<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO ___________________
COMMISSION FILE NUMBER 0-26123
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
DELAWARE 52-1623052
-------- ----------
<S> <C>
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
7600 COLSHIRE DRIVE, McLEAN, VIRGINIA 22102
------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(703) 394-5100
--------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
--------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEARS, IF CHANGES SINCE
LAST REPORT)
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
-------- ----------
YES X NO
-------- ----------
As of November 15, 1999 there were 10,911,445 shares of the issuer's common
stock outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
ASSETS (UNAUDITED)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 3,471,620 $ 1,916,479
Escrow deposit 400,985 -
Investment in available for sale securities - 24,635,567
Accounts receivable (net of allowance of approximately $52,000
at December 31, 1998, and September 30, 1999) 933,585 1,447,110
Prepaid expenses and other current assets 921,247 1,010,682
------------ ------------
Total current assets 5,727,437 29,009,838
Property and equipment, net 3,166,019 3,812,858
Other assets 527,972 274,638
------------ ------------
Total assets $ 9,421,428 $ 33,097,334
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,707,675 $ 1,605,375
Accrued expenses and other current liabilities 1,234,722 948,654
Deferred revenues 678,117 622,763
Current portion of capital lease obligations 614,585 753,427
Current portion of long term debt 711,962 -
Current portion of notes payable to related parties 200,000 -
------------ ------------
Total current liabilities 5,147,061 3,930,219
Capital lease obligation 605,322 501,691
Long term debt (net of unamortized discount of $506,861 at December 31,
1998) less current portion 8,525,467 -
Put option liability 362,700 -
Other noncurrent liabilities 193,400 -
------------ ------------
Total Liabilities 14,833,950 4,431,910
Commitments
Redeemable convertible Preferred Stock, $0.01 par value
Series B redeemable convertible preferred stock; 100,000 shares
designated, 1,000 shares issued and outstanding at December 31, 1998. 120,854 -
Series C redeemable convertible preferred stock; 287,000 shares
designated, 224,700 shares issued and outstanding at December 31, 1998. 25,655,400 -
------------ ------------
Total redeemable convertible Preferred Stock 25,776,254 -
Stockholders' equity (deficit)
Series A convertible preferred stock, $0.01 par value; 1,000,000 shares
authorized, 795,000 shares issued and outstanding at December 31, 1998. 7,950 -
Common stock, $.0001 par value; 35,000,000 shares authorized, 4,053,653, and
10,880,444 issued and outstanding at December 31, 1998 and September 30,
1999, respectively. 405 1,088
Additional paid-in capital 11,078,308 82,280,631
Deferred stock compensation - (254,083)
Accumulated deficit (41,937,066) (52,846,427)
Receivable from the sale of common stock (338,373) (515,785)
------------ ------------
Total stockholders' equity (deficit) (31,188,776) 28,665,424
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 9,421,428 $ 33,097,334
============ ============
</TABLE>
See accompanying notes to unaudited interim financial statements.
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ONLINE RESOURCES & COMMUNICATIONS CORPORATION
UNAUDITED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
--------------------- -------------------- -------------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Core services $ 1,241,553 $ 583,070 $ 3,035,137 $ 1,547,121
Support services 573,835 166,959 1,405,163 395,952
Implementation fees 412,198 354,509 1,132,707 788,434
Related products 64,852 58,393 202,708 196,614
----------- ----------- ------------- ------------
Total revenues 2,292,438 1,162,931 5,775,715 2,928,121
Expenses:
Cost of revenues 2,357,048 1,538,946 6,362,236 4,421,720
----------- ----------- ------------- ------------
(64,610) (376,015) (586,521) (1,493,599)
General & administrative 970,507 564,323 2,523,321 1,629,501
Selling and marketing 1,346,232 853,876 3,558,660 2,319,638
Systems and development 994,046 601,616 2,844,304 1,755,775
----------- ----------- ------------- ------------
3,310,785 2,019,815 8,926,285 5,704,914
----------- ----------- ------------- ------------
Loss from operations (3,375,395) (2,395,830) (9,512,806) (7,198,513)
Other income (expense):
Interest Income 305,322 32,140 452,489 88,267
Interest expense (69,670) (398,922) (912,784) (802,711)
Other (50,853) (461) (50,853) (15,437)
------------ ------------ -------------- -------------
Total other income (expense) 184,799 (367,243) (511,148) (729,881)
----------- ---------- ------------- ------------
Loss before extraordinary loss (3,190,596) (2,763,073) (10,023,954) (7,928,394)
Extraordinary debt extinguishment loss - - (885,407) -
----------- ----------- -------------- ------------
Net loss (3,190,596) (2,763,073) (10,909,361) (7,928,394)
Preferred stock accretion - (872,662) (2,236,716) (2,924,815)
Beneficial return on preferred shares - - (2,668,109) -
----------- ----------- -------------- ------------
Net loss available to common
stockholders $(3,190,596) $(3,635,735) $ (15,814,186) $(10,853,209)
============ ============ ============== =============
Basic and diluted loss per share:
Available to common stockholders before
extraordinary item $ (0.29) $ (0.90) $ (2.12) $ (2.69)
Extraordinary loss - - (0.13) -
Available to common stockholders (0.29) (0.90) (2.25) (2.69)
Pro forma basic and diluted loss per share:
Available to common stockholders before
extraordinary item $ (0.57) $ (1.67) $ (1.70)
Extraordinary loss - (0.10) -
Available to common stockholders (0.57) (1.77) (1.70)
Shares used in calculation of loss per share:
Basic and diluted 10,844,854 4,026,700 7,026,668 4,033,216
Pro forma basic and diluted 6,377,660 8,950,312 6,384,176
</TABLE>
See accompanying notes to interim unaudited financial statements.
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ONLINE RESOURCES & COMMUNICATIONS CORPORATION
UNAUDITED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
--------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (10,909,361) $ (7,928,394)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation 775,651 589,115
Amortization 199,488 102,570
Extraordinary debt extinguishment loss 885,407 -
Compensation expense related to
issuance of common stock 194,578 -
Provision for losses on accounts
receivable - (27,671)
Changes in assets and liabilities:
Accounts receivable (513,525) (430,193)
Prepaid expenses and other
current assets (515,604) (539,366)
Escrow deposit 400,985 (633,387)
Other assets (115,350) -
Accounts payable (102,300) 422,939
Accrued expenses (479,468) (7,309)
Deferred revenues (55,354) 314,561
----------------- -----------------
Net cash used in operating activities (10,234,853) (8,137,135)
INVESTING ACTIVITIES
Investment in available for sale securities (24,635,567) -
Purchase of property and equipment (990,071) (569,770)
----------------- -----------------
Net cash used in investing activities (25,625,638) (569,770)
FINANCING ACTIVITIES
Proceeds from issuance of common
stock 39,147,848 40,951
Purchase of treasury stock (50,000) -
Net proceeds from issuance of Series C
redeemable convertible preferred stock 5,349,000 -
Proceeds from issuance of long-term debt - 8,434,000
Proceeds from issuance of long-term
debt to related parties - 250,000
Repayment of capital lease
obligations (397,208) (279,637)
Repayment of long-term debt (9,744,290) (136,425)
Repayment of long-term debt to
related parties - (200,000)
----------------- -----------------
Net cash provided by financing activities 34,305,350 8,108,889
----------------- -----------------
Net increase (decrease) in cash and
cash equivalents (1,555,141) (598,016)
Cash and cash equivalents at
beginning of period 3,471,620 1,855,809
----------------- -----------------
Cash and cash equivalents at end of period $ 1,916,479 $ 1,257,793
================= =================
</TABLE>
See accompanying notes to unaudited interim financial statements.
4
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1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Online Resources & Communications Corporation (the "Company") is a provider
of interactive financial services to the banking and financial services industry
in the United States. The Company provides its financial institution clients
with an outsourced "privately branded" service enabling their consumers and
small business customers (end users) to perform bill paying, cash management,
securities trading and other financial services from their homes, offices and
other places of convenience.
Interim Financial Information
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles for interim financial
information and with the instructions for Form 10-Q and Article 10 of Regulation
S-X. Accordingly, certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed, or omitted, pursuant to the rules and
regulations of the Securities and Exchange Commission. In our opinion, the
statements include all adjustments necessary (which are of a normal and
recurring nature) for the fair presentation of the results of the interim
periods presented. These financial statements should be read in conjunction with
our audited financial statements for the year ended December 31, 1998, included
in our prospectus, dated June 4, 1999, filed with the Securities and Exchange
Commission in connection with our initial public offering and our interim
financial statements for the three months ended June 30, 1999 included in our
Form 10-Q filed with the Securities and Exchange Commission on August 15, 1999.
Our results of operations for any interim period are not necessarily indicative
of the results of operations for any other interim period or for a full fiscal
year.
2. INITIAL PUBLIC OFFERING
On June 4, 1999, the Company completed an initial public offering of
3,100,000 shares of its common stock. The offered shares generated proceeds, net
of underwriting commissions, to the Company of approximately $40 million and
this was further reduced by an additional $1 million of other related offering
costs. Concurrent with the offering, all 1,071,779 shares of our convertible
preferred stock automatically converted into 3,571,559 shares of common stock.
Approximately $9.4 million of the proceeds from the initial public offering
were used to retire outstanding notes payable. During the six month period,
prior to the debt extinguishment, the Company had previously paid down $344,000
of debt. The early extinguishment of the notes resulted in the Company incurring
an extraordinary loss of $885,407 related to unamortized debt discounts and
deferred finance fees.
3. NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share is calculated by dividing the
net loss by the weighted average number of common shares outstanding. Pro forma
net loss per share is computed using the weighted average number of shares used
for basic and diluted per share amounts and the weighted average redeemable
convertible preferred stock outstanding as if such shares were converted to
common stock at the time of issuance.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------- -------------------------------------
1999 1998 1999 1998
------------ ------------------ ----------------- -------------
<S> <C> <C> <C> <C>
Loss before extraordinary item $(3,190,596) $(2,763,073) $(10,023,954) $ (7,928,394)
Preferred stock accretion - (872,622) (2,236,716) (2,924,815)
Beneficial return on preferred
shares - - (2,668,109) -
----------- ----------- ------------- ------------
Loss available for common
stockholders before extraordinary item (3,190,596) (3,635,695) (14,928,779) (10,853,209)
Extraordinary item - - (885,407) -
----------- ----------- ------------- ------------
Net loss available for common
stockholders $(3,190,596) $(3,635,695) $(15,814,186) $(10,853,209)
============ ============ ============= =============
Weighted average number of common
shares 10,844,854 4,026,700 7,026,668 4,033,216
Effect of dilutive securities:
</TABLE>
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<PAGE> 6
<TABLE>
<S> <C> <C> <C> <C>
Stock options - - - -
Warrants - - - -
Redeemable convertible preferred stock - - - -
----------- ----------- ----------- -----------
Adjusted weighted average shares and assumed
Conversions 10,844,854 4,026,700 7,026,668 4,033,216
=========== =========== =========== ===========
Pro forma adjustment for redeemable convertible
preferred stock 2,350,960 1,923,644 2,350,960
Pro forma weighted average shares 10,844,854 6,377,660 8,950,312 6,384,176
Loss per share:
Basic and diluted before extraordinary item $ (0.29) $ (0.90) $ (2.12) $ (2.69)
Extraordinary loss - $ - $ (0.13) $ -
Basic and diluted $ (0.29) $ (0.90) $ (2.25) $ (2.69)
Pro forma basic and diluted before extraordinary
item $ (0.57) $ (1.67) $ (1.70)
Extraordinary loss $ - $ (0.10) $ -
Pro forma basic and diluted $ (0.57) $ (1.77) $ (1.70)
</TABLE>
Due to their antidulitive effects, outstanding shares of preferred stock,
stock options and warrants to purchase shares of common stock were excluded from
the computation of diluted earnings per share for all periods presented.
4. ISSUANCE OF SERIES C PREFERRED STOCK
During December 1998, the Company issued 50,451 shares of Series C Preferred
Stock for total proceeds of approximately $5 million. From January through March
1999, the Company issued 49,034 shares of Series C Preferred Stock for total
proceeds of approximately $4.9 million. The Company also issued 2,038 shares of
Series C Preferred Stock for the conversion of a $200,000 related party note
plus accrued interest of $3,800 at December 31, 1998. All preferred shares
converted into common stock at the time of the IPO. In addition to the Series C
Shares, each stockholder who purchased such shares between December 1998 thru
March 1999 received a warrant to purchase shares of common stock up to 30% of
the stockholder's investment at an exercise price of $8.42 per share. The
warrants have a five year life. The number of shares each warrant holder is
able to purchase was contingent upon the average closing price of the Company's
common stock for the twenty day period following the initial two week period the
stock has traded. Based on the average closing price of the common stock during
the period mentioned above which ended on July 16, 1999, the holders of the
Preferred Stock received warrants to purchase 247,476 shares of common stock at
an exercise price of $8.42 per share.
The Company recorded a deemed beneficial return in the amount of $2.7
million to the investors that purchased the Series C Preferred Stock during 1999
due to the Series C Preferred Stock being convertible into common stock at a
discount from fair value at the time of issuance.
5. REVERSE STOCK SPLIT
Effective May 2, 1999, the Board of Directors of the Company approved a 1
for 2.8056787 reverse stock split of the Company's $0.0001 par value common
stock. All references in the accompanying financial statements to the number of
shares of common stock and per share amounts have been restated to reflect this
split.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY NOTE
This Quarterly Report on Form 10-Q may contain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including, but
not limited to:
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<PAGE> 7
- Forecasts of growth in business-to-business electronic commerce, and
growth in the number of consumers using online banking and billpaying
services;
- Statements regarding Online Resources' preparedness for the Year 2000
date change and trends in Online Resources' revenues, expense levels,
and liquidity and capital resources;
- Statements regarding Online Resources' plans for growth of the Financial
Services Center;
- Statements about the sufficiency of the proceeds from Online Resources'
IPO and cash balances to meet currently planned working capital and
capital expenditure requirements; and
- Other statements identified or qualified by word such as "likely",
"will", "suggest", "may", "would", "could", "should", "expects",
"anticipates", "estimates", "plans", "projects", "believes", "seek",
"intend" and other similar words that signify forward-looking
statements.
These forward-looking statements represent the best judgment of Online Resources
as of the date of the Quarterly Report on Form 10-Q, and Online Resources
cautions readers not to place undue reliance on such statements. Actual
performance and results of operations may differ materially from those projected
or suggested in the forward-looking statements due to certain risks and
uncertainties, including but not limited to, the risks and uncertainties
described or discussed in the section "Risk Factors" in the Prospectus dated
June 4, 1999 of Online Resources. These risks include, among others, the
following:
- our history of losses and anticipation of future losses;
- our dependence on the marketing efforts of third parties;
- the potential fluctuations in our operating results;
- our potential need for additional capital;
- our potential inability to expand our services and related products
in the event of substantial increases in demand for these services
and related products;
- our competition;
- our ability to attract and retain skilled personnel;
- our reliance on our patents and other intellectual property;
- the early stage of market adoption of the services we offer; and
- consolidation of the banking and financial services industry.
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<PAGE> 8
OVERVIEW
We are a leading provider of electronic commerce services that enable
regional and community financial institutions to provide Internet and other
online banking services to their retail customers under such financial
institution's name. In 1992, we began offering banking and billpaying services
through our screen-based telephone. In 1993, our real-time ATM network-based
processing patent was issued. In 1995, additional PC and conventional telephone
access capabilities were added, as were third-party brokerage services. In 1996,
in response to the rapid growth of the Internet, we launched Internet banking
and billpaying services. In November 1998, we launched our Financial Services
Center which currently offers our clients' retail customers loan approval,
insurance, investment information and securities trading through third-party
partners.
We derive revenue from long-term service contracts with our financial
institution clients, who pay us recurring fees based primarily on the number of
their retail customers enrolled and transaction volumes, as well as an upfront
implementation fee. Our financial institution clients typically subsidize some
or all of our fees when reselling our services to their retail customers, as
they derive significant potential benefits including account retention, delivery
and paper cost savings, account consolidation and cross-selling of other
products. As a network-based service provider, we have made substantial up-front
investments in infrastructure. We believe our financial performance and
operating leverage will be based primarily on increasing retail customer
subscriptions and transaction volumes over a relatively fixed cost base.
Our current sources of revenue are from core services, support services,
implementations and selling related products. We expect that our primary source
of revenue growth will come from core services and support services as a result
of continued growth of retail customers.
Core Services: Our primary source of revenue is from providing core
services which include banking and billpaying for which we charge our financial
institution clients a fixed monthly fee based on the number of their retail
customers who use our service. We recognize revenue from core services as
provided.
Support Services: Support services include our customer service center, Web
page design and hosting, consumer marketing, information reporting,
administrative services, and communications services. Fees for these services
are closely tied to the number of retail customers and are bundled as either
fixed price monthly charges, fixed price project fees, or hourly billings.
Implementation: We generate revenue from implementation of our fully
integrated services to our financial institution clients. Implementation fees
are paid on a one time basis at signing and recognized as revenue using the
percentage of completion method tied to pilot and launch milestones.
Related Products: We also derive revenue from sales of related enabling
products and software at fixed prices, including our PC software, screen-based
telephone and customer service software. These have not been a significant
source of revenue.
Historically, the majority of our resources have been directed to creating
our proprietary Opus(SM) system. Our proprietary system enables us to provide a
broad range of services to our financial institutional clients including online
banking, billpaying, and access to complementary financial services supported by
our customer call center, marketing services and other support services. While
investment to date has been significant, we believe the infrastructure we have
built will enable us to support our anticipated growth over the next several
years with only nominal incremental cost for additional retail customers.
FINANCIAL CONDITION
Since our founding, we have incurred high costs to create our
infrastructure, while generating low revenues. As a result, we have historically
experienced large operating losses and negative cash flow. At September 30,
1999, we had accumulated deficits of $52.8 million and net property and
equipment of $3.8 million. We have funded our operations primarily through the
issuance of equity and debt securities. Ongoing working capital requirements
will primarily consist of personnel costs related to enhancing and maintaining
our Opus(SM) system. We expect to continue to incur losses in the near future.
As of September 30, 1999 the Company had $1.9 million in cash and cash
equivalents and $24.6 million in investments in available for sale securities as
compared to $3.5 million in cash and cash equivalents as of December 31, 1998.
The increase in cash and investments results from our initial public offering of
3.1 million shares of common stock at an initial public offering price of $14.00
per share. We received proceeds, net of underwriting commissions, of
approximately $40 million in cash and
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<PAGE> 9
this was further reduced by an additional $1 million of other related offering
costs. On June 10, 1999 we used $9.4 million of the net proceeds to pay off
corporate debt. Total liabilities decreased from $14.8 million as of December
31, 1998 to $4.4 million as of September 30, 1999 primarily as a result of the
$9.4 million debt payment during the second quarter. During the six month
period, prior to the debt extinguishment, the Company had already paid down
$344,000 of debt. Concurrent with the initial public offering, all 1,071,779
shares of our convertible preferred stock automatically converted into 3,571,559
shares of common stock which resulted in a $25.8 million decrease in redeemable
convertible preferred stock from $25.8 million as of December 31, 1998 to $0 as
of September 30, 1999.
Our limited operating history makes it difficult to evaluate our prospects
for success and our revenue and profitability potential is unproven.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998.
Revenues: We derive revenues from providing core services, support services,
implementations and from selling related products. Revenues increased 97% to
$2.3 million for the three months ended September 30, 1999 as compared to $1.2
million for the three months ended September 30, 1998. This increase was
primarily attributable to a 113% increase in core services fees and a 244%
increase in support services fees which were driven by having on average 184%
more retail customers for the three months ended September 30, 1999 compared to
the average retail customers for the three months ended September 30, 1998.
Additionally, implementation fees grew 16% to $412,000 as a result of increases
in clients launched onto our system.
Cost of Revenues: Cost of revenues primarily includes telecommunications,
payment processing, system operations, customer service, implementation and
related products. Cost of revenues increased 53% to $2.4 million for the three
months ended September 30, 1999 as compared to $1.5 million for the three months
ended September 30, 1998. This increase was primarily due to a 180% increase in
customer service costs and a 47% increase in payment processing costs as a
result of increased support staff and transactional costs associated with the
increase in the number of retail customers.
General and Administrative: General and administrative expenses primarily
consist of salaries for executives, administrative and financial control
personnel and facilities costs such as office leases, insurance, and
depreciation. General and administrative expenses increased 72% to $971,000 for
the three months ended September 30, 1999 as compared to $564,000 for the three
months ended September 30, 1998. The increase in general and administrative
expenses results from a 124% or $195,000 increase in salaries and benefits
associated with additional staffing, a 43% or $118,000 increase in rent and
depreciation associated with the expansion of the corporate facilities, and a
649% or $79,000 increase in consulting expenses.
Sales and Marketing: Sales and marketing expenses include salaries and
commissions paid to sales and marketing personnel, consumer marketing costs,
public relations costs, and other costs incurred in marketing our services and
products. We have 36 marketing partners who act as resellers of our services. We
have no obligation to these marketing partners other than to provide services
sold to financial institutions by the marketing partners and to pay commissions
to them on the sales. The marketing partners have no obligations to us other
than to re-sell our services. Sales and marketing expenses increased 58% to $1.3
million for the three months ended September 30, 1999 as compared to $854,000
for the three months ended September 30, 1998. Approximately $340,000 or 69% of
this increase was attributable to an increase in consumer marketing expenses.
Additionally, $87,000 or 18% of the increase is attributable to the expansion
of the client support group as a result of the number of clients launched, into
production, increasing to 222 as of September 30, 1999 compared to 99 as of the
same period in the prior year.
Systems and Development: Systems and development expenses include salaries
of personnel in the systems and development department, consulting fees and all
other expenses incurred in supporting the development of new services and
products, and new technology to enhance existing products. System and
development expenses increased 65% to $994,000 for the three months ended
September 30, 1999 as compared to $602,000 for the three months ended September
30, 1998. This increase was primarily attributable to costs associated with the
maintenance and enhancement of our systems, which resulted in a 515% or
$383,000 increase in consulting services.
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<PAGE> 10
Other Income and Expense: Interest income increased 850% to $305,000 for
the three months ended September 30, 1999 as compared to $32,000 for the three
months ended September 30, 1998. The increase was due to the investment of $24.6
million of the IPO proceeds in available for sale securities during the third
quarter of 1999. Interest expense decreased 83% to $70,000 for the three months
ended September 30, 1999 as compared to $399,000 for the three months ended
September 30, 1998. The decrease in interest expense is a result of the Company
extinguishing $9.4 million of corporate debt on June 10, 1999.
For the three months ended September 30, 1999 and 1998 the basic and diluted
loss per share from operations was $(0.31) and $(0.59), respectively. The
pro forma loss per share from operations was $(0.38) for the three months ended
September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1998.
Revenues: Revenues increased 97% to $5.8 million for the nine months ended
September 30, 1999 as compared to $2.9 million for the nine months ended
September 30, 1998. This increase was primarily attributable to a 96% increase
in core services fees and a 255% increase in support services fees which were
driven by having on average 182% more retail customers for the nine months ended
September 30, 1999 compared to the average retail customers for the nine months
ended September 30, 1998. Additionally, implementation fees increased 43% to
$1.1 million as a result of increases in sales and clients launched onto our
system.
Cost of Revenues: Cost of revenues increased 44% to $6.4 million for the
nine months ended September 30, 1999 as compared to $4.4 million for the nine
months ended September 30, 1998. This increase was primarily due to a 173%
increase in customer service costs and a 57% increase in payment processing
costs as a result of increased support staff and transactional costs associated
with the 182% increase in the number of retail customers.
General and Administrative: General and administrative expenses increased
55% to $2.5 million for the nine months ended September 30, 1999 as compared to
$1.6 million for the nine months ended September 30, 1998. The increase in
general and administrative expenses results from a 62% or $299,000 increase in
salaries and benefits associated with additional staffing, a 375% or $75,000
increase in consulting expenses and a 34% or $268,000 increase in rent and
depreciation associated with the expansion of the corporate facilities.
Sales and Marketing: Sales and marketing expenses increased 53% to $3.6
million for the nine months ended September 30, 1999 as compared to $2.3 million
for the nine months ended September 30, 1998. Approximately $582,000 or 47% of
this increase was attributable to an increase in consumer marketing expenses.
Of the remaining increase approximately $169,000 or 14% is attributable to
increased sales commissions as the result of increased institutional sales and
$110,000 or 9% is attributable to the expansion of the client support group as
a result of the number of clients launched, into production, increasing to 222
as of September 30, 1999 compared to 99 as of September 30, 1998.
Systems and Development: System and development expenses increased 62% to
$2.8 million for the nine months ended September 30, 1999 as compared to $1.8
million for the nine months ended September 30, 1998. This increase was
primarily attributable to costs associated with the maintenance and enhancement
of our systems, which resulted in a 377% or $855,000 increase in consulting
services and a 12% or $165,000 increase in salaries and benefits.
Other Income and Expense: Interest income increased 416% to $452,000 for
the nine months ended September 30, 1999 as compared to $88,000 for the nine
months ended September 30, 1998. The increase was due to the investment of the
IPO cash proceeds during the time period from June 9, 1999 to September 30,
1999. Interest expense increased 14% to $913,000 for the nine months ended
September 30, 1999 as compared to $803,000 for the nine months ended September
30, 1998. The increase in interest expense is the result of equipment financing
loans and the $8 million in senior debt incurred on March 31 and June 30, 1998
and outstanding through June 10, 1999. The company paid off $9.4 million of
corporate debt on June 10, 1999.
For the nine months ended September 30, 1999 and 1998 the basic and diluted
loss per share from operations was $(1.35) and $(1.78), respectively, and the
pro forma loss per share from operations was $(1.06) and $(1.13), respectively.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have primarily financed our operations through private
placements of our common and preferred stock and the issuance of debt. We have
also entered into various capital lease financing agreements. In June 1999, we
closed our initial public offering of 3.1 million shares of common stock at an
initial public offering price of $14.00 per share. Net of underwriting
commissions, we received cash proceeds of approximately $40 million in cash,
which was reduced further by an additional $1 million of other related offering
costs. At September 30, 1999 we had $1.9 million in cash and cash equivalents
and $24.6 million in investments in available for sale securities.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1998.
Net cash used in operating activities was $10.3 million for the nine months
ended September 30, 1999 as compared to $8.1 million in the nine months ended
September 30, 1998. Cash used in operating activities in the nine months ended
September 30, 1999 resulted primarily from a net loss of $10.9 million. Cash
used in operating activities in the nine months ended September 30, 1998 was
primarily attributable to a net loss of $7.9 million.
Net cash used in investing activities in the nine months ended September 30,
1999 was $25.6 million, of which $24.6 million related to the purchase of
investments in available for sale securities and $1.0 million was used to
purchase fixed assets.
Net cash provided by financing activities was $34.3 million in the nine
months ended September 30, 1999 as compared to $8.1 million in the nine months
ended September 30, 1998. Net proceeds from the IPO, net underwriting discounts
and offering costs, were $39.0 million, of which $9.4 million was used to pay
down existing debt. During the period, prior to the debt extinguishment payment,
the Company had previously paid down $344,000 of debt. During the nine months
ended September 30, 1998 $8.7 million in cash provided by financing activities
was the result of loan proceeds. Prior to the IPO, Online Resources financed its
operations primarily through the sale of its equity securities and debt
securities in private placements. At September 30, 1999 Online Resources had
cash and cash equivalents of $1.9 million, investments in available for sale
securities of $24.6 million, working capital of $25.1 million, long term
obligations of $502,000 and stockholder equity of $28.7 million.
Online Resources currently believes that cash balances will be sufficient to
meet anticipated cash requirements through at least 2000. However, there can be
no assurance that additional capital beyond the amounts currently forecasted by
Online Resources will not be required or that any such required additional
capital will be available on reasonable terms, if at all, at such time as
required.
In addition, until cash generated from operations is sufficient to satisfy
our future liquidity requirements, we believe that we will be required to seek
additional funds through issuance of additional equity or debt securities or
through credit facilities. The sale of additional equity will result in dilution
to our stockholders. Financing may not be available in the future in amounts or
on terms acceptable to us, if at all.
IMPACT OF YEAR 2000 ISSUE ON THE OPERATIONS AND FINANCIAL CONDITION OF ONLINE
RESOURCES
Year 2000 Issue: Many computer programs, computer systems and other
equipment that process or store date-related information by using two digits to
represent the year cannot appropriately differentiate the century. As a result,
these systems may not be able to accurately process data before, during or after
the year 2000. While we believe that we have taken adequate steps to make sure
that our systems are Year 2000 compliant and we do not believe that we will
incur material costs to prepare for the Year 2000 date change, achieving
complete Year 2000 compliance is subject to various risks and uncertainties. We
acknowledge that the Year 2000 date change may lead to failures of systems that
may have a material and adverse effect on our business.
State of readiness: We have been aware of the Year 2000 issue since our
inception in 1989 and have focused attention on making our business systems Year
2000 compliant since that time. We developed and deployed our Year 2000
compliant platform architecture starting in 1996. The business systems owned or
operated by us directly affect our ability to provide our services or otherwise
affect revenues or reliability. The failure of such systems ("Critical Systems")
for a period of time could lead to unrecoverable consequences. To mitigate risks
associated with the Year 2000 issue, we have adopted and executed a Year 2000
compliance program for our Critical Systems that included designation of a Year
2000 project team formulation and implementation of a Year 2000 project plan;
systematic and comprehensive inventory assessment, remediation and testing of
all Critical Systems; and contingency planning.
11
<PAGE> 12
OUR YEAR 2000 PROGRAM INCLUDED THE FOLLOWING PHASES AND COMPONENTS.
PHASE 1: AWARENESS OF PROGRAM
PHASE 2: ASSESSMENT OF IMPACT AND COMPLEXITY
PHASE 3: REMEDIATION AND RENOVATION
PHASE 4: VALIDATION AND TESTING
PHASE 5: IMPLEMENTATION
As of September 30, 1999 the Year 2000 project team had substantially completed
all phases and components of the Year 2000 project plan.
Costs: We have incurred expenses of $575,000 through September 30, 1999 in
connection with the Year 2000 program. All expenses relating to Year 2000
compliance has been incurred in the normal course of our business, as we have
developed and acquired the necessary products, network components and services,
and implemented specific client applications. The most significant costs to
date have been those related to testing and certifying our systems with
external parties, particularly ATM networks. The Year 2000 budget of $300,000
to $600,000 for fiscal 1999 is included within the current information systems
budget. Prioritizing Year 2000 work within the context of the total budget is
through submission and approval by the executive sponsors.
Risks: If we failed to solve any Year 2000 compliance problem with one of
our systems, the result could be a failure or interruption of normal business
operations. We believe that, due to the relative newness of our systems, the
comprehensive scope of our Year 2000 planning and program, and the remediation
and testing undertaken and completed by our compliance team, the potential for
significant interruptions to normal operations should be minimal. The primary
risks of Year 2000 failures are those related to external service providers
including telecommunications, electrical power, ATM networks, and financial and
accounting systems that we rely upon daily. Worst-case risks inherent in this
business include the following:
- Protracted interruption of electrical power to our operations and data
centers could materially and negatively impact our ability to provide
online transaction processing and other services. As part of our
disaster recovery program, we have an emergency power generation system
and the capability to transfer all critical systems to the alternative
source for a period of up to 60 days. However, electrical power
interruptions that impact external telecommunication services could
adversely impact us due to reliance on these systems for day-to-day
business.
- Protracted interruption of telecommunications and data network services
to our operations facilities could materially and negatively impact our
ability to provide data center operations. We have performed a detailed
assessment of the components of our telecommunications infrastructure
and tested our systems for compliance. We have contacted all critical
external service providers and obtained assurances and information about
the compliance programs of these companies. In some instances, we have
identified alternative providers and requisitioned alternative service
agreements.
- The unforeseen failure of certain components of our "back office" and
related systems could materially and negatively impact our business.
However, as a function of business growth, these systems are planned to
be retired before the end of 1999. As a contingency planning measure, we
have performed a technical assessment of the current systems and their
software applications in the event that the deployment of any Year 2000
compliant system is delayed beyond December, 1999.
- In the course of business, we use software products and services
provided by other companies and some of our systems interface to other
companies' systems. We do not have any control over these third parties
and we cannot guarantee that their products and systems will not suffer
any adverse effects due to the Year 2000 issue that may have a material
adverse effect on our business.
Risk Management: From a risk management perspective, the types of potential
losses related to Year 2000 issues include material or "property" losses due to
data corruption, erasure, reduced system performance, or calculation errors,
including loss of income. We may also face losses resulting from liability to an
injured third party due to the use of our software or systems with a Year 2000
deficiency. We are attempting to mitigate losses by ensuring Year 2000
capability. In addition, we have reviewed and updated our
12
<PAGE> 13
general liability and other insurance policies to ensure that appropriate
coverage is provided for the Year 2000 risks.
Contingency Plans: Contingency plans have been established to mitigate the
risks associated with Year 2000 compliance. If Year 2000 preparations are not
completed on time for any reason, we have solicited and received proposals from
Year 2000 consulting specialists to fulfill the Year 2000 process including
performance of additional testing and validation that may be required.
Unexpected production problems could result in the utilization of Year 2000
staffing and system resources. In the unlikely scenario that we fail to
successfully complete Year 2000 preparations, specialists are contracted to
support our existing staff in completion of Year 2000 plans.
Although we have taken appropriate steps to ensure that our business is not
impacted by the date transition to Year 2000 dates, we are not responsible for,
and we do not control the various telecommunications networks including voice
and data communication carriers, the ATM networks, the Internet or other
external parts of our technological environment and infrastructure.
Forward-looking Statements: This Year 2000 discussion contains
"forward-looking statements." Such statements including without limitation,
anticipated costs and the dates by which we expect to complete certain actions,
are based on management's best current estimates, which were derived based on
numerous assumptions about future events, including the continued availability
of certain resources, representations received from third parties and other
factors. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the ability to identify and remediate all relevant systems, the
results of Year 2000 testing, adequate resolution of Year 2000 issues by
governmental agencies, businesses and other third parties who are our sources,
service providers, suppliers, and vendors to us, anticipated system costs, the
adequacy of and ability to implement contigency plans, and similar
uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have operations subject to risks of foreign currency fluctuations,
nor do we use derivative financial instruments in our operations or investment
portfolio. Our exposure to market risk related changes in interest rates relates
primarily to our investment portfolio. At September 30, 1999 our investment
portfolio consisted of $1.9 million of cash and cash equivalents invested in
demand deposit and overnight investment accounts and $24.6 million invested in
available for sale securities. The fair value of our investment portfolio or
related income would not be significantly impacted by either a 100 basis point
increase or decrease in interest rates due mainly to the short-term nature of
the major portion of our investment portfolio. All of the potential changes
noted above are based on sensitivity analysis performed on our balances as of
September 30, 1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not a party to any litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Proceeds to Online Resources, from its initial public offering in June,
1999, net of offering costs from the offering, totaled approximately $39
million. As of September 30, 1999, Online Resources had used $9.4 million of
the proceeds for the repayment of debt, $3.0 million for working capital and
$26.6 million was held in cash and temporary investments.
During the fiscal quarter ended September 30, 1999, the following securities
were sold pursuant to the exercise of stock options and warrants upon reliance
of the exemption provided by Section 4(2) of the Securities Act:
Date Amount sold Price
---- ----------- -----
7/1/99 213 $ 7.92
7/1/99 1,336 $ 4.21
7/27/99 5,970 $ 3.51
7/30/99 1,998 $ 4.21
8/3/99 1,336 $ 4.21
8/31/99 9,263 $ 8.42
9/10/99 26,731 $ 4.21
9/10/99 118 $ 1.45
9/10/99 831 $ 9.41
9/10/99 6,011 $ 8.42
9/30/99 106 $ 8.42
13
<PAGE> 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits.*
3.1* Amended and restated certificate of incorporation
3.2* Amended and restated bylaws
4.1* Specimen Certificate
(27) Financial Data Schedule
(B) Form 8-Ks Reports
Online Resources did not file any Form 8-K reports during the
fiscal quarter ended September 30, 1999.
* Incorporation by reference to the exhibit of the same
number contained in the registration statement on Form S-1
filed with the Securities and Exchange Commission on April
26, 1999 (Registration number N333-74777).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<CAPTION>
ONLINE RESOURCES & COMMUNICATIONS
CORPORATION
<S> <C>
Date: November 15, 1999 By: /s/ Matthew P. Lawlor
----------------------- -------------------------
Matthew P. Lawlor
Chairman and Chief Executive
Officer (Principal Executive Officer)
Date: November 15, 1999 By: /s/ George E. Northup
----------------------- -------------------------
George E. Northup
Chief Financial Officer, Executive Vice President
(Principal Financial Officer)
</TABLE>
14
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