - 1 1 2 -------- ----- ----- ----- Total revenues........... 100 100 100 100 -------- ------ ----- ----- Cost of revenues: Cost of transaction fees...... 60 62 59 57 Cost of transaction fees to related party............. 20 20 21 21 Cost of other revenues........ - - 1 - -------- ------ ----- ----- Total cost of revenues....... 80 82 81 78 -------- ------ ----- ----- Gross profit..................... 20 18 19 22 -------- ------ ----- ----- Operating expenses: Sales and marketing............ 16 5 37 7 Development costs.............. 3 3 5 6 General and administrative..... 54 7 76 9 Depreciation and amortization... 2 1 3 1 Allocated expenses from related party............ - - 1 - -------- ------ ---- ---- Total operating expenses................... 76 16 122 23 -------- ------ ---- ---- (Loss) income from operations.... (56) 2 (103) - Other (loss) income, net......... 6 (1) 11 - -------- ------- ----- ---- Net (loss) income................ (50)% 1% (92)% (1)% ======== ======== ===== =====
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999 REVENUES Total Revenues. Total revenues increased $12.4 million to $17.7 million for the three months ended June 30, 2000 from $5.3 million for the three months ended June 30, 1999, an increase of 234%. This increase is primarily attributable to increases in revenues generated from processing personal federal and state income tax payments during the 2000 tax filing season. Federal Transaction Fees. Revenues from processing federal payments are solely related to federal income tax payments for balance-due, extension, and estimated payments. Federal transaction fees increased $10.9 million to $15.1 million for the three months ended June 30, 2000 from $4.2 million for the three months ended June 30, 1999, an increase of 260%. For the three months ended June 30, 2000, the Company processed approximately 164,000 transactions totaling $545.7 million, compared to approximately 41,500 transactions totaling $169.6 million for the three months ended June 30, 1999. The Company believes the increase in revenue from the comparable period in 1999 is primarily the result of new processing of extension and estimated federal tax payments, as well as the advertising of the Company's services by the Company, the IRS, and participating credit card companies. On average, the Company charged a 2.8% convenience fee based upon the dollar amount of the IRS payment for processing personal federal income taxes during the three months ended June 30, 2000, as compared to a 2.5% convenience fee in the three months ended June 30, 1999. Federal transaction fees represented 85% of total revenues for the three months ended June 30, 2000 compared to 80% of total revenues for the three months ended June 30, 1999. State Transaction Fees. Revenues from processing state payments are related to state income tax payments for balance-due, estimated and extension personal taxes and sales and use taxes to the states of California, New Jersey, Illinois, Connecticut, Oklahoma, Minnesota and the District of Columbia. State revenues increased $1.2 million to $1.3 million for the three months ended June 30, 2000 from $151,000 for the three months ended June 30, 1999, an increase of 795%. For the three months ended June 30, 2000, we processed approximately 36,800 transactions totaling $46.0 million, compared to approximately 6,400 transactions totaling $5.1 million for the three months ended June 30, 1999. The increase in revenues is primarily related to additional state contracts and additional payment services and options provided to existing state contracts. The Company processed income tax payments for nine states during the three months ended June 30, 2000, as compared to three states during the three months ended June 30, 1999. On average, the Company charged a 2.9% convenience fee based upon the dollar amount of the payment for processing state income and sales and use taxes during the three months ended June 30, 2000, as compared to a 3.0% convenience fee in the three months ended June 30, 1999. State transaction fees represented 7.4% of total revenues for the three months ended June 30, 2000 compared to 3% of total revenues for the three months ended June 30, 1999. Local Transaction Fees. Revenues from processing local payments consist of property taxes, traffic violations, parking citations, fax filing, and utility payments. Local revenues increased $398,000 to $1.3 million for the three months ended June 30, 2000 from $868,000 for the three months ended June 30, 1999, an increase of 46%. For the three months ended June 30, 2000, we processed approximately 133,100 transactions totaling $47.0 million, compared to approximately 98,000 transactions totaling $33.4 million for the three months ended June 30, 1999. Revenues from processing property tax payments increased $292,000 to $688,000 for the three months ended June 30, 2000 from $396,000 for the three months ended June 30, 1999, an increase of 74%. Revenues from processing fines for traffic violations increased $68,000 to $361,000 for the three months ended June 30, 2000 from $293,000 for the three months ended June 30, 1999, an increase of 23%. Revenues from processing fines for parking citations increased $35,000 to $109,000 for the three months ended June 30, 2000 from $74,000 for the three months ended June 30, 1999, an increase of 47%. Revenues from other transaction fees increased $3,000 to $108,000 for the three months ended June 30, 2000 from $105,000 for the three months ended June 30, 1999, an increase of 3%. The additional property tax, moving violation, and parking citation clients and increased brand awareness contributed to the increase in local transaction fees. Local transaction fees represented 7% of total revenues for the three months ended June 30, 2000 compared to 16% of total revenues for the three months ended June 30, 1999. Other Revenues. Other revenues consist of system sales, maintenance, and consulting revenues. Other revenues increased $31,000 to $67,000 for the three months ended June 30, 2000 from $36,000 for the three months ended June 30, 1999. Other revenues represented 0.4% of total revenues for the three months ended June 30, 2000 compared to 0.7% of total revenues for the three months ended June 30, 1999. COST OF REVENUES Cost of Transaction Fees. Cost of transaction fees increased $9.8 million to $14.2 million for the three months ended June 30, 2000 from $4.4 million for the three months ended June 30, 1999, an increase of 223%. The largest component of cost of transaction fees, merchant discount fees, increased $9.4 million to $13.6 million for the three months ended June 30, 2000 from $4.2 million for the three months ended June 30, 1999, an increase of 224%. The cost of telecommunication charges for the Company's toll-free interactive telephone system increased $428,000 to $518,000 for the three months ended June 30, 2000 from $90,000 for the three months ended June 30, 1999, an increase of 476%. Other cost of transaction fees increased $62,000 to $82,000 for the three months ended June 30, 2000 from $20,000 for the three months ended June 30, 1999, primarily related to Internet costs incurred during the current fiscal period. Cost of transaction fees was 80% of total revenues for the three months ended June 30, 2000, compared to 82% for the three months ended June 30, 1999. The decrease in cost of transaction fees as a percentage of revenues is primarily due to an increase in the average convenience fee charged for federal income tax payments to 2.8% for the 2000 tax filing season compared to 2.5% for the 1999 tax filing season. Cost of Other Revenues. Cost of other revenues increased $20,000 to $22,000 for the three months ended June 30, 2000 from $2,000 for the three months ended June 30, 1999. OPERATING EXPENSES Sales and Marketing. Sales and marketing expenses increased $2.6 million to $2.9 million for the three months ended June 30, 2000 from $259,000 for the three months ended June 30, 1999. This increase is primarily attributable to a $1.6 million advertising campaign to promote the Company's services for balance-due, extension, and estimated federal tax payments. The increase is also attributable to amortization of $266,000 for deferred stock-based compensation primarily for options to purchase shares of the Company's common stock at exercise prices below their fair market value at the date of grant which were granted to the Company's sales and marketing employees in August, September, and November 1999. The increase in sales and marketing personnel from June 30, 1999 to June 30, 2000 and sales commission payables also contributed to the increase in sales and marketing expenses. Sales and marketing expenses represented 16% of total revenues for the three months ended June 30, 2000 compared to 5% for the three months ended June 30, 1999. Development Costs. Development costs increased $353,000 to $532,000 for the three months ended June 30, 2000 from $179,000 for the three months ended June 30, 1999. The increase is primarily attributable to the increase in engineering personnel and related salary costs from June 30, 1999 to June 30, 2000 and consultants contracted to assist in the enhancement of the interactive voice response platform. Development costs represented 4% of total revenues for the three months ended June 30, 2000 compared to 3% for the three months ended June 30, 1999. General and Administrative. General and administrative expenses increased $9.2 million to $9.5 million for the three months ended June 30, 2000 from $347,000 for the three months ended June 30, 1999. This increase is primarily attributable to a non-one-time severance charge for the Company's former Chief Financial Officer, Brian W. Nocco in the amount of $4.1 million. The charge included a non-cash amortization expense of $3.6 million for deferred stock-based compensation for options granted to Mr. Nocco in August, September, and November 1999. The increase is also attributable to additional amortization expense of $2.7 million primarily for deferred stock-based compensation for options to purchase shares of the Company's common stock at exercise prices below their fair market value at the date of grant which were granted to the Company's general and administrative employees in August, September, and November 1999. The additional increase is primarily attributable to the enhancement of the Company's customer service department in preparation and handling of the increased volume of federal and state tax payments during the first two weeks of April 2000. Salary and travel expenses for the Company's general and administrative employees also increased due to the increase in headcount from June 30, 1999 to June 30, 2000. General and administrative expenses represented 54% of total revenues for the three months ended June 30, 2000 compared to 7% for the three months ended June 30, 1999. Depreciation and Amortization. Depreciation and amortization increased $384,000 to $429,000 for the three months ended June 30, 2000 from $45,000 for the three months ended June 30, 1999. The increase is primarily related to an increase in IVR equipment purchased during the first quarter of fiscal year 2000 in preparation for the higher volume of federal and state tax payments during the first two weeks of April 2000. The increase is also attributable to the additional office equipment and furniture and fixtures purchased during the Company's move to its new headquarters in May 2000. Depreciation and amortization represented 2% of total revenues for the three months ended June 30, 2000 compared to 1% for the three months ended June 30, 1999. Allocated Expenses from Related Parties. Related party expenses were $58,000 for the three months ended June 30, 2000, relating to payments made to Imperial Bank and Bruce Nelson. Imperial Bank, a California chartered bank and wholly owned subsidiary of Imperial Bancorp, is the beneficial owner of approximately 56% of the outstanding stock of the Company and charges the Company for human resource and other services, including payroll processing and benefits administration. Bruce Nelson, one of the Company's directors, provides services in connection with the Company's marketing and advertising campaign, analyst, and other presentations and corporate positioning strategy. The Company did not utilize Imperial Bank's or Mr. Nelson's services during the three months ended June 30, 1999. OTHER INCOME (EXPENSE), NET Other income (expense), net consists of interest income, interest expense and other non-operating expenses. Other income, net increased to $1.0 million for the three months ended June 30, 2000 compared to $33,000 in other expenses, net for the three months ended June 30, 1999. This increase is directly related to higher interest income resulting from higher average cash balances during the recent period, as compared to the second quarter of fiscal year 1999. COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 REVENUES Total Revenues. Total revenues increased $13.4 million to $19.5 million for the six months ended June 30, 2000 from $6.1 million for the six months ended June 30, 1999, an increase of 220%. This increase is primarily attributable to increases in revenues generated from processing personal federal and state income tax payments during the 2000 tax filing season. Federal Transaction Fees. Federal transaction fees increased $11.3 million to $15.6 million for the six months ended June 30, 2000 from $4.3 million for the six months ended June 30, 1999, an increase of 262%. For the six months ended June 30, 2000, the Company processed approximately 174,700 transactions totaling $564.2 million, compared to approximately 44,800 transactions totaling $174.0 million for the six months ended June 30, 1999. Federal transaction fees represented 80% of total revenues for the six months ended June 30, 2000 compared to 71% of total revenues for the six months ended June 30, 1999. State Transaction Fees. State revenues increased $1.4 million to $1.6 million for the six months ended June 30, 2000 from $173,000 for the six months ended June 30, 1999, an increase of 826%. For the six months ended June 30, 2000, the Company processed approximately 44,400 transactions totaling $55.6 million, compared to approximately 7,400 transactions totaling $5.8 million for the six months ended June 30, 1999. The increase in revenues is primarily related to additional state contracts and additional payment services and options provided to existing state contracts. State transaction fees represented 8% of total revenues for the six months ended June 30, 2000 compared to 3% of total revenues for the six months ended June 30, 1999. Local Transaction Fees. Local revenues increased $657,000 to $2.1 million for the six months ended June 30, 2000 from $1.5 million for the six months ended June 30, 1999, an increase of 45%. For the six months ended June 30, 2000, the Company processed approximately 239,500 transactions totaling $70.2 million, compared to approximately 173,800 transactions totaling $50.3 million for the six months ended June 30, 1999. Revenues from processing property tax payments increased $457,000 to $1.0 million for the six months ended June 30, 2000 from $553,000 for the six months ended June 30, 1999, an increase of 86%. Revenues from processing fines for traffic violations increased $110,000 to $681,000 for the six months ended June 30, 2000 from $571,000 for the six months ended June 30, 1999, an increase of 19%. Revenues from processing fines for parking citations increased $70,000 to $208,000 for the six months ended June 30, 2000 from $138,000 for the six months ended June 30, 1999, an increase of 51%. Revenues from other transaction fees increased $20,000 to $218,000 for the six months ended June 30, 2000 from $198,000 for the six months ended June 30, 1999, an increase of 10%. The additional property tax, moving violation, and parking citation clients and increased brand awareness contributed to the increase in local transaction fees. Local transaction fees represented 11% of total revenues for the six months ended June 30, 2000 compared to 24% of total revenues for the six months ended June 30, 1999. Other Revenues. Other revenues increased $96,000 to $234,000 for the six months ended June 30, 2000 from $138,000 for the six months ended June 30, 1999. The increase from the comparable period in the prior fiscal year is related to two significant system sales during the first quarter of 2000. Other revenues represented 1% of total revenues for the six months ended June 30, 2000 compared to 2% of total revenues for the six months ended June 30, 1999. COST OF REVENUES Cost of Transaction Fees. Cost of transaction fees increased $11.0 million to $15.7 million for the six months ended June 30, 2000 from $4.7 million for the six months ended June 30, 1999, an increase of 234%. The largest component of cost of transaction fees, merchant discount fees, increased $10.0 million to $14.6 million for the six months ended June 30, 2000 from $4.6 million for the six months ended June 30, 1999, an increase of 217%. The cost of telecommunication charges for the Company's toll-free interactive telephone system increased $777,000 to $913,000 for the six months ended June 30, 2000 from $136,000 for the six months ended June 30, 1999, an increase of 571%. Other cost of transaction fees increased $108,000 to $138,000 for the six months ended June 30, 2000 from $30,000 for the six months ended June 30, 1999 primarily related to Internet costs incurred during the current fiscal period. Cost of transaction fees was 80% of total revenues for the six months ended June 30, 2000, compared to 78% for the six months ended June 30, 1999. The increase in cost of transaction fees as a percentage of revenues is due primarily to one-time telecommunication costs incurred during the recent period in preparation for the anticipated higher volume of federal and state tax payments during the first two weeks in April 2000 and higher volume of federal income tax payments processed, which has a lower gross profit margin than other services provided. Cost of Other Revenues. Cost of other revenues increased $78,000 to $99,000 for the six months ended June 30, 2000 from $21,000 for the six months ended June 30, 1999. The increase in other revenues is primarily attributable to the equipment cost associated with the two significant system sales during the first quarter of 2000. OPERATING EXPENSES Sales and Marketing. Sales and marketing expenses increased $6.9 million to $7.3 million for the six months ended June 30, 2000 from $434,000 for the six months ended June 30, 1999. This increase is primarily related to $4.8 million in advertising expenses incurred during the first and second quarter of 2000 to promote the Company's federal tax payment services and increase brand awareness. The increase is also attributable to amortization of $515,000 primarily for deferred stock-based compensation for options to purchase shares of the Company's common stock at exercise prices below their fair market value at the date of grant which were granted to the Company's sales and marketing employees in August, September, and November 1999. The increase in sales and marketing personnel from June 30, 1999 to June 30, 2000 and sales commission payables also contributed to the increase in sales and marketing expenses. Sales and marketing expenses represented 37% of total revenues for the six months ended June 30, 2000 compared to 7% for the six months ended June 30, 1999. Development Costs. Development costs increased $685,000 to $1.0 million for the six months ended June 30, 2000 from $319,000 for the six months ended June 30, 1999 The increase is primarily attributable to the increase in engineering personnel and related salary costs from June 30, 1999 to June 30, 2000 and consultants contracted to assist in the enhancement of the interactive voice response platform. Development costs represented 5% of total revenues for the six months ended June 30, 2000 compared to 5% for the six months ended June 30, 1999. General and Administrative. General and administrative expenses increased $14.3 million to $14.8 million for the six months ended June 30, 2000 from $543,000 for the six months ended June 30, 1999. $4.1 million of the increase relates to the one-time severance charge for the Company's former Chief Financial Officer, Brian W. Nocco and $5.6 million of the increase relates to the amortization of deferred stock-based compensation. The additional increase is primarily attributable to the enhancement of the Company's customer service department in preparation and handling of the increased volume of federal and state tax payments during the first two weeks of April 2000. Salary and travel expenses for the Company's general and administrative employees also increased due to the increase in headcount from June 30, 1999 to June 30, 2000. General and administrative expenses represented 76% of total revenues for the six months ended June 30, 2000 compared to 9% for the six months ended June 30, 1999. Depreciation and Amortization. Depreciation and amortization increased $537,000 to $619,000 for the six months ended June 30, 2000 from $82,000 for the six months ended June 30, 1999. The increase is primarily related to an increase in IVR equipment purchased during the first quarter of fiscal year 2000 in preparation for the higher volume of federal and state tax payments during the first two weeks of April 2000. The increase is also attributable to the additional office equipment and furniture and fixtures purchased during the Company's move to its new headquarters in May 2000. Depreciation and amortization represented 3% of total revenues for the six months ended June 30, 2000 compared to 1% for the six months ended June 30, 1999. Allocated Expenses from Related Parties. Related party expenses were $103,000 for the six months ended June 30, 2000. The Company did not utilize Imperial Bank's or Mr. Nelson's services during the six months ended June 30, 1999. OTHER INCOME (EXPENSE), NET Other income (expense), net consists of interest income, interest expense and other non-operating expenses. Other income, net increased to $2.2 million for the six months ended June 30, 2000 from $30,000 in other expenses, net for the six months ended June 30, 1999. This increase is directly related to higher interest income resulting from higher average cash balances during the recent period, as compared to the first two quarters of fiscal year 1999. INCOME TAXES The Company incurred operating losses during the period of its incorporation from September 30, 1999 through June 30, 2000. The Company has recorded a valuation allowance for the full amount of net deferred tax assets, as the future realization of the tax benefit is not currently likely. For the nine months ended September 30, 1999, Official Payments was a California limited liability company. Therefore, all tax operating losses were used by the members of the limited liability company on their respective corporate tax returns. LIQUIDITY AND CAPITAL RESOURCES In November 1999, the Company completed the initial public offering of its common stock and realized net proceeds from the offering of approximately $78.7 million. Prior to the offering the Company had financed its operations through private sales of common stock, with net proceeds of $1.2 million, and through bank and shareholder loans. As of June 30, 2000, the Company had $74.5 million in cash and investments, and $70.0 million in working capital. Net cash used in operating activities was $4.0 million and $509,000 for the six months ended June 30, 2000 and 1999, respectively. The cash used in operating activities for the six months ended June 30, 2000 was primarily the result of the Company's net loss offset by non-cash operating expenses (such as amortization of deferred stock-based compensation and depreciation) and an increase in accounts payable and accrued expenses due to improved cash management. The cash used in operating activities for the six months ended June 30, 1999 was primarily the result of the Company's net loss and a decrease in accounts receivable, accounts payable, and accrued expenses. Net cash provided from investing activities was $2.9 million for the six months ended June 30, 2000. During the first quarter of 2000, the Company increased its IVR equipment purchases in preparation of the higher volume of federal and state tax payments during the first two weeks of April 2000. Additionally, the Company increased its purchases of office equipment and furniture and fixtures during the Company's move to its new headquarters in May 2000. These expenditures were offset by the sale of short-term investments during the six months ended June 30, 2000. Net cash used in investing activities was $268,000 for the six months ended June 30, 1999. Cash used in investing activities primarily reflects purchases of property and equipment during that period. Net cash provided by financing activities was $1.9 million and $395,000 for the six months ended June 30, 2000 and 1999, respectively. The cash generated in fiscal year 2000 was primarily related to the exercise of stock options by one of the Company's directors (although the shares of the Company's common stock so purchased remain subject to a right of repurchase by the Company in accordance with the terms of the Company's 1999 Stock Incentive Plan), and borrowings against a sale-leaseback agreement for interactive voice response telephone system (IVR) equipment that was acquired in preparation for the higher volume of federal and income tax payments made during the first two weeks of April 2000. These cash inflows were offset by the repayment of capital lease agreements. The cash generated in fiscal year 1999 was primarily related to a $440,000 notes payable from the Company's stockholders. This amount was slightly offset by the repayment of capital leases. The Company expects to experience growth in its operating costs for the foreseeable future in order to execute its business plan, particularly in the areas of web development costs and sales and marketing. As a result, the Company estimates that these operating costs, as well as other planned expenditures, will constitute a significant use of cash. The Company believes that the current cash resources will be sufficient to meet its working capital and capital expenditures for the foreseeable future. YEAR 2000 IMPACT As of the date of this filing, the Company has not incurred any significant business disruptions as a result of Year 2000 issues. However, while no such occurrence has developed, Year 2000 issues that may arise related to key suppliers and service providers may not become apparent immediately. We have received assurances of Year 2000 compliance from key suppliers. The Company has received assurances from key service providers such as financial institutions and Imperial Bank (which provides transaction processing services and various employee benefits services for the Company) as to their Year 2000 readiness. The Company will continue to monitor its own systems and business partners to identify and address any potential risk situations related to the Year 2000. No assurance can be provided that the Company will not be adversely affected by these suppliers and service providers due to noncompliance in the future. SEASONALITY AND FLUCTUATION OF QUARTERLY RESULTS The Company has generally experienced fiscal quarter over fiscal quarter revenue growth with some seasonal fluctuations, primarily in the second and fourth quarters. The sharp increase in revenues in the second quarter is due to processing personal federal and state income tax payments specifically in the month of April. The fluctuations in the second and fourth quarter also relate to an increase in revenues from processing property tax payments, which are generally collected twice a year - in April and December. We expect that results for the second quarter of future years will continue to be impacted by the April 15th deadline for paying personal federal and state income taxes. Since the Company does not process balance-due and extension personal federal income tax payments in the third quarter, revenues in that quarter are expected to be lower than in the second quarter. The Company anticipates that its operating expenses will continue to increase due to the expansion of its sales force in order to obtain additional state and municipal clients and the continuous marketing campaign to make consumer users aware of its electronic payment option. If revenues in any quarter do not increase correspondingly with increases in expenses, the Company's results for that quarter would be materially and adversely affected. In addition, as of June 30, 2000, the Company had $25.8 million in deferred stock-based compensation. The Company intends to amortize $25.2 million of this amount on a straight-line basis over the remaining of the three-year vesting period. The Company intends to amortize the remaining $594,000 on a straight-line basis over the remaining of the one-year vesting period. For the foregoing reasons, the Company believes that comparisons of its quarterly operating results are not necessarily meaningful and that its operating results in any particular quarter should not be relied upon as necessarily indicative of future performance. In addition, it is possible that in some future quarters the Company's operating results will be below the expectations of research analyst and investors, and in that case, the price of the Company's common stock is likely to decline. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio. The Company does not use derivative financial instruments in its investment portfolio. The primary objective of the Company's investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified investments, consisting primarily of investment grade securities. Due to the nature of the Company's investments, the Company believes that there is no material risk exposure. All investments are carried at market value, which approximates cost. The table below represents principal amounts and related weighted-average interest rates by year of maturity for the Company's investment portfolio.
FY2000 FY2001 FY2002 FY2003 FY2004 Thereafter Total ------ ------ ------ ------ ------ ---------- ----- Money market fund and cash $ 2,445 $ - $ - $ - $ - $ - $ 2,445 Average interest Rate 3.45% 0.00% 0.00% 0.00% 0.00% 0.00% Investments $ 72,064 $ - $ - $ - $ - $ - $ 72,064 Average interest rate 6.63% 0.00% 0.00% 0.00% 0.00% 0.00% --------- -------- ------- -------- ------- -------- ------- Total cash and investments $ 74,509 $ - $ - $ - $ - $ - $ 74,509 ======== ======= ======= ======= ======= ======== ========
PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company currently is not involved in any material legal proceedings. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On November 29, 1999, the Company completed the initial public offering of its common stock. The managing underwriters in the offering were Donaldson, Lufkin, & Jenrette, CIBC World Markets and DLJdirect Inc. The shares of the common stock sold in the offering were registered under the Securities Act of 1933, as amended, on a Registration Statement on Form S-1 (No. 333-87325). The Securities and Exchange Commission declared the Registration Statement effective on November 22, 1999. The offering commenced on November 23, 1999 and was completed on November 29, 1999 after the Company had sold all of the 5,750,000 shares of common stock registered under the Registration Statement (including 750,000 shares sold in connection with the exercise of the underwriters' over-allotment option). The initial public offering price was $15.00 per share, resulting in gross proceeds from the initial public offering of $86.2 million. The Company paid a total of $6.0 million in underwriting discounts and commissions and approximately $1.5 million has been incurred for costs and expenses related to the offering. None of the costs and expenses related to the offering were paid directly or indirectly to any director or officer of the Company or their associates, persons owning 10 percent or more of any class of equity securities of the Company or an affiliate of the Company. After deducting the underwriting discounts and commissions and the offering expenses, the estimated net proceeds to the Company from the offering were approximately $78.7 million. The net offering proceeds have been used to make the following payments: approximately $2.0 million for the purchase and installation of computer equipment to expand transaction processing capabilities and approximately $4.8 million for direct marketing and promotional activities. None of these costs or expenses were paid directly or indirectly to any director or officer of the Company or their associates, persons owning 10 percent or more of any class of equity securities of the Company or an affiliate of the Company. In the future, the Company may also use a portion of its net proceeds to acquire or invest in businesses, technologies, products or services (which amount has not been specifically allocated as of the date hereof). Unused proceeds are invested in short-term investments. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the six months ended June 30, 2000, there were no matters submitted to a vote of security holders through a solicitation of proxies or otherwise. ITEM 5. OTHER INFORMATION On August 9, 2000, the Company entered into an Employment Agreement with Edward J. DiMaria, pursuant to which Mr. DiMaria will serve as the Company's Chief Financial Officer. A copy of this employment agreement is included as an exhibit to this Report. Mr. DiMaria's employment with the Company is expected to begin in late August 2000. On July 17, 2000, the Company entered into a contract with the State of Arkansas to accept telephone and Internet tax payments for balance-due, estimated, extension, and sales taxes. On June 2, 2000, the Company's Board of Directors approved and adopted the Company's 2000 Stock Incentive Plan (the "2000 Plan"), pursuant to which up to the Company may from time to time grant certain employees of the Company restricted shares of, and/or options to purchase, the Company's common stock. Up to 1,250,000 shares of the Company's common stock are available for issuance under the 2000 Plan. The 2000 Plan is administered by the Compensation Committee of the Board of Directors. Directors and executive officers of the Company are not eligible to participate in the 2000 Plan. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Employment Agreement, dated as of August 9, 2000, between Edward J. DiMaria and the Company. 10.2 Form of Incentive Stock Option Agreement used by the Company under the Company's 1999 Stock Incentive Plan (also referenced as Annex A to Exhibit 10.1 hereto). 10.3 Form of Non-Qualified Stock Option Agreement used by the Company under the Company's 1999 Stock Incentive Plan (also referenced as Annex B to Exhibit 10.1 hereto). 27.1 Financial Data Schedule. (b) Reports on Form 8-K No current reports on Form 8-K were filed during the quarter covered by this report. SIGNATURES In accordance with the requirements of the Securities Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, there unto duly authorized. OFFICIAL PAYMENTS CORPORATION August 11, 2000 By: /s/ Thomas R. Evans ---------------------------- Thomas R. Evans Chairman of the Board and Chief Executive Officer August 11, 2000 By: /s/ Hyunjin F. Lerner ---------------------------- Hyunjin F. Lerner Controller (Chief Accounting Officer) INDEX TO EXHIBITS Exhibit No. Description - ------- ----------- 10.1 Employment Agreement, dated as of August 9, 2000, between Edward J. DiMaria and the Company. 10.2 Form of Incentive Stock Option Agreement used by the Company under the Company's 1999 Stock Incentive Plan (also referenced as Annex A to Exhibit 10.1 hereto). 10.3 Form of Non-Qualified Stock Option Agreement used by the Company under the Company's 1999 Stock Incentive Plan (also referenced as Annex B to Exhibit 10.1 hereto). 27.1 Financial Data Schedule EX-10 2 0002.txt EXHIBIT 10.1 - EMPLOYMENT AGREEMENT EXHIBIT 10.1 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is made as of August 9, 2000, by and between Official Payments Corporation, a Delaware corporation (the "Company"), and Edward J. DiMaria ("Executive"). WHEREAS, the Company desires to employ Executive to serve as its Chief Financial Officer on the terms and conditions herein provided; and WHEREAS, Executive desires to become an employee of the Company on the terms and conditions herein provided. NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Employment. Subject to the terms and conditions herein provided, the Company hereby employs Executive as Chief Financial Officer of the Company, reporting directly to the Chief Executive Officer. During the Employment Period (as hereinafter defined), Executive shall faithfully and diligently perform his duties under this Agreement and shall use his best efforts to promote the interests of the Company. 2. Term. Subject to the terms and conditions hereof, the initial term of employment of Executive by the Company under this Agreement shall be for the period commencing on September 11, 2000 or other date mutually agreed upon by the parties in writing (the "Commencement Date") and expiring when terminated as provided in Section 8 hereof. For purposes hereof, such period is referred to herein as the "Employment Period." 3. Executive's Obligations. Executive shall at all times comply with and be subject to the Company's policies, procedures, directives and regulations as established by the Company from time to time. Executive accepts such employment, responsibility and authority and agrees to perform the services of Chief Financial Officer of the Company and such other services as shall from time to time be reasonably assigned to him and agrees to devote all of his working time, skill and attention to such services. Executive shall not engage in any other business activity. Notwithstanding the foregoing, the parties agree that Executive may continue any educational, charitable and community activities (including membership on boards of educational, charitable or community organizations) in which he is engaged on the date hereof and may engage in other educational, charitable and community activities (including membership on the boards of educational, charitable or community organizations) and serve on the boards of directors of, or as an advisor to, other companies (including Conek Systems, Inc. and Best Friends Pet Care, Inc., in the latter case while such company is pursuing a sale or other recapitalization transaction) that do not compete (in the sole discretion of the Company's Board of Directors) with the Company, provided that such activities do not materially interfere with the performance of his duties to the Company. 4. Executive's Compensation and Benefits. During the Employment Period, as full compensation to the Executive for his performance of the services hereunder and for his acceptance of the responsibilities described herein, the Company agrees to pay the Executive, and the Executive agrees to accept, the following salary and other benefits: (a) Base Salary. From the Commencement Date, the Company shall pay Executive a salary at the annual rate of $195,000 (as such may be increased from time to time in the sole discretion of the Compensation Committee of the Company's Board of Directors, the "Base Salary"). The Base Salary shall be payable in accordance with the Company's standard payment policy, less any amounts required to be withheld by the Company from such Base Salary pursuant to the Other Benefit Plans (as hereinafter defined) and applicable laws and regulations. (b) Signing Bonus. On the Commencement Date, the Company shall make a one-time payment to Executive of $60,000. (c) Bonus. Executive shall be eligible to receive annual bonuses of up to 50% of the Base Salary (each a "Bonus") at the discretion of, in the amounts, at the times and based upon certain written performance criteria determined by, the compensation committee of the Company's Board of Directors (the "Compensation Committee"). Executive agrees that there can be no assurance that the Compensation Committee will grant a Bonus in any year; provided, however, that Executive shall receive a guaranteed minimum Bonus for the year immediately following the Commencement Date of not less than $35,000 (the "Minimum First Year Bonus"), which shall be paid not later than the one-year anniversary of the Commencement Date. (d) Long-Term Incentives. On the Commencement Date, Executive will be granted options (the "Executive Options") to purchase 200,000 shares of the common stock, par value $.01 per share, of the Company (the "Common Stock"), subject to (i) the terms and conditions set forth in the forms of Option Agreement annexed hereto as Annexes A and B (collectively, the "Option Agreements") and (ii) with respect to not more than 35,000 of the aforementioned 200,000 shares underlying the Executive Options, to the extent shares of Common Stock are not available for issuance pursuant to the exercise of stock options under the Company's 1999 Stock Incentive Plan, the stockholders of the Company approving an amendment to such plan increasing the number of shares of Common Stock available for issuance under such plan (the "Option Plan Amendment"). In connection with the foregoing, to the maximum extent permitted by Section 422 of the Internal Revenue Code of 1986, as amended, the Executive Options shall be incentive stock options, and the remainder of the Executive Options shall be non-qualified stock options. To the extent the Company's stockholders do not approve the Option Plan Amendment and the Executive is therefore unable to be granted a portion of the Executive Options, the parties shall negotiate in good faith to formulate an alternative compensation arrangement intended to provide Executive with substantially equivalent future economic value as represented by the Executive Options unable to be granted; provided, however, that in the event the parties are not able to agree upon such an alternative compensation arrangement prior to October 31, 2000, Executive may, prior to November 15, 2000, terminate the Employment Period on account of such failure to agree and receive the benefits described in Section 8(a) hereof (without duplication of benefits if Executive terminates the Employment Period pursuant to the proviso in the last sentence of Section 4(e) hereof), and notwithstanding anything in this Agreement to the contrary, neither party shall have any other obligations to the other hereunder upon and following such termination (except for obligations pursuant to Sections 5, 6, 8(g) and 10 of this Agreement). (e) Additional Performance-Based Incentive Options. The Company shall grant Executive options to purchase an additional 50,000 shares of Common Stock (the "Additional Options") on the earliest to occur of the following dates (such earliest date, the "date of grant" for purposes of the Option Agreements): (i) the one-year anniversary of the Commencement Date (provided that Executive is still employed by the Company on such date) or (ii) the date as of which the Compensation Committee, in its sole discretion, shall have determined that Executive has satisfied the specific performance goals established (for the purposes of this Section 4(e) and Executive's employment under this Agreement) by the Compensation Committee (upon consultation with Executive) within 60 days of the Commencement Date. Any options granted pursuant to the preceding sentence shall (i) be subject to the terms and conditions of the Option Agreements and the stockholders of the Company approving the Option Plan Amendment and (ii) have an exercise price equal to the lower of (x) the exercise price of the Executive Options and (y) the fair market value of the Common Stock on the date on which the Additional Options are granted. In connection with the foregoing, to the maximum extent permitted by Section 422 of the Internal Revenue Code of 1986, as amended, the Additional Options shall be incentive stock options, and the remainder of the Additional Options shall be non-qualified stock options. To the extent the Company's stockholders do not approve the Option Plan Amendment and the Executive is therefore unable to be granted all or a portion of the Additional Options, the parties shall negotiate in good faith to formulate an alternative compensation arrangement intended to provide Executive with substantially equivalent future economic value as represented by the Additional Options; provided, however, that in the event the parties are not able to agree upon such an alternative compensation arrangement prior to October 31, 2000, Executive may, prior to November 15, 2000, terminate the Employment Period on account of such failure to agree and receive the benefits described in Section 8(a) hereof (without duplication of benefits if Executive terminates the Employment Period pursuant to the proviso in the last sentence of Section 4(d) hereof), and notwithstanding anything in this Agreement to the contrary, neither party shall have any other obligations to the other hereunder upon and following such termination (except for obligations pursuant to Sections 5, 6, 8(g) and 10 of this Agreement). (f) Other Benefit Plans. Subject to eligibility requirements, and to the extent permitted by law, Executive shall be entitled to participate in any and all employee benefit plans (including, but not limited to, retirement, life insurance, medical, dental, disability and savings plans) established or maintained by the Company from time to time for the benefit of its employees (or executives) in general (collectively, the "Other Benefit Plans"). (g) Vacation. Executive shall be entitled to four weeks paid vacation per annum. 5. Reasonable Expenses. The Company will reimburse Executive for all reasonable business expenses, including travel and lodging, which are properly incurred by him in the performance of his duties hereunder, upon presentation of proper vouchers therefor and in accordance with such limitations and reporting requirements established from time to time by the Company for such reimbursements. 6. Assistance. Executive shall make himself reasonably available, upon the request of the Company, to testify or otherwise assist in litigation, arbitration, or other disputes involving the Company, or any of its officers, directors, employees, subsidiaries (whether or not in existence on the date hereof, for all purposes of this Agreement) or affiliates, during and after the Employment Period. 7. Covenant Not to Compete; Nonsolicitation. (a) Non-Compete. During the Employment Period and for a period of one year after the termination thereof (the "Non-Compete Period"), except in the proper performance of his services as an officer and employee of the Company, Executive shall not, either individually or as a partner, joint venturer, consultant, shareholder, member or Representative (as hereinafter defined) of another Person (as hereinafter defined) or otherwise, directly or indirectly, participate in, engage in, or have a financial or management interest in, promote or assist any other Person in any business operation or enterprise if such business operation or enterprise engages, or would engage, in a Restricted Business (as hereinafter defined) in a Restricted Area (as hereinafter defined); provided, however, that Executive may own up to one percent of the outstanding equity securities of any Person. For purposes of this Agreement: "Person" means an individual, partnership, limited liability company, joint venture, corporation, trust, unincorporated organization or division or operating group of any of the foregoing, a government or department or agency thereof, or any other entity. "Representative" means any officer, director, principal, agent, employee, consultant or other duly authorized representative of a Person. "Restricted Business" means any business involved in the processing of payments to government entities or any other business in which the Company is actively engaged on the date of termination of the Employment Period. "Restricted Area" means any country in which the Company or a subsidiary of the Company conducts a Restricted Business on the date of termination of the Employment Period. (b) Non-Solicitation. During the Non-Compete Period, Executive shall not, directly or indirectly (i) employ or seek to employ any person who is at the date on which the Employment Period is terminated (the "Termination Date"), an officer, general manager or director or equivalent or more senior level employee of the Company, its subsidiaries or affiliates, or otherwise solicit, encourage, cause or induce any such employee of the Company, its subsidiaries or affiliates to terminate such employee's employment with the Company, its subsidiaries or affiliates for the employment of another entity (including for this purpose the contracting with any Person who was an independent contractor (excluding consultant) of the Company, its subsidiaries or affiliates) during such period); or (ii) take any action that would interfere with the relationship of the Company, its subsidiaries or its affiliates with their respective clients, suppliers and franchisees, except to the extent permitted by the Board of Directors. (c) Enforcement. Executive agrees that all restrictions and agreements contained in this Section 7 (including, without limitation, those relating to duration and restricted territory) are necessary and fundamental to the protection of the business of the Company and are reasonable and valid. Executive agrees that the remedy at law for any breach of this Agreement will be inadequate, and that the damages flowing from such breach are not readily susceptible to being measured in monetary terms. Accordingly, Executive agrees that upon breach of this Section 7, the Company shall be entitled to immediate injunctive relief and may obtain a temporary order restraining any threatened further breach. Nothing in this Agreement shall be deemed to limit the Company's remedies at law or in equity for any breach by Executive of any of the provisions of this Agreement that may be pursued or availed of by the Company. Nothing contained herein shall be construed as prohibiting the Company from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of damages from Executive. Although the restrictions contained in Sections 7(a) and (b) are considered by the parties to be fair and reasonable under the circumstances, it is recognized that restrictions of such nature may fail for technical reasons, and accordingly, it is hereby agreed that if any of such restrictions shall be adjudged by a court of competent jurisdiction to be void or unenforceable for whatever reason, but would be valid if part of the wording thereof were deleted, the period thereof reduced or the area dealt with thereby reduced in scope, the restrictions contained in Sections 7(a) and (b) shall be enforced to the maximum extent permitted by law, and the parties consent and agree that such scope or wording may be accordingly judicially modified in any proceeding brought to enforce such restrictions. Notwithstanding that Executive's employment hereunder may be terminated as provided in Section 8, this Section 7 shall survive such termination. 8. Termination. (a) Termination by the Company Without Cause. The Company may immediately upon written notice to Executive terminate the Employment Period for any reason other than the reasons specified in Sections 8(b), 8(c) and 8(d). Upon termination of the Employment Period pursuant to this Section 8(a), neither then Company nor Executive, as the case may be, shall have liability or obligation to the other in respect of this Agreement, except as provided in Sections 8(g) and 11(m) and as set forth below: (i) within seven days of the Termination Date, the Company shall pay Executive a lump sum amount equal to the Base Salary; (ii) In the event the Termination Date occurs prior to the first anniversary of the Commencement Date, within seven days of the Termination Date, the Company shall pay Executive the Minimum First Year Bonus; (iii) For the one-year period following the Termination Date, the Company shall continue Executive's participation in the Other Benefits Plans (as hereinafter defined), to the extent Executive had participated in such benefit plans as of the Termination Date; provided, however, that to the extent Executive's participation in the Other Benefit Plans after the Termination Date is not permitted under the terms of such plans, the Company shall (at its sole discretion) provide Executive with equivalent benefits or cash payments in consideration thereof; and (iv) In the event the Termination Date occurs prior to the first anniversary of the Commencement Date, that number of the Executive Options shall immediately vest as equals the number of options which otherwise would have vested on the first anniversary of the Commencement Date under the terms of the Option Agreements if Executive were still employed with the Company and all other unvested Executive Options and the Additional Options (if granted prior to the Termination Date) shall be immediately cancelled and be of no further force and effect; provided, however, that the foregoing shall take into account the previous exercise by Executive of any non-qualified options (deemed to be part of the Executive Options) for shares of the Common Stock (such shares, "Non-Qualified Option Shares"), in which case, upon the Termination Date the Company's right of repurchase shall immediately lapse with respect to that number of the Non-Qualified Option Shares as otherwise would have lapsed on the first anniversary of the Commencement Date under the terms of the applicable Option Agreement if the Executive were still employed with the Company. (b) Death. If Executive dies during the Employment Period, the Employment Period shall automatically terminate and all obligations of the parties hereunder shall terminate effective as of the time of death, except for obligations under the Other Benefit Plans in which Executive participates as of the time of death, for which the terms of such plans shall govern, as the case may be. (c) Disability. If Executive becomes Disabled (as hereinafter defined) during the Employment Period, the Company shall be entitled to terminate his employment and the Employment Period upon written notice to Executive or a person acting on his behalf. In the event of such termination, Executive shall be released from any duties hereunder (except as otherwise provided in this Agreement), and for the one-year period following such termination, the Company shall be required to pay Executive the Base Salary then in effect (the "Salary Continuation Period"). In such event, Executive shall continue to participate during the Salary Continuation Period in the Other Benefit Plans in which he participates as of the Termination Date. For the purposes of this Agreement, "Disabled" means mental or physical impairment or incapacity rendering Executive substantially unable to perform his duties under this Agreement for a period of longer than 120 days out of any 360-day period during the Employment Period. A determination of whether Executive is Disabled shall be made by the Company in its sole discretion upon its own initiative after obtaining certification from a duly licensed physician or upon request of Executive or a person acting on his behalf. (d) Termination by the Company With Cause. The Company may terminate the Employment Period effective immediately upon written notice to Executive in the event of any of the following: (i) Executive's material breach of any material term or condition of this Agreement, such breach continuing unremedied for 30 days after written notice thereof from the Company describing the acts constituting the breach and requesting that they be remedied; (ii) Executive's (A) personal dishonesty, fraud, misappropriation, willful misconduct or breach of fiduciary duty, in each such case materially harmful to the Company's property, personnel or business operations, or materially damaging to the Company's relationships with its customers, clients, suppliers or employees or materially detrimental to the goodwill of the Company; or (B) failure to perform substantially the duties of his employment or his other obligations hereunder, or any continuing action by Executive materially detrimental to the goodwill of the Company or materially damaging to the Company's relationships with its customers, clients, suppliers or employees, which non-performance or actions remain unremedied for 30 days after written notice thereof from the Company describing in reasonable detail the non-performance or actions and requesting that they be remedied; (iii) Executive's pleading guilty or no-contest to, or conviction of, a felony or a crime involving moral turpitude or fraud; (iv) Executive's misappropriation (or attempted misappropriation) of the Company's funds or property or of a business opportunity of the Company, including, without limitation, attempting to secure or securing any personal profit in connection with any transaction entered into on behalf of the Company; (v) Executive's conviction of any criminal offense involving dishonesty or breach of trust or money laundering, or Executive's agreement to enter into a pretrial diversion or similar program in connection with a prosecution for such offense; (vi) Executive's excessive drunkenness, sale or use of illegal drugs or abuse of any controlled substance; or (vii) Executive's excessive absenteeism not related to Executive's illness, which absenteeism remains unremedied for 30 days after written notice by the Company requesting that it be remedied. Upon termination of the Employment Period pursuant to this Section 8(d), the Company will not have any liability to Executive in respect of this Agreement, including, without limitation, claims for damages or liability to the Company by Executive for compensation, severance payments and other benefits which otherwise would have accrued to Executive hereunder after termination; provided, however, that all compensation, benefits and reimbursements accrued through the Termination Date shall be paid to Executive at the times normally paid by the Company. (e) Executive's Voluntary Termination. Executive may terminate the Employment Period upon 30 days written notice to the Company, and upon such termination, the provisions of the last paragraph of Section 8(d) shall apply. Upon termination of the Employment Period pursuant to this Section 8(e), the Company will not have any liability to Executive in respect of this Agreement, including, without limitation, claims for damages or liability to the Company by Executive for compensation, severance payments and other benefits which otherwise would have accrued to Executive hereunder after termination; provided, however, that all compensation, benefits and reimbursements accrued through the Termination Date shall be paid to Executive at the times normally paid by the Company. Executive agrees, in connection with the termination of the Employment Period pursuant to this Section 8(e), not to disclose publically his intent to resign. (f) Termination by Executive for Good Reason. Executive may terminate the Employment Period at any time for Good Reason (as hereinafter defined). For the purposes hereof, "Good Reason" shall mean (i) a material diminution of Executive's authority, duties and responsibilities as provided in Section 3, (ii) a reduction in or failure to pay timely the Base Salary, (iii) the appointment of any person to a superior executive position in the Company's finance department or a change in Executive's direct reporting status to an officer of the Company other than the Chief Executive Officer (or equivalent), (iv) any relocation of the Company's corporate headquarters to a place 90 miles or more outside New York City, (v) the Company's breach of any material term or condition of this Agreement, and (vi) any termination of the Employment Period within the thirty days immediately following the expiration of the three-month period following a Change of Control (as hereinafter defined); provided, however, that each of the reasons set forth in clauses (i) through (vi) above shall be identified in written notice thereof delivered by Executive to the Company specifying the nature of the reason and the Company shall have been afforded a period of 30 days to respond to such notice and cure the condition set forth in such notice if capable of being cured. If Executive terminates this Agreement for Good Reason, the provisions of Section 8(a) shall apply. For purposes of this Agreement, "Change of Control" shall mean: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and subsidiaries, taken as a whole to any Person other than to the Company or one of its wholly-owned subsidiaries; (ii) the Company consolidates with or merges into another Person (other than a subsidiary) or any Person (other than a subsidiary) consolidates with, or merges into, the Company, in any such event pursuant to a transaction in which the outstanding shares of common stock of the Company are changed into or exchanged for cash, securities or other property, other than any such transaction where the holders of the shares of common stock of the Company immediately prior to such transaction own, directly or indirectly, not less than a controlling interest in the voting equity of the surviving or resulting Person immediately after such transaction; (iii) the consummation of any transaction or series of transactions (including. without limitation, any merger or consolidation), as a result of which any Person (other than a subsidiary of the Company) becomes the beneficial owner (as such term is defined in Rule l3d-3 and Rule l3d-5 under the Securities Exchange Act of 1934, as amended), directly or indirectly, of fifty percent (50%) or more of the voting equity of the Company; or (iv) a change in the composition of the Company's Board of Directors, as a result of which fewer than a majority of the incumbent directors are directors who either (A) had been directors of the Company on the Commencement Date or the date 24 months prior to the date of the event that may constitute a Change of Control (the "original directors") or (B) were elected, or nominated for election, to the Company's Board of Directors with the affirmative votes of at least a majority of the aggregate of the original directors who were still in office at the time of the election or nomination and the directors whose election or nomination was previously so approved. Notwithstanding the foregoing, the term "Change of Control" shall not include any transaction or series of transactions with or to (i) any affiliate of the Company, (ii) any entity or successor entity in which the Company holds at least a majority of the total voting power of such entity or successor entity (or retains the right or ability by voting power, contract or otherwise to elect or designate for election a majority of the members of the board of directors or other governing body of such entity or successor entity), (iii) any entity or successor entity in which no person or entity holds a greater percentage of the total voting power of such entity or successor entity than the Company's percentage voting interest in such entity or successor entity or (iv) any entity formed at the direction of the Company in connection with obtaining financing for the Company or any of its subsidiaries under an arrangement that provides the Company with an option to reacquire its assets or other properties or other similar financing arrangement. (g) Applicability of Section 7. Executive acknowledges and agrees that in the event the Employment Period is terminated pursuant to Section 4(d), 4(e) or 8 (other than Section 8(b)), and notwithstanding the termination of this Agreement in connection therewith, he shall continue to be subject to the provisions of Section 7 of this Agreement. 9. Insurance. The Company will have the right at its own cost and expense to apply for and secure in its own name, or otherwise, life, health or accident insurance or any or all of them covering Executive, and Executive agrees to submit to the usual and customary medical examination and otherwise to cooperate with the Company in connection with the procurement of any such insurance, and any claims thereunder. 10. Confidentiality; Books and Records; Company Property. Except in accordance with the provisions of this Agreement, during the Employment Period and thereafter, Executive shall keep secret and retain in strictest confidence, and shall not use for the benefit of Executive or others, all confidential matters and affairs relating to the Company. Upon any termination of this Agreement, Executive shall promptly deliver to the Company all confidential information theretofore supplied to him, and each copy thereof, whether in his possession or otherwise available to him, and shall certify in writing to the Company that all analyses, studies and other documents that discuss or analyze the business of the Company have been destroyed. All papers, books and records of every kind and description relating to the business and affairs of the Company, whether or not prepared by Executive, and all property owned by the Company shall be the sole and exclusive property of the Company and Executive shall surrender them to the Company upon request, during and after the Employment Period. 11. Miscellaneous. (a) Notices. All notices, requests, demands and other communications which are required to be or may be given under this Agreement to any of the other parties shall be in writing and shall be deemed to have been duly given (i) upon delivery in person, (ii) the day following dispatch by a recognized overnight courier service (such as Federal Express or UPS, etc.), (iii) upon facsimile transmission (with written confirmation and copy by first class mail), or (iv) five days after dispatch by certified or registered first class mail, postage prepaid, return receipt requested, to the party to whom the same is so given or made: If to the Company, addressed to: Official Payments Corporation Three Landmark Square Stamford, CT 06901-2501 Facsimile: (203) 356-0303 If to Executive, addressed to: Edward J. Dimaria 6 Hawley Lane Monroe, CT 06468 Facsimile: (203) 261-7318 (b) Amendments. This Agreement cannot be altered or otherwise amended except pursuant to an instrument in writing signed by each of the parties. (c) Assignment. Executive acknowledges that the services required of Executive hereunder are personal and that Executive may not assign this Agreement or any rights or duties under this Agreement. The Company may not assign or otherwise transfer this Agreement to any other entity without the prior written consent of Executive, which consent shall not be unreasonably withheld. (d) Entire Agreement. This Agreement contains the entire agreement between the parties with respect to the transactions contemplated herein and supersedes all previous written or oral negotiations, commitments and understandings. (e) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. (f) Headings. All headings are inserted for convenience of reference only and shall not affect the meaning or interpretation of any such provisions or of this Agreement, taken as an entirety. (g) Severability. If and to the extent that any court of competent jurisdiction holds any provision (or any part thereof) of this agreement to be invalid or unenforceable, such holding shall in no way affect the validity or enforceability of the remainder of this Agreement, but shall be confined in its operation to the jurisdiction in which made and to the provisions of this Agreement directly involved in the controversy in which such judgment shall have been rendered. (h) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to the conflicts of laws principles thereof. (i) Binding Effects. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, legal representatives and assigns. (j) Acquisitions, Mergers, Etc. Nothing herein contained shall be construed to prevent or limit any acquisition, merger, consolidation, reorganization or other transaction affecting the structure of the Company. (k) Representations, Warranties and Covenants. Executive hereby covenants, warrants and represents that (i) the execution of this Agreement and the discharge of his obligations hereunder will not breach or conflict with any other contract, agreement or understanding between Executive and any other party or parties; (ii) there are no agreements or arrangements, whether written or oral, in effect which would prevent Executive from rendering services to the Company during the term of this Agreement; (iii) Executive has not made and will not make any commitment to do any act in conflict with this Agreement; (iv) upon due execution and delivery of this Agreement by the Company, this Agreement constitutes a valid and legally binding obligation of Executive, enforceable against him in accordance with its terms, subject to (A) the effect of bankruptcy, insolvency, fraudulent conveyance and other similar laws relating to or affecting creditors' rights generally or (B) the availability of equitable remedies; and (v) the terms of this Agreement have been fully explained to him, that he understands the nature and extent of the rights and obligations provided under this Agreement, and that he has been given the opportunity to be represented by legal counsel in the negotiation and preparation of this Agreement. Executive understands and agrees that any breach of the representations or warranties in the preceding sentence that results in Executive being prohibited from performing his duties under this Agreement will constitute a material breach for purposes of Section 8(d)(i) of this Agreement, and on or at any time after it is determined that Executive is so prohibited, the Company will be permitted to terminate Executive's employment pursuant to Section 8(d). The Company hereby covenants, warrants and represents that (i) the execution of this Agreement and the discharge of its obligations hereunder will not breach or conflict with any other contract, agreement or understanding between the Company and any other party or parties, (ii) the execution and delivery of this Agreement have been duly and validly authorized by the Company; and (iii) upon due execution and delivery of this Agreement by Executive, this Agreement constitutes a valid and legally binding obligation of the Company, enforceable against it in accordance with its terms, subject to (A) the effect of bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws relating to or affecting creditors' rights generally or (B) the availability of equitable remedies. (l) Waiver. No consent or waiver, express or implied, by any party to or of any breach or default by another party in performance by the breaching party of its obligations under this Agreement shall be deemed or construed to be a consent or waiver to or of any breach or default by the breaching party in the performance by such breaching party of any other obligations of such breaching party under this Agreement. Failure on the part of any party to object to or complain of any act or failure to act of any of the other parties or to declare any of the other parties in default shall not constitute a waiver of any right or remedy or the ability to object or complain or to declare any default at any time in the future. (m) Survival. The provisions of Sections 5, 6, 7, 8, 10 and 11 shall survive termination of this Agreement. (n) Legal Fees. Each party hereto will be responsible for its own legal fees and costs of counsel in connection with negotiation and preparation of this Agreement, or any proceedings resulting herefrom. (o) Withholding Taxes. The Company may directly or indirectly withhold from any payments under this Agreement all federal, state, municipal or other taxes that shall be required pursuant to any law or governmental regulation. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. OFFICIAL PAYMENTS CORPORATION By: /s/ Thomas R. Evans _______________________________________ Thomas R. Evans Chairman and Chief Executive Officer /s/ Edward J. DiMaria ___________________________________________ Edward J. DiMaria EX-10 3 0003.txt EXHIBIT 10.2 - FORM OF ISO AGREEMENT EXHIBIT 10.2 OFFICIAL PAYMENTS CORPORATION 1999 STOCK INCENTIVE PLAN FORM OF INCENTIVE STOCK OPTION AGREEMENT - - ___________________________________________ _____ ______ _______ Name of Option Recipient Social Security Number ______________________________________________________________________________ Street Address _______________________ _______________________________ ___________________ City State Zip This Incentive Stock Option Agreement is intended to set forth the terms and conditions on which an Incentive Stock Option has been granted under the Official Payments Corporation 1999 Stock Incentive Plan (the "Plan"). Set forth below in Table I are the specific terms and conditions applicable to this Incentive Stock Option (this "Option") and attached hereto as Exhibit A are this Option's general terms and conditions. - ------------------------------------------------------------------------------- TABLE I =============================================================================== TERMS OF INCENTIVE STOCK OPTION GRANT =============================================================================== Date of Grant: Class of Optioned Shares:* Common No. of Optioned Shares:* Type of Option: Incentive Stock Option Exercise Price Per Share:* $ Earliest Exercise Date: ============================================================================ VESTING SCHEDULE ============================================================================ VESTING SCHEDULE FOR OPTION: This Option shall become vested and exercisable on the respective dates set forth on Schedule I hereto, but only if the option recipient is employed by Official Payments Corporation on such dates. Option Expiration Date:* ============================================================================ *Subject to adjustment as provided in the Plan and Exhibit A hereto. By signing where indicated below, Official Payments Corporation (the "Company") confirms the grant of this Incentive Stock Option with respect to the shares of its common stock, par value $0.01 per share ("Common Stock"), identified above, upon the specified terms and conditions, and the option recipient acknowledges receipt of a copy of the Plan and this Incentive Stock Option Agreement (including Exhibit A and Schedule I) and agrees to observe and be bound by the terms and conditions set forth therein and herein. OFFICIAL PAYMENTS CORPORATION OPTION RECIPIENT By ____________________________________ _______________________________ Name: Thomas R. Evans Name of Recipient Title: Chairman and Chief Executive Officer Exhibit A OFFICIAL PAYMENTS CORPORATION 1999 STOCK INCENTIVE PLAN INCENTIVE STOCK OPTION AGREEMENT General Terms and Conditions Section 1. Incentive Stock Option. The Company intends this Option to be an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986 ("Code") and the Plan. In the event that all (or a portion) of this Option fails to qualify as an "incentive stock option" under Section 422 of the Code, it shall be treated as a Non-Qualified Stock Option. Section 2. Option Term. (a) You shall have the right to exercise all or any portion of the Option at any time during the period (the "Option Term") commencing on the date the Option becomes exercisable in accordance with the vesting schedule specified in Table I on the first page of this Agreement and ending on the earliest to occur of the "Option Expiration Date" set forth in Table I and any of the dates set forth in clauses (i) through (iv) of Section 6.4(c) of the Plan. Notwithstanding the foregoing, the Option shall become immediately exercisable (i) upon the termination of your employment with the Company as a result of your death or Disability (as defined below), (ii) upon the occurrence of a Change of Control of the Company, or (iii) if your employment with the Company has been previously terminated (other than due to a Termination for Cause), upon the Company entering into, within 90 days following the date of such termination, a definitive agreement which, if consummated, would result in a Change of Control of the Company. (b) The following terms shall have the following definitions for purposes of the Plan and this Agreement: (i) "Disability" shall mean a mental or physical impairment or incapacity that renders you substantially unable to perform your duties for the Company for a period of longer then 120 days out of any 360-day period of employment with the Company. A determination of whether you have a Disability shall be made by the Company in its sole discretion upon (A) its own initiative after obtaining certification from a duly licensed physician or (B) upon your request or the request of a person acting on your behalf. (ii) "Earliest Exercise Date" shall mean the date specified in Table I on the first page of this Agreement on which the shares of Common Stock subject to this Option first become exercisable. (iii) "Exercise Price" shall mean the "Exercise Price Per Share" specified in Table I on the first page of the Agreement. (iv) "Termination for Cause" shall mean the termination of your employment with the Company for any of the following reasons: (A) fraud, misappropriation, personal dishonesty, willful misconduct or breach of fiduciary duty, in each such case materially harmful to the Company's property, personnel or business operations, or materially damaging to the Company's relationships with its customers, clients or employees or materially detrimental to the goodwill of the Company; (B) intentional failure to perform the duties of your employment, or any continuing action by you that is materially detrimental to the goodwill of the Company or materially damaging to the Company's relationships with its customers, clients or employees; (C) a guilty plea or a plea of no-contest to, or conviction of, a felony or a crime involving moral turpitude or fraud; (D) misappropriation (or attempted misappropriation) of any of the Company's funds or property or of a business opportunity of the Company, including attempting to secure or securing any personal profit in connection with any transaction entered into on behalf of the Company; (E) conviction of any criminal offense involving dishonesty or breach of trust or money laundering, or any agreement by you to enter into a pretrial diversion or similar program in connection with a prosecution for such offense; (F) excessive drunkenness, use of illegal drugs or abuse of any controlled substance; or (G) excessive absenteeism not related to your illness, which absenteeism remains unremedied for 30 days after written notice thereof requesting that it be remedied. Section 3. Exercise Price. During the Option Term, and after the Earliest Exercise Date, you shall have the right to exercise the Option (or any portion thereof) in accordance with Schedule I in order to purchase the appropriate number of shares of Common Stock at the Exercise Price. Section 4. Method of Exercise. You may, at any time during the Option Term provided by Section 2 and subject to Schedule I, exercise your right to purchase all or any portion of the Common Stock subject to this Option; provided, however, that the minimum number of shares of Common Stock which may be so purchased shall be one hundred (100) or, if less, the total number of shares of Common Stock then available for purchase pursuant to this Option. You may exercise such right by: (a) giving written notice to the Committee; and (b) delivering to the Company full payment of the Exercise Price for the optioned Common Stock to be purchased. The date of exercise shall be the earliest date practicable following the date on which the requirements of this Section 4 have been satisfied, but in no event more than three (3) days after such date. Payment shall be made as follows: (i) in United States dollars by certified check, money order or bank draft made payable to the order of Official Payments Corporation; (ii) in shares of Common Stock duly endorsed for transfer and with all necessary stock transfer tax stamps attached, which shares have already been owned by you for at least six months and have a Fair Market Value equal to the Exercise Price; (iii) in a broker-assisted cashless exercise effected in accordance with rules adopted by the Committee; or (iv) in any combination of the foregoing. Section 5. Delivery and Registration of Optioned Shares. As soon as is practicable following the date on which you have satisfied the requirements of Section 4, the Committee shall take such action as is necessary to cause the Company to issue a stock certificate evidencing your ownership of the Common Stock that has been purchased pursuant to the exercise of the Option. You shall have no right to vote or to receive dividends, nor have any other rights of a stockholder with respect to such Common Stock, prior to the date as of which such Common Stock is transferred to you on the stock transfer records of the Company, and no adjustments shall be made for any dividends or other rights for which the record date is prior to the date as of which such transfer is effected. The obligation of the Company to deliver Common Stock under this Agreement shall, if the Committee so requests, be conditioned upon the receipt of a representation as to the investment intention of you or the person to whom such Common Stock is to be delivered, in such form as the Committee shall determine to be necessary or advisable to comply with the provisions of applicable federal, state or local law. It may be provided that any such representation shall become inoperative upon a registration of the Common Stock or upon the occurrence of any other event eliminating the necessity of such representation. The Company shall not be required to deliver any Common Stock under this Agreement prior to: (i) the admission of such Common Stock to listing on any stock exchange on which Common Stock may then be listed or (ii) the completion of such registration or other qualification under any state or federal law, rule or regulation as the Committee shall determine to be necessary or advisable based on the reasonable advice of counsel. Section 6. Adjustments in the Event of Reorganization. In the event of any merger, reorganization, consolidation, sale of substantially all the Company's assets, recapitalization, stock dividend, stock split, spin-off, split-up, split-off distribution of assets or other change in the Company's corporate structure affecting the shares of the Company's Common Stock, the number of shares of Common Stock subject to this Option shall be adjusted in accordance with Section 4.4 of the Plan to account for such event and the Exercise Price shall be equitably adjusted commensurate therewith. Section 7. Taxes. Where any person is entitled to receive shares pursuant to the exercise of the Option, the Company shall have the right to require such person to pay to the Company the amount of any tax which the Company is required to withhold with respect to such shares, or, in lieu thereof, to retain, or to sell without notice, a sufficient number of shares to cover the amount required to be withheld. Section 8. Notices. Any communication required or permitted to be given under the Plan, including any notice, direction, designation, comment, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally or five (5) days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below, or at such other addresses which such party may, by written notice, specify to the other party: (a) If to the Committee: Official Payments Corporation Three Landmark Square Stamford, Connecticut 06901-2501 Attention: Corporate Secretary (b) If to you, to your address as shown in the Company's personnel records. Section 9. Restrictions on Transfer. This Option shall not be sold, assigned, alienated, pledged, hypothecated or otherwise transferred by you, other than by will or by the laws of descent and distribution. Section 10. Insider Trading Policy. By signing where indicated below, you agree to observe and be bound by the terms and conditions of the Official Payments Corporation Statement of Policy on Securities Trading by Directors, Officers and Employees, as the same may be amended from time to time by the Company. Section 11. Successors and Assigns. This Agreement shall inure to the benefit of and shall be binding upon the Company and you and your respective heirs, successors and assigns. Section 12. Construction of Language. Whenever appropriate in the Agreement, words used in the singular may be read in the plural, words used in the plural may be read in the singular, and words importing the masculine gender may be read as referring equally to the feminine or the neuter. Any reference to a Section shall be a reference to a Section of this Agreement, unless the context clearly indicates otherwise. Section 13. Governing Law. This Agreement shall be construed, administered and enforced according to the laws of the State of New York without giving effect to the conflict of laws principles thereof, except to the extent that such laws are preempted by the federal law. Section 14. Amendment. This Agreement may be amended, in whole or in part and in any manner not inconsistent with the provisions of the Plan, at any time and from time to time, by written agreement between the Company and you. Section 15. No Right to Continued Service. Nothing in this Agreement nor any action of the Board of Directors or the Committee with respect to this Agreement shall be held or construed to confer upon you any right to a continuation of service by the Company. You may be dismissed or otherwise dealt with as though this Agreement had not been entered into. Section 16. Incorporation by Reference, Etc. The provisions of the Plan are hereby incorporated herein by reference. Except as otherwise expressly set forth herein, this Agreement shall be construed in accordance with the provisions of the Plan and any capitalized terms not otherwise defined in this Agreement shall have the definitions set forth in the Plan. In the event of any conflict between the provisions of the Plan and the provisions of this Agreement, the provisions of this Agreement shall prevail. Notwithstanding the foregoing, the Committee shall have final authority to interpret and construe the Plan and this Agreement and to make any and all determinations under them, and its decision shall be binding and conclusive against you and your legal representative in respect of any questions arising under the Plan or this Agreement. EX-10 4 0004.txt EXHIBIT 10.3 - FORM OF NON-QUALIFIED AGREEMENT EXHIBIT 10.3 OFFICIAL PAYMENTS CORPORATION 1999 STOCK INCENTIVE PLAN FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT - - ________________________ ______ ________ ________ Name of Option Recipient Social Security Number _________________________________________________________________ Street Address ____________________ _____________________ ________________ City State Zip This Non-Qualified Stock Option Agreement is intended to set forth the terms and conditions on which a Non-Qualified Stock Option has been granted under the Official Payments Corporation 1999 Stock Incentive Plan (the "Plan"). Set forth below in Table I are the specific terms and conditions applicable to this Non-Qualified Stock Option (this "Option") and attached hereto as Exhibit A are this Option's general terms and conditions. TABLE I ============================================================================ Terms of Non-Qualified Stock Option Grant ============================================================================ Date of Grant: Class of Optioned Shares:* Common No. of Optioned Shares:* Type of Option: Non-Qualified Stock Option Exercise Price Per Share:* $____ Earliest Exercise Date: ============================================================================ Vesting Schedule ============================================================================ Lapse of Right of Repurchase: The Right of Repurchase shall lapse, and vesting will occur, on the respective dates set forth on Schedule I hereto, but only if the option recipient is employed by Official Payments Corporation on such dates. Option Expiration Date:* ============================================================================ *Subject to adjustment as provided in the Plan and Exhibit A hereto. By signing where indicated below, Official Payments Corporation (the "Company") confirms the grant of this Non-Qualified Stock Option with respect to the shares of its common stock, par value $0.01 per share ("Common Stock"), identified above, upon the specified terms and conditions, and the option recipient acknowledges receipt of a copy of the Plan and this Non-Qualified Stock Option Agreement (including Exhibit A and Schedule I) and agrees to observe and be bound by the terms and conditions set forth therein and herein. OFFICIAL PAYMENTS CORPORATION OPTION RECIPIENT By ___________________________________ ______________________________ Name: Thomas R. Evans Name of Recipient Title: Chairman and Chief Executive Officer EXHIBIT A OFFICIAL PAYMENTS CORPORATION 1999 STOCK INCENTIVE PLAN NON-QUALIFIED STOCK OPTION AGREEMENT General Terms and Conditions Section 1. Incentive Stock Option. The Company does not intend this Option to be an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986 ("Code") and the Plan. This Option shall be treated for all purposes as a Non-Qualified Stock Option. Section 2. Option Term. (a) Subject to the Company's "Right of Repurchase" as defined and provided for in Section 6 hereof, you shall have the right to exercise all or any portion of this Option at any time during the period (the "Option Term") commencing on the "Earliest Exercise Date" specified in Table I on the first page of this Agreement and ending on the earliest to occur of the "Option Expiration Date" set forth in Table I and any of the dates specified in clauses (i) though (iv) of Section 6.4(c) of the Plan. (b) The following terms shall have the following definitions for purposes of the Plan and this Agreement: (i) "Disability" shall mean a mental or physical impairment or incapacity that renders you substantially unable to perform your duties for the Company for a period of longer than 120 days out of any 360 day period of employment with the Company. A determination of whether you have a Disability shall be made by the Company in its sole discretion upon (A) its own initiative after obtaining certification from a duly licensed physician or (B) your request or the request of a person acting on your behalf. (ii) "Exercise Price" shall mean the "Exercise Price Per Share" specified in Table I on the first page of the Agreement. (iii) "Termination for Cause" shall mean the termination of your employment with the Company for any of the following reasons: (A) fraud, misappropriation, personal dishonesty, willful misconduct or breach of fiduciary duty, in each such case materially harmful to the Company's property, personnel or business operations, or materially damaging to the Company's relationships with its customers, clients or employees or materially detrimental to the goodwill of the Company; (B) intentional failure to perform the duties of your employment, or any continuing action by you that is materially detrimental to the goodwill of the Company or materially damaging to the Company's relationships with its customers, clients or employees; (C) a guilty plea or a plea of no-contest to, or conviction of, a felony or a crime involving moral turpitude or fraud; (D) misappropriation (or attempted misappropriation) of any of the Company's funds or property or of a business opportunity of the Company, including attempting to secure or securing any personal profit in connection with any transaction entered into on behalf of the Company; (E) conviction of any criminal offense involving dishonesty or breach of trust or money laundering, or any agreement by you to enter into a pretrial diversion or similar program in connection with a prosecution for such offense; (F) excessive drunkenness, use of illegal drugs or abuse of any controlled substance; or (G) excessive absenteeism not related to your illness, which absenteeism remains unremedied for 30 days after written notice thereof requesting that it be remedied. Section 3. Exercise Price. During the Option Term and after the Earliest Exercise Date, you shall have the right to exercise the Option (or any portion thereof) to purchase the appropriate number of shares of Common Stock at the Exercise Price. Section 4. Method of Exercise. You may, at any time during the Option Term provided by Section 2, exercise your right to purchase all or any portion of the Common Stock subject to this Option; provided, however, that the minimum number of shares of Common Stock which may be so purchased shall be one hundred (100) or, if less, the total number of shares of Common Stock then available for purchase pursuant to this Option. You may exercise such right by: (a) giving written notice to the Committee; and (b) delivering to the Company full payment of the Exercise Price for the optioned Common Stock to be purchased. The date of exercise shall be the earliest date practicable following the date on which the requirements of this Section 4 have been satisfied, but in no event more than three (3) days after such date. Payment shall be made as follows: (i) in United States dollars by certified check, money order or bank draft made payable to the order of Official Payments Corporation; (ii) in shares of Common Stock duly endorsed for transfer and with all necessary stock transfer tax stamps attached, which shares have already been owned by you for at least six months and have a Fair Market Value equal to the Exercise Price; (iii) in a broker-assisted cashless exercise effected in accordance with rules adopted by the Committee; or (iv) in any combination of the foregoing. Section 5. Delivery and Registration of Optioned Shares. Subject to the provisions of Section 6 hereof with respect to shares of Common Stock subject to a Right of Repurchase (as such term is defined below), as soon as is practicable following the date on which you have satisfied the requirements of Section 4, the Committee shall take such action as is necessary to cause the Company to issue a stock certificate evidencing your ownership of the Common Stock that has been purchased pursuant to the exercise of the Option. You shall have no right to vote or to receive dividends, nor have any other rights of a stockholder with respect to such Common Stock, prior to the date as of which such Common Stock is transferred to you on the stock transfer records of the Company, and no adjustments shall be made for any dividends or other rights for which the record date is prior to the date as of which such transfer is effected. The obligation of the Company to deliver Common Stock under this Agreement shall, if the Committee so requests, be conditioned upon the receipt of a representation as to the investment intention of you or the person to whom such Common Stock is to be delivered, in such form as the Committee shall determine to be necessary or advisable to comply with the provisions of applicable federal, state or local law. It may be provided that any such representation shall become inoperative upon a registration of the Common Stock or upon the occurrence of any other event eliminating the necessity of such representation. The Company shall not be required to deliver any Common Stock under this Agreement prior to: (i) the admission of such Common Stock to listing on any stock exchange on which Common Stock may then be listed or (ii) the completion of such registration or other qualification under any state or federal law, rule or regulation as the Committee shall determine to be necessary or advisable based on the reasonable advice of counsel. Section 6. Right Of Repurchase. (a) Scope of Repurchase Right. Any shares of Common Stock that have been purchased pursuant to this Agreement but have not vested in accordance with the terms set forth in Table I on the first page of this Agreement and Section 6(b) below, shall be subject to a right (but not an obligation) of repurchase by the Company (hereinafter, the "Right of Repurchase") and all such unvested shares shall be deemed "Restricted Stock." Shares of Restricted Stock shall be non-transferable (other than as provided in Section 6(d) hereof) until the date on which the Company's Right of Repurchase with respect to such shares has lapsed. The Company's Right of Repurchase shall be exercisable with respect to the shares of Restricted Stock during the 30-day period following the end of the Option Term, unless the Company's Right of Repurchase has earlier lapsed in accordance with Section 6(b) of this Agreement. (b) Lapse of Repurchase Right. The Company's Right of Repurchase shall lapse with respect to the shares of Common Stock acquired pursuant to this Agreement and all such shares shall cease to be Restricted Stock in accordance with the vesting schedule set forth in Table I on the first page of this Agreement; provided, however, such vesting shall be accelerated and the Company's Right of Repurchase shall lapse fully (i) upon the termination of your employment with the Company due to your death or Disability, (ii) upon the occurrence of a Change of Control of the Company, or (iii) if your employment with the Company has been previously terminated (other than due to a Termination for Cause), upon the Company entering into, within 90 days following the date of such termination, a definitive agreement which, if consummated, would result in a Change of Control of the Company. (c) Repurchase Cost. If the Company exercises its Right of Repurchase, it shall pay to you an amount equal to the Exercise Price set forth in Table I on the first page of this Agreement for each share of Restricted Stock being repurchased. (d) Exercise of Repurchase Right. The Company's Right of Repurchase shall be exercisable only by written notice delivered to you prior to the expiration of the 30-day period specified in Section 6(a) above. The notice shall set forth the date on which the repurchase is to be effected. Such date shall not be more than 35 days after the end of the Option Term. The certificate(s) representing the Restricted Stock to be repurchased shall, prior to the close of business on the date specified for the repurchase, be delivered to the Company properly endorsed for transfer. The Company shall, concurrently with the receipt of such certificate(s), pay you the purchase price determined according to Section 6(c) above. Payment shall be made in cash or cash equivalents. The Company's Right of Repurchase shall terminate with respect to any Restricted Stock for which it has not been timely exercised pursuant to this Section 6(d). (e) Additional Shares or Substituted Securities. In the event of the declaration of a stock dividend, the declaration of an extraordinary dividend payable in a form other than stock, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company's outstanding securities without receipt of consideration, any new, substituted or additional securities or other property (including money paid other than as an ordinary cash dividend) which are by reason of such transaction distributed with respect to any Restricted Stock or into which such Restricted Stock thereby become convertible shall immediately be subject to the Right of Repurchase. Appropriate adjustments to reflect the distribution of such securities or property shall be made to the number and/or class of the Restricted Stock. Appropriate adjustments shall also, after each such transaction, be made to the price per share to be paid upon the exercise of the Right of Repurchase in order to reflect any change in the Company's outstanding securities effected without receipt of consideration therefor; provided, however, that the aggregate purchase price payable for the Restricted Stock shall remain the same. (f) Termination of Rights as Stockholder. If the Company makes available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Restricted Stock to be repurchased in accordance with this Section 6, then after such time, you shall no longer have any rights as a holder of such Restricted Stock (other than the right to receive payment of such consideration in accordance with this Agreement). Such Restricted Stock shall be deemed to have been repurchased in accordance with the applicable provisions hereof, whether or not the certificate(s) therefor have been delivered as required by this Agreement. (g) Escrow. Upon issuance, the certificates for Restricted Stock shall be deposited in escrow with the Company to be held in accordance with the provisions of this Agreement. Any new, substituted or additional securities or other property described in Section 6(f)above shall immediately be delivered to the Company to be held in escrow, but only to the extent the shares are at such time shares of Restricted Stock. All regular cash dividends on Restricted Stock (or other securities at the time held in escrow) shall be paid directly to you and shall not be held in escrow. You shall have the right to direct the manner in which all voting rights appurtenant to the shares of Restricted Stock held in escrow will be exercised. Such voting direction shall be given by completing and filing, with the inspector of elections or such other person as the Committee may designate, a written direction in the form and manner prescribed by the Committee. If no voting direction is given, then the voting rights appurtenant to the shares of Restricted Stock held in escrow will not be exercised. All shares of Restricted Stock, together with any other assets or securities held in escrow hereunder, shall be: (i) surrendered to the Company for repurchase and cancellation upon the Company's exercise of its Right of Repurchase or (ii) released to you, upon your request, to the extent the shares of Common Stock are no longer subject to the Company's Right of Repurchase. Section 7. Stock Legends. All certificates evidencing shares of Common Stock purchased under this Agreement and subject to the provisions of Section 6 hereof, as applicable, shall bear the following legend: "THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE SHARES). SUCH AGREEMENT GRANTS TO THE COMPANY CERTAIN REPURCHASE RIGHTS UPON TERMINATION OF SERVICE WITH THE COMPANY. THE SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE." All certificates evidencing shares of Common Stock purchased under this Agreement in an unregistered transaction shall bear the following legend (and such other restrictive legends as are required or deemed advisable under the provisions of any applicable law): "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." Section 8. Removal of Legends. If, in the opinion of the Company and its counsel, any legend placed on a stock certificate representing shares of Common Stock purchased under this Agreement is no longer required, the holder of such certificate shall be entitled to exchange such certificate for a certificate representing the same number of shares of Common Stock but without such legend. Section 9. Adjustments in the Event of Reorganization. In the event of any merger, reorganization, consolidation, sale of substantially all the Company's assets, recapitalization, stock dividend, stock split, spin-off, split-up, split-off distribution of assets or other change in the Company's corporate structure affecting the shares of the Company's Common Stock. The number of shares of Common Stock subject to this Option shall be adjusted in accordance with Section 4.4 of the Plan to account for such event and the Exercise Price shall be equitably adjusted commensurate therewith. Section 10. Taxes. Where any person is entitled to receive shares pursuant to the exercise of the Option, the Company shall have the right to require such person to pay to the Company the amount of any tax which the Company is required to withhold with respect to such shares, or, in lieu thereof, to retain, or to sell without notice, a sufficient number of shares to cover the amount required to be withheld. Section 11. Notices. Any communication required or permitted to be given under the Plan, including any notice, direction, designation, comment, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally or five (5) days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below, or at such other addresses which such party may, by written notice, specify to the other party: (a) If to the Committee: Official Payments Corporation Three Landmark Square Stamford, Connecticut 06901-2501 Attention: Corporate Secretary (b) If to you, to your address as shown in the Company's personnel records. Section 12. Insider Trading Policy. By signing where indicated below, you acknowledge receipt of and agree to observe and be bound by the terms and conditions of the Official Payments Corporation Statement of Policy on Securities Trading by Directors, Officers and Employees, as the same may be amended from time to time by the Company. Section 13. Restrictions on Transfer. This Option shall not be sold, assigned, alienated, pledged, hypothecated or otherwise directly or indirectly transferred by you, other than by will or by the laws of descent and distribution. Section 14. Successors and Assigns. This Agreement shall inure to the benefit of and shall be binding upon the Company and you and your respective heirs, successors and assigns. Section 15. Construction of Language. Whenever appropriate in the Agreement, words used in the singular may be read in the plural, words used in the plural may be read in the singular, and words importing the masculine gender may be read as referring equally to the feminine or the neuter. Any reference to a Section shall be a reference to a Section of this Agreement, unless the context clearly indicates otherwise. In the event that at the time this Option is granted you are a Consultant (rather than an employee of the Company), references in this Agreement to your "employment" with the Company (including, without limitation, in the context of "termination of employment") shall be deemed to refer to your service to the Company as a Consultant. Section 16. Governing Law. This Agreement shall be construed, administered and enforced according to the laws of the State of New York without giving effect to the conflict of laws principles thereof, except to the extent that such laws are preempted by the federal law. Section 17. Amendment. This Agreement may be amended, in whole or in part and in any manner not inconsistent with the provisions of the Plan, at any time and from time to time, by written agreement between the Company and you. Section 18. No Right to Continued Service. Nothing in this Agreement nor any action of the Board of Directors or the Committee with respect to this Agreement shall be held or construed to confer upon you any right to a continuation of service by the Company. You may be dismissed or otherwise dealt with as though this Agreement had not been entered into. Section 19. Incorporation by Reference, Etc. The provisions of the Plan are hereby incorporated herein by reference. Except as otherwise expressly set forth herein, this Agreement shall be construed in accordance with the provisions of the Plan and any capitalized terms not otherwise defined in this Agreement shall have the definitions set forth in the Plan. In the event of any conflict between the provisions of the Plan and the provisions of this Agreement, the provisions of this Agreement shall prevail. Notwithstanding the foregoing, the Committee shall have final authority to interpret and construe the Plan and this Agreement and to make any and all determinations under them, and its decision shall be binding and conclusive against you and your legal representative in respect of any questions arising under the Plan or this Agreement. EX-27 5 0005.txt EXHIBIT 27.1 - FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Official Payment Corporation's quarterly report on Form 10-Q for the period ended June 30, 2000 and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 2,445 72,064 75 (67) 0 75,475 6,526 (1,138) 80,958 5,493 0 0 0 215 74,432 74,647 19,304 19,539 15,663 15,762 23,833 0 229 (17,877) 0 0 0 0 0 (17,877) (0.84) (0.84)
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