<PAGE> 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 June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Transition period from ______ to ______
Commission File Number 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 August 9, 2000 was 11,686,465.
================================================================================
<PAGE> 2
ONESOURCE INFORMATION SERVICES, INC.
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet as of
June 30, 2000 and December 31, 1999 3
Consolidated Statement of Operations:
Three months and six months ended June 30, 2000 and 1999 4
Consolidated Statement of Cash Flows:
Six months ended June 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 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
Exhibit Index 21
</TABLE>
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ONESOURCE INFORMATION SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ......................................... $ 16,231 $ 13,598
Accounts receivable, net of allowance for doubtful accounts of
$362 and $348 at June 30, 2000 and
December 31, 1999, respectively ............................... 10,661 14,420
Restricted time deposit ........................................... -- 100
Deferred subscription costs ....................................... 6,037 7,225
Prepaid expenses and other current assets ......................... 237 272
-------- --------
Total current assets .......................................... 33,166 35,615
Property and equipment, net ............................................ 4,827 3,422
Intangible assets, net ................................................. 8,854 9,606
Restricted time deposits ............................................... 603 603
Other assets ........................................................... 419 452
-------- --------
Total assets ............................................... $47,869 $ 49,698
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of capital lease obligations ...................... $ 122 $ 205
Accounts payable .................................................. 1,746 1,501
Accrued expenses .................................................. 4,842 4,618
Accrued royalties ................................................. 4,108 5,760
Deferred revenues ................................................. 23,808 24,222
-------- --------
Total current liabilities ..................................... 34,626 36,306
Capital lease obligations, net of current portion ...................... -- 29
-------- --------
Total liabilities .......................................... 34,626 36,335
-------- --------
Stockholders' equity:
Preferred stock, $0.01 par value:
1,000,000 shares authorized, no shares issued and
outstanding at June 30, 2000 and December 31, 1999 ............ -- --
Common stock, $0.01 par value:
20,000,000 shares authorized, 11,600,974 and 10,381,109
shares issued and outstanding at June 30, 2000
and December 31, 1999, respectively ........................... 115 104
Additional paid-in capital ........................................ 29,083 28,504
Deferred compensation ............................................. (222) (271)
Accumulated deficit ............................................... (15,821) (14,891)
Accumulated other comprehensive income (loss) ..................... 88 (83)
-------- --------
Total stockholders' equity ................................. 13,243 13,363
-------- --------
Total liabilities and stockholders' equity ................. $ 47,869 $ 49,698
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
- 3 -
<PAGE> 4
ONESOURCE INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------- -------------------------
2000 1999 2000 1999
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Web-based product ........................ $ 11,535 $ 7,513 $ 21,604 $ 14,416
CD Rom product and other ................. 1,036 867 2,525 2,107
-------- -------- -------- --------
12,571 8,380 24,129 16,523
-------- -------- -------- --------
Cost of revenues:
Web-based product ........................ 3,547 3,331 7,508 6,301
CD Rom product and other ................. 706 354 1,246 841
-------- -------- -------- --------
4,253 3,685 8,754 7,142
-------- -------- -------- --------
Gross profit ............................. 8,318 4,695 15,375 9,381
-------- -------- -------- --------
Operating expenses:
Selling and marketing .................... 5,328 2,994 9,937 5,921
Platform and product development ......... 2,099 1,947 4,450 3,665
General and administrative ............... 1,237 2,257 2,511 3,117
Amortization of intangible assets ........ 376 -- 752 --
-------- -------- -------- --------
Total operating expenses ............. 9,040 7,198 17,650 12,703
-------- -------- -------- --------
Loss from operations ................. (722) (2,503) (2,275) (3,322)
Interest expense .............................. (4) (362) (30) (554)
Interest income ............................... 239 156 435 255
Other income .................................. 500 500 1,000 1,000
-------- -------- -------- --------
Income (loss) before provision for
income taxes ....................... 13 (2,209) (870) (2,621)
Provision for income taxes .................... 40 -- 60 --
-------- -------- -------- --------
Net loss ............................. $ (27) $ (2,209) $ (930) $ (2,621)
======== ======== ======== ========
Basic and diluted net loss per share .......... $ 0.00 $ (0.27) $ (0.08) $ (0.35)
Weighted average common shares outstanding..... 11,526 8,207 11,194 7,455
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
-4-
<PAGE> 5
ONESOURCE INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows relating to operating activities:
Net Loss .............................................. $ (930) $ (2,621)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization ..................... 1,151 772
Amortization of intangible assets ................. 752 --
Amortization of deferred compensation relating to
grants of stock options ......................... 49 45
Amortization of debt discount ..................... -- 52
Changes in assets and liabilities:
Accounts receivable ............................ 3,533 4,165
Deferred subscription costs .................... 1,188 704
Prepaid expenses and other assets .............. 86 120
Accounts payable ............................... 299 76
Accrued expenses ............................... 239 (1,070)
Accrued royalties .............................. (1,652) (896)
Deferred revenues .............................. (79) (2,562)
-------- --------
Net cash provided (used) by operating activities .. 4,636 (1,215)
-------- --------
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 ................... (2,488) (1,326)
Capitalization of software development costs .......... (80) (113)
-------- --------
Net cash used by investing activities ............. (2,468) (1,854)
-------- --------
Cash flows relating to financing activities:
Proceeds from issuance of common stock ................ 590 27,092
Repurchase of common stock ............................ -- (3,387)
Repayment of long-term debt ........................... -- (6,284)
Repayments of capital lease obligations ............... (112) (252)
-------- --------
Net cash provided by financing activities ......... 478 17,169
-------- --------
Effect of exchange rate changes on cash and cash equivalents (13) (22)
-------- --------
Increase in cash and cash equivalents ...................... 2,633 14,078
Cash and cash equivalents, beginning of period ............. 13,598 8,665
-------- --------
Cash and cash equivalents, end of period ................... $ 16,231 $ 22,743
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
-5-
<PAGE> 6
ONESOURCE INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements as of June 30, 2000 and
for the three and six months ended June 30, 2000 and 1999 are unaudited. In the
opinion of OneSource's management, the June 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 six months ended June 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. Earnings Per Share
Basic net loss per share is computed using the weighted average number of
common shares outstanding during the period. Diluted net 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. Total potential
common stock consists of 3,389,899 stock options outstanding with a weighted
average exercise price of $4.03 per share as of June 30, 2000. All potential
common stock have been excluded from the calculation of diluted net loss per
share since its inclusion would be anti-dilutive.
3. Comprehensive Income (Loss)
Total comprehensive income (loss), which includes net income (loss) and the
foreign currency translation adjustment, was $109,000 and ($759,000) for the
three and six months ended June 30, 2000, respectively, and ($2,184,000) and
($2,560,000) for the three and six months ended June 30, 1999, respectively.
4. Geographic Information
Revenue was distributed geographically as follows:
<TABLE>
<CAPTION>
For the Three Months For the Six months
ended June 30, ended June 30,
---------------------- ----------------------
2000 1999 2000 1999
------- ------ ------- -------
<S> <C> <C> <C> <C>
United States.................... $10,016 $6,380 $19,264 $12,603
United Kingdom................... 2,555 2,000 4,865 3,920
------- ------ ------- -------
$12,571 $8,380 $24,129 $16,523
======= ====== ======= =======
</TABLE>
Substantially all of OneSource's identifiable assets are located in the
United States.
-6-
<PAGE> 7
5. Recently Issued Accounting Pronouncements
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.
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. OneSource does not expect the application of FIN No. 44 to have a
significant impact on their financial position or results of operations.
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
-7-
<PAGE> 8
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 $21.6 million, or 90% of
total revenues, for the six months ended June 30, 2000, an increase from $14.4
million, or 87% of total revenues, for the six months ended June 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 $2.5 million, or 10% of total revenues,
from $2.1 million, or 13% of total revenues. As of June 30, 2000, 731
organizations subscribed to our Business Browser product line, and the
annualized contract value for these organizations was $49.0 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 increased 1.7% to $23.2 million as of June 30, 2000 from $22.8 million
as of December 31, 1999 and increased 55% from $14.9 million as of June 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 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 includes expenses
relating to the Corporate Technology database product and implementation of our
KeyID technology to integrate disparate information sources into our Web-based
products.
-8-
<PAGE> 9
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 June 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 JUNE 30, 2000 AND JUNE 30, 1999
Revenues. Total revenues increased 50% to $12.6 million for the quarter
ended June 30, 2000 from $8.4 million for the quarter ended June 30, 1999.
Web-based product revenues increased 54% to $11.5 million for the quarter
ended June 30, 2000 from $7.5 million for the quarter ended June 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
19% to $1.0 million in the second quarter of 2000 from $0.9 million in the
second quarter of 1999. Included in revenues for the quarter ended June 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 88% to $0.1 million in the second quarter
of 2000 from $0.9 million in the second quarter of 1999, as OneSource continued
to transition away from its legacy CD Rom business.
Cost of Revenues. Total cost of revenues increased 15% to $4.3 million for
the quarter ended June 30, 2000 from $3.7 million for the quarter ended June 30,
1999. As a percentage of total revenues, total cost of revenues decreased to 34%
for the quarter ended June 30, 2000 from 44% for the quarter ended June 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.
Cost of Web-based product revenues increased 6% to $3.5 million for the
quarter ended June 30, 2000 from $3.3 million for the quarter ended June 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 June 30, 2000 from 44% for the quarter ended June 30, 1999, and
was principally due to lower costs of acquiring data from information providers.
Cost of CD Rom and other product revenues increased 99% to $0.71 million for
the quarter ended June 30, 2000 from $0.35 million for the quarter ended June
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 and
other product revenues, cost of CD Rom and other product revenues increased to
68% for the quarter ended June 30, 2000 from 41% for the quarter ended June 30,
1999.
Selling and Marketing Expense. Selling and marketing expense increased 78%
to $5.3 million for the quarter ended June 30, 2000 from $3.0 million for the
quarter ended June 30, 1999, principally due to increased headcount and expenses
incurred to hire and train new sales
-9-
<PAGE> 10
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 42% for the quarter ended June 30, 2000
from 36% for the quarter ended June 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 8% to $2.1 million for the quarter ended June 30, 2000 from
$1.9 million for the quarter ended June 30, 1999. This increase was due
principally to additional headcount to meet new product demands as well as the
addition of system engineers associated with the acquired Corporate Technology
business. Platform and product development expense decreased as a percentage of
total revenues to 17% for the quarter ended June 30, 2000 from 23% for the
quarter ended June 30, 1999.
General and Administrative Expense. General and administrative expense
decreased 45% to $1.2 million for the quarter ended June 30, 2000 from $2.3
million for the quarter ended June 30, 1999. General and administrative expense
decreased as a percentage of total revenues to 10% for the quarter ended June
30, 2000 from 27% for the quarter ended June 30, 1999. These decreases were
primarily the result of non-recurring expenses incurred by OneSource for the
quarter ended June 30, 1999, 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
quarter ended June 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.
Interest Income, Net. Interest income, net of interest expense, increased
214% to $0.2 million of net interest income for the quarter ended June 30, 2000
from $0.2 million of net interest expense for the quarter ended June 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 $0.5 million for each of the quarters ended
June 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 SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
Revenues. Total revenues increased 46% to $24.1 million for the six months
ended June 30, 2000 from $16.5 million for the six months ended June 30, 1999.
Web-based product revenues increased 50% to $21.6 million for the six months
ended June 30, 2000 from $14.4 million for the six months ended June 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
20% to $2.5 million in the first six months of 2000 from $2.1 million in the
first six months of 1999. Included in revenues for the six months ended June 30,
2000 were $2.3 million of revenue recognized from products related to the
acquired Corporate Technology business. Excluding revenues attributable to
Corporate Technology, CD Rom revenues decreased 89% to $0.2 million in the first
six months of 2000 from $2.1 million in the first six 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 $8.8 million for
the six months ended June 30, 2000 from $7.1 million for the six months ended
June 30, 1999. As a percentage
-10-
<PAGE> 11
of total revenues, total cost of revenues decreased to 36% for the six months
ended June 30, 2000 from 43% for the six months ended June 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.
Cost of Web-based product revenues increased 19% to $7.5 million for the six
months ended June 30, 2000 from $6.3 million for the six months ended June 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 35% for the
six months ended June 30, 2000 from 44% for the six months ended June 30, 1999,
due to an increase in our customer base and expansion of existing customers,
which enabled OneSource to better leverage royalty rates and infrastructure
expenses.
Cost of CD Rom and other product revenues increased 48% to $1.2 million for
the six months ended June 30, 2000 from $0.84 million for the six months ended
June 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 increased to 49%
for the six months ended June 30, 2000 from 40% for the six months ended June
30, 1999.
Selling and Marketing Expense. Selling and marketing expense increased 68%
to $9.9 million for the six months ended June 30, 2000 from $5.9 million for the
six months ended June 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 six months ended June 30, 2000 from 36% for the six months ended June
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 21% to $4.5 million for the six months ended June 30, 2000
from $3.7 million for the six months ended June 30, 1999. This increase was due
principally to additional headcount to meet new product demands as well as the
addition of system engineers associated with the acquired Corporate Technology
business. Platform and product development expense decreased as a percentage of
total revenues to 18% for the six months ended June 30, 2000 from 22% for the
six months ended June 30, 1999.
General and Administrative Expense. General and administrative expense
decreased 19% to $2.5 million for the six months ended June 30, 2000 from $3.1
million for the six months ended June 30, 1999. General and administrative
expense decreased as a percentage of total revenues to 10% for the six months
ended June 30, 2000 from 19% for the quarter ended June 30, 1999. These
decreases were primarily the result of non-recurring expenses incurred by
OneSource for the quarter ended June 30, 1999, 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
six months ended June 30, 2000 was $0.8 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
235% to $0.4 million of net interest income for the six months ended June 30,
2000 from $0.3 million of net interest expense for the six months ended June 30,
1999. This increase was primarily due to invested cash balances from the public
offering proceeds and cash generated from operations.
-11-
<PAGE> 12
Other Income. Other income was $1.0 million for each of the six months
ended June 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 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:
<TABLE>
<CAPTION>
ONE MONTH
OF INVOICED
WEB-BASED FEES IN
DEFERRED DEFERRED ANNUALIZED
MEASUREMENT DATE REVENUES REVENUES CONTRACT VALUE
---------------- -------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
June 30, 1999............... $14,905 $2,587.5 $31,051
June 30, 2000............... 23,165 4,081.0 48,973
</TABLE>
-12-
<PAGE> 13
We have increased annualized contract value attributable to Web-based
products 58% to $49.0 million as of June 30, 2000 from $31.1 million as of June
30, 1999. The number of Web-based customers has increased 48% to 731 at June 30,
2000 from 493 at June 30, 1999. At the same time, the average annualized
contract value of all Web-based product customers has increased 6% to $67,000
per customer at June 30, 2000 from $63,000 per customer at June 30, 1999. This
growth was attributable to an increase in the number of user seats purchased by
customers and the addition of new products.
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.
Our cash and cash equivalents totaled $16.2 million at June 30, 2000,
compared to $13.6 million at December 31, 1999, and $22.7 million at June 30,
1999. The increase of $2.6 million from December 31,1999 is primarily due to
funds provided by operating activities, while the decrease of $6.5 million from
June 30, 1999 is primarily due to funds used to acquire Corporate Technology.
Net cash provided by operating activities was $4.6 million for the six
months ended June 30, 2000, compared to net cash used in operating activities of
$1.2 million for the six months ended June 30, 1999.
Net cash used in investing activities was $2.5 million for the six months
ended June 30, 2000, compared to $1.9 million for the six months ended June 30,
1999. Cash used in investing activities was primarily attributable to the
purchases of property and equipment for $2.5 million and $1.3 million during the
six months ended June 30, 2000 and 1999, respectively, 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 in 1999.
Net cash provided by financing activities was $0.5 million for the six
months ended June 30, 2000, compared to $17.2 million for the six months ended
June 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 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.
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. OneSource does not expect the application of FIN No. 44 to have a
significant impact on their financial position or results of operations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
-13-
<PAGE> 14
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.
OUR BUSINESS BROWSER PRODUCTS HAVE NOT BEEN PROFITABLE AND MAY NOT BECOME
PROFITABLE IN THE 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 six months ended June 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 in order to become profitable. As of June 30, 2000, we
had an accumulated deficit of $15.8 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 90% of total
revenues for the six months ended June 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 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.
ONESOURCE MAY NOT BE ABLE TO RETAIN KEY EMPLOYEES OF CORPORATE TECHNOLOGY.
Key founders and some employees of Corporate Technology, several of whom were
large stockholders, received a substantial cash payment upon closing of the
acquisition. In certain cases, these individuals may be financially independent.
Additionally, startup and other companies will seek out these individuals due to
the financial result they have achieved for Corporate Technology. Under the
circumstances, OneSource faces a difficult and significant task of retaining and
motivating the key personnel of Corporate Technology to stay committed to
OneSource.
-14-
<PAGE> 15
SUBSCRIBERS OF ONESOURCE AND CORPORATE TECHNOLOGY MAY NOT RENEW THEIR
SUBSCRIPTIONS AS A RESULT OF CONCERNS OVER THE ACQUISITION. The closing of our
acquisition of Corporate Technology could cause subscribers of OneSource and
Corporate Technology to allow their subscriptions to lapse as a result of
concerns over product evolution, integration and support of the combined
company's products. These non-renewals could have a material adverse effect on
the business, operating results and financial condition of OneSource.
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
- 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
-15-
<PAGE> 16
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 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:
-16-
<PAGE> 17
- changes in demand for our products
- 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 on
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 six months ended June 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
-17-
<PAGE> 18
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. 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.
Item 4. SUBMISSIONS OF MATTERS TO VOTE OF SECURITY HOLDERS.
a. The annual meeting of stockholders was held on May 25, 2000.
b. No information provided due to inapplicability of item.
c. A vote was proposed to (1) elect four directors to the Company's Board
of Directors, each to serve for a term of one year or until his
successor is duly elected and qualified; (2) consider and act upon a
proposal to approve an amendment to the 1999 Stock Option and Incentive
Plan to increase the aggregate number of shares of Common Stock that
may be issued pursuant to said plan by 1 million shares; and (3) ratify
the selection of PricewaterhouseCoopers LLP independent public
accountants, as auditors for the fiscal year ending December 31, 2000.
The voting results are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Votes
Votes For Votes Against Withheld/Abstained
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
----------------------------------------------------------------------------------------
(1) Martin Kahn 9,846,771 N/A 48,815
----------------------------------------------------------------------------------------
Daniel J. Schimmel 9,847,178 N/A 48,408
----------------------------------------------------------------------------------------
David Dominik 9,848,806 N/A 46,780
----------------------------------------------------------------------------------------
Gregg S. Newmark 9,848,806 N/A 46,780
----------------------------------------------------------------------------------------
(2) 1999 Stock Option and 6,309,557 606,225 28,578
Incentive Plan
----------------------------------------------------------------------------------------
(3) PricewaterhouseCoopers 9,891,218 888 3,480
----------------------------------------------------------------------------------------
</TABLE>
-18-
<PAGE> 19
d. No information provided due to inapplicability of item.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
Exhibit
Number Description
------ -----------
10.1 1999 Stock Option and Incentive Plan, as amended
10.2 1999 Employee Stock Purchase Plan, as amended
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 June 30, 2000.
-19-
<PAGE> 20
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: August 11, 2000 By: /s/ Roy D. Landon
-------------------------------------
Roy D. Landon
Senior Vice President, Chief
Financial Officer (Principal
Financial Officer)
-20-
<PAGE> 21
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description Page
------- ------------------------------------------------ -------------
10.1 1999 Stock Option and Incentive Plan, as amended 22
10.2 1999 Employee Stock Purchase Plan, as amended 28
27.1 Financial Data Schedule *
* Exhibit included in EDGAR filing with Securities and Exchange Commission.
-21-
