1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 0-26123
ONLINE RESOURCES CORPORATION
(formerly known as Online Resources & Communications Corporation)
----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1623052
-------- ----------
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
7600 COLSHIRE DRIVE, McLEAN, VIRGINIA 22102
------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(703) 394-5100
--------------
(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 October 31, 2000 there were 11,647,098 shares of the issuer's
common stock outstanding.
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ONLINE RESOURCES CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Page
-------
Part I. FINANCIAL INFORMATION
Item 1: Financial statements
Balance Sheets at September 30, 2000 and December 31, 1999 1
Statements of Operations for the three and nine months
ended September 30, 2000 and 1999 2
Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 3
Notes to Financial Statements 4
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 3: Quantitative and Qualitative Disclosures about Market Risk 11
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 11
Item 2: Changes in Securities and Use of Proceeds 11
Item 3 and 4: Not applicable 11
Item 5: Other Information 11
Item 6: Exhibits and Reports on Form 8-K 11
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ONLINE RESOURCES CORPORATION
BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,758,130 $ 1,588,187
Investments 23,761,890 19,905,929
Accounts receivable (net of allowance of approximately $114,000
and $152,000 at September 30, 2000, and December 31, 1999,
respectively) 3,085,755 1,875,707
Prepaid expenses and other current assets 1,060,765 946,207
---------------- ------------
Total current assets 29,666,540 24,316,030
Property and equipment, net 5,559,000 4,616,672
Other assets 1,478,555 284,473
---------------- ------------
Total assets $ 36,704,095 $ 29,217,175
================ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 710,810 $ 812,082
Accrued expenses and other current liabilities 1,265,135 565,384
Accrued wages 373,094 537,553
Accrued vacation 268,639 378,640
Deferred revenues 437,043 417,926
Current portion of capital lease obligations 375,954 709,076
----------------- ------------
Total current liabilities 3,430,675 3,420,661
Capital lease obligation, less current maturities 111,864 329,480
Convertible subordinated notes 20,000,000 -
---------------- ------------
Total Liabilities 23,542,539 3,750,141
Stockholders' equity
Common stock, $.0001 par value; 35,000,000 shares authorized,
11,599,998 and 11,050,456 issued and outstanding at
September 30, 2000 and December 31, 1999, respectively 1,160 1,105
Additional capital 84,636,905 83,035,825
Deferred stock compensation (205,209) (267,949)
Accumulated deficit (70,792,858) (56,651,707)
Receivable from the sale of common stock (422,604) (650,240)
Unrealized loss on available for sale securities (55,838) -
----------------- ------------
Total stockholders' equity 13,161,556 25,467,034
---------------- ------------
Total liabilities and stockholders' equity $ 36,704,095 $ 29,217,175
================ ============
See accompanying notes to unaudited interim financial statements.
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ONLINE RESOURCES CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Revenues:
Service fees $3,724,723 $1,815,388 $8,907,009 $4,440,300
Implementation and other revenues 601,120 477,050 2,236,830 1,335,415
------------ ------------ ------------ ------------
Total revenues 4,325,843 2,292,438 11,143,839 5,775,715
Expenses:
Cost of revenues 3,466,635 2,357,048 9,794,371 6,362,236
------------ ------------ ------------ ------------
Gross profit (loss) 859,208 (64,610) 1,349,468 (586,521)
General and administrative 1,580,854 970,507 4,744,562 2,523,321
Selling and marketing 2,269,018 1,346,232 6,697,858 3,558,660
Systems and development 1,568,796 994,046 4,680,510 2,844,304
------------ ------------ ------------ ------------
5,418,668 3,310,785 16,122,930 8,926,285
------------ ------------ ------------ ------------
Loss from operations (4,559,460) (3,375,395) (14,773,462) (9,512,806)
Other income (expense):
Interest income 168,467 305,322 707,018 452,489
Interest expense (25,199) (69,670) (74,707) (912,784)
Other - (50,853) - (50,853)
------------ ------------ ------------ ------------
Total other income (expense) 143,268 184,799 632,311 (511,148)
------------ ------------ ------------ ------------
Loss before extraordinary item (4,416,192) (3,190,596) (14,141,151) (10,023,954)
Extraordinary debt
extinguishments loss - - - (885,407)
------------ ------------ ------------ ------------
Net loss (4,416,192) (3,190,596) (14,141,151) (10,909,361)
Preferred stock accretion - - - (2,236,716)
Beneficial return on
preferred shares - - - (2,668,109)
------------ ------------ ------------ ------------
Net loss available to common
stockholders $(4,416,192) $(3,190,596) $(14,141,151) $(15,814,186)
============ ============ ============ ============
Basic and diluted loss per share:
Loss before extraordinary item $ (0.38) $ (0.29) $ (1.24) $ (2.12)
Extraordinary loss - - - (0.13)
Basic and diluted loss per share (0.38) (0.29) (1.24) (2.25)
Shares used in calculation of
loss per share:
Basic and diluted 11,594,792 10,844,854 11,425,557 7,026,668
See accompanying notes to interim unaudited financial statements.
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ONLINE RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
-------------------------------
OPERATING ACTIVITIES
Net loss $(14,141,151) $(10,909,361)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation 1,255,020 775,651
Amortization - 199,488
Extraordinary debt extinguishments loss - 885,407
Compensation expense related to
issuance of common stock 147,665 194,578
Provision for losses on accounts receivable (38,000) -
Other (69,028) -
Changes in assets and liabilities:
Accounts receivable (1,172,048) (513,525)
Prepaid expenses and other current
assets (114,558) (515,604)
Escrow deposit - 400,985
Accrued interest (99,097) -
Other assets (367) (115,350)
Accounts payable (101,272) (102,300)
Accrued expenses 425,291 (479,468)
Deferred revenues 19,117 (55,354)
------------ ------------
Net cash used in operating activities (13,888,428) (10,234,853)
INVESTING ACTIVITIES
Investments in available for sale securities (35,633,983) (24,635,567)
Sale of available for sale securities 31,890,309 -
Purchase of property and equipment (2,189,845) (990,071)
------------ ------------
Net cash used in investing activities (5,933,519) (25,625,638)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,516,210 39,147,848
Purchase of treasury stock - (50,000)
Repayment of stock subscription receivable 227,636 -
Net proceeds from issuance of Series C
redeemable convertible preferred stock - 5,349,000
Net proceeds from issuance of convertible
subordinated notes 18,798,782 -
Repayment of capital lease obligations (550,738) (397,208)
Repayment of long-term debt - (9,744,290)
------------ ------------
Net cash provided by financing activities 19,991,890 34,305,350
------------ ------------
Net increase (decrease) in cash and
cash equivalents 169,943 (1,555,141)
Cash and cash equivalents at
beginning of period 1,588,187 3,471,620
------------ ------------
Cash and cash equivalents at end of period $ 1,758,130 $ 1,916,479
============ ============
See accompanying notes to unaudited interim financial statements.
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ONLINE RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
Online Resources Corporation (the "Company") is a leading Internet
banking, bill payment and e-finance application service provider to financial
institutions. We provide our clients, primarily regional and community banks,
thrifts and credit unions, with an end-to-end outsourced service, which is
branded in their name. This enables cost-effective delivery of Internet-based
financial services to the consumer, small business and other retail customers of
our clients. By packaging our transaction services with our call center,
database and support services, we offer an integrated financial hub and a single
point of accountability for our clients and their retail customers.
Effective September 11, 2000, the Company changed its name to Online
Resources Corporation from Online Resources & Communications Corporation. The
stock symbol and Web address remain the same.
2. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles for interim financial
information and with the instructions for Form 10-Q and Article 10 of Regulation
S-X. Accordingly, certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed, or omitted, pursuant to the rules and
regulations of the Securities and Exchange Commission. In our opinion, the
statements include all adjustments necessary (which are of a normal and
recurring nature) for the fair presentation of the results of the interim
periods presented. These financial statements should be read in conjunction with
our audited financial statements for the year ended December 31, 1999, included
in the amended Annual Report on Form 10-K/A filed by the Company with the
Securities and Exchange Commission on June 30, 2000. Our results of operations
for any interim period are not necessarily indicative of the results of
operations for any other interim period or for a full fiscal year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements. Actual results may differ from those estimates.
3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended, which is required to be adopted in years beginning after June 15, 2000.
Because of the Company's minimal use of derivatives, management does not
anticipate that the adoption of the new Statement will have a significant effect
on earnings or the financial position of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition," which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. The SEC also issued the SAB 101 Frequently Asked
Questions and Answers on October 12, 2000. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosure
related to revenue recognition policies. The implementation date of SAB 101 is
no later than the quarter ended December 31, 2000. At this time, the Company is
still assessing the impact of SAB 101 and its effect on the Company's
financial position, results of operations and cash flows.
4. NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share is calculated by dividing the
net loss by the weighted average number of common shares outstanding.
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The following table summarizes the average number of common shares used
in the calculation of basic and diluted net loss per common share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
----------- ----------- ------------ ------------
Loss before extraordinary item $(4,416,192) $(3,190,596) $(14,141,151) $(10,023,954)
Preferred stock accretion - - - (2,236,716)
Beneficial return on preferred shares - - - (2,668,109)
----------- ----------- ------------ ------------
Net loss available for common
stockholders before extraordinary
item (4,416,192) (3,190,596) (14,141,151) (14,928,779)
Extraordinary item - - - (885,407)
----------- ----------- ------------ ------------
Net loss available for common stockholders $(4,416,192) $(3,190,596) $(14,141,151) $(15,814,186)
=========== =========== ============ ============
Weighted average number of common
shares 11,594,792 10,844,854 11,425,557 7,026,668
Effect of dilutive securities:
Stock options - - - -
Warrants - - - -
Convertible subordinated notes - - - -
Redeemable convertible preferred stocks - - - -
----------- ----------- ------------ ------------
Adjusted weighted average shares and
assumed conversions 11,594,792 10,844,854 11,425,557 7,026,668
=========== =========== ============ ============
Loss per share:
Basic and diluted before
extraordinary item $ (0.38) $ (0.29) $ (1.24) $ (2.12)
Extraordinary loss $ - $ - $ - $ (0.13)
Basic and diluted $ (0.38) $ (0.29) $ (1.24) $ (2.25)
Due to their antidulitive effects, outstanding shares of preferred stock,
convertible subordinated notes, stock options and warrants to purchase shares of
common stock were excluded from the computation of diluted earnings per share
for all periods presented.
5. CONVERTIBLE SUBORDINATED NOTES
On September 28, 2000, the Company completed the private placement of $20
million in convertible subordinated notes (the "2000 Convertible Notes") to a
group of accredited investors. The Company received proceeds of $18.8 million
net of debt issuance costs of $1.2 million including Commissions of $917,200.
The proceeds will be used for working capital. The 2000 Convertible Notes mature
in 2005, unless previously converted, and carry an 8% coupon. Interest payment
dates are April 1 and October 1, commencing April 1, 2001. The 2000 Convertible
Notes are convertible at a price of $4.75 per share subject to reset under
certain circumstances in one year but in no event less than $4.00 per share.
Subject to certain conditions, the Company may redeem all or part of the 2000
Convertible Notes prior to maturity. Jefferies & Company, Inc., one of the
underwriters of the placement, also obtained 200,000 warrants that expire on
September 30, 2005 that are exercisable at the same price as the conversion
price under the notes.
The 2000 Convertible Notes have not been registered under the Securities
Act and may not be offered or sold in the United States absent registration
unless an applicable exemption from the registration requirements exist.
6. EQUITY
During the quarter ended September 30, 2000, individuals participated in
the Employee Stock Purchase Plan and exercised options and warrants to purchase
approximately 18,000 shares of common stock with net proceeds to the Company of
approximately $163,000. For the nine months ended September 30, 2000,
individuals exercised options and warrants to purchase 549,542 shares of common
stock with net proceeds to the Company of approximately $1.5 million.
7. COMPREHENSIVE LOSS
Comprehensive loss includes the Company's net loss adjusted for changes,
net of tax, of unrealized losses on investments in marketable securities.
Comprehensive loss for the three months and nine months ended September 30, 2000
and 1999 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
----------- ----------- ------------ ------------
Comprehensive loss:
Net loss $(4,416,192) $(3,190,596) $(14,141,151) $(15,814,186)
Unrealized loss on
investments in
marketable securities (27,158) - (55,838) -
----------- ----------- ------------ ------------
Total comprehensive
loss: $(4,443,350) $(3,190,596) $(14,196,989) $(15,814,186)
=========== =========== ============ ============
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY NOTE
This Quarterly Report on Form 10-Q may contain "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,
including, but not limited to:
- Forecasts of growth in business-to-business electronic commerce,
and growth in the number of consumers using online banking and
billpaying services;
- Statements regarding trends in online Resources' revenues, expense
levels, and liquidity and capital resources;
- Statements about the sufficiency of our cash balances to meet
currently planned working capital and capital expenditure
requirements; and
- Other statements identified or qualified by words such as
"likely", "will", "suggest", "may", "would", "could", "should",
"expects", "anticipates", "estimates", "plans", "projects",
"believes", "seek", "intend" and other similar words that signify
forward-looking statements.
These forward-looking statements represent our best judgment as of the
date of the Quarterly Report on Form 10-Q, and we caution readers not to
place undue reliance on such statements. Actual performance and results of
operations may differ materially from those projected or suggested in the
forward-looking statements due to certain risks and uncertainties, including but
not limited to, the risks and uncertainties described or discussed in the
section "Risk Factors" in our 10-K filed March 31, 2000. These risks include,
among others, the following:
- our history of losses and anticipation of future losses;
- our volatile stock price;
- substantial number of shares of common stock may be sold and
affect the trading prices of our common stock;
- our dependence on the marketing efforts of third parties;
- the potential fluctuations in our operating results;
- our potential need for additional capital;
- our potential inability to expand our services and related
products in the event of substantial increases in demand for these
services and related products;
- our competition;
- reduction or elimination of the fees we charge for some services
due to the consumer demand for low-cost or free online financial
services
- our ability to attract and retain skilled personnel;
- our reliance on our patents and other intellectual property;
- the early stage of market adoption of the services we offer;
- consolidation of the banking and financial services industry;
- our failure to successfully implement a system upgrade or
conversion may adversely affect our business;
- our dependence on our financial institution clients to market our
services;
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- our co-marketing efforts may not be successful;
- government regulation could interfere with our business;
- our certificate of incorporation and bylaw provisions may prevent
or delay third parties from buying your stock;
- control of our management and affairs by management and directors;
- security breaches or system failures could disrupt our business;
and
- if we lose a material client our business may be adversely
impacted
OVERVIEW
We derive revenue primarily from long-term service contracts with our
financial institution clients, who pay us recurring fees based primarily on the
number of their retail customers enrolled and transaction volumes. We also
derive revenue from upfront implementation fees.
As a network-based service provider, we have made substantial up-front
investments in infrastructure. We believe our financial performance and
operating leverage will be based primarily on increasing retail customer
subscriptions and transaction volumes over a relatively fixed cost base.
Our current sources of revenue include service and implementation fees.
We expect that our primary source of revenue growth will come from service fees
as a result of continued growth of retail customers.
Service fees: Our primary source of revenue is from providing services
which include banking, billpaying, customer service, consumer marketing,
information reporting, administrative services, and communications services. We
charge our financial institution clients a fixed monthly fee based on the number
of their retail customers who use our banking, billpaying and customer support
services. Fees for consumer marketing, information reporting, administrative
services, and communications services are closely tied to the number of retail
customers and are bundled as either fixed price monthly charges, fixed price
project fees, or hourly billings.
Implementation and other: We generate revenue from implementation of our
systems to our financial institution clients. Implementation fees are paid on a
one time basis at signing and recognized as revenue using the percentage of
completion method. Additionally, we also derive revenue from sales of related
enabling products and software at fixed prices, including our PC software and
customer service software. These have not been a significant source of revenue
and continue to decline as retail customers migrate to the web service.
Historically, the majority of our resources have been directed to
creating our proprietary system. This system enables us to provide a broad range
of services to our financial institutional clients including online banking,
billpaying, and access to complementary financial services supported by our
customer call center, marketing services and other support services. While
investment to date has been significant, we believe the infrastructure we have
built will enable us to support our anticipated growth over the next several
years with only nominal incremental cost for additional retail customers.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended, which is required to be adopted in years beginning after June 15, 2000.
Because of the Company's minimal use of derivatives, management does not
anticipate that the adoption of the new Statement will have a significant effect
on earnings or the financial position of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition," which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. The SEC also issued the SAB 101 Frequently Asked
Questions and Answers on October 12, 2000. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosure
related to revenue recognition policies. The implementation date of SAB 101 is
no later than the quarter ended December 31, 2000. At this time, the Company is
still assessing the impact of SAB 101 and its effect on the Company's financial
position, results of operations and cash flows.
FINANCIAL CONDITION
Since our founding, we have incurred high costs to create our
infrastructure, while generating low revenues. As a result, we have historically
experienced large operating losses and negative cash flow. At September 30,
2000, we had accumulated deficits of $70.8 million and net property and
equipment of $5.6 million. We have funded our operations primarily through the
issuance of equity and debt securities. Ongoing working capital requirements
will primarily consist of personnel costs related to enhancing and maintaining
our system. We expect to continue to incur losses in the foreseeable future.
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As of September 30, 2000 the Company had $1.8 million in cash and cash
equivalents and $23.8 million in investments as compared to $1.6 million in cash
and cash equivalents and $19.9 million in investments as of December 31, 1999.
The increase in cash and investments results primarily from the issuance of
convertible subordinated notes of $20 million net of cash used for operating
purposes. Total liabilities increased from $3.8 million as of December 31, 1999
to $23.5 million as of September 30, 2000 primarily as a result of the issuance
of convertible subordinated notes.
Our limited operating history makes it difficult to evaluate our
prospects for success and our revenue and profitability potential is unproven.
RESULTS OF OPERATIONS
The following table presents certain items derived from our statements of
operations expressed as a percentage of revenue.
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- --------------------
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
2000 1999 2000 1999
Statement of Operations Data:
Revenues:
Service fees 86% 79% 80% 77%
Implementation and
other revenues 14 21 20 23
---- ---- ---- ----
Total revenues 100 100 100 100
Expenses:
Cost of revenues 80 103 88 110
---- ---- ---- ----
Gross margin (loss) 20 (3) 12 (10)
General and administrative 37 42 43 44
Sales and marketing 52 59 60 62
Systems and development 36 43 42 49
---- ---- ---- ----
125 144 145 155
---- ---- ---- ----
Loss from operations (105) (147) (133) (165)
Other income (expense) 3 8 6 (9)
Extraordinary debt
extinguishments loss - - - (15)
Preferred stock accretion
and beneficial return (85)
---- ---- ---- ----
Net loss (102)% (139)% (127)% (274)%
==== ==== ==== ====
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999.
Revenues: We derive revenues from service fees, implementations and from
selling other products. Revenues increased 89% to $4.3 million for the three
months ended September 30, 2000 as compared to $2.3 million for the three
months ended September 30, 1999. This increase was primarily attributable to a
105% increase in service fees which were largely recurring and driven by an
increase of 175% in retail customers measured at September 30, 2000 and
September 30, 1999 and an increase of 163% in the number of transactions.
Additionally, implementation and other fees grew 26% as a result of increases
in the number of financial institutions with whom we have contracted and
enabled on our services. We signed 37 and enabled 38 financial institutions for
the quarter ending September 30, 2000, increasing the total number of financial
institutions under contract to 480 as of September 30, 2000.
Cost of Revenues: Cost of revenues primarily includes telecommunications,
payment processing, system operations, customer service, implementation and
related products. Cost of revenues increased 47% to $3.5 million for the three
months ended September 30, 2000 as compared to $2.4 million for the three months
ended September 30, 1999. This increase was primarily attributable to a $525,000
increase in customer service costs and a $500,000 increase in payment processing
costs. These increases resulted from a 175% increase in the number of retail
customers generating a 163% increase in transactions and a required increase in
staff to support the growth of our operations. Cost of revenues as a percentage
of revenues decreased to 80% for the three months ended September 30, 2000 as
compared to 103% for the corresponding period last year.
Gross Margin: Gross margin increased from a gross loss of $65,000 for the
quarter ended September 30, 1999 to a gross profit of $859,000 for the quarter
ended September 30, 2000. Gross margin improved from a loss of 3% to a profit of
20% primarily due to increased service fee revenue and implementation revenue
leveraged over our relatively fixed operating cost base. Service fees margin
improved as a result of increased end user growth without a corresponding
incremental increase in costs.
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General and Administrative: General and administrative expenses primarily
consist of salaries for executives, administrative and financial control
personnel and facilities costs such as office leases, insurance, and
depreciation. General and administrative expenses increased 63% to $1.6 million
for the three months ended September 30, 2000 as compared to $971,000 for the
three months ended September 30, 1999. The increase in general and
administrative expenses results from a 38% increase in our headcount and
increased depreciation expenses associated with the expansion of corporate
infrastructure.
Sales and Marketing: Sales and marketing expenses include salaries and
commissions paid to sales and marketing personnel, consumer marketing costs,
public relations costs, and other costs incurred in marketing our services and
products. As of September 30, 2000, we had 37 marketing partners who act as
resellers of our services. We have no obligation to these marketing partners
other than to provide services sold to financial institutions by the marketing
partners and to pay commissions to them on the sales. The marketing partners
have no obligations to us other than to re-sell our services. Sales and
marketing expenses increased 69% to $2.3 million for the three months ended
September 30, 2000 as compared to $1.3 million for the three months ended
September 30, 1999. Increased personnel costs, consumer marketing expenses and
commissions contributed to the escalation in sales and marketing expenses. The
increase in commissions is associated with higher revenues and the increases in
consumer marketing expenditures attributable to promoting the adoption of our
services by the retail customers of the growing number of launched financial
institution clients. Retail customers increased 175% to 294,000 consumer end
users from 107,000 for the same period a year ago.
Systems and Development: Systems and development expenses include
salaries of personnel in the systems and development department, consulting fees
and all other expenses incurred in supporting the development of new services
and products, and new technology to enhance existing products. System and
development expenses increased 58% to $1.6 million for the three months ended
September 30, 2000 as compared to $994,000 for the three months ended September
30, 1999. This was primarily attributable to costs associated with a technical
staff expansion.
Other Income and Expense: Interest income decreased 45% to $168,000 for
the three months ended September 30, 2000 as compared to $305,000 for the three
months ended September 30, 1999. The decrease was primarily due to lower average
cash and investment balances in the quarter ended September 30, 2000. Interest
and other expenses decreased 79% to $25,000 for the three months ended September
30, 2000 as compared to $121,000 for the three months ended September 30, 1999.
The decrease in interest and other expenses was mainly due to the reduction of
capital lease obligations.
For the three months ended September 30, 2000 and 1999 the basic and
diluted loss per share were $(0.38) and $(0.29), respectively, as a result of
the various factors as described above.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999.
Revenues: Revenues increased 93% to $11.1 million for the nine months
ended September 30, 2000 as compared to $5.8 million for the nine months ended
September 30, 1999. This increase was primarily attributable to a 101% increase
in service fees which were driven by an increase of 175% in retail customers and
an increase of 185% in the number of transactions for the nine months ended
September 30, 2000. Additionally, implementation and other fees grew 68% as a
result of increases in the number of financial institutions contracted for our
service. We signed 128 financial institutions for the nine months ended
September 30, 2000 compared to 99 financial institutions for the same period
last year, increasing the total number of financial institutions under contract
to 480 as of September 30, 2000 and we enabled 105 financial institutions during
the nine months ended September 30, 2000 compared to 98 financial institutions
for the same period last year, increasing the total number of financial
institutions launched to 383 as of September 30, 2000.
Cost of Revenues: Cost of revenues increased 54% to $9.8 million for the
nine months ended September 30, 2000 as compared to $6.4 million for the nine
months ended September 30, 1999. This increase was primarily attributable to a
$1.6 million increase in customer service costs and a $1.4 million increase in
payment processing costs. These increases resulted from the increased number of
retail customers and transactions and a required increase in staff to support
the growth of our operations. Cost of revenues percentage of revenues decreased
to 88% for the nine months ended September 30, 2000 as compared to 110% for the
corresponding period last year.
Gross Margin: Gross margin increased from a gross loss of $587,000 for
the nine months ended September 30, 1999 to a gross profit of $1.3 million for
the nine months ended September 30, 2000. Gross margin improved from a loss of
10% to a profit of 12% primarily due to increased service fee revenue and
implementation revenue leveraged over our relatively fixed operating cost base.
Service fees margin improved as a result of increased end user growth without a
corresponding incremental increase in costs.
General and Administrative: General and administrative expenses increased
88% to $4.7 million for the nine months ended
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September 30, 2000 as compared to $2.5 million for the nine months ended
September 30, 1999. The increase in general and administrative expenses resulted
mainly from an increase in staffing for finance and accounting, required after
the Company went public in June 1999 and increased rent and depreciation
expenses associated with the expansion of corporate facilities.
Sales and Marketing Expenses: Sales and marketing expenses increased 88%
to $6.7 million for the nine months ended September 30, 2000 as compared to $3.6
million for the nine months ended September 30, 1999. Increased personnel costs,
consumer marketing expenses, commissions, and travel costs contributed to the
escalation in sales and marketing expenses. The increase in commissions was
associated with higher revenue and the increases in consumer marketing
expenditures were attributable to promoting the adoption of our services by the
retail customers of the growing number of launched financial institution
clients.
Systems and Development: System and development expenses increased 65% to
$4.7 million for the nine months ended September 30, 2000 as compared to $2.8
million for the nine months ended September 30, 1999. This was primarily
attributable to costs associated with a technical staff expansion and the use of
third party consultants. The cost of third party consultants is generally higher
than the cost of internal resources. The technical staff expansion supports
developmental efforts associated with system maintenance, product enhancements
and the development of new products.
Other Income and Expense: Interest income increased 56% to $707,000 for
the nine months ended September 30, 2000 as compared to $452,000 for the nine
months ended September 30, 1999. The increase was primarily due to higher
average cash and investment balances for the nine months ended September 30,
2000. Interest and other expenses decreased 92% to $75,000 for the nine months
ended September 30, 2000 as compared to $964,000 for the nine months ended
September 30, 1999. The decrease in interest expense is a result of the Company
extinguishing $9.4 million of corporate debt on June 10, 1999.
For the nine months ended September 30, 2000 and 1999 the basic and
diluted loss per share were $(1.24) and $(2.25), respectively,
as a result of the various factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
Since inception and until our initial public offering, we have primarily
financed our operations through private placements of our common and preferred
stock and the issuance of debt. We have also entered into various capital lease
financing agreements. In June 1999, we closed our initial public offering of 3.1
million shares of common stock at an initial public offering price of $14.00 per
share. Net of underwriting commissions, we received cash proceeds of
approximately $40 million in cash, which was reduced further by an additional $1
million of other related offering costs. On September 28, 2000, we completed the
private placement of $20 million in convertible subordinated notes. Net of
commission and other debt issuance costs, we received cash proceeds of
approximately $18.8 million. As of September 30, 2000 we had $1.8 million in
cash and cash equivalents and $23.8 million in investments in available for sale
securities.
Net cash used in operating activities was $13.9 million for the nine
months ended September 30, 2000 as compared to $10.2 million in the nine months
ended September 30, 1999. Cash used in operating activities for the nine months
ended September 30, 2000 and 1999 resulted primarily from the net loss of $14.1
million and $10.9 million, respectively.
Net cash used in investing activities for the nine months ended September
30, 2000 was $5.9 million, which primarily resulted from the net increase of
$3.7 million of investment in available for sale securities and $2.2 million of
capital expenditure. Net cash used in investing activities for the nine months
ended September 30, 1999 was $25.6 million, which primarily resulted from the
net increase of $24.6 million of investment in available for sale securities and
$1.0 million of capital expenditure.
Net cash provided by financing activities was $20.0 million in the nine
months ended September 30, 2000 as compared to $34.3 million in the nine months
ended September 30, 1999. Cash provided by financing activities in the nine
months ended September 30, 2000 resulted primarily from the net proceeds of
$18.8 million from the issuance of convertible subordinated notes in September
2000 and $1.5 million from the issuance of common stock attributable to the
exercise of stock options and warrants. During the nine months ended September
30, 1999, cash provided by financing activities was primarily the result of the
net proceeds of $39.0 million from the initial public offering and $5.3 million
from the issuance of Series C redeemable convertible preferred stock net of the
repayment of long-term debt in the amount of $9.7 million.
Online Resources currently believes that cash balances will be sufficient
to meet anticipated cash requirements through September 30, 2001 assuming the
net loss we are forecasting does not materially increase. There can be no
assurance, however, that the net losses we incur will not exceed our forecasts.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have operations subject to risks of foreign currency
fluctuations, nor do we use derivative financial instruments in our operations
or investment portfolio. Our exposure to market risk related changes in interest
rates relates primarily to our investment portfolio. At September 30, 2000 our
investment portfolio consisted of $1.8 million of cash and cash equivalents
invested in demand deposit and overnight investment accounts and $23.8 million
invested in available for sale securities. The fair value of our investment
portfolio or related income would not be significantly impacted by either a 100
basis point increase or decrease in interest rates due mainly to the short-term
nature of the major portion of our investment portfolio. All of the potential
changes noted above are based on sensitivity analysis performed on our balances
as of September 30, 2000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not a party to any pending material litigation nor is it
aware of any pending or threatened litigation that would have a material adverse
effect on the Company or its business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Proceeds to Online Resources, from its initial public offering in June 4,
1999, net of offering costs from the offering, totaled approximately $39
million. As of September 30, 2000, Online Resources had used $9.4 million of the
proceeds for the repayment of debt, $22.9 million for working capital and $6.7
million was held in cash and temporary investments.
During the fiscal quarter ended September 30, 2000, individuals exercised
options and warrants to purchase approximately 18,000 shares of common stock
with net proceeds to the Company of approximately $163,000. For the nine months
ended September 30, 2000, individuals exercised options and warrants to purchase
549,542 shares of common stock with net proceeds to the Company of approximately
$1.5 million.
The Company issued 3,291 shares of common stock upon a cashless,
otherwise known as a net, exercise of 4,989 outstanding warrants. Because of
this cashless exercise, no cash proceeds were obtained upon the exercise of the
warrants. The Company relied upon Section 4 (2) of the Securities Act of 1933,
as amended, in connection with the issuance of the shares.
On September 28, 2000, the Company issued and sold to accredited
investors (within the meaning of Regulation D under the Securities Act of 1933,
as amended) five-year convertible subordinated notes. These notes possess an 8%
interest rate and are convertible, subject to certain reset provisions, at $4.75
per share. Jefferies & Company, Inc. and Keefe, Bruyette and Woods, Inc. served
as underwriters. The total amount received from the sale of the notes was $20
million. Commissions of $917,200 and other debt issuance costs of $284,000 were
paid in connection with the placement. Jefferies & Company, Inc. also obtained
200,000 warrants that expire on September 30, 2005 that are exercisable at the
same price as the conversion price under the notes. The Company relied upon
Rule 506 under Regulation D in connection with the issuance of the notes. All
purchasers of notes had to substantiate their status as accredited investors.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
The Company secured the rights to the corporate name of "Online
Resources" and based upon the approval of its stockholders at its last annual
meeting, filed an amendment to its certificate of incorporation to change its
name from Online Resources & Communications Corporation to Online Resources
Corporation.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(A) Exhibits required to be filed by Item 601 of Regulation S-K.
Exhibit No. Description of Exhibit
4.1 Indenture dated September 28, 2000 between Online Resources Corporation and
Banker Trust Company for 8.0% Convertible Subordinated Notes Due 2005
4.2 Registration Rights Agreement between Online Resources Corporation and the
purchasers of convertible subordinated notes
4.3 Warrant Certificate issued to Jefferies & Company, Inc.
27 Financial Data Schedule
(B) Reports on Form 8-K
Online Resources did not file any Form 8-K reports during the
quarter ended September 30,2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ONLINE RESOURCES CORPORATION
Date: November 14, 2000 By: /s/ Matthew P. Lawlor
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Matthew P. Lawlor
Chairman and Chief Executive
Officer (Principal Executive Officer)
Date: November 14, 2000 By: /s/ Carl D. Blandino
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Carl D. Blandino
Chief Financial Officer, Executive
Vice President
(Principal Financial Officer)
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