1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[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 0-25849
ONESOURCE INFORMATION SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3204522
-------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
300 BAKER AVENUE, CONCORD, MA 01742
------------------------------------------------------------
(Address of principal executive offices, including Zip Code)
(978) 318-4300
---------------
(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
--- ---
The number of shares of the issuer's Common Stock, $0.01 par value per share,
outstanding as of November 10, 2000 was 12,113,808.
2
ONESOURCE INFORMATION SERVICES, INC.
CONTENTS
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet as of
September 30, 2000 and December 31, 1999 3
Consolidated Statement of Operations for the
Three months and nine months ended September 30, 2000 and 1999 4
Consolidated Statement of Cash Flows for the
Nine months ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 18
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
Exhibit Index 21
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PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ONESOURCE INFORMATION SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
(unaudited)
September 30, December 31,
2000 1999
------------- ------------
Assets
Current assets:
Cash and cash equivalents .................................... $ 16,729 $ 13,598
Accounts receivable, net of allowance for doubtful accounts of
$375 and $348 at September 30, 2000 and
December 31, 1999 respectively ............................ 8,841 14,420
Restricted time deposit ...................................... -- 100
Deferred subscription costs .................................. 5,300 7,225
Prepaid expenses and other current assets .................... 342 272
------------- ------------
Total current assets ...................................... 31,212 35,615
Property and equipment, net .........,,,,,......................... 5,260 3,422
Intangible assets, net ............................................ 8,478 9,606
Restricted time deposits .......................................... 603 603
Other assets ...................................................... 414 452
------------- ------------
Total assets ........................................... $ 45,967 $ 49,698
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of capital lease obligations ................. $ 63 $ 205
Accounts payable ............................................. 1,183 1,501
Accrued expenses ............................................. 4,382 4,618
Accrued royalties ............................................ 4,189 5,760
Deferred revenues ............................................ 21,808 24,222
------------- ------------
Total current liabilities ................................. 31,625 36,306
Capital lease obligations, net of current portion ................. -- 29
------------- ------------
Total liabilities ...................................... 31,625 36,335
------------- ------------
Stockholders' equity:
Preferred stock, $0.01 par value:
1,000,000 shares authorized, no shares issued and
outstanding at September 30, 2000 and December 31, 1999 .... -- --
Common stock, $0.01 par value:
20,000,000 shares authorized, 11,702,762 and 10,381,109
shares issued and outstanding at September 30,2000
and December 31, 1999, respectively ........................ 117 104
Additional paid-in capital ................................... 29,423 28,504
Deferred compensation ........................................ (198) (271)
Accumulated deficit .......................................... (15,185) (14,891)
Accumulated other comprehensive income (loss) ................ 185 (83)
------------- ------------
Total stockholders' equity ............................. 14,342 13,363
------------- ------------
Total liabilities and stockholders' equity ............. $ 45,967 $ 49,698
============= ============
The accompanying notes are an integral part of these
consolidated financial statements.
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ONESOURCE INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(unaudited)
For the three months ended For the nine months ended
September 30, September 30,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
Revenues:
Web-based product ............................. $ 12,674 $ 8,383 $ 34,278 $ 22,799
CD Rom product and other ...................... 982 335 3,507 2,442
-------- -------- -------- --------
13,656 8,718 37,785 25,241
-------- -------- -------- --------
Cost of revenues:
Web-based product ............................. 3,977 3,466 11,485 9,767
CD Rom product and other ...................... 563 197 1,809 1,038
-------- -------- -------- --------
4,540 3,663 13,294 10,805
-------- -------- -------- --------
Gross profit .................................. 9,116 5,055 24,491 14,436
-------- -------- -------- --------
Operating expenses:
Selling and marketing ......................... 5,472 3,284 15,409 9,205
Platform and product development .............. 2,113 2,074 6,563 5,739
General and administrative .................... 1,208 1,068 3,719 4,185
Amortization of intangible assets ............. 376 -- 1,128 --
-------- -------- -------- --------
Total operating expenses ................... 9,169 6,426 26,819 19,129
-------- -------- -------- --------
Loss from operations ....................... (53) (1,371) (2,328) (4,693)
Interest expense ................................... (58) (70) (88) (624)
Interest income .................................... 264 270 699 525
Other income ....................................... 500 500 1,500 1,500
-------- -------- -------- --------
Income (loss) before provision for income taxes 653 (671) (217) (3,292)
Provision for income taxes ......................... 17 -- 77 --
-------- -------- -------- --------
Net income (loss) ............................. $ 636 $ (671) $ (294) $ (3,292)
======== ======== ======== ========
Basic and diluted net income (loss) per share ...... $ 0.05 $ (0.07) $ (0.03) $ (0.39)
Weighted average common shares outstanding:
Basic ......................................... 11,664 10,061 11,352 8,340
Diluted ....................................... 13,734 10,061 11,352 8,340
The accompanying notes are an integral part of these
consolidated financial statements.
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ONESOURCE INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
For the nine months ended
September 30,
-------------------------
2000 1999
-------- --------
Increase (Decrease) in Cash and Cash Equivalents
Cash flows relating to operating activities:
Net loss .............................................. ($ 294) ($ 3,292)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization ...................... 1,813 1,212
Amortization of intangible assets .................. 1,128 --
Amortization of deferred compensation relating to
grants of stock options ......................... 73 78
Amortization of debt discount ...................... -- 52
Changes in assets and liabilities:
Accounts receivable .............................. 5,296 3,380
Deferred subscription costs ...................... 1,925 689
Prepaid expenses and other assets ................ (25) 86
Accounts payable ................................. (189) 144
Accrued expenses ................................. (268) (127)
Accrued royalties ................................ (1,571) (434)
Deferred revenues ................................ (1,891) (2,531)
-------- --------
Net cash provided (used) by operating activities ...... 5,997 (743)
-------- --------
Cash flows relating to investing activities:
Investment in restricted time deposits ................ -- (415)
Proceeds from maturity of restricted time deposit ..... 100 --
Purchases of property and equipment ................... (3,549) (2,020)
Capitalization of software development costs .......... (120) (169)
Deposit for subsequent acquisition .................... -- (7,610)
-------- --------
Net cash used by investing activities .............. (3,569) (10,214)
-------- --------
Cash flows relating to financing activities:
Proceeds from issuance of common stock ................ 932 26,985
Repurchase of common stock ............................ -- (3,387)
Repayment of long-term debt ........................... -- (6,284)
Repayments of capital lease obligations ............... (171) (360)
-------- --------
Net cash provided by financing activities .......... 761 16,954
-------- --------
Effect of exchange rate changes on cash and cash equivalents (58) 3
-------- --------
Increase in cash and cash equivalents ...................... 3,131 6,000
Cash and cash equivalents, beginning of period ............. 13,598 8,665
-------- --------
Cash and cash equivalents, end of period ................... $ 16,729 $ 14,665
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
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ONESOURCE INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements as of September 30, 2000
and for the three and nine months ended September 30, 2000 and 1999 are
unaudited. In the opinion of OneSource's management, the September 30, 2000 and
1999 unaudited interim consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations for those
periods. The results of operations for the nine months ended September 30, 2000
are not necessarily indicative of the results of operations for the year ending
December 31, 2000.
The balance sheet as of December 31, 1999 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
consolidated financial statements and footnotes thereto included in OneSource's
Annual Report on Form 10-K, as filed with the Securities and Exchange Commission
on March 29, 2000.
2. Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income (loss)
per share is computed using the weighted average number of common shares
outstanding during the period, plus the dilutive effect of potential common
stock.
Shares used in calculating basic and diluted net income (loss) per share
are as follows (in thousands):
Three months Nine months
ended September 30, ended September 30,
------------------------ ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
Weighted average shares outstanding
used for basic net income (loss)
per share 11,664 10,061 11,352 8,340
Dilutive stock options 2,070 -- -- --
-------- -------- -------- --------
Weighted average shares outstanding
used for dilutive net income (loss)
per share 13,734 10,061 11,352 8,340
======== ======== ======== ========
Options to purchase 85,579 shares were outstanding at September 30, 2000
but not included in the computation of diluted net income (loss) per share
because the exercise prices of the options were greater than the average market
price of the Company's common stock during the three months ended September 30,
2000.
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All potential common stock have been excluded from the calculation of diluted
earnings per share for the three months ended September 30, 1999 and the nine
months ended September 30, 2000 and 1999 since its inclusion would be
anti-dilutive. Total potential common stock consists of 3,346,771 and 3,931,069
shares of common stock issuable upon the exercise of stock options outstanding
with a weighted average exercise price of $4.12 and $2.27 per share as of
September 30, 2000 and 1999, respectively.
3. Comprehensive Income (Loss)
Total comprehensive income (loss), which includes net income (loss) and the
foreign currency translation adjustment, was $733,000 and ($26,000) for the
three and nine months ended September 30, 2000, respectively, and ($725,000) and
($3,286,000) for the three and nine months ended September 30, 1999,
respectively.
4. Geographic Information
Revenue was distributed geographically as follows (in thousands):
For the three months For the nine months
ended September 30, ended September 30,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
United States ..................... $ 10,630 $ 6,680 $ 29,894 $ 19,283
United Kingdom .................... 3,026 2,038 7,891 5,958
-------- -------- -------- --------
$ 13,656 $ 8,718 $ 37,785 $ 25,241
======== ======== ======== ========
Substantially all of OneSource's identifiable assets are located in the United
States.
5. Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective date of FASB Statement No. 133" and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an Amendment of
FASB Statement No. 133", which establishes accounting and reporting standards
for derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. OneSource, to
date, has not engaged in derivative and hedging activities, and accordingly does
not believe that the adoption of SFAS No. 133 will have a material impact on the
financial reporting and related disclosures. OneSource will adopt SFAS No. 133
as required by SFAS No. 137 in fiscal year 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," as amended by SAB No. 101A and 101B, which is effective no later
than the fourth fiscal quarter of fiscal years beginning after December 15,
1999. SAB No. 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. OneSource does
not expect the application of SAB No.101 to have a significant impact on its
financial position or results of operations.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving
Stock Compensation - an interpretation of APB Opinion No. 25." FIN No. 44
primarily clarifies (a) the definition of an employee for purposes of applying
APB Opinion No. 25, (b) the criteria for determining whether a plan qualifies as
a noncompensatory plan, (c) the accounting consequence of various modifications
to the terms of previously fixed stock options or awards, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN No.
44 was effective July 1, 2000, but certain conclusions in FIN No. 44 cover
specific events that occurred after either December 15, 1998 or January 12,
2000. The application of FIN No. 44 did not impact OneSource's financial
position or results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion and analysis below contain trend analysis and other
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk factors set
forth below under "Certain Factors That May Affect Future Results" and in the
Company's Annual Report on Form 10-K as filed with the Securities and Exchange
Commission on March 29, 2000.
OVERVIEW
OneSource provides Web-based business and financial information to
professionals who need quick access to reliable corporate, industry and market
intelligence. OneSource was formed as a division of Lotus Development
Corporation in 1987 and became an independent company when it was purchased in a
management buy-out in 1993. In December 1996, OneSource introduced Business
Browser, which today represents over 90% of revenues. OneSource's Business
Browser product line is designed to be a comprehensive and easy-to-use business
and financial information resource, integrating over 2500 sources of business
information from more than 25 category-leading business and financial
information providers.
On October 1, 1999, OneSource acquired Corporate Technology Information
Services, Inc. ("Corporate Technology"). Corporate Technology is a provider of
high technology company profiles with a focus on emerging private companies. The
consideration paid by OneSource was $7.6 million in cash. A portion of the cash
consideration is being held in escrow to be released in accordance with the
Agreement and Plan of Merger and an Escrow Agreement. For financial statement
purposes, this acquisition was accounted for as a purchase and, accordingly, the
results of operations of Corporate Technology subsequent to October 1, 1999 have
been included in OneSource's consolidated statement of operations.
Revenues from Web-based products accounted for $34.3 million, or 91% of
total revenues, for the nine months ended September 30, 2000, an increase from
$22.8 million, or 90% of total revenues, for the nine months ended September 30,
1999. In the same period, CD Rom product and other revenues, which consist of
printed directories and mailing lists (products acquired as part of the
Corporate Technology acquisition) increased to $3.5 million, or 9% of total
revenues, from $2.4 million, or 10% of total revenues. As of September 30, 2000,
831 organizations subscribed to our Business Browser product line, and the
annualized contract value for these organizations was $53.8 million.
Our revenues for both CD Rom and Web-based products consist of monthly
subscription fees from customer contracts. Customer contracts span varying
periods of time but are generally for one year, are renewable for like periods,
and are payable in advance. Subscription fees generally are quoted to clients on
an annual basis but are earned as revenues on a monthly basis over the
subscription period. Invoices are recorded as accounts receivable until paid and
as deferred revenues until earned. Deferred revenues attributable to Web-based
products decreased 6% to $21.5 million as of September 30, 2000 from $22.8
million as of December 31, 1999 and increased 41% from $15.2 million as of
September 30, 1999. Other revenues are recognized when goods and services are
delivered.
Cost of revenues consists primarily of royalties to information providers
and, to a lesser extent, employee salaries and benefits, facilities allocation
and related expenses, depreciation
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associated with computers for data processing and on-line requirements, and Web
hosting expenses. We enter into contracts with our information providers, which
generally are for a term of at least one year and are automatically renewable if
not canceled with advance notice. These contracts may be terminated under
certain circumstances. Under these arrangements, royalties are typically paid on
a quarterly basis to information providers. Royalties generally are calculated
either as a flat percentage of our revenues, as a fixed fee per period, or in
some cases, we pay a calculated fee based upon product growth compared to like
periods from the prior year.
Selling and marketing expense consists primarily of employee salaries and
benefits and sales commissions paid to our sales force, customer support
organization and marketing personnel, as well as facilities allocation and
related expenses, direct marketing promotional materials, trade show exhibitions
and advertising. Sales commissions are paid when customers are invoiced and are
recorded as deferred subscription costs, which are amortized ratably over the
term of the contract, typically 12 months, as the associated revenues are
recognized. All other selling and marketing costs are expensed as incurred.
Platform and product development expense consists primarily of employee
salaries and benefits, facilities allocation and related expenses, as well as
outside contractor expenses, relating to the development of our "platform" of
core software supporting our products and the development of new products based
upon that platform. Platform and product development expense also includes
expenses relating to our KeyID technology to integrate disparate information
sources into our Web-based products.
General and administrative expense consists primarily of employee salaries
and benefits, facilities allocation and related expenses associated with
OneSource's management, finance, human resources, management information systems
and administrative groups.
Other income consists of revenue generated in conjunction with the May 1998
sale of our CD-Insurance division. In connection with the disposition, we
licensed certain of our CD Rom software to the acquiror in exchange for $4.0
million of license fees. These license fees are being paid in eight equal
quarterly installments which began January 1, 1999 and running through December
31, 2000 and will be recognized ratably as other income. During each of the
three-month periods ended September 30, 2000 and 1999, OneSource recorded $0.5
million of other income related to the software license agreement.
COMPARISON OF RESULTS FOR THE QUARTER ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30,
1999
Revenues. Total revenues increased 57% to $13.7 million for the quarter
ended September 30, 2000 from $8.7 million for the quarter ended September 30,
1999.
Web-based product revenues increased 51% to $12.7 million for the quarter
ended September 30, 2000 from $8.4 million for the quarter ended September 30,
1999. The increase was attributable to the addition of new customers, an
increase in the number of user seats purchased by existing customers and the
sale of new products to existing customers. At the same time, CD Rom product and
other revenues, which consist of printed directories and mailing lists,
increased by 193% to $1.0 million in the third quarter of 2000 from $0.3 million
in the third quarter of 1999. Included in other revenues for the quarter ended
September 30, 2000 are $0.9 million of revenue recognized from products related
to the acquired Corporate Technology business. Excluding revenues attributable
to Corporate Technology, CD Rom revenues decreased 67% to $0.1 million in the
third quarter of 2000 from $0.3 million in the third quarter of 1999, as
OneSource continued to transition away from its legacy CD Rom business.
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Cost of Revenues. Total cost of revenues increased 24% to $4.5 million for
the quarter ended September 30, 2000 from $3.7 million for the quarter ended
September 30, 1999. As a percentage of total revenues, total cost of revenues
decreased to 33% for the quarter ended September 30, 2000 from 42% for the
quarter ended September 30, 1999. The increase in total cost of revenues was
principally due to increased royalty expense for our Web-based products and
costs associated with the acquired Corporate Technology business. The decrease
as a percentage of total revenues is the result of lower effective royalty rates
paid to information providers.
Cost of Web-based product revenues increased 15% to $4.0 million for the
quarter ended September 30, 2000 from $3.5 million for the quarter ended
September 30, 1999, primarily due to the growth in revenue. As a percentage of
Web-based product revenues, cost of Web-based product revenues decreased to 31%
for the quarter ended September 30, 2000 from 41% for the quarter ended
September 30, 1999, and was principally due to lower costs of acquiring data
from information providers.
Cost of CD Rom product and other revenues increased 186% to $0.6 million
for the quarter ended September 30, 2000 from $0.2 million for the quarter ended
September 30, 1999. This increase was solely due to costs associated with the
acquired Corporate Technology business, but was partially offset by a decrease
in CD Rom costs attributable to decreased revenues resulting from OneSource's
continued shift away from its legacy CD Rom product line. As a percentage of CD
Rom product and other revenues, cost of CD Rom product and other revenues
decreased to 57% for the quarter ended September 30, 2000 from 59% for the
quarter ended September 30, 1999.
Selling and Marketing Expense. Selling and marketing expense increased 67%
to $5.5 million for the quarter ended September 30, 2000 from $3.3 million for
the quarter ended September 30, 1999, principally due to increased headcount and
expenses incurred to hire and train new sales personnel as well as the addition
of a telesales group associated with the acquired Corporate Technology business.
Selling and marketing expense increased as a percentage of total revenues to 40%
for the quarter ended September 30, 2000 from 38% for the quarter ended
September 30, 1999. We expect to see further increases in selling and marketing
expense as we continue to build our international market presence.
Platform and Product Development Expense. Platform and product development
expense was consistent at $2.1 million for the three months ended September 30,
2000 and September 30, 1999. Platform and product development expense decreased
as a percentage of total revenues to 15% for the quarter ended September 30,
2000 from 24% for the quarter ended September 30, 1999.
General and Administrative Expense. General and administrative expense
increased 13% to $1.2 million for the quarter ended September 30, 2000 from $1.1
million for the quarter ended September 30, 1999. This increase was due
principally to additional headcount associated with the acquired Corporate
Technology business. General and administrative expense decreased as a
percentage of total revenues to 9% for the quarter ended September 30, 2000 from
12% for the quarter ended September 30, 1999.
Amortization of Intangible Assets. Amortization of intangible assets for
the quarter ended September 30, 2000 was $0.4 million. This expense is the
result of the acquisition of Corporate Technology and the associated
amortization of intangible assets acquired as part of that transaction.
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Interest Income, Net. Interest income, net of interest expense, was
consistent at $0.2 million of net interest income for both the quarter ended
September 30, 2000 and the quarter ended September 30, 1999.
Other Income. Other income was $0.5 million for each of the quarters ended
September 30, 2000 and 1999 and was attributable to a software license agreement
in connection with the May 1998 sale of our CD-Insurance division for the
license and support services provided during the period.
COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER
30, 1999
Revenues. Total revenues increased 50% to $37.8 million for the nine months
ended September 30, 2000 from $25.2 million for the nine months ended September
30, 1999.
Web-based product revenues increased 50% to $34.3 million for the nine
months ended September 30, 2000 from $22.8 million for the nine months ended
September 30, 1999. The increase was attributable to the addition of new
customers, an increase in the number of user seats purchased by existing
customers and the sale of new products to existing customers. At the same time,
CD Rom product and other revenues, which consist of printed directories and
mailing lists, increased by 44% to $3.5 million in the first nine months of 2000
from $2.4 million in the first nine months of 1999. Included in revenues for the
nine months ended September 30, 2000 were $3.2 million of revenue recognized
from products related to the acquired Corporate Technology business. Excluding
revenues attributable to Corporate Technology, CD Rom revenues decreased 87% to
$0.3 million in the first nine months of 2000 from $2.4 million in the first
nine months of 1999, as OneSource continued to transition away from its legacy
CD Rom business.
Cost of Revenues. Total cost of revenues increased 23% to $13.3 million for
the nine months ended September 30, 2000 from $10.8 million for the nine months
ended September 30, 1999. As a percentage of total revenues, total cost of
revenues decreased to 35% for the nine months ended September 30, 2000 from 43%
for the nine months ended September 30, 1999. The increase in total cost of
revenues was due to increased royalty expense for our Web-based products and
costs associated with the acquired Corporate Technology business. The decrease
as a percentage of total revenues is the result of lower effective royalty rates
paid to information providers.
Cost of Web-based product revenues increased 18% to $11.5 million for the
nine months ended September 30, 2000 from $9.8 million for the nine months ended
September 30, 1999, primarily due to the growth in revenue. As a percentage of
Web-based product revenues, cost of Web-based product revenues decreased to 34%
for the nine months ended September 30, 2000 from 43% for the nine months ended
September 30, 1999, due to an increase in our customer base and expansion of
existing customers, which enabled OneSource to lower its effective royalty rates
and infrastructure expenses.
Cost of CD Rom and other product revenues increased 74% to $1.8 million for
the nine months ended September 30, 2000 from $1.0 million for the nine months
ended September 30, 1999. This increase was solely due to costs associated with
the acquired Corporate Technology business, but was partially offset by a
decrease in CD Rom costs attributable to decreased revenues resulting from
OneSource's continued shift away from its legacy CD Rom product line. As a
percentage of CD Rom product revenues, cost of CD Rom and other product revenues
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increased to 52% for the nine months ended September 30, 2000 from 43% for the
nine months ended September 30, 1999.
Selling and Marketing Expense. Selling and marketing expense increased 67%
to $15.4 million for the nine months ended September 30, 2000 from $9.2 million
for the nine months ended September 30, 1999, principally due to increased
headcount and expenses incurred to hire and train new sales personnel as well as
the addition of a telesales group associated with the acquired Corporate
Technology business. Selling and marketing expense increased as a percentage of
total revenues to 41% for the nine months ended September 30, 2000 from 36% for
the nine months ended September 30, 1999. We expect sales and marketing expenses
to increase as we continue to hire and train additional sales personnel.
Platform and Product Development Expense. Platform and product development
expense increased 14% to $6.6 million for the nine months ended September 30,
2000 from $5.7 million for the nine months ended September 30, 1999. This
increase was due principally to additional headcount to meet new product
development demands. Platform and product development expense decreased as a
percentage of total revenues to 17% for the nine months ended September 30, 2000
from 23% for the nine months ended September 30, 1999.
General and Administrative Expense. General and administrative expense
decreased 11% to $3.7 million for the nine months ended September 30, 2000 from
$4.2 million for the nine months ended September 30, 1999. General and
administrative expense decreased as a percentage of total revenues to 10% for
the nine months ended September 30, 2000 from 17% for the nine months ended
September 30, 1999. These decreases were primarily the result of non-recurring
expenses incurred by OneSource, which relate to arrangements which were
terminated upon the completion of our initial public offering in May 1999.
Amortization of Intangible Assets. Amortization of intangible assets for
the nine months ended September 30, 2000 was $1.1 million. This expense is the
result of the acquisition of Corporate Technology and the associated
amortization of intangible assets acquired as part of that transaction.
Interest Income, Net. Interest income, net of interest expense, increased
717% to $0.6 million of net interest income for the nine months ended September
30, 2000 from $0.1 million of net interest expense for the nine months ended
September 30, 1999. This increase was primarily due to invested cash balances
from the public offering proceeds and cash generated from operations.
Other Income. Other income was $1.5 million for each of the nine months
ended September 30, 2000 and 1999 and was attributable to a software license
agreement in connection with the May 1998 sale of our CD-Insurance division for
the license and support services provided during the period.
ANNUALIZED CONTRACT VALUE
One measure of the performance of our business is "annualized contract
value." This is a measurement we use for normalized period-to-period comparisons
to indicate business volume and growth in terms of new customers, upgrades and
expansions at existing customers. Our presentation and calculation of annualized
contract value may not be comparable to similarly titled measures used by other
companies. It is not an absolute indicator and we cannot guarantee that any
annualized contract value will be ultimately realized as revenues.
We use annualized contract value as a measure of our business because it
shows the growth or decline in our customer base in a way that revenues cannot.
Since our business is a subscription business, revenues are recognized not when
a sale is made, but in ratable portions over the term
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13
of the subscription (which is usually twelve months). As a result, from a
revenue viewpoint the addition or loss of even a major customer contract may not
have a dramatic impact on a quarter-to-quarter basis. On the other hand, by
looking at the value of customer contracts in hand at the end of each quarter,
we can more readily see trends in our business. For example, the addition of a
one-year subscription contract with total payments of $1.0 million may only
increase revenues by approximately $250,000 ($1.0 million divided by four) in
the quarter in which the sale is made, but would increase annualized contract
value by $1.0 million. Similarly, if the customer did not renew that contract,
revenues in the next quarter would only decrease by $250,000, while annualized
contract value would decrease by $1.0 million.
In calculating annualized contract value, we include only those contracts
where the customer has actually been invoiced. Since amounts invoiced are
included in deferred revenues on our balance sheet for all customer contracts
with terms extending beyond the month of invoice, this demonstrates that
annualized contract value is based on actual customer contracts reflected in our
historical financial statements. To compute annualized contract value, we
multiply by twelve the total amount of fees invoiced for one month and included
in deferred revenues. Annualized contract value is not intended to be an
absolute indicator of future revenues. We only annualize existing, invoiced
contracts, but we do so without regard to the remaining term of those contracts.
Most of our contracts are for twelve months, but as of the date that we
calculate annualized contract value the remaining term of nearly all of our
contracts will be less than twelve months. If a customer fails to pay its
invoiced fees or terminates the contract or if we are unable to renew a
contract, our revenues in subsequent periods may be less than expected based
solely on annualized contract values. Conversely, if we add additional customers
or renew existing contracts at higher rates, our revenues in future periods may
exceed expectations based solely on annualized contract value.
The calculation of annualized contract value for our Web-based products is
illustrated below:
ONE MONTH
OF INVOICED
WEB-BASED FEES IN
DEFERRED DEFERRED ANNUALIZED
MEASUREMENT DATE REVENUES REVENUES CONTRACT VALUE
- ---------------- -------- ----------- --------------
(IN THOUSANDS)
September 30, 1999........................ $ 15,164 $2,846.6 $ 34,159
September 30, 2000........................ 21,517 4,479.8 53,757
We have increased annualized contract value attributable to Web-based
products 57% to $53.8 million as of September 30, 2000 from $34.2 million as of
September 30, 1999. The number of Web-based customers has increased 56% to 831
at September 30, 2000 from 531 at September 30, 1999. At the same time, the
average annualized contract value of all Web-based product customers has
increased to $64,700 per customer at September 30, 2000 from $64,300 per
customer at September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since acquiring our business from Lotus Development Corporation in 1993, we
have funded our operations through a combination of seller financing, proceeds
received from the sale of Class P common stock and common stock in connection
with the purchase of the business from Lotus Development Corporation, bank debt,
proceeds received from the sale of non-strategic lines of business, capitalized
equipment leases, cash flows from operations and our initial public offering
which closed in May 1999.
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14
Our cash and cash equivalents totaled $16.7 million at September 30, 2000,
compared to $13.6 million at December 31, 1999, and $14.7 million at September
30, 1999. The increase of $3.1 million from December 31,1999 is primarily due to
funds provided by operating activities.
Net cash provided by operating activities was $6.0 million for the nine
months ended September 30, 2000, compared to net cash used in operating
activities of $0.7 million for the nine months ended September 30, 1999. The net
change of $6.7 million period to period is the result of a lower net loss of
$3.0 million, increased depreciation and amortization of $1.7 million and a
favorable net change of assets and liabilities of $2.0 million.
Net cash used in investing activities was $3.6 million for the nine months
ended September 30, 2000, compared to $10.2 million for the nine months ended
September 30, 1999. During the nine months ended September 30, 2000, cash used
in investing activities was primarily used for the purchase of property and
equipment of $3.6 million. During the nine months ended September 30, 1999, cash
used in investing activities was primarily used for $7.6 million of funds placed
in escrow for the purchase of Corporate Technology Information Services, Inc.,
the purchase of property and equipment for $2.0 million, as well as $0.4 million
of cash used to purchase a restricted time deposit used to guarantee a letter of
credit related to our new headquarters.
Net cash provided by financing activities was $0.8 million for the nine
months ended September 30, 2000, compared to $17.0 million for the nine months
ended September 30, 1999. Net cash provided by financing activities in 2000
primarily consisted of net proceeds from the sale of common stock, offset in
part by repayments of capital lease obligations. Net cash provided by financing
activities in 1999 primarily consisted of net proceeds from the sale of common
stock, offset in part by the repurchase and retirement of common stock and
repayments of debt and capital lease obligations.
We do not currently have a line of credit but intend to enter into a
revolving line of credit for letters of credit and general working capital.
We believe that our current cash and cash equivalents and funds anticipated
to be generated from operations will be sufficient to satisfy working capital
and capital expenditure requirements for at least the next twelve months.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133" and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an Amendment of
FASB Statement No. 133", which establishes accounting and reporting standards
for derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. OneSource, to
date, has not engaged in derivative and hedging activities, and accordingly does
not believe that the adoption of SFAS No. 133 will have a material impact on the
financial reporting and related disclosures. OneSource will adopt SFAS No. 133
as required by SFAS No. 137 in fiscal year 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," as amended by SAB No. 101A and 101B, which is effective no later
than the fourth fiscal quarter of fiscal years beginning after December 15,
1999. SAB No. 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. OneSource does
not expect the application of SAB No.101 to have a significant impact on their
financial position or results of operations.
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15
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving
Stock Compensation - an interpretation of APB Opinion No. 25." FIN No. 44
primarily clarifies (a) the definition of an employee for purposes of applying
APB Opinion No. 25, (b) the criteria for determining whether a plan qualifies as
a noncompensatory plan, (c) the accounting consequence of various modifications
to the terms of previously fixed stock options or awards, (d) and the accounting
for an exchange of stock compensation awards in a business combination. FIN No.
44 is effective July 1, 2000, but certain conclusions in FIN No. 44 cover
specific events that occurred after either December 15, 1998 or January 12,
2000. The application of FIN No. 44 did not impact OneSource's financial
position or results of operations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report on Form 10-Q contains forward-looking statements,
which involve risks and uncertainties. OneSource's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including without limitation, those set forth in the
following risk factors discussed below and in our Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission on March 29, 2000. The
following risk factors should be considered carefully in evaluating OneSource
and its business.
WE HAVE A LIMITED OPERATING HISTORY WITH BUSINESS BROWSER AND THE PRODUCTS
ACQUIRED FROM CORPORATE TECHNOLOGY ON WHICH TO EVALUATE OUR PROSPECTS. We began
operations as an independent company in 1993. We began to migrate our business
to the Web from CD Rom-based products in early 1996, and launched the Web-based
Business Browser product line in December 1996. In 1999, we acquired several
products, primarily consisting of CD Rom, printed directories and mailing lists
from Corporate Technology. Our prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies
transitioning to a new product line, particularly companies in the new and
rapidly evolving market for Internet and Web-based business information
products.
WE HAVE A CUMULATIVE DEFICIT AND EXPECT TO CONTINUE TO HAVE A CUMULATIVE
DEFICIT FOR THE FORESEEABLE FUTURE. We incurred losses from operations of
approximately $1.6 million in 1996, $1.4 million in 1997, $5.0 million in 1998,
$6.4 million in 1999 and $2.3 million for the nine months ended September 30,
2000. In addition, we have not reached the critical mass of users of Web-based
products, that we believe is necessary to effectively leverage our royalty
payments and infrastructure expenses, which may not allow OneSource to sustain
and increase profits. As of September 30, 2000 we had an accumulated deficit of
$15.2 million.
WE RELY ON OUR BUSINESS BROWSER PRODUCT LINE, AND WE WILL NOT SUCCEED
UNLESS DEMAND FOR OUR BUSINESS BROWSER PRODUCTS CONTINUES TO GROW. Subscription
revenues from our Business Browser product line accounted for 91% of total
revenues for the nine months ended September 30, 2000, 90% of total revenues in
1999, 53% of total revenues in 1998 and 11% in 1997. We are phasing out our
legacy CD Rom products that are not part of the Business Browser product line.
As a result, our future financial condition will depend heavily on the success
or failure of our Business Browser product line. Business Browser products were
introduced in December 1996 and it is difficult to predict demand and market
acceptance for these products in the new and rapidly evolving Web-based
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business information services market. If the demand for Business Browser
products does not grow, whether due to competition, lack of market acceptance,
failure of Internet or Web use to grow in general, technological change or other
factors, our business would suffer significantly.
ANNUALIZED CONTRACT VALUE MAY NOT BE AN ACCURATE INDICATION OF OUR
PERFORMANCE. We use "annualized contract value" as a measurement for normalized
period-to-period comparisons to indicate business volume and growth. Our
presentation and calculation of annualized contract value may not be comparable
to similarly titled measures used by other companies. It is not an absolute
indicator and we cannot guarantee that any annualized contract value will be
ultimately realized as revenues.
COMPETITION IN OUR INDUSTRY IS INTENSE AND MANY OF OUR COMPETITORS HAVE
GREATER RESOURCES THAN WE DO; THIS COMPETITION MAY ADVERSELY AFFECT OUR
FINANCIAL RESULTS. The business information services industry is intensely
competitive. We face direct or indirect competition from the following types of
companies:
- large, well-established business and financial information providers
such as Dow Jones, Lexis-Nexis, Pearson, Reuters, Factiva, Thomson,
Primark and McGraw-Hill
- on-line information services or Websites targeted to specific markets
or applications, such as NewsEdge, Factset and Bloomberg
- providers of sales, marketing and credit information such as Dun &
Bradstreet, InfoUSA, iMarket, Siebel
- Web retrieval, Web "portal" companies and other free or low-cost mass
market on-line services such as Excite, Infoseek, Lycos, Yahoo! and
AOL/Netscape
- free or low-cost specialized business and financial information
Websites such as Hoovers.com, Marketwatch.com, Multex.com and
TheStreet.com
Based on reported operating results, industry reports and other publicly
available information, we believe that many of our existing competitors, as well
as a number of prospective competitors, have longer operating histories, greater
name recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we do. As a result, they may be able to
respond more quickly to new or emerging technologies and changes in user
requirements, or to devote greater resources to the development, promotion and
sale of their products than we can. These competitors may be able to undertake
more extensive marketing campaigns, adopt more aggressive pricing policies and
make more attractive offers to potential employees, customers and information
providers. Our competitors also may develop products that are equal or superior
to our products or that achieve greater market acceptance than our products.
IF OUR INFORMATION PROVIDERS STOPPED DOING BUSINESS WITH US, WE COULD NOT
CONTINUE TO SELL BUSINESS BROWSER. We do not own or create all of the original
content distributed through our products. We depend significantly on information
providers to supply information and data feeds to us on a timely basis. Our
products could
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17
experience interruptions due to any failure or delay in the transmission or
receipt of this information.
IF OUR SOFTWARE IS DEFECTIVE, IT MIGHT BE COSTLY TO CORRECT; WE COULD GET
SUED AND OUR REPUTATION COULD BE HARMED. Complex software like the software we
develop for our products may contain errors or defects, especially when first
implemented, that may be very costly to correct. Defects or errors also could
result in downtime and our business could suffer significantly from potential
adverse customer reaction, negative publicity and harm to our reputation.
WE MAY HAVE DIFFICULTY IDENTIFYING AND COMPETING FOR ACQUISITION
OPPORTUNITIES. Our business strategy includes the pursuit of strategic
acquisitions. From time to time we may engage in discussions with third parties
concerning potential acquisitions of niche expertise, business and proprietary
rights. In executing our acquisition strategy, we may be unable to identify
suitable companies as acquisition candidates, making it more difficult to
acquire suitable companies on favorable terms.
PURSUING AND COMPLETING POTENTIAL ACQUISITIONS COULD DIVERT MANAGEMENT
ATTENTION AND FINANCIAL RESOURCES AND MAY NOT PRODUCE THE DESIRED BUSINESS
RESULTS. If we pursue any acquisition, our management could spend a significant
amount of time and management and financial resources in the acquisition process
and to integrate the acquired business with our existing business. To pay for an
acquisition, we may use capital stock, cash, or a combination of both.
Alternatively, we may borrow money from a bank or other lender. If we use cash
or debt financing, our financial liquidity will be reduced. In addition, from an
accounting perspective, an acquisition may involve nonrecurring charges or
involve amortization of significant amounts of goodwill that could adversely
affect our results of operations.
Despite the investment of these management and financial resources and
completion of due diligence with respect to these efforts, an acquisition may
not produce the revenue, earnings or business synergies that we anticipated, and
an acquired technology or proprietary right may not perform as expected for a
variety of reasons, including:
- difficulty in the assimilation of the operations, technologies,
rights, products and personnel of the acquired company
- risks of entering markets in which we have no or limited prior
experience
- expenses of any undisclosed or potential legal liabilities of the
acquired company
- the potential loss of key employees of the acquired company
WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY RESULTS, WHICH
MAKES IT DIFFICULT FOR INVESTORS TO MAKE RELIABLE PERIOD-TO-PERIOD COMPARISONS
AND CONTRIBUTES TO VOLATILITY IN THE MARKET PRICE FOR OUR COMMON STOCK. Our
quarterly revenues, gross profits and results of operations have fluctuated
significantly in the past and we expect them to continue to fluctuate
significantly in the future. In addition, we believe that an important measure
of our business is the annualized contract value at the end of each period,
which also may fluctuate. Causes of such fluctuations have included and may
include, among other factors:
- changes in demand for our products
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18
- the dollar value and timing of both new and renewal subscriptions
- competition (particularly price competition)
- increases in selling and marketing expenses, as well as other
operating expenses
- technical difficulties or system downtime affecting our products or
the Web generally
- economic conditions specific to the Web, as well as general economic
conditions
- consolidation of our customers
In addition, a substantial portion of our expenses, including most product
development and selling and marketing expenses, must be incurred in advance of
revenue generation. If our projected revenue does not meet our expectations,
then we are likely to experience an even larger shortfall in our operating
profit (loss) relative to our expectations.
Any one or more of these factors could affect our business, financial
condition and results of operations, and this makes the prediction of results of
operations on a quarterly basis unreliable. As a result, we believe that
period-to-period comparisons of our historical results of operations and
annualized contract values are not necessarily meaningful and should not be
relied upon as an indication for future performance. Also, due to these and
other factors, it is possible that our quarterly results of operations
(including the annualized contract value) may be below expectations. If this
happens, the price of our common stock would likely decrease.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
OneSource is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. However, our exposure to currency
exchange rate fluctuations has been and is expected to continue to be modest due
to the fact that the operations of our United Kingdom subsidiary are almost
exclusively conducted in local currency. Operating results are translated into
United States dollars and consolidated for reporting purposes. The impact of
currency exchange rate movements on intercompany transactions was not
significant for the nine months ended September 30, 2000.
OneSource also owns financial instruments that are sensitive to market
risks as part of its investment portfolio. The investment portfolio is used to
preserve OneSource's capital until it is required to fund operations, including
the Company's marketing and product development activities. None of these
market-risk sensitive instruments are held for trading purposes. The investment
portfolio contains instruments that are subject to the risk of a decline in
interest rates. We do not enter into derivatives or any other financial
instruments for trading or speculative purposes.
PART II- OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On May 19, 1999, we commenced an initial public offering of 3,636,000
shares of common stock, $0.01 par value per share, pursuant to a final
prospectus dated May 19, 1999.
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19
The prospectus was contained in OneSource's registration statement on Form S-1,
which was declared effective by the Securities and Exchange Commission (SEC File
No. 333-73263) on May 18, 1999. Of the 3,636,000 shares of common stock offered,
2,500,000 shares were offered and sold by OneSource and 1,136,000 shares were
offered and sold by certain stockholders of OneSource. The offering closed on
May 24, 1999 upon the sale of all 3,636,000 shares. The aggregate offering price
of the offering to the public was $43,632,000, with proceeds to OneSource and
the selling stockholders, after deduction of the underwriting discount, of
$27,900,000 and $12,677,760, respectively. The aggregate amount of expenses
incurred by OneSource in connection with the issuance and distribution of the
shares of common stock sold in the offering were approximately $3.9 million,
including approximately $3.0 million in underwriting discounts and commissions
and $0.9 million in other offering expenses.
The net proceeds to OneSource from the offering, after deducting
underwriting discounts and commissions and other offering expenses was
approximately $27.0 million.
The net proceeds from the offering, less $6.8 million used to pay off
long-term debt and $7.6 million used to acquire Corporate Technology Information
Services, Inc., have been invested in interest bearing, investment grade
securities.
Since the initial public offering, OneSource has produced positive cash
flow and has not needed to further draw from these funds for day-to-day
operations.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
Exhibit
Number Description
------ -----------
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed by OneSource for the quarter ending
September 30, 2000.
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SIGNATURE
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.
ONESOURCE INFORMATION SERVICES, INC.
Date: November 13, 2000 By: /s/ Roy D. Landon
-----------------------------------------
Roy D. Landon
Senior Vice President, Chief Financial
Officer (Principal Financial Officer)
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EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description Page
- --------- ------------------------------------------------------- ------------
27.1 Financial Data Schedule *
* Exhibit included in EDGAR filing with Securities and Exchange Commission.
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