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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 19, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
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REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ONLINE RESOURCES & COMMUNICATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7389 52 162 3052
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
7600 COLSHIRE DRIVE
MCLEAN, VIRGINIA 22102
(703) 394-5100
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(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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MATTHEW P. LAWLOR
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
7600 COLSHIRE DRIVE
MCLEAN, VIRGINIA 22102
(703) 394-5100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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COPIES TO:
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JOSEPH G. PASSAIC, JR., ESQ. MARK J. WISHNER, ESQ. BART FRIEDMAN, ESQ.
MARY M. SJOQUIST, ESQ. MICHAELS, WISHNER & BONNER, P.C. CAHILL GORDON & REINDEL
PATTON BOGGS LLP 1140 CONNECTICUT AVENUE, N.W., 80 PINE STREET
2550 M STREET, NW SUITE 900 NEW YORK, NEW YORK 10005
WASHINGTON, DC 20037 WASHINGTON, DC 20036 (212) 701-3000
(202) 457-6000 (202) 223-5000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If the Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE
<S> <C> <C>
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Common Stock, par value $.0001 per share $46,000,000 $12,788
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(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(o).
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
Subject to Completion
Dated March 19, 1999
Shares
[ONLINE RESOURCES LOGO]
Common Stock
Online Resources is offering shares of its common stock. This is our
initial public offering and no public market currently exists for our common
stock. We estimate that our initial public offering price will be between
$ and $ per share.
We have applied to have the common stock listed on the Nasdaq National Market
under the symbol "ORCC."
INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PROCEEDS TO
PRICE TO UNDERWRITING ONLINE
PUBLIC DISCOUNT RESOURCES
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<S> <C> <C> <C>
Per Share $ $ $
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Total $ $ $
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</TABLE>
We have granted the underwriters an option to purchase a maximum of
additional shares of common stock to cover over-allotments.
J.P. MORGAN & CO.
U.S. BANCORP PIPER JAFFRAY
KEEFE, BRUYETTE & WOODS, INC.
, 1999
<PAGE> 3
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is an offer to sell, or a
solicitation of offers to buy, shares of common stock only in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless of the
time of delivery of this prospectus or of any sale of our common stock. In this
prospectus, "the Company," "Online Resources," "we," "us" and "our" refer to
Online Resources & Communications Corporation.
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................... 4
Risk Factors................................ 7
Forward-looking Statements.................. 12
Use of Proceeds............................. 13
Dividend Policy............................. 13
Capitalization.............................. 14
Dilution.................................... 15
Selected Financial Information.............. 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 17
Business.................................... 25
Management.................................. 36
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PAGE
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Principal Stockholders...................... 41
Certain Transactions........................ 43
Description of Capital Stock................ 44
Restrictions on Acquisition of
Online Resources.......................... 46
Shares Eligible for Future Sale............. 50
Underwriting................................ 52
Legal Matters............................... 53
Experts..................................... 54
Available Information....................... 54
Index to Financial Statements............... F-1
</TABLE>
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UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 4
[GRAPHICS 1-3]
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus and should be read
in conjunction with the more detailed information and financial statements
included elsewhere in this prospectus.
Online Resources is a leading provider of electronic commerce solutions that
enable our clients to provide their retail customers a fully-integrated and
branded set of Internet and other online banking services. Our clients are
regional and community financial institutions who, according to SNL Securities,
accounted for approximately 50% of U.S. deposits in 1998. We offer our clients
access to our financial electronic commerce hub which provides online banking,
billpaying and access to complementary financial services. In addition, we
provide customer support through our call center and offer a range of marketing
and other services and products.
The number of households banking online is expected to grow from 6 million in
1999 to 25 million by 2004, according to International Data Corporation. As a
result, financial institutions can no longer rely exclusively on traditional
retail banking delivery methods. We believe that our clients often lack the
resources and expertise to cost-effectively develop the technology
infrastructure necessary to offer, market and support online financial services.
We believe our single source electronic commerce solution enables our financial
institution clients to offer the breadth of online financial services needed to
remain competitive. We bring economies of scale and technical expertise to our
clients and offer them a cost-effective means to retain and expand their
customer base, deliver their services more efficiently and strengthen their
customer relationships.
Our financial electronic commerce hub connects our clients, their retail
customers and financial services providers through our proprietary Opus(SM)
system. The key to our system is the middleware component, which integrates
customer and financial data through our access, electronic funds transfer and
services gateways. We further differentiate ourselves by internally developing,
integrating and controlling many critical services, such as billpaying and call
center support, rather than relying primarily on third-party providers for these
services.
We provide our clients with a low up-front cost through our patented method of
connecting to retail customers through established ATM networks. We believe our
real-time ATM network links provide our clients substantial scale, quality,
security and cost benefits. As of December 31, 1998, we were connected to and
certified with 50 ATM networks and processors such as Star, Honor, NYCE, EDS,
Fiserv and Alltel. As each ATM network and processor integration and
certification can take up to a year to complete, we believe that these
certifications and our patent offer us a substantial competitive advantage.
We derive revenue from long-term service contracts with our clients, who pay us
recurring fees based primarily on the number of enrolled retail customers and
transaction volumes, as well as an upfront implementation fee. At December 31,
1998, we had contracts with 315 clients who had approximately 6.7 million retail
customers. At year end, we had launched 117 of these clients including 60 during
1998. These 117 clients had an estimated retail customer base of approximately
3.7 million, of which 50,332 were using our services. 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 goal is to become the leading provider of electronic commerce solutions to
financial institutions by rapidly expanding and enhancing our financial hub. We
have developed a multiple channel sales network, including a network of 34
marketing partners that complement our direct sales force. With our ATM network
certifications largely completed, we intend to increase the retail customer base
by accelerating launches of our financial institution clients. We expect to use
a portion of the proceeds of this offering for co-marketing programs with our
clients designed to increase the retail customer adoption levels. These programs
will include expansion of our BankOnline.com Web site to direct potential retail
customers to our clients.
4
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THE OFFERING
COMMON STOCK OFFERED................ shares
COMMON STOCK TO BE OUTSTANDING AFTER
THE OFFERING...................... shares
USE OF PROCEEDS.....................We will use the net proceeds from the
offering for repayment of debt, co-marketing
programs directed to retail customers,
general corporate purposes, including
capital expenditures, and working capital.
PROPOSED NASDAQ NATIONAL MARKET
SYMBOL.............................."ORCC"
RISK FACTORS........................See "Risk Factors" beginning on page 7 for a
discussion of certain factors that you
should consider before purchasing shares of
common stock.
Unless otherwise indicated, the share information in the table above excludes up
to shares that may be issued to the underwriters to cover
over-allotments. See "Underwriting."
The table includes, as of March 16, 1999, 9,969,266 shares of common stock
issuable upon the consummation of this offering as a result of the conversion of
all outstanding shares of all series of our preferred stock and 5,252,451 shares
of common stock issuable upon the exercise of our outstanding exercisable
warrants. See "Description of Capital Stock."
The table excludes 5,285,214 shares reserved for issuance under our stock option
plans, of which 5,065,543 shares were subject to outstanding options on March
16, 1999 (of which 4,195,300 were exercisable) and 219,671 shares were eligible
for future grant. See "Capitalization" and "Management -- Stock Option Plans."
All references to shares of common stock in this prospectus do not reflect a
reverse stock split of the common stock which will become effective
prior to the consummation of this offering.
Our executive offices are located at 7600 Colshire Drive, McLean, Virginia
22102. Our telephone number is 703-394-5100 and our corporate Web site address
is www.orcc.com. Information contained in our Web site is not part of this
prospectus.
5
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SUMMARY FINANCIAL INFORMATION
The following table presents summary financial data for the periods indicated
and should be read in conjunction with the information set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the financial statements and related notes, and other information
included elsewhere in this prospectus.
Pro forma amounts in the tables below give effect to the automatic conversion of
our redeemable convertible preferred stock into common stock. Pro forma as
adjusted amounts reflect the conversion of the redeemable convertible preferred
stock and the sale of shares of common stock in this offering and the
application of the estimated net proceeds therefrom. See "Capitalization" and
"Use of Proceeds."
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YEAR ENDED DECEMBER 31,
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1996 1997 1998
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STATEMENT OF OPERATIONS DATA:
Revenues:
Core services........................................... $ 417,590 $ 1,011,161 $ 2,221,230
Support services........................................ 176,653 207,697 644,818
Implementation fees..................................... 417,116 1,310,950 1,200,158
Related products........................................ 119,150 324,736 259,898
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Total revenues...................................... 1,130,509 2,854,544 4,326,104
Loss from operations........................................ (6,661,377) (10,722,084) (10,490,730)
Net loss.................................................... (6,976,391) (11,045,811) (11,558,469)
Preferred stock accretion................................... -- (1,998,665) (3,779,169)
Net loss available for common............................... (6,976,391) (13,044,476) (15,337,638)
Net loss per share -- basic and diluted..................... (0.66) (1.20) (1.36)
Shares used in calculation of basic and diluted loss per
share..................................................... 10,500,930 10,825,662 11,250,270
Pro forma net loss per share-basic and diluted.............. (0.68)
Shares used in calculation of pro forma basic and diluted
loss per share............................................ 17,040,349
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AS OF DECEMBER 31, 1998
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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BALANCE SHEET DATA:
Cash and equivalents........................................ $ 3,471,620 $3,471,620
Working capital............................................. 580,376 580,376
Total assets................................................ 9,421,428 9,421,428
Notes payable, less current portion......................... 8,525,467 8,525,467
Capital lease obligations, less current portion............. 605,322 605,322
Other long-term liabilities................................. 556,100 556,100
Total liabilities........................................... 14,833,950 14,833,950
Redeemable convertible preferred stock...................... 25,776,254 --
Series A preferred stock.................................... 7,950 7,950
Stockholders' equity (deficit).............................. (31,188,776) (5,412,522)
</TABLE>
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AS OF DECEMBER 31,
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1996 1997 1998
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OPERATING DATA:
Financial institution clients
Cumulative(#)....................................... 60 172 315
Customer base(#)(1)................................. 1,951,810 4,263,357 6,738,184
Clients launched
Cumulative(#)....................................... 8 57 117
Customer base(#)(1)................................. 125,131 1,390,956 3,688,134
Usage and transaction volume
Cumulative retail customers(#)...................... 5,036 21,103 50,332
Transactions(#)..................................... 122,936 462,906 878,469
Infrastructure
ATM networks and processors--Cumulative(#)(2)....... 14 34 50
Marketing Partners--Cumulative(#)................... 14 24 34
</TABLE>
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(1) Aggregate for clients and measured in transaction accounts such as demand
deposit accounts. The customer base information is derived from information
published by Thompson Financial Publishing.
(2) The number of ATM networks and processors to which we were certified and
which provide connectivity to our clients and their retail customers.
6
<PAGE> 8
RISK FACTORS
You should carefully consider the following risk factors in addition to the
other information contained in this prospectus before purchasing the common
stock we are offering.
RISKS PARTICULAR TO ONLINE RESOURCES
WE HAVE A HISTORY OF LOSSES AND COULD CONTINUE TO LOSE MONEY
We have not yet had an operating profit for any quarterly or annual period and
are unsure when we will become profitable, if ever. We may not be able to
attract and retain enough financial institutions and retail customers to reach
profitable levels. We were established in 1989 and a significant portion of our
existence has been devoted to developing the proprietary systems and
infrastructure needed to implement our business. Profitability in the future
will depend upon a number of factors, including our ability to continue to
contract with new financial institution clients and to develop and retain a
larger retail customer base that uses our services on a regular basis.
OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS
Our quarterly revenues, expenses and operating results have varied significantly
in the past and are likely to vary significantly from quarter to quarter in the
future. As a result, our operating results may fall below market analysts'
expectations in some future quarters, which could have a material adverse effect
on the market price of our stock.
WE MAY NEED TO RAISE CAPITAL TO STAY IN BUSINESS
We may not achieve cash flow break-even and may require additional infusions of
capital to sustain operations. This capital may not be available. We may need to
raise additional funds sooner than we expect if we incur unforeseen required
capital expenditures or substantial operating losses. If adequate funds are not
available or are not available on acceptable terms, we may not be able to
develop or enhance our services, take advantage of future opportunities or
respond to competitive pressures, which could have a material adverse effect on
our business.
WE SIGNIFICANTLY RELY ON THIRD PARTIES FOR THE SUCCESS OF OUR MARKETING EFFORTS
We depend upon the assistance of marketing partners who include some or all of
our services and related products as a part of their offerings to financial
institutions. To date, approximately 59% of our financial institution clients
were signed as a result of leads from these marketing partners. Failure by these
marketing partners to continue to offer our services and related products could
have a material adverse effect on our business.
WE DEPEND UPON OUR FINANCIAL INSTITUTION CLIENTS TO MARKET OUR SERVICES
To market our services to retail customers, we depend primarily upon our
financial institution clients. Our financial institution clients may not
effectively market our services to their retail customers. Any failure of our
clients to effectively market our services could have a material adverse effect
on our business.
OUR CO-MARKETING EFFORTS FOLLOWING THIS OFFERING MAY NOT BE SUCCESSFUL
We plan to use a portion of the net proceeds from this offering to co-market our
services and related products with our financial institution clients to their
retail customers. These marketing efforts may not result in the desired increase
in acceptance by retail customers.
WE MAY NOT BE ABLE TO EXPAND TO MEET INCREASED DEMAND
We may not be able to expand or adapt our services and related products to meet
the demands of our financial institution clients and their retail customers
quickly or at a reasonable cost. The type and volume of transactions processed
through our system and the number of financial institution clients connected to
it have been relatively limited to date. We will need to continue to expand and
adapt our infrastructure, services and related products to accommodate
additional financial institution clients and their retail customers, increased
transaction volumes and changing customer requirements. This will require
substantial financial, operational and management resources. In the past as we
have developed our infrastructure, clients have experienced periods when they
were unable to utilize our services. If we are unable to scale our system and
processes to
7
<PAGE> 9
support the variety and number of transactions and retail customers who
ultimately use our services, our business may be materially adversely affected.
IF WE LOSE A MATERIAL CLIENT, OUR BUSINESS MAY BE ADVERSELY IMPACTED
One of our financial institution clients, Riggs National Bank, accounted for
10.8% of revenue for the year ended December 31, 1998. The loss of this contract
in the near term, or the loss of any other material contract in the future,
either directly to a competitor, or indirectly in the event that a financial
institution client is acquired by an institution not utilizing our services, or
decides to provide these services in-house, could have a material adverse effect
on revenues. Loss of any material financial institution contract in the future
could also negatively impact our ability to attract and retain other financial
institution clients.
WE MAY NOT BE ABLE TO COMPETE WITH LARGER, MORE ESTABLISHED BUSINESSES OFFERING
SIMILAR PRODUCTS OR SERVICES
We may not be able to compete with current and potential competitors, many of
whom have longer operating histories, greater name recognition, larger, more
established customer bases and significantly greater financial, technical and
marketing resources. Further, some of our competitors provide or have the
ability to provide the same range of services we offer. They could market to our
targeted regional and community financial institution client base. Other
competitors, such as core banking processors, have broad distribution channels
that bundle competing products directly to financial institutions. Also,
competitors may compete directly with us by adopting a similar business model.
A significant number of companies offer portions of the services we provide and
compete directly with us. For example, the Web servers of some companies compete
with our front-end Internet access capabilities. Other software providers have
created units to provide on an outsource basis a portion of services like ours.
These companies may use billpayers who team with access providers. Also, certain
services may be available to retail customers independent of financial
institutions such as Intuit's Quicken.com and Yahoo! Finance. Finally, there are
some ATM and other networks who provide similar services in addition to
connecting to financial institutions.
Many of our competitors may be able to afford more extensive marketing campaigns
and more aggressive pricing policies in order to attract financial institutions.
Our failure to compete effectively in our markets would have a material adverse
effect on our business.
FAILURE TO SUCCESSFULLY IMPLEMENT A SYSTEMS UPGRADE OR CONVERSION MAY ADVERSELY
AFFECT OUR REPUTATION AND OUR BUSINESS
A failure to implement a systems upgrade or conversion would delay
implementation of some of our financial institution clients, could cause us to
divert significant resources and could negatively impact our reputation in the
banking industry. We are currently upgrading our system from software version
2.0 to version 3.0. We may be unable to successfully complete this conversion
and any future systems upgrades or conversions.
WE DEPEND ON OUR OFFICERS AND SKILLED EMPLOYEES DUE TO OUR COMPLEX BUSINESS
If we fail to attract, assimilate or retain highly qualified managerial and
technical personnel and, in particular, software developers for whom demand is
high in all industry markets, our business could be materially adversely
affected. Our performance is substantially dependent on the performance of our
executive officers and key employees who must be knowledgeable and experienced
in both banking and technology. We are also dependent on our ability to retain
and motivate high quality personnel, especially management and highly skilled
technical teams. The loss of the services of any executive officers or key
employees could have a material adverse effect on our business. Our future
success also depends on the continuing ability to identify, hire, train and
retain other highly qualified managerial and technical personnel. Competition
for such personnel is intense.
SYSTEM FAILURES COULD HURT OUR BUSINESS--WE COULD BE LIABLE FOR SOME TYPES OF
FAILURES
Like other system operators, our operations are dependent on our ability to
protect our system from interruption caused by damage from fire, earthquake,
power loss, telecommunications failure, unauthorized entry or other events
beyond our control. Our back-up site is located approximately one mile from our
headquarters, where most of our computer systems, including processing
equipment, is currently operated and maintained. In the event of major
disasters, both locations could be equally impacted. Loss of all or part of our
systems for a period of time could have a material adverse effect on our
business.
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SECURITY BREACHES COULD DISRUPT OUR BUSINESS
Like other system operators, our computer systems may also be vulnerable to
computer viruses, hackers, and other disruptive problems caused by criminals or
retail customers. Computer attacks or disruptions may jeopardize the security of
information stored in and transmitted through the computer systems of our
financial institution clients and their retail customers using our services,
which may result in significant losses or liability. This, or the perception
that our systems may be vulnerable to such attacks or disruptions, also may
deter retail customers from using our services.
Data networks are also vulnerable to attacks and disruptions. For example, in a
number of public networks, hackers have bypassed firewalls and misappropriated
confidential information. It is possible, that despite existing safeguards, an
employee could divert retail customer funds while these funds are in our
control, exposing us to a risk of loss or litigation and possible liability.
Contract provisions that limit our liability arising from the failure of the
security features contained in our system and processes may not be enforceable.
In dealing with numerous consumers, it is possible that some level of fraud or
error will occur, which may result in erroneous external payments. Losses or
liabilities that we incur as a result of any of the foregoing could have a
material adverse effect on our business.
WE FACE RISKS RELATING TO THE YEAR 2000 ISSUE
If our systems, the systems of our vendors, the systems of our financial
institution clients or their vendors, telecommunications networks, or the
systems of the ATM networks or core banking processors are not Year 2000
compliant or are unable to recover from system interruptions which may result
from the Year 2000 date change, our business could be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Impact of Year 2000 Issue on the Operations and Financial
Condition of Online Resources."
WE RELY ON OUR INTELLECTUAL PROPERTY RIGHTS AND PROPRIETARY INFORMATION
We rely on patent trade secret laws to protect our intellectual property, such
as the software and processes which we have developed in connection with our
business. If we fail to adequately protect our intellectual property rights and
proprietary information or if we become involved in litigation relating to our
intellectual property rights, our business could be harmed. Any actions we take
may not be adequate to protect our intellectual property rights and other
companies may develop technologies that are similar or superior to our
intellectual property. Although we believe that our services do not infringe on
the intellectual property rights of others and that we have all rights needed to
use the intellectual property employed in our business, it is possible that we
could become subject to claims alleging infringement of third-party intellectual
property rights. Any claims could subject us to litigation, and could require us
to pay damages or develop non-infringing intellectual property, any of which
could be expensive, or require us to acquire licenses to the intellectual
property that is the subject of the alleged infringement.
OUR CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS MAY PREVENT OR DELAY THIRD
PARTIES FROM BUYING YOUR STOCK
Our Restated Certificate of Incorporation will authorize the Board of Directors
to issue up to 3,000,000 shares of preferred stock and to determine the price,
rights, preferences and privileges, including voting rights, of those shares
without any further vote or action by the stockholders. The rights of the
holders of common stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. The Certificate of Incorporation will provide for staggered terms for
the members of the Board of Directors. In addition, the Certificate of
Incorporation will provide that directors can be removed only for cause and only
by a majority of the other directors or by vote of stockholders owning 80% or
more of the voting power. Some provisions of our proposed Certificate of
Incorporation and Bylaws could have a depressive effect on our stock price or
make it more difficult for a third party to acquire a majority of our
outstanding voting stock or delay, prevent or deter a merger, acquisition,
tender offer or proxy contest. See "Description of Capital Stock--Preferred
Stock" and "Restrictions on Acquisition of Online Resources -- Anti-Takeover
Effects of the Certificate of Incorporation and Bylaws."
INDUSTRY RISKS
OUR SERVICES MAY NOT BE BROADLY USED AND ACCEPTED BY CONSUMERS
There is no established history of broad acceptance by retail customers of
services like ours and those services may not be accepted in the future. Because
our fee structure is designed to establish recurring revenues through monthly
usage by retail
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customers of our financial institution clients, our recurring revenues are
dependent on the acceptance of our services by retail customers and their
continued use of online banking, billpaying and other financial services.
CONSOLIDATION OF THE BANKING AND FINANCIAL SERVICES INDUSTRY COULD NEGATIVELY
IMPACT OUR BUSINESS
The continuing consolidation of the banking and financial services industry
could result in a smaller market for our services. Consolidation frequently
results in a complete change in the electronic infrastructure of the combined
entity. This could result in the termination of our services and related
products if the acquiring institution has its own in-house system or outsources
to competitive vendors. This would also result in the loss of revenue from
actual or potential retail customers of the acquired financial institution.
GOVERNMENT REGULATION COULD INTERFERE WITH OUR BUSINESS
Federal or state agencies may attempt to regulate our activities. In addition,
Congress could enact legislation that would require us to comply with data,
record keeping, processing and other requirements. We may be subject to
additional regulation as the market for our business continues to evolve. The
Federal Reserve Board or other Federal or state agencies may adopt new rules and
regulations for electronic funds transfers that could lead to increased
operating costs and could also reduce the convenience and functionality of our
services, possibly resulting in reduced market acceptance.
Because of the growth in the electronic commerce market, Congress has held
hearings on whether to regulate providers of services and transactions in the
electronic commerce market, and Federal or state authorities could enact laws,
rules or regulations affecting our business or operations. If enacted and
applied to our business, these laws, rules or regulations could render our
business or operations more costly, burdensome, less efficient or impracticable,
any of which could have a material adverse effect on our business.
RISKS RELATING TO THE OFFERING
MANAGEMENT AND DIRECTORS WILL CONTINUE TO CONTROL OUR MANAGEMENT AND AFFAIRS
Upon completion of this offering, management and directors will beneficially own
approximately % of our outstanding common stock, and % if
the underwriters' over-allotment option is exercised in full. Consequently, such
persons, as a group, will be able to control the outcome of all matters
submitted for stockholder action including the election of members to our board
of directors and the approval of significant change-in-control transactions.
Therefore, they will effectively control our management and affairs. This may
have the effect of delaying or preventing a change in control. See "Management"
and "Principal Stockholders."
THESE SHARES MAY NOT HAVE AN ACTIVE MARKET AND THE PRICE MAY BE VOLATILE
Prior to this offering, there has been no public market for our common stock. An
active or liquid trading market in the common stock may not develop upon
completion of this offering, or if it does develop, it may not continue. The
initial public offering price of the common stock will be determined through our
negotiations with the underwriters and may be more than the market price of
common stock after this offering. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price.
The market price of the common stock could be subject to significant
fluctuations in response to variations in quarterly operating results, our
failure to achieve operating results consistent with securities analysts'
projections of our performance, and other factors. If the public offering price
of our common stock does not remain at certain levels during the 20-day trading
period following the initial two week period of trading, some of our
securityholders will receive the right to exercise warrants to purchase shares
of common stock. See "Description of Capital Stock -- Warrants."
The stock market has experienced extreme price and volume fluctuations and
volatility that has particularly affected the market prices of many technology,
emerging growth and developmental stage companies. Such fluctuations and
volatility have often been unrelated or disproportionate to the operating
performance of such companies. Factors such as announcements of the introduction
of new or enhanced services or related products by us or our competition,
announcements of joint development efforts or corporate partnerships in the
financial electronic commerce services market, market conditions in the
technology, banking, telecommunications and other emerging growth sectors, and
rumors relating to us or our competitors may have a significant impact on the
market price of the common stock.
10
<PAGE> 12
PURCHASERS IN THIS OFFERING WILL EXPERIENCE DILUTION
The initial public offering price is substantially higher than the net tangible
book value per share of the outstanding common stock will be immediately after
the offering. Any common stock you purchase in the offering will have a
post-offering net tangible book value per share of $ less than the
price you paid for the share, assuming an initial public offering price of
$ per share, the mid point of the range set forth on the cover page of
this prospectus. See "Dilution."
THE MARKET PRICE OF OUR COMMON STOCK COULD BE AFFECTED BY THE SUBSTANTIAL NUMBER
OF SHARES THAT ARE AVAILABLE TO FUTURE SALE
A substantial number of shares of our common stock could be sold into the public
market after this offering. The occurrence of such sales, or the perception that
such sales could occur, could materially and adversely affect our stock price or
could impair our ability to obtain capital through an offering of equity
securities. After this offering, we will have outstanding shares of
common stock, or shares if the underwriters exercise their option to
purchase additional shares of common stock in this offering. At March 16, 1999,
we had also reserved an additional 5,285,214 shares of common stock for issuance
under our stock option plans and 6,973,771 shares of common stock under our
warrants. As of March 16, 1999, options to purchase 5,065,543 of these shares
were outstanding (of which 4,195,300 were exercisable) and exercisable warrants
to purchase 5,252,451 of these shares have been issued.
The shares of common stock being sold in this offering will be freely
transferable under the securities laws immediately after issuance, except for
any shares sold to our "affiliates". Certain stockholders have agreed pursuant
to written "lock-up" agreements that, for a period of 180 days from the date of
this prospectus, they will not sell their shares. As a result, upon the
expiration of the lock-up agreements 180 days after the date of this prospectus,
shares of common stock will be eligible for sale subject, in most
cases, to certain volume and other restrictions under the Federal securities
laws. The remaining shares of common stock will become eligible for resale after
the expiration of the waiting periods prescribed under the Federal securities
laws. See "Shares Eligible for Future Sale."
11
<PAGE> 13
FORWARD-LOOKING STATEMENTS
This prospectus contains statements about future events and expectations, which
are "forward-looking statements." Any statement in this prospectus that is not a
statement of historical fact may be deemed to be a forward-looking statement.
These statements include:
- 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; and
- other statements, including statements containing words such as
"anticipate," "believe," "plan," "estimate," "expect," "seek," "intend"
and other similar words that signify forward-looking statements.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause our actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Specific
factors that might cause such a difference include, but are not limited to:
- 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.
See additional discussion under "Risk Factors" beginning on page 7.
12
<PAGE> 14
USE OF PROCEEDS
Our net proceeds from the sale of common stock offered hereby are estimated to
be approximately $ million (approximately $ million if the
underwriters' over-allotment option is exercised in full), assuming an initial
public offering price of $ per share (the midpoint of the range set
forth on the cover page of this prospectus), and after deducting underwriting
discounts and commissions and estimated offering expenses. We intend to use the
net proceeds from this offering for (1) the repayment of corporate debt in the
principal amount of $9.7 million; (2) the expansion of co-marketing programs
with existing financial institution clients directed at their retail customers;
and (3) general corporate purposes, including capital expenditures and working
capital. The corporate debt to be repaid includes $8.0 million of loans which
bear interest at 12.75% per annum and are due March 2003, and an equipment note
of $1.7 million which bears interest at 9% per annum and is due June 1, 2000. We
also may use net proceeds to pursue opportunities to invest in or acquire
services, products, technologies or companies that complement or otherwise
enhance our existing businesses. However, we currently have no understandings,
commitments or agreements with respect to any such acquisition. Pending use of
the net proceeds for the above purposes, we intend to invest such funds in
short-term, interest-bearing, investment-grade obligations.
The foregoing discussion represents our best estimate of the allocation of the
net proceeds of this offering based upon our current plans. Actual expenditures
may vary substantially from these estimates and we may find it necessary or
advisable to reallocate the net proceeds within the above-described categories
or to use portions thereof for other purposes.
DIVIDEND POLICY
We intend to retain our future earnings, if any, to fund the development and
growth of our business and, therefore, do not anticipate paying any cash
dividends in the foreseeable future. Our future decisions concerning the payment
of dividends on the common stock will depend upon our results of operations,
financial condition and capital expenditure plans, as well as such other factors
as the Board of Directors, in its sole discretion, may consider relevant. In
addition, our existing indebtedness restricts, and we anticipate our future
indebtedness may restrict, our ability to pay dividends. To date, we have not
paid dividends.
13
<PAGE> 15
CAPITALIZATION
The following table sets forth as of December 31, 1998, our actual
capitalization, our pro forma capitalization which gives effect to the automatic
conversion of our redeemable convertible preferred stock into common stock and
our pro forma capitalization, as adjusted to reflect the issuance and sale of
shares of common stock in this offering and the application of the
resulting net proceeds. See "Use of Proceeds." You should read this table in
conjunction with our financial statements and the related notes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
-----------------------------------------
DECEMBER 31, 1998
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ -----------
<S> <C> <C> <C>
Long term obligations, less current portion................. $ 9,686,889 $ 9,686,889
------------
Redeemable convertible preferred stock...................... 25,776,254 --
------------
Stockholders' equity:
Series A convertible preferred stock, $0.01 par value;
1,000,000 shares authorized, 795,000 shares issued and
outstanding at December 31, 1997 and 1998; liquidation
preference of $795,000 at December 31, 1998 ... 7,950 7,950
Common Stock, $.0001 par value; 35,000,000 shares
authorized, 11,373,564 shares issued and
outstanding, actual; 18,896,897 shares issued and
outstanding pro forma; shares issued and
outstanding pro forma as adjusted.................... 1,138 1,890
Additional paid-in capital............................. 11,077,575 36,853,077
Accumulated deficit.................................... (41,937,066) (41,937,066)
Receivable from sale of common stock................... (338,373) (338,373)
------------ ------------
Total stockholders' equity (deficit).............. (31,188,776) (5,412,522)
------------ ------------
Total capitalization.............................. $ 4,274,367 $ 4,274,367
============ ============
</TABLE>
14
<PAGE> 16
DILUTION
Net tangible book value represents the amount of total tangible assets less
total liabilities. We had a net tangible book value of $(31,188,776) or $(2.77)
per share at December 31, 1998. After giving effect to the offering at an
assumed initial public offering price of $ per share (the midpoint of
the range set forth on the cover of this prospectus) and the receipt of proceeds
therefrom, and after deducting estimated offering expenses and underwriting
discounts, our pro forma net tangible book value as of December 31, 1998, would
have been approximately $ or $ per share. This represents an
immediate dilution of $ per share to new investors purchasing shares of
common stock in the offering and an immediate increase in net tangible book
value to existing stockholders of $ per share. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Net tangible book value per share as of December 31, 1998... $(31,188,776)
Pro forma increase in net tangible book value per share
attributable to the offering and use of proceeds
therefrom.................................................
------------
Pro forma increase in net tangible book value per share
after the offering........................................
----------
Pro forma dilution per share to new investors (assuming
exercise of all outstanding options and warrants)......... $
==========
</TABLE>
The following table summarizes, on a pro forma as adjusted basis as of December
31, 1998, the number of shares of common stock purchased, the total
consideration paid for the common stock and the average price per share paid by
the existing stockholders and by the new investors purchasing shares of common
stock in the offering, assuming an offering price of $ per share (the
midpoint of the range set forth on the cover page of this prospectus) before the
deduction of underwriting discounts and estimated expenses payable by Online
Resources:
<TABLE>
<CAPTION>
---------------------------------------------------------------
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................................. % $ % $
New investors.........................................
----- ----- ------ ----- ------
Total............................................ $ $
===== ===== ====== ===== ======
</TABLE>
Except as indicated above, the foregoing tables assume no exercise of the
underwriters' over-allotment option and no exercise of outstanding stock options
or warrants to purchase common stock. See "Management--Stock Option Plans" and
"Description of Capital Stock--Warrants."
15
<PAGE> 17
SELECTED FINANCIAL INFORMATION
The tables that follow present portions of our financial statements and are not
complete. You should read the following selected financial information in
conjunction with our financial statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The statement of operations
data for the three years ended December 31, 1998 and the balance sheet data as
of December 31, 1997 and 1998 are derived from our audited financial statements,
which are included elsewhere in this prospectus. The statement of operations
data for the two years ended December 31, 1995 and the balance sheet data as of
December 31, 1994, 1995 and 1996 are derived from audited financial statements
that are not included in this prospectus. Pro forma balance sheet data reflects
the conversion of the redeemable convertible preferred stock upon consummation
of this offering. Historical results are not necessarily an indication of future
results. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
---------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Core services..................................... $ 449,386 $ 372,573 $ 417,590 $ 1,011,161 $ 2,221,230
Support services.................................. 254,309 307,423 176,653 207,697 644,818
Implementation fees............................... -- 66,620 417,116 1,310,950 1,200,158
Related products.................................. 149,529 237,654 119,150 324,736 259,898
----------- ----------- ----------- ------------ ------------
Total revenues............................. 853,224 984,270 1,130,509 2,854,544 4,326,104
Expenses:
Cost of revenues.................................. 1,067,446 1,853,486 1,864,991 5,128,584 6,289,462
General and administrative........................ 1,050,929 1,699,363 2,208,218 2,508,058 2,705,029
Sales and marketing............................... 963,330 1,423,255 2,249,405 3,257,725 3,377,728
Systems and development........................... 890,716 1,241,874 1,469,272 2,682,261 2,444,615
----------- ----------- ----------- ------------ ------------
Total expenses............................. 3,972,421 6,217,978 7,791,886 13,576,628 14,816,834
----------- ----------- ----------- ------------ ------------
Loss from operations................................ (3,119,197) (5,233,708) (6,661,377) (10,722,084) (10,490,730)
Other income (expense).............................. 92,651 6,251 (315,014) (323,727) (1,067,739)
----------- ----------- ----------- ------------ ------------
Net loss............................................ (3,026,546) (5,227,457) (6,976,391) (11,045,811) (11,558,469)
Preferred stock accretion........................... -- -- -- (1,998,665) (3,779,169)
----------- ----------- ----------- ------------ ------------
Net loss available for common....................... (3,026,546) (5,227,457) (6,976,391) (13,044,476) (15,337,638)
Net loss per share basic and diluted................ $ (0.36) $ (0.54) $ (0.66) $ (1.20) $ (1.36)
=========== =========== =========== ============ ============
Shares used in calculation of basic and diluted loss
per share......................................... 8,388,865 9,617,661 10,500,930 10,825,662 11,250,270
Pro forma net loss per share basic and diluted...... -- -- -- -- $ (0.68)
Shares used in calculation of pro forma basic and
diluted loss per share............................ -- -- -- -- 17,040,349
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
AS OF DECEMBER 31,
---------------------------------------------------------------------------------
1998
--------------------------
1994 1995 1996 1997 ACTUAL PRO FORMA
---------- ---------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents.................... $ 586,932 $ 762,738 $ 41,142 $ 1,855,809 $ 3,471,620 $ 3,471,620
Working capital......................... 1,333,985 1,265,745 (1,399,022) (144,592) 580,376 580,376
Total assets............................ 2,654,184 2,429,060 2,082,436 4,681,995 9,421,428 9,421,428
Notes payable, less current portion..... -- 475,000 4,555,808 1,199,225 8,525,467 8,525,467
Capital lease obligations, less current
portion............................... 123,006 92,154 -- 352,956 605,322 605,322
Other non-current liabilities........... -- -- -- -- 556,100 556,100
Total liabilities....................... 704,677 993,447 6,927,011 4,217,590 14,833,950 14,833,950
Redeemable convertible preferred
stock................................. -- -- 645,000 16,836,016 25,776,254 --
Series A Preferred Stock................ 7,950 7,950 7,950 7,950 7,950 7,950
Stockholders' equity (deficit).......... 1,949,507 1,435,613 (5,489,575) (16,371,611) (31,188,776) (5,412,522)
</TABLE>
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes included elsewhere in this prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from the results
anticipated in these forward-looking statements as a result of factors
including, but not limited to, those under "Risk Factors" and elsewhere in this
prospectus.
OVERVIEW
We are a leading provider of electronic commerce solutions that enable regional
and community financial institutions to provide branded Internet and other
online banking services to their retail customers. 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 our 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 up-front
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
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 and financial electronic commerce hub. Our
proprietary system enables us to provide a broad range of services to our
financial institution 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.
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 December 31, 1998 we had
accumulated deficits of $41.9 million and net property and equipment of $3.2
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.
17
<PAGE> 19
Our strategy is to rapidly expand and enhance our electronic commerce hub with
additional financial institution clients, retail customers and financial
services. We believe that our revenue growth and future profitability will
depend on the speed of launching our financial institution clients and the rate
of adoption of our services by their retail customers. By achieving growth in
these areas, we believe we can increase our operating margins through economies
of scale and create increased marketing and distribution opportunities. We
intend to use a portion of the proceeds from this offering to expand our co-
marketing efforts with our financial institution clients in order to promote
adoption of our services by their retail customers. We are presently conducting
co-marketing pilot programs with several of our clients. However, we cannot
predict whether our co-marketing programs will be successful.
Our limited operating history makes it difficult to evaluate our prospects for
success and our revenue and profitability potential is unproven. Investors
should not use our operating history as a basis for assessing our future
performance.
RESULTS OF OPERATIONS
The following table presents certain items derived from our statements of
operations expressed as a percentage of revenue.
<TABLE>
<CAPTION>
------------------------------------
YEAR ENDED DECEMBER 31,
STATEMENT OF OPERATIONS DATA: ------------------------------------
<S> <C> <C> <C>
Revenues: 1996 1997 1998
------ ------ ------
Core services............................................. 36.9% 35.4% 51.3%
Support services.......................................... 15.6% 7.3% 14.9%
Implementation fees....................................... 36.9% 45.9% 27.7%
Related products.......................................... 10.6% 11.4% 6.1%
------ ------ ------
Total revenues.................................... 100.0% 100.0% 100.0%
Expenses:
Cost of revenues.......................................... 165.0% 179.7% 145.4%
------ ------ ------
Gross margin................................................ (65.0)% (79.7)% (45.4)%
General and administrative................................ 195.3% 87.9% 62.5%
Sales and marketing....................................... 199.0% 114.1% 78.1%
Systems and development................................... 130.0% 94.0% 56.5%
------ ------ ------
Total expenses.................................... 524.3% 296.0% 197.1%
------ ------ ------
Loss from operations........................................ (589.3)% (375.7)% (242.5)%
------ ------ ------
Total other income (expense)................................ (27.9)% (11.3)% (24.7)%
------ ------ ------
Net loss.................................................... (617.2)% (387.0)% (267.2)%
====== ====== ======
</TABLE>
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Revenues
We derive revenues from providing core services, support services,
implementations and from selling related products. Revenues increased 51.6% to
$4.3 million in 1998 as compared to $2.9 million in 1997. This increase was
primarily attributable to a 119.7% increase in core services fees and a 210.5%
increase in support services fees, which were driven by a 138.5% increase in the
number of retail customers. The increase in retail customers was driven
primarily by the launch of an additional 60 clients during 1998.
Cost of Revenues
Cost of revenues primarily includes telecommunications, payment processing,
systems operations, customer service, implementation and related products. Cost
of revenues increased 22.6% to $6.3 million in 1998 as compared to $5.1 million
in 1997. This increase was primarily due to a 110.6% increase in payment
processing costs as a result of increased support staff and transactional costs
associated with the 138.5% increase in retail customers. Additionally,
telecommunications costs increased 57.5% and customer service costs increased
34.1% as a result of the increase in retail customers. Related product costs
decreased 78.5% as the result of the recognition of a $496,721 reserve on
screen-based telephones taken in 1997.
General and Administrative
General and administrative expenses primarily consist of salaries for executive,
administrative and financial control personnel and facilities costs such as
office leases, insurance and depreciation. General and administrative expenses
increased by 7.9%
18
<PAGE> 20
to $2.7 million in 1998 as compared to $2.5 million in 1997. The increase was
due to a 480.1% increase in professional services and a 49.6% increase in rent
expense, which were partially offset by a 22.9% decrease in salaries expenses.
In 1997, a one-time charge of $137,000 was incurred due to a reduction in head
count. This reduction in head count contributed to the reduction in salaries
expense in 1998.
Sales and Marketing
Sales and marketing expenses include salaries and commissions paid to sales and
marketing personnel, public relations costs, and other costs incurred in
marketing our services and related products. Sales and marketing expenses
increased 3.7% to $3.4 million in 1998 as compared to $3.3 million in 1997. This
increase was due to a 3.8% increase in personnel expenses, a significant
increase in advertising expenses and expenses related to the distribution of
marketing materials, which were partially offset by a 4.2% decrease in sales
commissions. The decrease in sales commissions was a result of more client
signings coming from marketing partners and a greater proportion of sales
commissions paid in the form of our equity rather than as cash compensation.
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. Systems and development expenses decreased by 8.9% to
$2.4 million in 1998 as compared to $2.7 million in 1997. This decrease was
attributable to a 7.5% decrease in personnel expenses and a 74.4% decrease in
recruiting expenses as hiring growth slowed and we relied less on external
recruiting services, which were partially offset by a 39.1% increase in
consulting services.
Other Income and Expense. Interest expense increased 143.3% to $1.1 million in
1998 as compared to $471,187 in 1997 as we continued to finance our working
capital through equipment financing loans in late 1997 and financings in 1998.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Revenues
Revenues increased 152.5% to $2.9 million in 1997 as compared to $1.1 million in
1996. This increase was attributable to a 142.1% increase in core services
revenue due to a 319% increase in the number of retail customers. Additionally,
implementation fees increased 214.3% as a result of increases in sales and
clients launched onto our system. Related product revenue increased 172.5% as we
delivered additional screen-based telephones and fulfillment material to our new
retail customers.
Cost of Revenues
Cost of revenues increased 175.0% to $5.1 million in 1997 as compared to $1.9
million in 1996. This increase was primarily attributable to a 239.3% increase
in telecommunication costs, a 237.9% increase in customer service costs and a
98.8% increase in billpaying processing costs. These increases resulted from the
increased number of retail customers, an increase in staff to support the growth
of our operations and the recognition of a $496,721 reserve on screen-based
telephones.
General and Administrative
General and administrative expenses increased 13.6% to $2.5 million in 1997 as
compared to $2.2 million in 1996. This increase was due to a one-time $137,000
charge incurred in November 1997 due to a reduction in head count. As a result
of the growth in operations we had a 130.5% increase in rent expense associated
with office expansion, a 92.9% increase in depreciation and amortization
expense, and an 18.4% increase in salaries expense associated with additional
staffing. These expenses increased as a result of the growth of our operations.
The increase in general and administrative expenses was partially offset by the
absence of bonus awards in 1997.
Sales and Marketing
Sales and marketing expenses increased 44.8% to $3.3 million in 1997 as compared
to $2.2 million in 1996. Approximately 27.7% of this increase was attributable
to the account services group which was formed in order to strengthen client
relations and promote adoption of our services by the retail customers of the
growing number of launched financial institution clients. Additionally, sales
commissions increased 97.9% commensurate with the increase in the number of
signed financial institution clients. Travel expenses increased 19.0% due to the
addition of new sales representatives.
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<PAGE> 21
Systems and Development
Systems and development expenses increased 82.6% to $2.7 million in 1997 as
compared to $1.5 million in 1996. This was primarily attributable to costs
associated with a technical staff expansion to support the enhancement of our
Opus(sm) system, which resulted in a 78.5% increase in salary and benefits and a
480.4% increase in recruiting costs.
Other Income and Expense
Interest income increased 338.7% to $147,988 in 1997 as compared to $33,730 in
1996. This increase was offset by a 37.2% increase in interest expense to
$471,187 in 1997 as compared to $343,384, in 1996 as a result of increased
bridge loans and equipment financing in 1997.
Quarterly Results of Operations
The following table presents certain unaudited quarterly financial information
for each of the eight quarters during the years ended December 31, 1997 and
1998. In the opinion of management, this information has been prepared on the
same basis as the audited financial statements and includes all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
unaudited quarterly results set forth herein. We expect to continue to
experience fluctuations in our quarterly operating results. Our quarterly
results have in the past been subject to fluctuations and, therefore, the
operating results for any quarter or quarters are not necessarily indicative of
results for any future period. The quarterly results data should be read in
conjunction with our financial statements and related notes appearing elsewhere
in this prospectus.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
THREE MONTHS ENDED,
-----------------------------------------------------------------------------------
1997 1998
------------------------------------------------------ -------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
Core services.............. $ 117,294 $ 193,592 $ 308,144 $ 392,131 $ 479,409 $ 484,642
Support services........... 21,045 45,231 64,946 76,475 105,322 123,671
Implementation fees........ 230,875 316,650 340,525 422,900 159,825 274,100
Related products........... 46,977 56,344 80,290 141,125 75,184 63,037
----------- ----------- ----------- ----------- ----------- -----------
Total revenues....... 416,191 611,817 793,905 1,032,631 819,740 945,450
Expenses:
Cost of revenues........... 803,692 1,067,636 1,213,454 2,043,802 1,368,803 1,513,971
General and
administrative........... 523,561 541,482 611,519 831,496 521,397 543,781
Sales and marketing........ 694,404 918,937 854,229 790,155 733,827 731,935
Systems and development.... 629,273 626,686 765,952 660,350 547,028 607,131
----------- ----------- ----------- ----------- ----------- -----------
Total expenses....... 2,650,930 3,154,741 3,445,154 4,325,803 3,171,055 3,396,818
----------- ----------- ----------- ----------- ----------- -----------
Loss from operations......... (2,234,739) (2,542,924) (2,651,249) (3,293,172) (2,351,315) (2,451,368)
----------- ----------- ----------- ----------- ----------- -----------
Total other income
(expense).................. (129,204) (131,596) 3,884 (66,811) (71,744) (290,894)
----------- ----------- ----------- ----------- ----------- -----------
Net loss..................... $(2,363,943) $(2,674,520) $(2,647,365) $(3,359,983) $(2,423,059) $(2,742,262)
=========== =========== =========== =========== =========== ===========
<CAPTION>
--------------------------
THREE MONTHS ENDED,
--------------------------
1998
--------------------------
SEPTEMBER 30 DECEMBER 31
------------ -----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
Core services.............. $ 583,070 $ 674,109
Support services........... 166,959 248,866
Implementation fees........ 354,509 411,724
Related products........... 58,393 63,284
----------- -----------
Total revenues....... 1,162,931 1,397,983
Expenses:
Cost of revenues........... 1,538,946 1,867,742
General and
administrative........... 564,323 1,075,528
Sales and marketing........ 853,876 1,058,090
Systems and development.... 601,616 688,840
----------- -----------
Total expenses....... 3,558,761 4,690,200
----------- -----------
Loss from operations......... (2,395,830) (3,292,217)
----------- -----------
Total other income
(expense).................. (367,243) (337,858)
----------- -----------
Net loss..................... $(2,763,073) $(3,630,075)
=========== ===========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have raised approximately $50.2 million of capital,
consisting of $12.5 million for common stock and Series A preferred stock, $18.4
million for redeemable preferred stock and $19.3 million of debt. Of the debt,
$850,000 has been exchanged for common stock and $8.0 million has been exchanged
for redeemable preferred stock. We have also utilized $1.8 million of capital
lease financing. Through December 31, 1998, we invested $5.5 million in capital
expenditures and applied the remainder to development of our Opus(sm) system and
the creation of the infrastructure requirements to support our increased client
base.
Beyond our capital expenditures, the funds we have raised have been applied to
support our working capital needs. These needs prior to 1996 consisted primarily
of costs to develop and implement our infrastructure. In these years, we raised
a total of $14.1 million, consisting of $795,000 from the issuance of Series A
preferred stock, $1.6 million from the issuance of debt, and $11.7 million from
the issuance of common stock.
Beginning in 1996 and through December 31, 1998, our working capital needs
expanded significantly as our client base grew from 18 to 315 financial
institution clients. Our infrastructure needs grew to accommodate our expanding
client base.
During 1996, we raised $4.0 million of debt. During 1996, we also issued
$670,000 of Series B preferred stock.
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<PAGE> 22
During 1997, we received $335,000 from the issuance of Series B preferred stock,
net cash proceeds of $7.6 million from the issuance of Series C preferred stock
and $3.3 million from the issuance of convertible debt. In 1997 we also issued
an equipment financing note from which we received $1.5 million.
During 1998, we received net cash proceeds of $4.6 million from the issuance of
Series C preferred stock and $8.0 million from the issuance of two senior debt
notes. We also received an additional $434,000 under our equipment financing
note. Additionally, in 1998 we incurred $450,000 of debt.
Throughout the three years ended December 31, 1998, we used lease financing to
obtain systems hardware and other assets. In total, we obtained $1.8 million of
capital lease financing during this period, mostly in 1998.
Finally, in the first quarter of 1999 we received net cash proceeds of $5.2
million from the issuance of Series C preferred stock.
As of December 31, 1998, we had $8 million of senior debt outstanding, with
principal and interest maturing on March 31, 2001. Also at December 31, 1998 we
had $1.7 million of equipment notes outstanding. The equipment notes require
monthly payments of $61,500 from July 1, 1998 through maturity on June 1, 2001.
As of December 31, 1998, we had $1.2 million of capital lease financing
obligations outstanding. At December 31, 1998, we had cash of $3.5 million. In
the next twelve months we expect capital expenditures of approximately $500,000.
We believe that these resources, together with the estimated net proceeds from
this offering and anticipated debt and capital lease financing, will be
sufficient to fund our operations for at least the next 12 months. If we expand
more rapidly than currently anticipated, if our working capital needs exceed our
current expectations or if we make acquisitions, we will need to raise
additional capital from equity or debt sources. We cannot be sure that we will
be able to obtain the additional financing to satisfy our cash requirements or
to implement our growth strategy on acceptable terms or at all. If we cannot
obtain such financing on terms acceptable to us, we may be forced to curtail our
planned business expansion and may be unable to fund our ongoing operations.
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. During 1998, the Year 2000 project team began Year 2000
compliance testing. We are currently engaged in implementing Year 2000 compliant
systems for all of our customers. Additionally, effort has been concentrated on
business systems owned or operated by us or third parties, and which directly
affect our ability to provide our services or otherwise affect revenues or
reliability. The failure of such systems (collectively identified as "Critical
Systems") for a period of time may lead to unrecoverable consequences. To
mitigate risks associated with the Year 2000 issue, we have adopted a Year 2000
compliance program for our Critical Systems that has 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.
Our Year 2000 program has the following phases and components:
Phase 1. Awareness of Problem
A Year 2000 coordinator has been designated to monitor Year 2000 events, direct
communications within the company regarding Year 2000 and report and monitor
progress of Year 2000 activities. It is our policy to evaluate for Year 2000
compliance, all software, hardware and telecommunications services we purchase.
A checklist of Year 2000 considerations is used for this purpose.
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<PAGE> 23
Phase 2. Assessment of Impact and Complexity
To assess the magnitude and complexity of Year 2000 conversion issues, we
performed a comprehensive inventory of Year 2000 issues at the enterprise level.
We approved an operating definition of Year 2000 compliance to mean that the
system hardware and software supports dates changing from the 1900s to the 2000s
without major delays resulting from the date change and without affecting the
intended performance of the system. We completed a comprehensive system
inventory of core operations, development systems and administration that
encompassed the following areas: proprietary software; operating systems; third
party software and products of other companies utilized for critical operations;
computer equipment and network components; telecommunications including voice,
data and automated call distribution systems; database systems and data;
automated accounting systems; computer equipment; infrastructure including
buildings, electrical power, security systems, elevators and HVAC systems; and
interfaces to external networks, processors and financial institutions. Because
the Year 2000 project has been considered part of the overall planning, no
initiatives will be delayed significantly as a result of Year 2000 testing.
However, testing and certification will be required.
Phase 3. Remediation and Renovation
We have adopted a plan for renovation with regard to computer systems that
involves the following main steps:
- identify all systems that are not currently Year 2000 compliant;
- prioritize all conversion issues based on identifying those systems and
processes that directly affect the delivery of our products and services,
other mission-critical systems and non-critical ancillary or support
systems;
- determine whether to renovate, retire or replace each noncompliant system
(renovate, retire, or replace);
- convert the system or software to be Year 2000 compliant or replace the
system depending on the system;
- schedule Year 2000 compliance testing and test all interfaces, starting
with mission-critical interfaces; and
- implement Year 2000 compliant platform architecture and systems for all
customers.
Phase 4. Validation and Testing
The goal of Year 2000 testing is to demonstrate the capability of systems to
process dates into the next century and to identify any additional modifications
that may be required. Systems and software are then modified or replaced so that
they process date information correctly. As of March, 1999, testing of internal
"mission-critical" systems has been completed and testing with external service
providers and customers has been started.
Phase 5. Implementation
The process for implementing Year 2000 compliant platform architecture and
deploying Year 2000 compliant systems for all customers is currently in
progress. Testing will continue through the Year 2000 as new customers are
connected to the system.
Costs
We have incurred expenses of $250,000 through March 16, 1999 in connection with
the Year 2000 program. All expenses relating to Year 2000 compliance have 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 $500,000 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 fail to solve a 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
22
<PAGE> 24
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 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 have obtained information from various other third-party
providers regarding the Year 2000 readiness of their systems and we are
continuing to review this information. We have submitted requests to
other third parties for information regarding the Year 2000 readiness of
their 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.
- We anticipate completing our Year 2000 readiness and compliance program
by the third quarter of 1999. If we do not complete our testing and
implementation plans, the potential Year 2000 liabilities may be
increased. We could respond late or not at all to problems caused by the
date changeover at the end of 1999. In addition, any response we make may
be poorly conceived or executed. Our compliance program includes
contingency plans that are continually being reviewed.
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 are currently reviewing our 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
the project not being completed on time. If the Year 2000 project is 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 tests and validation. 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 renovation or testing of
mission-critical systems, Year 2000 specialists are contracted to complete the
remediation process.
Although we have found no material Year 2000 problems with our internal
mission-critical systems, and despite our expectation that Year 2000 compliance
efforts will result in Year 2000 compliant services, we are currently developing
business continuation contingency plans and performing tests on our existing
systems. We expect to complete all testing with material third parties by
September 1999.
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,
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<PAGE> 25
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 outsourcers, service providers, suppliers, and
vendors to us, unanticipated system costs, the adequacy of and ability to
implement contingency plans, and similar uncertainties.
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<PAGE> 26
BUSINESS
OVERVIEW
We are a leading provider of electronic commerce solutions that enable our
clients to provide branded Internet and other online banking services to their
retail customers. Our clients are regional and community financial institutions.
We offer our clients' retail customers online banking, billpaying and access to
complementary financial products. As part of our services, we provide customer
support through our call center, marketing services and other services.
Together, our capabilities provide a single source electronic commerce solution.
We provide a financial electronic commerce hub through our proprietary Opus(sm)
system. The key to our system is the middleware component which connects our
clients, their retail customers and financial service providers, and integrates
customer and financial data through our three gateways.
Our Access Gateway provides our clients' retail customers with a choice of
access either through the Internet or through private communications networks,
using either our PC software, our screen-based telephone, or a touch tone
telephone. Our patented EFT Gateway enables real-time electronic funds transfer
with substantially all U.S. depository financial institutions through various
ATM networks. Our Services Gateway links retail customers to our online banking
and billpaying services, as well as to other services offered through our
third-party partners. These other services presently include loan approval,
insurance, investment information and securities trading.
By December 31, 1998 we had substantially completed a key component of our hub
by connecting with 50 ATM networks and processors. This essentially constitutes
all major regional ATM networks, such as Star, Honor and NYCE, and most major
core banking processors, including EDS, Fiserv and Alltel. We had launched a
total of 117 financial institution clients, with 60 of these launched during
1998. Of our clients' total estimated customer base of approximately 3.7
million, we had 50,332 retail customers who were using our services by year end.
INDUSTRY BACKGROUND
Growth of Financial Electronic Commerce
Consumer acceptance of easy-to-use electronic media has had a significant impact
on the financial services industry. Since most financial transactions require
transferring only information, rather than tangible goods, the financial
services industry is particularly well-suited for electronic commerce. The
combination of the following trends is driving the adoption of financial
electronic commerce:
- - Expanding PC Ownership. Declining prices for PCs and rapid growth in the
number of computer-literate consumers are driving increased penetration of
PCs in U.S. homes. The Yankee Group estimates that by 1998 the percentage of
U.S. consumer households owning a PC had grown to over 44% and expects this
number to increase to 58% by the year 2002.
- - Increasing Internet Accessibility. Reduced communications costs, improved
Web browsers, and faster connection speeds have made the Internet
increasingly accessible to consumers and to businesses offering products and
services online. International Data Corporation or IDC estimates that there
were 52 million Internet users in the U.S. at the end of 1998, and that this
figure will grow to 136 million by the end of 2002.
- - Increasing Acceptance of Electronic Commerce. Consumers have grown
increasingly comfortable with the security of electronic commerce and are
willing to conduct large transactions online. IDC estimates that goods and
services purchased over the Internet in the U.S. will increase from
approximately $26 billion in 1998 to over $269 billion in 2002.
Emergence of Online Financial Services
Financial institutions have begun to recognize the advantages offered by online
delivery systems. Financial electronic commerce provides these institutions the
opportunity to offer their services to targeted audiences. Additionally, these
solutions provide financial institutions with the opportunity to reduce or
eliminate personnel, paper and other back office expenses associated with
traditional distribution channels.
Banks, thrifts and credit unions have responded by offering customers convenient
at-home or at-work access to a range of financial services. Retail customers now
have the capability to execute a wide array of online transactions, including
funds transfers, billpaying, and consumer and residential loan processing. IDC
estimates that the number of households banking online will expand to 6 million
during 1999 and to 25 million by 2004.
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<PAGE> 27
With the rapid growth of the online banking market, financial institutions can
no longer rely exclusively on traditional retail delivery methods. Financial
institutions that are unable to offer competitive electronic banking as part of
their overall services will find it increasingly difficult to attract and retain
customers.
A number of Web-based financial service specialists such as Charles Schwab's
E-Schwab, E*Trade, DLJdirect, and Datek are taking advantage of these trends in
financial electronic commerce. According to IDC, the number of online brokerage
accounts grew 73% over 1997 to 6.4 million by December 31, 1998. IDC expects
this figure to reach 24 million by the end of 2002. IDC further estimates that
the percentage of individual investors trading online will increase from 8% of
the total trading population in 1998 to 30% in 2002.
Challenges for Regional and Community Financial Institutions
SNL Securities estimates that of 22,000 depository financial institutions in the
U.S., all but approximately 80 are regional and community institutions with
assets of less than $10 billion. Approximately 50% of U.S. deposits are held in
these institutions. While the online banking trend is being driven primarily by
very large financial institutions, regional and community financial institutions
are being compelled to offer competitive products.
These financial institutions face many obstacles in making electronic commerce
services available to their customers. In particular, they often lack the
capital and human resources to:
- develop the substantial technology infrastructure necessary to provide
their customers with Internet and other online banking services;
- develop the operating and technical expertise to deliver online services
and manage rapidly changing technologies;
- design and execute consumer marketing campaigns necessary to promote the
use of online banking services; and
- provide integrated customer support for their online banking services.
We believe that these limitations present a significant impediment to retaining
and attracting customers and put these financial institutions at a distinct
disadvantage.
THE ONLINE RESOURCES SOLUTION
We provide a single source electronic commerce solution which we believe enables
regional and community financial institutions to offer the breadth of services
needed to remain competitive. We bring economies of scale and technical
expertise to our clients that would otherwise lack the resources to compete in
the rapidly changing, complex financial services industry. We differentiate
ourselves by internally developing, integrating and controlling many critical
services, such as billpaying and call center support, rather than relying
primarily on third-party providers for these services. As a single source
vendor, we believe our clients benefit from one point of accountability and
control. We believe our solution provides our clients with a cost-effective
means to retain and expand their customer base, deliver their services more
efficiently and strengthen their customer relationships.
We provide our solution through our (1) technology infrastructure, (2) operating
and technical expertise, (3) marketing services, and (4) support services.
Our Technology Infrastructure
Regional and community financial institutions often lack the resources to
develop the substantial infrastructure necessary to provide their customers with
Internet and other online banking services. We provide our services through our
proprietary Opus(SM) system. This system integrates our communications, systems,
processing and support capabilities. We serve as a financial electronic commerce
hub by connecting our financial institution clients, their retail customers and
other financial service providers through three gateways. Our middleware
component enables us to integrate customer and financial data gathered through
our gateways. This unifying software co-ordinates customer authorization,
transactions, settlement, security, user profiles, data warehousing,
registration, fulfillment, administrative support and our customer call center
services. These functions and our gateways operate substantially in real-time
and provide an integrated application for our clients and their retail
customers.
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<PAGE> 28
The following diagram illustrates our financial electronic commerce hub:
[ONLINE RESOURCES' FINANCIAL HUB GRAPH
- - Our access gateway provides our clients' retail customers with a choice of
access either through the Internet or through private communications networks
using our PC software, our screen-based telephone or a touch tone telephone.
- - Our electronic funds transfer gateway uses our patented process to link us to
financial institutions in real-time through ATM networks, thereby leveraging
the established banking industry infrastructure for online payments. We have
completed connection and certification to 50 ATM networks and processors. Our
connectivity through these ATM networks and processors gives us an established
path to most U.S. depository financial institutions and provides a rapid, low
cost way to securely link to their host and legacy systems.
- - Our services gateway allows us to provide our clients' retail customers with a
single point of selection for a broad range of financial products. We perform
and integrate our own online banking and billpaying services. Third-party
partners provide other financial products through our Financial Services
Center. Today these products include loan approval, insurance, investment
information and securities trading.
Our Operating and Technical Expertise
We provide regional and community financial institutions with our operating and
technical expertise. We believe that our industry focus and outsourcing
capabilities add value for our clients by simplifying complex processes and
technologies. After seven years of operating experience, we have established the
processes, procedures, controls and staff necessary to keep our systems running
reliably and securely. At the same time, we have developed the organizational
flexibility and inter-disciplinary staff skills necessary to adjust to a rapidly
changing environment.
Our Marketing Services
We actively support the retail customer marketing programs of our clients. We
supply marketing support material, such as standardized retail customer
applications, signage, media templates and promotional programs. All marketing
support material is privately branded by our financial institution clients. In
addition, for selected clients, we assume some consumer marketing
responsibilities. These services are also privately branded.
Our Support Services
We provide a comprehensive set of support services to complement our banking and
billpaying services. These support services include our customer service center,
Web site design and hosting, billing, administrative services, security and
communications services. We provide each of these services on an optional basis
and have fully integrated them into our banking, billpaying and related
products.
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<PAGE> 29
STRATEGY
Our goal is to become the leading provider of electronic commerce solutions to
financial institutions by rapidly expanding and enhancing our hub. As our
business grows, we believe we can lower costs through economies of scale and
create new opportunities for marketing and distribution. Our strategy includes
the following key elements:
Continue Rapid Expansion of Our Financial Institution Client Base
We rapidly increased our financial institution client base from 18 to 315 over
the three years ended December 31, 1998; however, a large portion of our target
market is still unserved. We seek to expand our universe of financial
institution clients through a multiple channel sales strategy. Our direct sales
force focuses on the mid-sized financial institution within our target client
base. In addition, we intend to leverage our growing network of marketing
partners to resell our solution to the smaller and larger financial institution
market.
Increase Retail Customer Usage
We intend to increase retail customer usage by accelerating the launches of our
financial institution clients using our system and increasing their retail
customer adoption levels. The recently completed connections and certifications
with 50 ATM networks and processors provide us with a platform that allows us to
more aggressively launch our backlog of signed financial institution clients. We
are also expanding our consumer marketing services to increase retail customer
adoption rates. We have hired a senior consumer marketing director and have
begun direct marketing pilot programs with some of our financial institution
clients. As part of this initiative, we utilize our BankOnline.com Web site to
direct potential retail customers to our financial institution clients.
Enhance Our Services Gateway
We believe our financial institution clients and their retail customers
represent an attractive distribution channel for additional financial services
and content provided by us and by our third-party partners. We expect to
integrate bill presentment into our billpaying services through alliances with
companies who specialize in servicing billers. We also intend to expand our
Financial Services Center to include additional retail services and content. Our
recent partnership with Intuit will further support retail customers with their
"small office/home office" business banking needs. Our patented method for
targeting advertising will allow us to support our clients' efforts to
cross-sell financial services.
Maintain Superior Service Quality and Support Services
We believe that providing superior quality service is important in attracting
and retaining financial institutions and their retail customers. This is
imperative to our clients since our online banking services and customer call
center are branded in their name. Despite the challenges of building our
infrastructure to meet the demands of our rapidly growing client base, we
believe our quality of service is currently among the highest in the industry.
Our system availability now exceeds 99.5%. Approximately 54% of our billpayments
are made electronically and our billpaying error rate is 0.1%. We also expanded
our customer call center from 44 to 57 employees during 1998 and we have
invested substantially in specialized call center systems, software and
management. We believe that we are able to provide our technology-based services
with a high level of proficiency and interaction that could not easily be
attained and controlled when outsourced to third parties.
Strengthen Integration of Financial Data
We believe that a key to assisting our clients in remaining competitive in
electronic commerce will hinge on their ability to package and seamlessly
integrate multiple services and products. This ability will allow our clients'
retail customers to conduct and control all of their financial affairs
conveniently. We expect that this will further strengthen the relationships
between our clients and their retail customers. We recently upgraded our
proprietary middleware and made substantial investments in software tools and
technical staff to further enhance our integration capabilities. Using these
resources, we plan to create a more fully integrated application with
third-party financial service providers, such as by performing real-time debits
and credits for their services.
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The following diagram illustrates our fully integrated applications:
[ONLINE RESOURCES' FULLY INTEGRATED APPLICATION GRAPH
SERVICES AND RELATED PRODUCTS
We offer a single source electronic commerce solution to our financial
institution clients. Typically, we contract with our clients to provide a
fully-integrated set of Internet and other online banking and financial services
and related products. We are able to provide these services and products to meet
our clients' specific needs. Our services and related products include: (1)
implementation, (2) banking and billpaying, (3) support services, and (4)
third-party services gateway.
Implementation
Initially, we contract with a financial institution to provide services and
products tailored to meet its specific needs. At the time of entering into a
contract, a financial institution client pays a one-time fee which generally
ranges from $3,000 to $50,000 based on certain factors, including the size of
the financial institution and the scope of services.
Implementation consists of systems integration and a pilot testing period. A
project management team is assembled to integrate our hub with a financial
institution client's legacy host system, typically via an ATM network. A
financial institution's legacy host system houses its transaction accounts. Upon
completion of systems integration, we conduct a pilot testing period using
selected customers and employees. Following the pilot, the financial institution
client is fully launched and services are made generally available to its retail
customers. At this point, the financial institution client begins to pay at
least the minimum user fees. Our goal is to complete full implementation within
180 days from the date a contract is signed.
Banking and Billpaying
Our banking and billpaying services allow a financial institution to offer to
its retail customers and "small office/home office" business customers 24 hours
a day, seven days a week account access and transaction capabilities. Retail
customers are able to access their accounts anytime and anywhere either through
the Internet or through a private communications network using our PC software,
our screen-based telephone or a touch tone telephone.
Our banking and billpaying services offer retail customers the following
features:
- viewing transaction histories and real-time account balances;
- transferring funds within and between financial institutions either
immediately or in the future;
- initiating immediate and future bill payments or transfers; and
- viewing projected balances based upon billpaying and account activities.
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Using our PC software, our clients' retail customers may import and export data
with popular personal financial management software such as Quicken and
Microsoft Money. We also offer "small office/home office" capabilities and have
partnered with Intuit to support QuickBooks and other popular small business
services.
Using our billpaying service, retail customers may pay any merchant biller or
individual. Approximately 54% of our billpayments are currently made
electronically to merchants. We guarantee electronic billpayments will be
received within two business days of initiation by the retail customer. We
guarantee paper payment will be received within five business days. Paper and
electronic payments are drawn on our escrow account. As of December 31, 1998, we
had a billpaying database of approximately 460,000 merchant-user links to 47,000
discreet merchant billers.
We believe our real-time debit process, described under "Systems and Technology"
below, offers substantial cost and quality advantages in our billpaying
services. Under alternative batch-oriented debit systems, the billpaying
processor cannot immediately verify the availability of sufficient funds to
cover the bill payment. This may result in potential collections issues, the
need to assess credit risk and increased use of paper versus electronic
payments. We therefore believe that real-time debit capability results in a
higher percentage of electronic payments, lower operating costs and a higher
quality of service.
Our banking and billpaying services generate revenues from recurring monthly
fixed fees charged to financial institution clients, typically based on the
number of enrolled retail customer. Banking and billpaying services are priced
on a monthly per retail customer basis, and in limited cases, on a transaction
basis. Pricing ranges from $1.95 to $7.45 per month per retail customer
depending upon the level of services we provide to the financial institution.
The pricing of these services to retail customers is at the discretion of each
financial institution. Because our clients generally derive internal cost
savings, account retention and other marketing benefits by offering our
services, the majority of our clients do not pass all of these charges through
to their retail customers, and an increasing number of clients offer the banking
portion of our services free-of-charge.
Support Services
We complement our banking and billpaying services with the following
comprehensive support services:
- Customer Service Center. We maintain a customer service center for
financial institution clients that choose to outsource this service to
us. Retail customers can access the customer service operation by phone
or e-mail 24 hours a day, seven days a week. As of December 31, 1998, our
customer service center had 57 employees available to respond to retail
customers' questions relating to enrollment, transactions or technical
support. For those clients that choose not to use our customer service
bureau, we provide proprietary software for their customer service
operations.
- Web Site Design and Hosting. We offer Web site design and hosting
services to our financial institution clients. We charge an upfront fee
for design and a recurring monthly maintenance fee for hosting the Web
site.
- Consumer Marketing. We provide packaged and customized marketing
materials to our financial institution clients which are, in turn,
privately labeled by them. These materials include customer applications,
signage, regulatory compliance forms, demonstration software, and devices
and advertising templates for a variety of media, including television
and radio. Standard marketing services are bundled with our
implementation services. Customized marketing support is provided for an
additional charge.
- Administrative Services. We provide administrative support services to
our financial institution clients including the compilation of customized
reports regarding their retail customers' account activity. We charge our
clients on an hourly basis for these services.
- Communications and Security Services. We provide communications network
management and related security support for financial institution clients
that use our non-Internet-based services. In some cases, we bundle the
cost of these services with our banking and billpaying services fees. In
other cases, we unbundle these costs and charge on a usage basis.
Third-Party Services Gateway
We facilitate retail customers' linking to additional financial services beyond
our proprietary banking and billpaying services. We provide our clients' retail
customers with a comprehensive suite of financial services through our Financial
Services Center, which currently supports Internet-based delivery of:
- investment tools and access to major online investment brokerage services
(Thomson Financial);
- loans (Bisys Marketing Solutions);
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- insurance (InsWeb);
- financial planning tools for home buying, college education and
retirement; and
- shopping services (Amazon.com, 1-800 Flowers and the Travel Page).
We have also developed business arrangements and links to third parties for
expanded retail customer access. We currently have such arrangements, in various
stages of development, with eight third-party access providers, such as America
Online, UltraData (a banking software provider of hosting and server solutions),
Voice Access (a voice response system provider to financial institutions), and
Aftech (a core banking processor subsidiary of Fiserv serving credit unions).
In addition, by aggregating the retail customers of our financial institution
clients into a large online community, we believe we have begun to assemble an
attractive audience for third parties to market their products and services. In
cooperation with our financial institution clients, we believe that over time
this aggregated community will generate significant buying power and could
attract many additional third-party providers.
SALES AND MARKETING
We have adopted a multiple channel institutional sales strategy, covering both
direct and indirect sales. Our direct sales team focuses on mid-sized financial
institutions. Our indirect sales team supports our marketing partners, who sell
to small or very large financial institutions. In addition to our institutional
sales strategy, we also actively assist with or assume the consumer marketing
programs of our clients.
Direct Marketing to Financial Institutions
As of December 31, 1998, we had an eight person direct sales force focusing on
our target market: depository institutions with 10,000 to 350,000 transaction
accounts. Members of the direct sales team have an average of over 12 years of
industry experience. Our direct sales team operates out of seven field locations
throughout the U.S. and is geographically organized with some specialization by
industry and account size. Sales representatives earn a base salary plus
commission and are offered incentives to support indirect sales with our
marketing partners.
Indirect Sales to Financial Institutions
We support an indirect sales channel by partnering with third parties who sell
complementary services or products to financial institutions. As of December 31,
1998, we had an experienced four-person indirect sales team coordinating 34
marketing partners covering approximately 15,000 financial institutions. These
alliances leverage the established vending relationships of our marketing
partners and reduce marketing costs by replacing the need for a larger direct
sales force. Our marketing partners include ATM networks such as MAC and Honor,
software providers such as Intuit, communications server vendors such as
UltraData, core banking processors such as Affiliated Computer Systems, payment
servicers such as Deluxe Payment Systems, and endorsers such as America's
Community Bankers. Fee arrangements for our marketing partners vary and are
based on the value-added and scope of responsibilities assumed by the marketing
partner. Typically, marketing partners earn a portion of our implementation fee.
If the marketing partner performs additional on-going account management and
other support services, then the marketing partner may earn a small portion of
our on-going operating fees. Additionally, marketing partners may benefit from
the direct sales of their products and services, such as transaction fees for
ATM networks and processors.
Consumer Marketing Support for Financial Institution Clients
We intend to use a portion of the proceeds of this offering to provide
co-marketing programs to our financial institution clients. We recently created
a consumer marketing department whose main focus is creating cost-effective
programs to increase the rate of retail customer adoption. Initially, the
programs will use several direct marketing media including, direct mail,
telemarketing and direct selling. The marketing programs will be privately
branded by the financial institutions so they may take advantage of their
existing relationships. We believe this will be a critical factor to the success
of our marketing programs. We also developed and support our BankOnline.com Web
site. This site is being used as a co-marketing vehicle to attract and expand
the number of retail customers of our financial institution clients.
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SYSTEMS AND TECHNOLOGY
Overview
We designed our systems and technology around real-time communications and
processing which optimizes quality, scalability and cost. Our systems are based
on a multi-tiered architecture consisting of:
- Enabling technology--proprietary and commercial software and hardware
enabling retail customers to easily access our hub;
- Front-end servers--proprietary and commercial communications software and
hardware providing Internet and private communications access to our hub
for retail customers;
- Middleware--proprietary and commercial software and hardware used to
integrate customer and financial data and to process financial
transactions;
- Back-end systems--databases and proprietary software which support our
banking and billpaying services; and
- Support systems--proprietary and commercial systems supporting our
customer service and other support services.
Our systems architecture is designed to provide retail customer access across
multiple devices and communications channels, into a common database integrated
with our banking and billpaying services and our proprietary support services
software. Third-party financial services are linked to our systems through the
Internet, which we plan to more fully integrate into our retail customer
application and transaction processing. Our proprietary enabling PC software is
designed to export and import data to popular personal financial management
software, such as Quicken and Microsoft Money. By incorporating such third-
party capabilities into our system, we are able to focus our technical resources
on our proprietary middleware and integrating capabilities.
Real-Time ATM Network-Based Process
We typically link to financial institution clients through an ATM network. By
using an ATM network or processor to link into a financial institution client's
primary database for retail customer accounts, we take advantage of established
electronic funds transfer infrastructure. This includes all telecommunications
and software links, security, settlements and other critical operating rules and
processes. Using this ATM architecture, financial institution clients avoid the
substantial additional costs necessary to expand their existing infrastructure.
The net result of using this architecture is that high quality remote financial
electronic commerce services can be provided, enabling retail customers to
access their financial account information and pay bills by debiting funds from
their accounts.
The following diagram illustrates our patented ATM network-based process:
ONLINE RESOURCES STEP 4 GRAPH
- - Step 1: The retail customer accesses our services either through the Internet
or through a private network using our PC software, our screen-based telephone
or a touch tone telephone. Once connected, the retail customer has the ability
to execute transactions and view banking and billpaying information on a
real-time basis.
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- - Step 2: Once the retail customer authorizes payment to a merchant, we verify
availability of sufficient funds in the customer's account via the ATM
network.
- - Step 3: Upon verification of funds availability, the customer's account is
debited immediately and the guaranteed payment amount is transferred into our
escrow account at the end of the day.
- - Step 4: We forward the funds with remittance information to the merchant
biller for processing.
In addition to quality and cost benefits associated with billpaying, we believe
that our real-time architecture is more scalable than traditional batch systems,
which warehouse and store duplicate data. Instead of duplicating each financial
institution's host system by daily batch transmittal of customer balance
information, we communicate in real-time through online ATM networks and
processors to retrieve account balances as needed. We are therefore working with
ATM networks and processors to expand their transaction support to include
retail customer account histories, access to additional information and
interest-related security standards.
Security and Systems Integrity
Our services and related products provide security and system integrity which
are based on proven Internet and other communications standards, certified ATM
network transaction processing procedures and banking industry standards for
control and data processing. Prevailing security standards for Internet-based
transactions are incorporated into our Internet solution, including but not
limited to, Secure Socket Layer 128K encryption, using public-private key
algorithms developed by RSA, along with firewall technology for secured
transactions. In the case of payment and transaction processing, we meet
security transaction processing and other operating certification standards for
each ATM network through which we route transactions. We also employ Digital
Encryption Standards technology for transactions processed through our
screen-based telephone and PC software. Our interactive voice response system
performs transactions only if the retail customer is first verified through the
financial institution client's interactive voice response security system.
Finally, in conformance with industry standards promulgated by applicable
financial institution regulatory bodies, we adhere to SAS 70 types I and II
requirements for control, data processing and disaster recovery.
PROPRIETARY RIGHTS
In June 1993, we were awarded U.S. patent number 5,220,501 covering our
real-time ATM network-based payments process. Our patent covers billpaying and
other online payments made from the home using any enabling device where the
transaction is routed in real-time through an ATM network. We have licensed this
patent to other parties for limited use. In March 1995 we cross-licensed our
patent to Citibank for their internal use in settlement of litigation.
On February 9, 1999, we were awarded U.S. patent number 5,870,724 for targeting
advertising in a home retail banking delivery service. This patent provides for
the targeting of advertising or messaging to home banking users, using their
confidential billpayment and other financial information, while preserving
consumer privacy. Acting in co-operation and on behalf of a financial
institution client, we first analyze their billpaying and other financial data
to determine an advertising profile or purchasing power. The patent provides for
the targeted advertisement or other message to the selected person or group
based on their profile. No third parties have access to the retail customers'
sensitive financial data. Through interactive messaging, selected retail
customers of our financial institutions receiving the advertisement or message
then have the choice of releasing their names to the advertiser or messenger.
The confidentiality of their sensitive financial information is thereby
preserved and released only with the approval of the financial institution
client and their retail customers.
In addition to our patent we have registered trademarks. We also have Internet
domain names including BankOnline.com. A significant portion of our systems,
software and processes are proprietary. So, as a matter of policy, all
management and technical employees execute non-disclosure agreements as a
condition of employment.
COMPETITION
We believe that the principal competitive factors in our market are industry
trust, technical capabilities, operating effectiveness, cost and scalability,
customer service, security, speed to market, and capital. Many of our
competitors have the financial, technical and marketing resources, plus
established industry relationships, to better compete based on these factors.
Competitive pressures we face may have a material adverse effect on our
business, financial condition or operating results.
We are not aware of any other company which offers a similar financial
electronic commerce hub which integrates multiple consumer access channels into
a common database, in-sources banking and billpaying services, fully integrates
support services and links to other financial service providers. However, many
of our current and potential competitors have longer
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operating histories, greater name recognition, larger installed customer bases
and significantly greater financial, technical and marketing resources. Further,
some of our competitors, namely CheckFree and TransPoint (the joint venture
between Microsoft, First Data Corporation and Citibank), while currently
targeting billpaying and presentment services to large financial institutions,
do provide or have the ability to provide the same range of services we offer
and could determine to direct their marketing initiatives towards our targeted
smaller financial institution client base.
Other competitors such as M&I Data, EDS, Fiserv and other core banking
processors have broad distribution channels that bundle competing products
directly to financial institutions. These core banking processors also have
developed or acquired extensive online banking capabilities of their own,
including billpayers in the case of M&I, which may be further expanded to exceed
or meet our capabilities.
In addition, a significant number of companies offer portions of the services
provided by us and compete directly with us to provide such services. For
example, the Web servers of companies such as Broadvision, Digital Insight,
Edify, Funds Express, nFront and Q-Up compete with our front-end Internet access
capabilities. These and other software providers, such as Security First
Technologies, First Data Direct Banking and CFI ProServices, have created
outsourced units to provide a portion of our services. These companies may in
turn use billpayers, such as CheckFree, Princeton Telecom, M&I Data (which is
acquiring Travelers Express), who often team with access providers. Finally,
there are networks, such as Integrion and NYCE, who facilitate connectivity by
some of our competitors to certain larger financial institutions. Also, certain
services such as Intuit's Quicken.com and Yahoo! Finance may be available to
retail customers independent of financial institutions.
GOVERNMENT REGULATION
We are not licensed by the Office of the Comptroller of the Currency, the
Federal Reserve Board, the Office of Thrift Supervision or other Federal or
state agencies that regulate or monitor banks or other types of providers of
financial electronic commerce services. Federal, state or foreign agencies may
attempt to regulate our activities. Congress could enact legislation that would
require us to comply with data, record keeping, processing and other
requirements. We may be subject to additional regulation as the market for our
business continues to evolve. For example, Regulation E which is promulgated by
the Federal Reserve Board, governs certain electronic funds transfers made by
regulated financial institutions and providers of access devices and electronic
fund transfer services, including many aspects of our services. Under Regulation
E, we are required, among other things, to provide certain disclosure to retail
customers, to comply with certain notification periods regarding changes in the
terms of service provided and to follow certain procedures for dispute
resolutions. The Federal Reserve Board may adopt new rules and regulations for
electronic funds transfers that could lead to increased operating costs and
could also reduce the convenience and functionality of our services, possibly
resulting in reduced market acceptance. Because of the growth in the electronic
commerce market, Congress has held hearings on whether to regulate providers of
services and transactions in the electronic commerce market, and Federal or
state authorities could enact laws, rules or regulations affecting our business
operations. We also may be subject to Federal, state and foreign money
transmitter laws, encryption and security export laws and regulations and state
and foreign sales and use tax laws. If enacted or deemed applicable to us, such
laws, rules or regulations could be imposed on our activities or our business
thereby rendering our business or operations more costly, burdensome, less
efficient or impossible, any of which could have a material adverse effect on
our business, financial condition and operating results.
The market we currently target, the financial services industry, is subject to
extensive and complex Federal and state regulation. Our current and prospective
clients, which consist of financial institutions such as commercial banks,
thrifts, credit unions, brokerage firms, credit card issuers, consumer finance
companies, other loan originators, insurers and other providers of retail
financial services, operate in markets that are subject to extensive and complex
Federal and state regulations and oversight. While we are not generally subject
to such regulations, our services and related products must be designed to work
within the extensive and evolving regulatory constraints in which our clients
operate. These constraints include Federal and state truth-in-lending disclosure
rules, state usury laws, the Equal Credit Opportunity Act, the Electronic Funds
Transfer Act, the Fair Credit Reporting Act, Bank Secrecy Act and the Community
Reinvestment Act. Because many of these regulations were promulgated before the
development of our system, the application of such regulations to our system
must be determined on a case by case basis. We do not make representations to
clients regarding the applicable regulatory requirements, but instead rely on
each such client making its own assessment of the applicable regulatory
provisions in deciding whether to become a client. Furthermore, some consumer
groups have expressed concern regarding the privacy, security and interchange
pricing of financial electronic commerce services. It is possible that one or
more states or the federal government may adopt laws or regulations applicable
to the delivery of financial electronic commerce services in order to address
these or other privacy concerns. It is not possible to predict the impact that
any such regulations could have on our business.
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We currently offer services on the Internet. Due to the increasing popularity of
the Internet, it is possible that laws and regulations may be enacted with
respect to the Internet, covering issues such as user privacy, pricing, content,
characteristics and quality of services and products. The adoption of any such
laws or regulations may limit the growth of the Internet, which could affect our
ability to utilize the Internet to deliver financial electronic commerce
services.
PROPERTIES
We are headquartered in McLean, Virginia where we lease approximately 36,000
square feet of office space, which will be expanded to 54,000 square feet by May
1999. The lease has a five-year term and expires July 31, 2002. We also lease
approximately 3,000 square feet of office space in McLean, Virginia for our
back-up site. We have field offices located in Atlanta, Chicago, Denver, Fort
Worth, Orlando, Sacramento, and St. Louis.
EMPLOYEES
At December 31, 1998, we had 171 employees. None of our employees are
represented by a collective bargaining arrangement. We believe our relationship
with our employees is good.
LITIGATION
From time to time we may be involved in litigation arising in the normal course
of our business. We are not a party to any litigation, individually or in the
aggregate, that we believe would have a material adverse effect on our financial
condition or results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors are as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------
NAME AGE POSITION
- ---------------------------------------------------------------------------------
<S> <C> <C>
Matthew P. Lawlor 50 Chief Executive Officer and Chairman of the Board
Raymond T. Crosier 43 Executive Vice President--Client Services
Alex J. Seltzer 45 Executive Vice President--Systems & Technology
Ronald J. Bergamesca 39 Senior Vice President--Product and Consumer Marketing
Richard A. Martin 44 Senior Vice President--Operations
George E. Northup 40 Senior Vice President--Chief Financial Officer
Lori S. Stewart 49 Senior Vice President--Corporate Marketing
Barry F. Fingerhut* 51 Director
Michael H. Heath 56 Director
Thomas S. Johnson+ 58 Director
Michael K. Lee+ 40 Director
George M. Middlemas* 52 Director
David A. O'Connor* 64 Director
Joseph J. Spalluto+ 40 Director
</TABLE>
- ---------------
* Member of Compensation Committee
+ Member of Audit Committee
MATTHEW P. LAWLOR has served as Chairman and Chief Executive Officer since March
1989. Mr. Lawlor started his career as a project engineer with RCA. After
completing his graduate business education in 1973, he joined Chemical Bank,
where he later headed its leading regional consumer branch division and its
international equity investment company. In 1980, he served as a Presidential
Exchange Executive with the White House. He formed US Multitrade in 1981, a
venture development firm noted for the seed financing of Security Dynamics
Technologies, Inc. and other emerging growth companies. He later co-founded
Online Resources, and currently serves on the Board of Directors of the
Electronic Funds Transfer Association where he chairs its Internet Council. Mr.
Lawlor has a BS in mechanical engineering from the University of Pennsylvania
and an MBA from Harvard University.
RAYMOND T. CROSIER joined Online Resources in January 1996 as Senior Vice
President responsible for institutional sales and was promoted to Executive Vice
President responsible for client services, including institutional sales, client
implementation, and client account management, in December 1997. He has 20 years
of sales and marketing experience with the financial services industry. Before
joining Online Resources, he served as Vice President of Sales for First
Financial Management Corp., TeleCheck International, a check verification and
guarantee firm, from 1977 to 1982. Mr. Crosier served in a variety of other
management positions at TeleCheck, including in its national account division
from 1989 to 1990 and customer service divisions from 1990 to 1995. Mr. Crosier
received a BS in Psychology from the University of Virginia.
ALEX J. SELTZER joined Online Resources in January 1991 and currently serves as
Executive Vice President responsible for systems and technology. Mr. Seltzer has
20 years experience in computer systems and electronics hardware. He formerly
headed systems integration at NetExpress (a large facsimile network later
acquired by Canon) from 1987 to 1989 and designed and developed a hand-held
communications terminal for United Software Security. He also served with
Telenet from 1976 to 1977, Data Resources from 1973 to 1976, and Strategic
Planning Associates from 1980 to 1989. Mr. Seltzer has a BS in Computer Science
from Massachusetts Institute of Technology and an MBA from Stanford University.
RONALD J. BERGAMESCA joined Online Resources in November 1998 and currently
serves as Senior Vice President responsible for product and consumer marketing.
He has 13 years of experience in direct marketing management. He was a Vice
President of Cendant Corporation (formerly CUC International) from 1996 to 1998.
He also served as a Product Manager at MBI, Inc. from 1986 to 1996, and was a
Project Engineer at Exxon Corporation from 1981 to 1984. Mr. Bergamesca holds a
BS degree in Mechanical Engineering from Lafayette College and an MBA degree
from Massachusetts Institute of Technology.
RICHARD A. MARTIN joined Online Resources in June 1997 as Senior Vice President
responsible for operations including billpayment operations, customer service
bureau, and enabling product fulfillment. He has 20 years of operations
experience in
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the financial services industry. He served as Director of Accounting Services
for Boston Market, a retail franchiser, before joining Online Resources in 1997.
From 1993 to 1996 he served as Vice President of Operations and Chief Financial
Officer of MedKit Corporation, a medical software company. From 1979 to 1993,
Mr. Martin served with Telecheck Services, Inc., a worldwide leader in check
acceptance, guarantee, and collection services. While at TeleCheck, Mr. Martin
attained the position of Vice President, Support Services including its customer
service and call center. Mr. Martin holds a BS from the University of Maryland
and is a CPA.
GEORGE E. NORTHUP joined Online Resources in October 1996 as Senior Vice
President and Chief Financial Officer. He is responsible for corporate
accounting and finance, legal affairs, and administration. Mr. Northup has 18
years experience, primarily in the high-technology and telecommunications arena.
He previously held positions as vice president and controller of Intellicall,
from 1992 to 1996, and Chief Financial Officer of Iverson Technology Corp from
1990 to 1991. Mr. Northup obtained his CPA while a member of the professional
staff at Deloitte & Touche and received a BS from Duke University.
LORI S. STEWART joined Online Resources in May 1990 and serves as Senior Vice
President responsible for corporate marketing, including public relations,
product management, Internet services and marketing support. Ms. Stewart has 20
years of experience in financial services. From 1970 to 1983 she served with
Lehman Brothers in corporate finance, where she was involved in general client
services and financial marketing strategies. From 1985 to 1988 she served with
Smith Barney & Co., where she was engaged in new business development and
general marketing activities. Ms. Stewart has a BS from Santa Clara University.
BARRY K. FINGERHUT, has served as a Director of Online Resources since May 1996.
He currently serves as President of Geo Capital Corp., an investment advisory
firm, and as General Partner of Applewood Associates, 21(st) Century Capital,
and Wheatley Partners, which are investment limited partnerships. Prior to
joining Geo Capital, in 1981, Mr. Fingerhut was a limited partner and analyst at
First Manhattan Co., and a general partner at Weiss, Peck and Greer, both of
which are investment management and brokerage concerns. Mr. Fingerhut is a
director of Carriage Services, Inc. UOL Publishing, Inc. and the Millbrook
Press, Inc. Mr. Fingerhut holds a BS from the University of Maryland and an MBA
from New York University. Mr. Fingerhut is a Director at the designation of
Series C preferred stockholders.
MICHAEL H. HEATH has served as a Director since March 1989, and served as
President of Online Resources from January 1995 to October 1997. Mr. Heath has
held positions both in and outside of the financial services industry. He is the
former President of MediaNews, which owned the Denver Post and the Houston Post;
and President of The Record, a New Jersey-based regional newspaper and broadcast
company. Mr. Heath also worked in a variety of senior management positions with
Chemical Bank and a consumer branch division. Mr. Heath received his BA from
Williams College and an MBA from Harvard University.
THOMAS S. JOHNSON has served as a Director of Online Resources since May 1994.
Since August 1993, Mr. Johnson has served as Chairman and Chief Executive
Officer of GreenPoint Bank and GreenPoint Financial Corp., a large thrift and
specialty mortgage originator based in New York. Mr. Johnson formerly served as
President of Chemical Banking Corporation from 1983 to 1989, and as President of
Manufacturers Hanover Trust Company from 1989 to 1991. Mr. Johnson is a director
of R.R. Donnelly & Sons Company, Alleghany Corporation and GreenPoint Financial
Corp. He holds a BA from Trinity College and an MBA from Harvard University.
MICHAEL K. LEE, a Director since June 1997, is founder and Managing Partner of
Dominion Ventures, a venture capital firm specializing in emerging growth
companies. With offices in Boston and San Francisco, Dominion currently manages
over $200 million in institutional funds. Mr. Lee is a director of five private
companies. Mr. Lee received his BS in Economics and an MBA from Brigham Young
University. Mr. Lee is a Director at the designation of Series C preferred
stockholders.
GEORGE M. MIDDLEMAS, a Director since June 1997, is a Managing General Partner
of Apex Investment Partners ("Apex") focused in the telecommunications, software
and information services industries. He has been a venture capital investor
since 1979. Prior to joining Apex, Mr. Middlemas was a senior vice president and
principal with Inco Venture Capital Management and a vice president and member
of the investment commitment committee of Citicorp Venture Capital. He was
instrumental in the founding of America Online and Security Dynamics
Technologies, Inc. Mr. Middlemas is a director of Security Dynamics, Tutt
Systems and Pure Cycle. Mr. Middlemas holds a BA in both history and political
science from Pennsylvania State University, an MA in political science from the
University of Pittsburgh, and an MBA from Harvard University. Mr. Middlemas is a
Director at the designation of Series C preferred stockholders.
DAVID A. O'CONNOR, a Director since April 1996, is an EFT industry consultant.
He was Vice Chairman of Honor Technologies, one of the largest ATM networks in
the nation from 1997 to 1998. Mr. O'Connor was previously President of CashFlow,
Inc. an electronic banking subsidiary of Sovran Financial Services (now
NationsBank) and one of the first shared ATM networks. Later, Mr. O'Connor
served as President and CEO of Internet, Inc., owner of MOST, which was the
nation's
37
<PAGE> 39
fifth largest ATM network before merging with Honor Technologies. Mr. O'Connor
served on the Board of Directors of the Electronic Funds Transfer Association
and served as its chairman. He also served as President of the Mid-Atlantic
Exchange and Senior Vice President of Virginia National Bank. Mr. O'Connor holds
a BS from American University.
JOSEPH J. SPALLUTO, a Director since May 1995, is a Managing Director of
Corporate Finance for Keefe Bruyette & Woods, Inc., a national investment
banking firm specializing in the financial services industry. Keefe, Bruyette &
Woods, Inc. is an investor in Online Resources and has participated in joint
marketing programs with Online Resources. Mr. Spalluto has been with Keefe
Bruyette & Woods, Inc. since August 1981. He holds a BA from Amherst College and
a JD from the University of Connecticut.
CLASSIFICATION OF DIRECTORS
The eight directors comprising the Board of Directors will be divided into three
classes. Two directors will constitute Class I and will stand for election at
the annual meeting of stockholders to be held in 1999. Three directors will
constitute Class II and will stand for election at the annual meeting of
stockholders to be held in 2000. Three directors will constitute Class III and
will stand for election at the annual meeting of stockholders to be held in
2001. After their initial term following the offering, directors in each class
will serve for a term of three years. The Certificate of Incorporation will
provide that directors can be removed only for cause and only by a majority of
the other directors or by the vote of stockholders owning 80% or more of the
voting power of Online Resources. Officers are chosen by and serve at the
discretion of the Board of Directors.
DIRECTOR COMPENSATION
Directors who are also employees are not separately compensated for serving on
the Board of Directors. Non-employee directors are compensated through stock
option plans and are reimbursed for related travel expenses. No cash
compensation is currently paid. Specifically, each non-employee director
receives 10,000 options to purchase common stock (with an exercise price at the
fair market value of the common stock at the time of grant) for each year of
service.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table presents certain information regarding compensation paid
during the year ended December 31, 1998 to the Chief Executive Officer and each
of our other executive officers (collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
-----------------------------------------------
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#)
--------------------------- --------- -------- ------------
<S> <C> <C> <C>
Matthew P. Lawlor........................................... $124,000 $33,500 50,000
Chief Executive Officer and Chairman of the Board
Raymond T. Crosier.......................................... 117,094 52,500 88,125
Executive Vice President -- Client Services
Alex J. Seltzer............................................. 116,000 24,500 11,000
Executive Vice President -- Systems and Technology
Ronald J. Bergamesca........................................ 17,969 -- 73,422
Senior Vice President -- Product and Consumer Marketing(1)
Richard A. Martin........................................... 112,062 -- 5,650
Senior Vice President -- Operations
George E. Northup........................................... 99,000 -- 61,000
Senior Vice President -- Chief Financial Officer
Lori S. Stewart............................................. 94,846 -- 20,238
Senior Vice President -- Corporate Marketing
</TABLE>
- ---------------
(1) Mr. Bergamesca joined Online Resources in November 1998.
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<PAGE> 40
Option Grants During 1998
The following table presents for each of the Named Executive Officers certain
information concerning stock options granted during the fiscal year ended
December 31, 1998.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
GRANTED(#) FISCAL YEAR ($/SH) DATE 5% 10%
NAME ---------- ------------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Matthew P. Lawlor.................... 50,000 4.5% $3.00 05/13/05 $ 61,065 $142,308
Raymond T. Crosier................... 50,000 4.5 3.00 01/31/05 61,065 142,308
10,000 0.9 3.00 02/11/05 12,213 28,462
28,125 2.5 3.00 12/29/05 34,349 80,048
Alex J. Seltzer...................... 11,000 1.0 3.00 02/11/05 13,434 31,308
Ronald J. Bergamesca................. 40,000 3.6 3.00 11/08/05 48,852 113,846
32,000 2.9 3.00 11/08/05 39,082 91,077
1,422 0.1 3.00 12/29/05 1,737 4,047
Richard A. Martin.................... 5,650 0.5 3.00 12/29/05 6,900 16,081
George E. Northup.................... 11,000 1.0 3.00 01/13/05 13,434 31,308
15,000 1.3 3.00 02/14/05 18,320 42,692
25,000 2.2 3.00 03/28/05 30,533 71,154
10,000 0.9 3.00 02/11/05 12,213 28,462
Lori S. Stewart...................... 7,500 0.7 3.00 02/14/05 9,160 21,346
12,738 1.1 3.00 03/11/05 15,557 36,254
</TABLE>
- ---------------
(1) The potential realizable value is calculated based on the term of the option
(7 years) and is calculated by assuming that the fair market value of common
stock on the date of grant as determined by the Board of Directors appreciates
at the indicated annual rate compounded annually for the entire term of the
option and that the option is exercised and sold on the last day of its term for
the appreciated price. The 5% and 10% assumed rates of appreciation are derived
from the rules of the Securities and Exchange Commission. The actual value
realized may be greater than or less than the potential realizable values set
forth in the table.
Aggregated Option Exercises and Fiscal Year-end Option Values
The following table provides certain information regarding the number and value
of stock options held by the Named Executive Officers at December 31, 1998.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES FISCAL YEAR END(#) FISCAL YEAR END($)
ACQUIRED ON VALUE --------------------------- ---------------------------
EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Matthew P. Lawlor................... 87,500 $133,125 177,875 -- 53,500 --
Raymond T. Crosier.................. -- -- 189,588 80,000 47,500 15,000
Alex J. Seltzer..................... 423,750 820,006 494,333 37,500 979,750 18,750
George E. Northup................... -- -- 75,602 45,000 -- --
Lori S. Stewart..................... 87,500 175,000 212,738 20,000 254,375 10,000
Richard A. Martin................... -- -- 18,030 27,857 -- --
Ronald J. Bergamesca................ -- -- 2,088 71,334 -- --
</TABLE>
STOCK OPTION PLANS
The 1989 Stock Option Plan was adopted by the Board of Directors in 1989 and
approved by the stockholders in the same year. The 1989 option plan permits the
granting of both incentive stock options (i.e., options that meet the
requirements of
39
<PAGE> 41
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")) and
nonqualified stock options (i.e., options that do not meet such requirements) to
employees, consultants and directors. The aggregate number of shares of common
stock that may be issued pursuant to options granted under the 1989 option plan
may not exceed 6,500,000 shares, subject to adjustment in the event of certain
events affecting our capitalization.
The 1989 option plan is administered by the Board of Directors or by a duly
appointed committee of the Board of Directors, which is authorized, subject to
the provisions of the 1989 option plan, to determine to whom and at what time
the stock options may be granted, the designation of the option as either an
incentive option or a nonqualified option, per share exercise price, duration of
each option, the number of shares subject to each option, any limitations,
restrictions and conditions on such shares, the rate and manner of exercise and
the timing and form of payment.
An incentive option may not have an exercise price less than the fair market
value of the common stock on the date of grant or an exercise period that
exceeds ten years from the date of grant and is subject to certain other
limitations which allow the option holder to qualify for favorable tax
treatment. Nonqualified options may have an exercise price less than the fair
market value of the underlying common stock on the date of grant but, like
incentive options, are limited to an exercise period of no longer than ten
years.
The exercise price of an option may be paid in (i) cash; (ii) by delivery of
previously acquired shares of common stock having a fair market value not less
than the option price; or (iii) by such other consideration as the Board of
Directors may approve on the date of grant.
An option is not transferable except by will or by the laws of descent and
distribution and may be exercised, during the lifetime of the optionee, only by
the optionee or by the optionee's legal representative.
Any incentive option granted under the 1989 option plan will terminate
automatically (i) three months after the employee's termination of employment
other than by reason of death or disability, and (ii) one year after the
employee's death or termination of employment by reason of disability unless the
option expires earlier by its terms. Any nonqualified option granted under the
1989 option plan will terminate automatically if the optionee's relationship
with Online Resources is terminated for cause. The 1989 option plan may be
amended or terminated by action of the Board of Directors, subject to certain
limitations. The 1989 option plan terminates in 1999, unless earlier terminated
by the Board of Directors.
As of December 31, 1998, we had granted options for 7,351,915 shares of common
stock at exercise prices ranging from $.02 to $3.50 under the 1989 option plan.
Certain of these options have exercise prices which are tied to our initial
public offering price or discount thereof. As of December 31, 1998, 1,103,286
shares had been exercised at an exercise prices ranging from $.33 to $1.25 per
share, unexercised options for 4,993,149 shares of common stock had been granted
at exercise prices ranging from $.02 to $3.50 per share (of which options for
4,174,093 shares were exercisable) and shares remained eligible for grant under
the 1989 option plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee during the year ended December 31, 1998, consisted of
David A. O'Connor (Chairman), Barry K. Fingerhut and George M. Middlemas. Each
is a member of the Board of Directors and none is an employee. None of the
executive officers served as a director or member of the Compensation Committee
or other board committee performing equivalent functions of another corporation,
one of whose executive officers served on the Board of Directors or Compensation
Committee of Online Resources.
40
<PAGE> 42
PRINCIPAL STOCKHOLDERS
The following table presents information with respect to the beneficial
ownership of common stock as of March 16, 1999, and as adjusted to reflect the
sale of the common stock offered hereby (1) each person we know to own
beneficially five percent or more of our outstanding shares of common stock; (2)
each director of Online Resources; (3) the Named Executive Officers; and (4) all
current directors and executive officers as a group. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares issuable upon conversion of
preferred stock and shares of common stock subject to options or warrants held
by that person that are currently convertible or exercisable or that are or may
become convertible or exercisable within 60 days of March 16, 1999 are deemed
outstanding. Such shares, however, are not deemed outstanding for the purposes
of computing the percentage ownership of any other person. Except as indicated
in the footnotes to this table and pursuant to applicable community property
laws, each stockholder named in the table has sole voting and investment power
with respect to the shares set forth opposite such stockholder's name.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF PERCENTAGE OF
SHARES OWNERSHIP OWNERSHIP
NAME AND ADDRESS(1) BENEFICIALLY OWNED(2) PRIOR TO OFFERING(2) AFTER OFFERING(3)
------------------- --------------------- -------------------- -----------------
<S> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Matthew P. Lawlor..................................... 4,055,992(4) 18.6%
Alex J. Seltzer....................................... 854,610(5) 3.9
Ronald J. Bergamesca.................................. 7,422(6) *
Richard A. Martin..................................... 19,180(7) *
Raymond T. Crosier.................................... 225,447(8) 1.3
Lori S. Stewart....................................... 312,257(9) 1.4
George E. Northup..................................... 82,852(10) *
Thomas S. Johnson..................................... 190,960(11) *
Joseph J. Spalluto.................................... 94,191(12) *
David A. O'Connor..................................... 30,000(13) *
Barry K. Fingerhut.................................... 3,511,212(14) 15.1
George M. Middlemas................................... 1,502,745(15)
Michael K. Lee........................................ 2,093,897(16) 9.4
Michael H. Heath...................................... 270,613(17) 1.2
All directors and executive officers as a group (14
persons)............................................ 13,251,378(18) 51.1%
</TABLE>
- ---------------
* Less than 1 percent
(1) Except as otherwise indicated below, the address for each executive officer
and director is 7600 Colshire Drive, McLean Virginia 22102.
(2) Assumes the conversion of all outstanding shares of preferred stock into
common stock. Beneficial ownership is determined based on 21,454,330 shares of
common stock, consisting of 11,485,064 shares of common stock outstanding on
March 16, 1999 and 9,969,266 shares of common stock issuable upon the conversion
of all of our outstanding shares of preferred stock.
(3) Assumes the underwriters do not exercise their over-allotment option.
(4) Includes 150,782 shares of common stock issuable pursuant to warrants
exercisable within 60 days of March 16, 1999 and 182,375 shares of common stock
issuable pursuant to options exercisable within 60 days of March 16, 1999.
(5) Includes 534,083 shares of common stock issuable pursuant to options
exercisable within 60 days of March 16, 1999.
(6) Represents 6,088 shares of common stock issuable pursuant to options
exercisable within 60 days of March 16, 1999.
(7) Represents 19,180 shares of common stock issuable pursuant to options
exercisable within 60 days of March 16, 1999.
(8) Includes 32,826 shares of common stock issuable pursuant to warrants
exercisable within 60 days of March 16, 1999 and 220,588 shares of common stock
issuable pursuant to options exercisable within 60 days of March 16, 1999.
(9) Includes 85,238 shares of common stock issuable pursuant to options
exercisable within 60 days of March 16, 1999.
(10) Represents 76,602 shares of common stock issuable pursuant to options
exercisable within 60 days of March 16, 1999.
(11) Includes 13,801 shares of common stock issuable pursuant to warrants
exercisable within 60 days of March 16, 1999 and 26,000 shares of common stock
issuable pursuant to options exercisable within 60 days of March 16, 1999.
41
<PAGE> 43
(12) Includes 26,946 shares of common stock issuable pursuant to warrants
exercisable within 60 days of March 16, 1999 and 23,000 shares of common stock
issuable pursuant to options exercisable within 60 days of March 16, 1999.
Options exercisable for 16,667 of these shares are held of record by Ellen
Spalluto, Mr. Spalluto's wife.
(13) Represents 30,000 shares of common stock issuable pursuant to options
exercisable within 60 days of March 16, 1999.
(14) Includes 1,745,269 shares of common stock issuable pursuant to warrants
exercisable within 60 days of March 16, 1999 and 20,000 shares of common stock
issuable pursuant to options exercisable within 60 days of March 16, 1999. Of
the total shares, 1,716,217 are held of record by 21st Century Communications
Partners, L.P. of which 974,724 are issuable upon exercise of warrants, 230,791
are held of record by 21st Century Communications Foreign Partners, L.P. of
which 131,034 are issuable upon the exercise of warrants, 583,905 are held of
record by 21st Century Communications T-E Partners, L.P. of which 331,697 are
issuable upon the exercise of warrants and 744,963 are held of record by
Applewood Associates, L.P. of which 307,814 are issuable upon the exercise of
warrants. Mr. Fingerhut has shared voting and investment power of all the shares
which he does not hold of record. The address for Mr. Fingerhut and the
partnerships is 767 5th Avenue, 45th Floor, New York, NY 10153.
(15) Includes 305,506 shares of common stock issuable pursuant to warrants
exercisable within 60 days of March 16, 1999 and 10,000 shares of common stock
issuable pursuant to options exercisable within 60 days of March 16, 1999. Of
the total shares 585,904 are held of record by Apex Investment Fund II, L.P. of
which 138,839 are issuable upon the exercise of warrants; 7,849,960 shares are
held of record by Apex Investment Fund III, L.P. of which 156,214 are issuable
upon the exercise of warrants and 56,880 shares are held of record by Apex
Strategic Partners, LLC of which 10,453 are issuable upon the exercise of
warrants. Mr. Middlemas has shared voting and investment power of all the shares
which he does not hold of record. The address for Mr. Middlemas and all the
above-named parties is 233 S. Wacker Drive, Suite 900, Chicago, IL 60606.
(16) Includes 750,000 shares of common stock issuable pursuant to warrants
exercisable within 60 days of March 16, 1999 and 10,000 shares of common stock
issuable pursuant to options exercisable within 60 days of March 16, 1999. Of
the total shares 2,083,867 are held of record by Dominian Fund IV, L.P. of which
750,000 are issuable upon the exercise of warrants. Mr. Lee has shared voting
and investment power of all the shares which he does not hold of record. The
address for Mr. Lee and Dominion Fund IV, L.P. is 44 Montgomery Street, Suite
4200, San Francisco, CA 94104.
(17) Includes 5,455 shares of common stock issuable pursuant to warrants
exercisable within 60 days of March 16, 1999 and 217,811 shares of common stock
issuable pursuant to options exercisable within 60 days of March 16, 1999. Of
these, 17,112 shares are held of record by Mary L. Heath, Mr. Heath's wife.
(18) Includes 3,016,784 shares of common stock issuable pursuant to warrants
exercisable within 60 days of March 16, 1999 and 1,460,965 shares of common
stock issuable pursuant to options exercisable within 60 days of March 16, 1999.
42
<PAGE> 44
CERTAIN TRANSACTIONS
We have three promissory notes outstanding with senior officers which were made
in connection with the exercise of stock options by the employees. The
promissory notes are payable, upon maturity, by Matthew P. Lawlor in the amount
of $9,375 Alex J. Seltzer, in the amount of $62,004, and Lori S. Stewart, in the
amount of $87,500. The promissory notes carry an interest rate of 8% per annum
and mature on the earlier of January 1, 2000 or 180 days following the effective
date of a registration statement on Form S-1. The promissory notes are
collateralized by the underlying common stock issued in connection with the
exercise of the stock options related to the promissory notes.
In each of the following transactions, the terms offered to the investors
described below were identical to the terms offered to investors who were not
our affiliates.
In 1996, Mr. Lawlor purchased a $250,000 10% note due June 30, 1999 as part of
an offering in which we issued $4,375,000 of notes. Mr. Lawlor also received
100,000 warrants. Also, in 1996, Mr. Lawlor purchased 250 shares of Series B
preferred stock for $25,000 as part of a financing in which 10,050 shares of
Series B preferred stock were issued. In 1997, Mr. Lawlor's note and shares of
Series B preferred stock were exchanged, as part of an exchange offer to the
holders of all the notes and shares for 2,759 shares of Series C preferred stock
and 33,782 warrants.
In 1996, as part of the 10% note offering, Raymond T. Crosier purchased a
$60,000 note and received 24,000 warrants. In 1997, Mr. Crosier exchanged his
note for 661 shares of Series C preferred stock and 8,826 warrants.
In 1996, Joseph J. Spalluto purchased a $30,000 note as part of the 10% note
offering and also received 12,000 warrants. Also, in 1996 Mr. Spalluto purchased
250 shares of Series B preferred stock for $25,000. In 1997, the note and shares
were exchanged for 595 shares of Series C preferred stock and 7,946 warrants. In
January 1999, Ellen Spalluto, Mr. Spalluto's wife, purchased for $50,000 500
shares of Series C preferred stock and 5,000 contingent warrants.
In 1996, Thomas S. Johnson purchased 1,000 shares of Series B preferred stock
for $100,000. In 1997, these shares were exchanged for 1,035 shares of Series C
preferred stock and 13,801 warrants. In 1999, Mr. Johnson also purchased 1,000
shares of Series C preferred stock and 10,000 contingent warrants.
In 1997, venture capital fund affiliates of Barry K. Fingerhut, while he was a
director, advanced us $750,000 under an 8% note which was part of a $3,270,000
bridge note financing. This note along with $3,000,000 of the 10% notes which
these affiliates held and which were issued as part of the 1996 10% note
offering, were exchanged in 1997 for 40,893 shares of Series C preferred stock
and 545,269 warrants. In 1998, these venture capital fund affiliates advanced us
$250,000. This advance was later exchanged for 2,515 shares of Series C
preferred stock and 25,150 contingent warrants. In 1999, Mr. Fingerhut purchased
for $100,000 1,000 shares of Series C preferred stock and 10,000 contingent
warrants.
In 1998, venture capital fund affiliates of George M. Middlemas advanced us
$700,000. These advances were later exchanged for 7,478 shares of Series C
preferred stock and 74,780 contingent warrants.
In 1996, Mary Lou Heath, the wife of Michael H. Heath, who was then the
president and a director of our company, purchased a $50,000 10% note due
December 31, 1997 as part of a note offering and received 5,455 warrants. Mrs.
Heath did not elect to exchange her note in an exchange offer for the 10% notes
due June 30, 1999. Her note was repaid in 1998.
In 1998, a venture capital fund affiliate of Michael K. Lee advanced us
$1,000,000. This advance was exchanged for 10,017 shares of Series C preferred
stock and 100,170 contingent warrants.
43
<PAGE> 45
DESCRIPTION OF CAPITAL STOCK
The following summary of certain provisions of the common stock and preferred
stock does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of our Restated Certificate of Incorporation which
will become effective immediately prior to the consummation of this offering and
our Amended and Restated Bylaws, as they will be amended at the same time, and
by the provisions of applicable law.
Upon consummation of the offering, the authorized capital stock of Online
Resources will consist of 35,000,000 shares of common stock, par value $.0001
per share, and 3,000,000 shares of preferred stock, par value $.001 per share,
of which shares of common stock (assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options and
warrants to purchase shares of common stock) and shares of preferred
stock will be outstanding. All of the issued and outstanding shares of common
stock will be fully paid and nonassessable. As of March 16, 1999, there were 198
holders of record of outstanding shares of common stock.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to
preferences that may be applicable to any outstanding shares of preferred stock,
the holders of common stock are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors out of funds legally available
for the payment of dividends. See "Dividend Policy." If we liquidate, dissolve
or wind up, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities and liquidation preferences of any
outstanding shares of preferred stock. The rights, preferences and privileges of
holders of common stock are subject to, and may be adversely affected by, the
rights of holders of any series of preferred stock currently outstanding or
which we may designate and issue in the future. Holders of common stock have no
preemptive rights or rights to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
common stock.
Delaware law does not require stockholder approval for any issuance of
authorized shares of common stock. These additional shares may be used for a
variety of corporate purposes, including future public offerings to raise
additional capital or to facilitate corporate acquisitions. One of the effects
of the existence of unissued and unreserved common stock may be to enable the
Board of Directors to issue shares to persons friendly to current management,
which issuance could render more difficult or discourage an attempt to obtain
control of Online Resources by means of a merger, tender offer, proxy contest or
otherwise, and thereby protect the continuity of management and possibly deprive
the stockholders of opportunities to sell their shares of common stock at prices
higher than prevailing market prices. See "Restrictions on Acquisition of Online
Resources."
PREFERRED STOCK
Pursuant to our Certificate of Incorporation, the Board of Directors will have
the authority, without further action by the stockholders, to issue up to
3,000,000 shares of preferred stock in one or more series and to fix the
designations, powers, preferences, privileges, and relative, participating,
optional or special rights and the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater than
the rights of the common stock. The Board of Directors, without stockholder
approval, can issue preferred stock with voting, conversion or other rights that
could adversely affect the voting power and other rights of the holders of
common stock. Preferred stock could thus be issued quickly with terms calculated
to delay or prevent a change in control of Online Resources or make removal of
management more difficult. Additionally, the issuance of preferred stock may
have the effect of decreasing the market price of the common stock, and may
adversely affect the voting and other rights of the holders of common stock.
As of December 31, 1998, three series of convertible preferred stock comprising
1,387,000 shares have been designated. Of these shares, 1,020,700 were issued
and outstanding and were convertible into 8,318,333 shares of common stock. The
Series A preferred stock is convertible, at the holder's option, into one share
of common stock and is entitled to receive dividends at the same rate as holders
of common stock. Additionally, each Series A preferred stockholder is entitled
to a liquidation preference equal to $1.00 plus declared but unpaid dividends.
Pursuant to the terms of the Series B preferred stock and Series C preferred
stock, as of December 31, 1998 the preferred stock of these series will
automatically convert into 7,523,333 shares in the aggregate upon consummation
of a public offering of $30 million or more.
44
<PAGE> 46
WARRANTS
In order to encourage investors to purchase the securities offered in some of
its private placements, we have often included warrants as part of the
securities issued in the private placements. As of March 16, 1999, the following
outstanding warrants had been issued:
<TABLE>
<CAPTION>
-----------------------------------------
NUMBER OF
ISSUED EXERCISE OUTSIDE
PLACEMENT WARRANTS PRICE EXPIRATION DATE(1)
--------- --------- -------- ------------------
<S> <C> <C> <C>
1995 Bridge Note Financing.................................. 160,300 $2.50 March 31, 2000
10% Notes Due 12/31/97...................................... 13,637 $2.75 December 31, 2000
10% Notes Due 6/30/99....................................... 1,750,000 $2.50 April 30, 2001
Series C Convertible Preferred Stock........................ 2,307,514 $3.00 June 1, 2002
9% $2 Million Note Due 6/01/01.............................. 350,000(2) $3.00 June 3, 2002
12.75% $6 Million Note Due 3/30/03.......................... 625,000(3) $3.00 May 31, 2003
12.75% $2 Million Note Due 3/30/03.......................... 460,000(4) $3.00 May 31, 2003
Series C Convertible Preferred Stock........................ 1,026,320(5) $3.00 December 31, 2003
</TABLE>
- ---------------
(1) In some but not all cases, the expiration dates of the warrants accelerate
upon an acquisition of Online Resources.
(2) These warrants were initially issuable for 10,500 shares of Series C
convertible preferred stock. The forced conversion into common stock of the
Series C convertible preferred stock resulting from this offering will cause
these warrants to be issuable for common stock.
(3) The number of warrants commences at 250,000 and while the $6 million note is
outstanding, starting on March 31, 1999 the number of warrants increases at the
rate of 75,000 on each March 31, through March 31, 2003.
(4) The number of warrants commences at 100,000 and while the $2 million note is
outstanding, starting on December 30, 1998 the number of warrants increases at
the rate of 40,000 on each December 30 and June 30, through December 30, 2002.
(5) These warrants cannot be exercised if the registration statement of which
this prospectus is a part is declared effective by the SEC prior to July 12,
1999 and if the average closing price for the 20-day trading period following
the initial two-week period of trading of our stock is at least $6.00 per share.
However, if the registration statement is declared effective prior to July 12,
1999 and the average closing price for the above 20-day period is at least $4.30
but less than $6.00 per share then 684,213 of the warrants can be exercised. In
all other cases, these warrants are exercisable for 1,026,320 shares.
We have issued 281,000 warrants as compensation for investment banking services.
These warrants are exercisable at $2.50 per share. All of these warrants expire
by the end of 2001.
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<PAGE> 47
RESTRICTIONS ON ACQUISITION OF ONLINE RESOURCES
GENERAL
Certain provisions in our Certificate of Incorporation and Bylaws and in our
management remuneration, together with provisions of Delaware corporate law, may
have anti-takeover effects.
RESTRICTIONS IN CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Certificate of Incorporation and Bylaws will deal
with matters of corporate governance and certain rights of stockholders. The
following discussion is a general summary of the provisions of our Certificate
of Incorporation and Bylaws which might be deemed to have a potential
"anti-takeover" effect. These provisions may have the effect of discouraging a
future takeover attempt which is not approved by the Board of Directors but
which individual stockholders may deem to be in their best interests or in which
stockholders may receive a substantial premium for their shares over then
current market prices. As a result, stockholders who might desire to participate
in such a transaction may not have an opportunity to do so. Such provisions will
also render the removal of the current Board of Directors or management more
difficult.
Board of Directors
The Board of Directors will be divided into three classes, each of which shall
contain approximately one-third of the whole number of members of the Board of
Directors. Each class shall serve a staggered term, with approximately one-third
of the total number of directors being elected each year. The Certificate of
Incorporation and Bylaws will provide that the size of the Board shall be
determined by a majority of the directors. The Certificate of Incorporation and
the Bylaws will provide that any vacancy occurring in the Board, including a
vacancy created by an increase in the number of directors or resulting from
death, resignation, retirement, disqualification, removal from office or other
cause, may be filled for the remainder of the unexpired term exclusively by a
majority vote of the directors then in office. The classified Board is intended
to provide for continuity of the Board of Directors and to make it more
difficult and time consuming for a stockholder group to fully use its voting
power to gain control of the Board of Directors without the consent of the
incumbent Board of Directors. The Certificate of Incorporation will provide that
a director may be removed from the Board of Directors prior to the expiration of
his term only for cause, upon the vote of 80% or more of the outstanding shares
of voting stock. In the absence of these provisions, the vote of the holders of
a majority of the shares could remove the entire Board, with or without cause,
and replace it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent
The Certificate of Incorporation will not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders may be called only by the
Board of Directors or an appropriate committee designated by the Board of
Directors. The Certificate of Incorporation also will provide that any action
required or permitted to be taken by the stockholders may be taken only at an
annual or special meeting and prohibits stockholder action by written consent in
lieu of a meeting.
Authorized Shares
The Certificate of Incorporation will authorize the issuance of 35,000,000
shares of common stock and 3,000,000 shares of preferred stock. The shares of
common stock and preferred stock will be authorized in an amount greater than
that to be issued in the offering to provide the Board of Directors with as much
flexibility as possible to effect, among other transactions, finances,
acquisitions, stock dividends, stock splits and employee stock options. However,
these additional authorized shares may also be used by the Board of Directors
consistent with its fiduciary duty to deter future attempts to gain control of
Online Resources. The Board of Directors also has sole authority to determine
the terms of any one or more series of preferred stock, including voting rights,
conversion rates, and liquidation preferences. As a result of the ability to fix
voting rights for a series of preferred stock, the Board has the power, to the
extent consistent with its fiduciary duty, to issue a series of preferred stock
to persons friendly to management in order to attempt to block a post-tender
offer merger or other transaction by which a third party seeks control, and
thereby assist management to retain its position. Other than this offering, the
Board of Directors currently has no plans for the issuance of additional shares.
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<PAGE> 48
Stockholder Vote Required to Approve Business Combinations with Interested
Stockholders
The Certificate of Incorporation will require the approval of the holders of at
least 80% of the outstanding shares of voting stock entitled to vote thereon to
approve certain "Business Combinations" involving a "Ten Percent Stockholder,"
each as defined therein, and related transactions. Under Delaware law, absent
this provision, business combinations, including mergers, consolidations and
sales of all or substantially all of the assets of a corporation must, subject
to certain exceptions, be approved by the vote of the holders of only a majority
of the outstanding shares of common stock and any other affected class of stock.
Under the Certificate of Incorporation, the approval of the holders of at least
80% of the shares of capital stock entitled to vote thereon will be required for
any business combination involving a Ten Percent Stockholder (as defined below)
except (i) in cases where the proposed transaction has been approved by a
majority of those members of the Board of Directors who are unaffiliated with
the Ten Percent Stockholder and were Directors prior to the time when the
stockholder became a Ten Percent Stockholder or (ii) if the proposed transaction
meets certain conditions set forth therein which are designed to afford the
stockholders a fair price in consideration for their shares. In each such case,
where stockholder approval is required, the approval of only a majority of the
outstanding shares of voting stock is sufficient.
The term "Ten Percent Stockholder" means, among others, any individual, a group
acting in concert, corporation, partnership, association or other entity (other
than Online Resources or its subsidiary) who or which is the beneficial owner,
directly or indirectly, of 10% or more of the outstanding shares of voting
stock.
This provision of the Certificate of Incorporation will apply to any "Business
Combination," which is defined to include:
- any merger or consolidation of Online Resources or any of its
subsidiaries with any Ten Percent Stockholder or Affiliate (as defined in
the Certificate of Incorporation) of a Ten Percent Stockholder or any
corporation which is, or after such merger or consolidation would be, an
Affiliate of a Ten Percent Stockholder;
- any sale, lease, exchange, mortgage, pledge, transfer, or other
disposition to or with any Ten Percent Stockholder or Affiliate of 25% or
more of the assets of Online Resources or combined assets of Online
Resources and its subsidiary;
- the issuance or transfer to any Ten Percent Stockholder or its Affiliate
by Online Resources (or any subsidiary) of any securities of Online
Resources (or any subsidiary) in exchange for any cash, securities or
other property the value of which equals or exceeds 25% of the fair
market value of the common stock of Online Resources and its
subsidiaries;
- the adoption of any plan for the liquidation or dissolution of Online
Resources proposed by or on behalf of any Ten Percent Stockholder or
Affiliate thereof; and
- any reclassification of securities, recapitalization, merger or
consolidation of Online Resources with any of its subsidiaries which has
the effect of increasing the proportionate share of common stock or any
class of equity or convertible securities of Online Resources or
subsidiary owned directly or indirectly, by a Ten Percent Stockholder or
Affiliate thereof.
Supermajority Voting Requirement for Amendment of Certain Provisions of the
Certificate of Incorporation
The Certificate of Incorporation will provide that specified provisions
contained in the Certificate of Incorporation may not be repealed or amended
except upon the affirmative vote of the holders of not less than 80% of the
outstanding shares of the common stock entitled to vote generally in the
election of directors. This requirement exceeds the majority vote of the
outstanding stock that would otherwise be required by Delaware law for the
repeal or amendment of the Certificate of Incorporation provision. The specific
provisions covered by the supermajority voting requirement for amendment of such
provisions include the following:
- the calling of special meetings of stockholders, the absence of
cumulative voting rights and the requirement that stockholder action be
taken only at annual meetings;
- the number and classification of the Board of Directors;
- removing directors;
- the requirement for the approval of certain Business Combinations
involving Ten Percent Stockholders;
- the indemnification of directors, officers, employees and agents of
Online Resources;
- the limitation of voting rights; and
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<PAGE> 49
- the required stockholder vote for amending the Certificate of
Incorporation or Bylaws.
This provision is intended to prevent the holders of less than 80% of the
outstanding stock from circumventing any of the foregoing provisions by amending
the Certificate of Incorporation to delete or modify one of such provisions.
This provision will enable the holders of more than 20% of the voting stock to
prevent amendments to the Certificate of Incorporation or Bylaws even if they
were favored by the holders of a majority of the voting stock.
Certain Bylaw Provisions
Our Bylaws will also require a stockholder who intends to nominate a candidate
for election to the Board of Directors, or to raise new business at a
stockholder meeting to give at least 90 days advance notice to the Secretary.
The notice provision will require a stockholder who desires to raise new
business to provide us certain information concerning the nature of the new
business, the stockholder and the stockholder's interest in the business matter.
Similarly, a stockholder wishing to nominate any person for election as a
director will need to provide us with certain information concerning the nominee
and the proposing stockholder.
ANTI-TAKEOVER EFFECTS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
The Board of Directors believes that the provisions of the Certificate of
Incorporation, Bylaws and management remuneration plans to be established are in
the best interest of Online Resources and its stockholders. An unsolicited
non-negotiated proposal can seriously disrupt the business and management of a
corporation and cause it great expense. Accordingly, the Board of Directors
believes it is in the best interests of Online Resources and its stockholders to
encourage potential acquirors to negotiate directly with Board of Directors and
that these provisions will encourage such negotiations and discourage non-
negotiated takeover attempts. It is also the Board of Directors' view that these
provisions should not discourage persons from proposing a merger or other
transaction at a price that reflects the true value of Online Resources and that
otherwise is in the best interest of all stockholders.
DELAWARE CORPORATE LAW
The State of Delaware has a statute designed to provide Delaware corporations
with additional protection against hostile takeovers. The takeover statute,
which is codified in Section 203 of the Delaware General Corporate Law, is
intended to discourage certain takeover practices by impeding the ability of a
hostile acquiror to engage in certain transactions with the target company.
In general, Section 203 provides that a person who owns 15% or more of the
outstanding voting stock of a Delaware corporation (an "interested stockholder")
may not consummate a merger or other business combination transaction with such
corporation at any time during the three-year period following the date such
Person became an interested stockholder. The term "business combination" is
defined broadly to cover a wide range of corporate transactions including
mergers, sales of assets, issuances of stock, transactions with subsidiaries and
the receipt of disproportionate financial benefits.
The statute exempts the following transactions from the requirements of Section
203:
- any business combination if, prior to the date a person became an
interested stockholder, the Board of Directors approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder;
- any business combination involving a person who acquired at least 85% of
the outstanding voting stock in the transaction in which he became an
interested stockholder, with the number of shares outstanding calculated
without regard to those shares owned by the corporation's directors who
are also officers and by certain employee stock plans;
- any business combination with an interested stockholder that is approved
by the Board of Directors and by a two-thirds vote of the outstanding
voting stock not owned by the interested stockholder; and
- certain business combinations that are proposed after the corporation had
received other acquisition proposals and which are approved or not
opposed by a majority of certain continuing members of the Board of
Directors.
A corporation may exempt itself from the requirements of the statute by adopting
an amendment to its certificate of incorporation or bylaws electing not to be
governed by Section 203. At the present time, the Board of Directors does not
intend to propose any such amendment.
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<PAGE> 50
REGISTRATION RIGHTS
We have granted registration rights under registration rights agreements to the
purchasers of shares of common stock in 1995, to the recipients of warrants who
purchased 10% notes due June 30, 1999 who did not convert their notes into
shares of Series C preferred stock, to the purchasers of shares of Series B
preferred stock who did not exchange their shares for Series C preferred stock,
to the purchasers of shares of Series C preferred stock and to Sirrom Capital
Corporation. The registration rights granted to the purchasers of Series C
preferred stock cover not only the shares of common stock issued upon conversion
of this series but also all other shares of common stock which these purchasers
currently hold and all shares of common stock issued to them in the future upon
exercise of any warrants. Sirrom has the same rights as the holders of Series C
preferred stock.
All persons to whom registration rights have been granted possess the right to
include their shares, subject to underwriter consent, in any registration which
we undertake to sell our shares or the shares of any stockholder other than in
connection with employee benefit plans or other types of registrations which
preclude the inclusion of their shares. All registration rights which we have
granted other than to the purchasers of common stock in 1995 also contain a
demand right. This demand right requires us to register shares under certain
circumstances. As to the holders of warrants issued to the purchasers of 10%
notes due June 30, 1999, and the holders of Series B preferred stock as of March
16, 1999, only 38,333 shares of common stock remain subject to this right since
all other holders of these notes and stock exchanged their notes and stock for
shares of Series C preferred stock. The demand right granted to the holders of
Series C preferred stock limits these holders to two demand registrations if we
cannot register shares on a short form such as an S-3. If we qualify to use a
short form, these holders have unlimited demand rights if the shares being
registered have a value of more than $250,000. We are required to bear the
expenses of all registrations we are required to undertake.
Stockholders of Online Resources who will hold in the aggregate shares
of common stock upon completion of this offering have agreed not to exercise any
registration rights during the 180 day period beginning on the date of this
prospectus.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is .
LISTING
Application has been made to list the shares of common stock on the Nasdaq
National Market under the symbol "ORCC."
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<PAGE> 51
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the common stock. Future
sales of substantial amounts of common stock in the public market could
adversely affect market prices of the common stock prevailing from time to time.
Furthermore, because only a limited number of shares will be available for sale
shortly after the consummation of this offering due to certain contractual and
legal restrictions on resale (as described below), sales of substantial amounts
of common stock in the public market after the restrictions lapse could
adversely affect the prevailing market price of the common stock and our ability
to raise equity capital in the future. For a discussion of certain potential
issuances of capital stock to address liquidity needs, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Upon completion of this offering, we will have outstanding an aggregate of
shares of common stock, assuming no exercise of the underwriters'
over-allotment option (and no exercise of outstanding exercisable options for an
aggregate of 4,195,300 shares and outstanding exercisable warrants for an
aggregate of 5,252,451 warrants at March 16, 1999 and assuming conversion of
795,000 shares of Series A Convertible Preferred Stock into like number of
shares of common stock) and based upon the number of shares outstanding as of
March 16, 1999. Of these shares, all of the shares sold in this offering will be
freely tradeable without restriction or further registration under the
Securities Act, except that any shares purchased by our affiliates may generally
only be sold in compliance with the limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES; OPTIONS
Upon the consummation of this offering, Online Resources will have
shares of common stock outstanding assuming no exercise of the underwriters'
over-allotment option. All of the shares of common stock sold in this offering
will be freely tradeable under the Securities Act, unless purchased by our
"affiliates," as the Securities Act defines that term. Upon the expiration of
lock-up agreements among Online Resources, certain of our stockholders, our
executive officers and directors and the underwriters, which will occur 180 days
after the date of this prospectus and exercise of all options granted under our
stock option plan, shares of common stock will become eligible for
sale, subject to compliance with Rule 144 or Rule 701 of the Securities Act as
described below.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated), including an affiliate, who has beneficially owned
restricted stock for at least one year is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater of
(i) one percent of the then outstanding shares of common stock or (ii) the
average weekly trading volume in the common stock during the four calendar weeks
preceding the date on which notice of such sale is filed. In addition, under
Rule 144(k), a person who is not an affiliate and has not been an affiliate for
at least three months prior to the sale and who has beneficially owned shares of
restricted stock for at least two years may resell such shares without
compliance with the foregoing requirements. In meeting the one and two year
holding periods described above, a holder of restricted stock can include the
holding periods of a prior owner who was not an affiliate.
Rule 701 under the Securities Act provides that the shares of common stock
acquired on the exercise of currently outstanding options may be resold by
persons, other than affiliates, beginning 90 days after the date of this
prospectus, subject only to the manner of sale provisions of Rule 144, and by
affiliates under Rule 144 without compliance with its one-year minimum holding
period, subject to certain limitations.
As of March 16, 1999, options to purchase a total of 4,195,300 shares of common
stock were outstanding at a weighted average exercise price of $2.36. An
additional 219,671 shares of common stock are available for future grants under
our stock option plans. See "Management--Stock Option Plans."
We intend to file one or more registration statements on Form S-8 under the
Securities Act to register all shares of common stock subject to outstanding
stock options and common stock issuable pursuant to our stock option plans that
do not qualify for an exemption under Rule 701 from the registration
requirements of the Securities Act. We expect to file these registration
statements as soon as practicable following the closing of this offering, and
such registration statements are expected to become effective upon filing.
Shares covered by these registration statements will thereupon be eligible for
sale in the public markets subject to the lock-up agreements, to the extent
applicable.
At March 16, 1999, we had outstanding warrants to purchase an aggregate of
5,252,451 shares of common stock as more fully described under "Description of
Capital Stock--Warrants." Any shares acquired pursuant to the exercise of any
warrants will be deemed restricted securities unless the sale of such shares is
registered under the Securities Act under such registration rights or otherwise
and will be subject to the resale limitations of Rule 144.
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<PAGE> 52
LOCK-UP AGREEMENTS
Certain stockholders and members of senior management and all directors have
agreed, pursuant to the lock-up agreements that, during the period beginning
from the date of this prospectus and continuing and including the date 180 days
after the date of this prospectus, they will not, directly or indirectly offer,
sell, offer to sell, contract to sell or otherwise dispose of, or register for
sale under the Securities Act, any shares of common stock or any of our
securities which are substantially similar to the common stock, including but
not limited to any securities that are convertible into or exchangeable for, or
that represent the right to receive, common stock or any such substantially
similar securities or enter into any swap, option, future, forward or other
agreement that transfers, in whole or in part, the economic consequence of
ownership of common stock or any securities substantially similar to the common
stock, without the prior written consent of J.P. Morgan Securities Inc.
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<PAGE> 53
UNDERWRITING
The underwriters named below, for whom J.P. Morgan Securities Inc., U.S. Bancorp
Piper Jaffray Inc. and Keefe, Bruyette & Woods, Inc. are acting as
representatives, have severally agreed, subject to the terms and conditions set
forth in the underwriting agreement between us and the representatives, to
purchase from us, and we have agreed to sell to the underwriters, the respective
number of shares of common stock set forth opposite their names below:
<TABLE>
<CAPTION>
------------
NUMBER OF
SHARES
------------
<S> <C>
UNDERWRITER
J.P. Morgan Securities Inc..................................
U.S. Bancorp Piper Jaffray Inc. ............................
Keefe, Bruyette & Woods, Inc................................
------------
Total.............................................
============
</TABLE>
The nature of the underwriters' obligations under the underwriting agreement is
such that all of the common stock being offered, excluding shares covered by the
over-allotment option granted to the underwriters, must be purchased if any are
purchased.
The representatives have advised us that the several underwriters propose to
offer the common stock to the public initially at the public offering price set
forth on the cover page of this prospectus and may offer the common stock to
selected dealers at such price less a concession not to exceed $ per
share. The underwriters may allow, and such dealers may reallow, a concession to
other dealers not to exceed $ per share. After the initial public
offering of the common stock, the public offering price and other selling terms
may be changed by the representatives.
We have granted the underwriters an option, exercisable within 30 days after the
date of this prospectus, to purchase up to additional shares of common
stock from us at the same price per share to be paid by the underwriters for the
other shares offered hereby. If the underwriters purchase any such additional
shares pursuant to the option, each of the underwriters will be committed to
purchase such additional shares in approximately the same proportion as set
forth in the above table. The underwriters may exercise the option only to cover
over-allotments, if any, made in connection with the distribution of the common
stock offered hereby.
Prior to the offering, there has been no public market for our common stock. The
initial public offering price will be determined by negotiations between us and
the representatives. Among the factors to be considered in determining the
initial public offering price are prevailing market conditions, the market
valuations of certain publicly traded companies, our past and present financial
performance and revenues and earnings of comparable companies in recent periods,
estimates of our business
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<PAGE> 54
potential and the prospects and experience of our management and our position in
the industry. The following table shows the per share and total underwriting
discounts to be paid to the underwriters by us.
<TABLE>
<CAPTION>
--------------------------------
NO EXERCISE FULL EXERCISE
------------ -------------
<S> <C> <C>
Per Share................................................ $ $
Total.................................................... $ $
</TABLE>
The representatives have informed us that the underwriters will not confirm,
without prior specific written approval, sales to their customer accounts as to
which they have discretionary trading power.
Online Resources, certain of our stockholders and each of our officers and
directors, have agreed, with limited exceptions, that, during the period
beginning from the date of this prospectus and continuing and including the date
180 days after the date of this prospectus, they will not, directly or
indirectly offer, sell, offer to sell, contract to sell or otherwise dispose of,
or register for sale under the Securities Act, any shares of common stock or any
of our securities which are substantially similar to the common stock, including
but not limited to any securities that are convertible into or exchangeable for,
or that represent the right to receive, common stock or any such substantially
similar securities or enter into any swap, option, future, forward or other
agreement that transfers, in whole or in part, the economic consequence of
ownership of common stock or any securities substantially similar to the common
stock, other than by us pursuant to employee stock option and restricted stock
plans existing on the date of this prospectus, without the prior written consent
of J.P. Morgan Securities Inc.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect thereof
It is expected that delivery of the shares will be made to investors on or about
, 1999.
We estimate that the total expenses of this offering, excluding underwriting
discounts, will be $ .
Application has been made to have the common stock quoted on The Nasdaq National
Market under the trading symbol "ORCC."
At our request, the underwriters have reserved % of the common stock
offered for sale at the initial offering price to employees and other persons
having business relationships with us. The number of shares of common stock
available for sale to other members of the public will be reduced to the extent
that these persons purchase such reserved shares. Any reserved shares not
purchased will be offered by the underwriters on the same basis as the other
shares offered hereby.
In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may overallot the offering, creating a syndicate
short position. In addition, the underwriters may bid for, and purchase, shares
of common stock in the open market to cover syndicate shorts or to stabilize the
price of the common stock. Finally, the underwriting syndicate may reclaim
selling concessions allowed for distributing shares of common stock in the
offering, if the syndicate repurchases previously distributed common stock in
syndicate covering transactions, in stabilization transactions or otherwise. Any
of these activities may stabilize or maintain the market price of the shares of
common stock above independent market levels. The underwriters are not required
to engage in these activities, and may end any of these activities at any time.
From time to time in the ordinary course of their respective businesses, certain
of the underwriters and their affiliates have engaged in and may in the future
engage in commercial banking and/or investment banking transactions with us and
our affiliates.
In addition, two of the representatives, Keefe, Bruyette & Woods, Inc. and U.S.
Bancorp Piper Jaffray Inc., hold common stock, warrants and convertible
preferred stock of Online Resources representing beneficial ownership of 4.0%
and 1.1%, respectively, of our common stock. Furthermore, employees of Keefe,
Bruyette & Woods, Inc. hold common stock, warrants, options and convertible
preferred stock of Online Resources representing beneficial ownership of 2.3% of
our common stock.
LEGAL MATTERS
Certain legal matters in connection with the sale of the shares of common stock
offered hereby will be passed upon for Online Resources by Patton Boggs LLP,
Washington, D.C. and by Michaels, Wishner & Bonner, P.C., Washington D.C. and
for the underwriters by Cahill Gordon & Reindel, a partnership including a
professional corporation, New York, New York.
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<PAGE> 55
EXPERTS
The financial statements and schedule of Online Resources & Communications
Corporation at December 31, 1998 and 1997, and for each of the three years in
the period ended December 31, 1998, appearing in this prospectus and
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 (which term shall encompass all amendments, exhibits and
schedules thereto) under the Securities Act with respect to the common stock
offered hereby. This prospectus does not contain all the information set forth
in the registration statement, certain parts of which are omitted in accordance
with the rules and regulations of the SEC, and to which reference is hereby
made. Statements made in this prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the registration statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. The registration statement
can be inspected and copied at the public reference section of the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or by calling at
1-800-SEC-0330 and at the SEC's regional offices at Seven World Trade Center,
13th Floor, New York, New York 10048, and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of the registration
statement can be obtained from the Public Reference Section of the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
SEC maintains a Web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, that file
electronically with the SEC.
Upon completion of this offering, we will become subject to the information and
periodic reporting requirements of the Exchange Act, and, in accordance
therewith, will file periodic reports, proxy statements and other information
with the SEC. Such periodic reports, proxy statements and other information will
be available for inspection and copying at the regional offices, public
reference facilities and Web site of the SEC referred to above.
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<PAGE> 56
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 57
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Online Resources & Communications Corporation
We have audited the accompanying balance sheets of Online Resources &
Communications Corporation as of December 31, 1997 and 1998, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Online Resources &
Communications Corporation at December 31, 1997 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
February 26, 1999
F-2
<PAGE> 58
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY
DECEMBER 31, AT DECEMBER 31,
1997 1998 1998
------------- ------------- ---------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2) $ 1,855,809 $ 3,471,620
Escrow deposit -- 400,985
Accounts receivable (net of allowance of approximately
$80,000, and $52,000 at December 31, 1997 and 1998,
respectively) 516,056 933,585
Prepaid expenses and other current assets 148,953 921,247
------------- -------------
Total current assets 2,520,818 5,727,437
Property and equipment, net (Note 3) 2,161,177 3,166,019
Other assets -- 527,972
------------- -------------
Total assets $ 4,681,995 9,421,428
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 989,402 1,707,675
Accrued expenses and other current liabilities 895,035 1,234,722
Deferred revenues 382,200 678,117
Current portion of capital lease obligation 175,935 614,585
Current portion of long term debt (Note 4) 222,838 711,962
Current portion of notes payable to related parties -- 200,000
------------- -------------
Total current liabilities 2,665,410 5,147,061
Capital lease obligation 352,955 605,322
Notes payable to related parties 200,000 --
Long Term debt (net of unamortized discount of $277,936
and $506,861 at December 31, 1997 and 1998,
respectively) less current portion 999,225 8,525,467
Other Noncurrent Liabilities -- 556,100
------------- -------------
Total Liabilities 4,217,590 14,833,950
Commitments (Notes 4 and 5)
Redeemable convertible Preferred Stock, $.01 par value (Note
7)
Series B redeemable convertible preferred stock;
100,000 shares designated, 1,000 shares issued and
outstanding at December 31, 1997 and 1998 110,331 120,854
Series C redeemable convertible preferred stock;
287,000 shares designated, 173,036 and 224,700
shares issued and outstanding at December 31, 1997
and 1998, respectively 16,725,685 25,655,400
------------- -------------
Total redeemable convertible Preferred Stock 16,836,016 25,776,254
Stockholders' equity (deficit) (Note 8)
Series A convertible preferred stock, $.01 par value;
1,000,000 shares authorized, 795,000 shares issued
and outstanding at December 31, 1997 and 1998;
liquidation preference of $795,000 at December 31,
1997 7,950 7,950 7,950
Common stock, $.0001 par value; 35,000,000 shares
authorized, 10,919,027 and 11,373,564 issued and
outstanding at December 31, 1997 and 1998, respectively 1,092 1,138 1,890
Additional paid-in capital 14,217,442 11,077,575 36,853,077
Accumulated deficit (30,378,597) (41,937,066) (41,937,066)
Receivable from the sale of common stock (219,498) (338,373) (338,373)
------------- ------------- -------------
Total stockholders' equity (deficit) (16,371,611) (31,188,776) (5,412,522)
------------- ------------- -------------
Total liabilities and stockholders' equity $ 4,681,995 $ 9,421,428 $ 9,421,428
============= ============= =============
</TABLE>
See accompanying notes.
F-3
<PAGE> 59
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-----------------------------------------------
YEAR ENDED DECEMBER 31,
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Core services $ 417,590 $ 1,011,161 $ 2,221,230
Support services 176,653 207,697 644,818
Implementation fees 417,116 1,310,950 1,200,158
Related products 119,150 324,736 259,898
----------- ------------ ------------
Total revenues 1,130,509 2,854,544 4,326,104
Expenses:
Cost of revenues 1,864,991 5,128,584 6,289,462
----------- ------------ ------------
Gross margin (734,482) (2,274,040) (1,963,358)
General and administrative 2,208,218 2,508,058 2,705,029
Selling and marketing 2,249,405 3,257,725 3,377,728
Systems and development 1,469,272 2,682,261 2,444,615
----------- ------------ ------------
Total expenses 5,926,895 8,448,044 8,527,372
Loss from operations (6,661,377) (10,722,084) (10,490,730)
Other income (expense):
Interest income 33,730 147,988 94,312
Interest expense (343,384) (471,187) (1,146,614)
Other (5,360) (528) (15,437)
----------- ------------ ------------
Total other income (expense) (315,014) (323,727) (1,067,739)
----------- ------------ ------------
Net loss (6,976,391) (11,045,811) (11,558,469)
----------- ------------ ------------
Preferred stock accretion -- (1,998,665) (3,779,169)
----------- ------------ ------------
Net loss available to common shareholders $(6,976,391) $(13,044,476) $(15,337,638)
=========== ============ ============
Loss per share:
Basic and diluted $ (0.66) $ (1.20) $ (1.36)
Pro forma basic and diluted $ (0.68)
Shares used in calculation of loss per share:
Basic and diluted 10,500,930 10,825,662 11,250,270
Pro forma basic and diluted 17,040,349
</TABLE>
See accompanying notes.
F-4
<PAGE> 60
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
SERIES A ADDITIONAL EMPLOYEE STOCK TOTAL
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED SUBSCRIPTION STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE EQUITY
------- ------ ---------- ------ ----------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995 795,000 7,950 10,397,283 1,040 13,783,018 (12,356,395) -- 1,435,613
Issuance of common stock -- -- 5,056 -- 17,196 -- -- 17,196
Purchase of treasury
shares -- -- (1,784) -- (6,244) -- -- (6,244)
Exercise of stock options -- -- 307,500 31 40,220 -- -- 40,251
Net loss -- -- -- -- -- (6,976,391) -- (6,976,391)
------- ------ ---------- ------ ----------- ------------ --------- ------------
Balance at December 31,
1996 795,000 7,950 10,708,055 1,071 13,834,190 (19,332,786) -- (5,489,575)
Issuance of common stock -- -- 432 -- 1,454 -- -- 1,454
Exercise of stock options -- -- 210,540 21 234,477 -- (219,498) 15,000
Issuance of common stock
warrants -- -- -- -- 2,145,986 -- -- 2,145,986
Series B preferred stock
accretion -- -- -- -- (10,331) -- -- (10,331)
Series C preferred stock
accretion -- -- -- -- (1,988,334) -- -- (1,988,334)
Net loss -- -- -- -- -- (11,045,811) -- (11,045,811)
------- ------ ---------- ------ ----------- ------------ --------- ------------
Balance at December 31,
1997 795,000 $7,950 10,919,027 $1,092 $14,217,442 $(30,378,597) $(219,498) $(16,371,611)
Issuance of common stock -- -- 1,959 -- 5,400 -- -- 5,400
Exercise of stock options -- -- 585,246 59 674,002 -- (118,875) 555,186
Purchase of treasury
stock -- -- (180,668) (18) (517,985) -- -- (518,003)
Issuance of common stock
options -- -- -- -- 333,890 -- -- 333,890
Conversion of series C
preferred stock to
common stock -- -- 48,000 5 143,995 -- -- 144,000
Series B preferred stock
accretion -- -- -- -- (10,523) -- -- (10,523)
Series C preferred stock
accretion -- -- -- -- (3,768,646) -- -- (3,768,646)
Net loss -- -- -- -- -- (11,558,469) -- (11,558,469)
------- ------ ---------- ------ ----------- ------------ --------- ------------
795,000 $7,950 11,373,564 $1,138 $11,077,575 $(41,937,066) $(338,373) $(31,188,776)
======= ====== ========== ====== =========== ============ ========= ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 61
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-------------------------------------------
YEARS ENDED DECEMBER 31,
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(6,976,391) $(11,045,811) $(11,558,469)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 277,042 496,745 813,988
Amortization of long-term debt discount -- 47,063 166,009
Compensation expense related to issuance of common stock 15,250 1,454 333,890
Provision for losses on accounts receivable 26,000 53,553 (28,118)
Reserve for inventory obsolescence 77,741 496,721 --
Loss on write-off of long-term receivable -- 100,000 --
Changes in assets and liabilities:
Accounts receivable (10,304) (342,025) (389,411)
Inventory (308,745) 85,215 --
Prepaid expenses and other current assets 245,089 (27,434) (322,294)
Escrow deposit -- -- (400,985)
Other assets -- -- (352,009)
Accounts payable 581,807 151,219 718,273
Accrued expenses 999,824 299,476 339,687
Deferred revenues 363,883 15,650 295,917
----------- ------------ ------------
Net cash used in operating activities (4,708,804) (9,668,174) (10,383,522)
INVESTING ACTIVITIES
Purchase of property and equipment (681,795) (1,096,582) (559,787)
----------- ------------ ------------
Net cash used in investing activities (681,795) (1,096,582) (559,787)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 35,953 15,000 43,065
Proceeds from issuance of Series B redeemable
convertible Preferred Stock 645,000 360,000 --
Net proceeds from issuance of Series C redeemable
convertible Preferred Stock -- 7,598,750 4,589,791
Proceeds from issuance of long-term debt 3,725,000 4,020,000 8,434,000
Proceeds from issuance of long-term debt to related parties 300,000 750,000 450,000
Repayment of capital lease obligations (36,950) (114,327) (568,026)
Repayment of long-term debt -- (50,000) (189,710)
Repayment of long-term debt to related parties -- -- (200,000)
----------- ------------ ------------
Net cash provided by financing activities 4,669,003 12,579,423 12,559,120
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents (721,596) 1,814,667 1,615,811
Cash and cash equivalents at beginning of period 762,738 41,142 1,855,809
----------- ------------ ------------
Cash and cash equivalents at end of period $ 41,142 $ 1,855,809 $ 3,471,620
=========== ============ ============
</TABLE>
See accompanying note.
F-6
<PAGE> 62
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents. Cash held for bill
payments in process is immediately disbursed on behalf of users and no net cash
balance is reflected on the Company's financial statements.
Cash paid for interest during the years ended December 31, 1996, 1997 and 1998
was approximately $16,000, $151,000, and $953,000 respectively.
Revenue Recognition
The Company generates revenues from several sources including implementation
fees, core services, support services and related products. Revenues from core
services include access and transaction fees for banking and billpaying
services. Support services include customer service, communication, web page
design and other services. Implementation revenues are generated from the
linking of the Financial Institution clients to the Company's proprietary
Opus(sm) system through various networks and the Company's gateways. The Company
earns revenues from related products through the sale of devices used to access
the Opus(sm) system.
Core and support service revenues are recognized over the term of the contract
as the services are provided. Revenues from implementation fees are recognized
under the percentage of completion method in accordance with Statement of
Position ("SOP") 81-1, "Accounting for performance of Construction-Type and
Certain Production Type Contracts" as certain milestone output measures are
completed. Related product sales revenue is recognized as products are shipped.
Deferred revenues result from advance receipts on product sales and
implementation services while complying with the aforementioned revenue
recognition policies. For the years ended December 31, 1996, 1997 and 1998, the
Company derived 34%, 36% and 11% of its revenue from one, three and one
customer(s), respectively.
Systems and Development
Systems and development costs are charged to expense as incurred.
Inventory
Inventory is stated at the lower of cost or market, with market determined on a
FIFO (first-in, first-out) basis and is composed primarily of finished goods. At
December 31, 1997 and 1998, the reserve for inventory obsolescence is $899,359
and $815,817 respectively.
Property and Equipment
Property and equipment are depreciated using the straight-line method over the
estimated useful lives of the related assets which range from five to seven
years. Equipment recorded under capital leases is amortized over the shorter of
the estimated useful life of the asset or the lease term.
Fair Value of Financial Instruments
At December 31, 1998, the Company has the following financial instruments: cash
and cash equivalents, accounts receivable, accounts payable, accrued
liabilities, capital lease obligations and long term debt. The carrying value of
cash and cash
F-7
<PAGE> 63
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments (continued)
equivalents, accounts receivable, accounts payable and accrued liabilities
approximates their fair value based on the liquidity of these financial
instruments or based on their short term nature. The carrying value of capital
lease obligations and long term debt approximates fair value based on the market
interest rates available to the Company for debt of similar risk and maturities.
Reclassifications
Certain balances in prior periods have been reclassified to conform with the
1998 presentation.
Earnings (Loss) Per Share
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128"). SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings (loss) per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the SFAS No. 128 requirements.
Basic and diluted earnings per share is also computed pursuant to SEC Staff
Accounting Bulletin No. 98 ("SAB 98"). SAB 98 requires that all equity
instruments issued at nominal prices, prior to the effective date of an initial
public offering, be included in the calculation of basic and diluted earnings
(loss) per share as if they were outstanding for all periods presented. To date
the Company has not had any nominal issuances or options granted at nominal
prices.
Pro forma earnings per share is computed by dividing net loss by the weighted
average number of common shares outstanding and the weighted average redeemable
convertible preferred stock outstanding as if such shares were converted into
common stock at the time of issuance.
Stock Based Compensation
The Company has adopted Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123). The provisions of SFAS
No. 123 allow companies to either expense the estimated fair value of stock
options or to continue to follow the intrinsic value method set forth in APB
Opinion 25, "Accounting for Stock Issued to Employees" (APB No. 25) but disclose
the pro forma effects on net loss had the fair value of the options been
expensed. The Company has elected to continue to apply APB No. 25 in accounting
for its stock option incentive plan and, accordingly, recognizes compensation
expense for the difference between the fair value of the underlying common stock
and the grant price of the option at the date of grant.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
-----------------------
DECEMBER 31,
1997 1998
---------- ----------
<S> <C> <C>
Central processing systems and terminals $2,141,562 $2,348,465
Office furniture and equipment 449,426 643,895
Central processing systems and terminals under capital
leases 552,640 1,212,103
Office furniture and equipment under capital leases 182,118 781,698
Leasehold improvements 325,272 483,687
---------- ----------
3,651,018 5,469,848
Less accumulated depreciation 1,489,841 2,303,829
---------- ----------
$2,161,177 $3,166,019
========== ==========
</TABLE>
F-8
<PAGE> 64
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT (CONTINUED)
Property and equipment are recorded at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets.
4. LONG TERM DEBT
From November 1995 to May 1996, the Company issued $4,500,000 of long-term notes
payable, $360,000 of which was to related parties. Each bridge unit consisted of
a 10% promissory note with a face value ranging from $10,000 to $500,000 (the
"Bridge Notes"), convertible into shares of preferred stock at a price per share
achieved in future equity placements, and warrants to purchase 1,456,727 shares
of common stock (36,000 of which are held by directors of the Company) ranging
from $2.50 to $2.75 per share which approximated the fair value of the warrants
(Note 8). Payments of $50,000 plus $51,900 in accrued interest, were made during
1997. In addition, during 1997, $4,250,000 of the Bridge Notes plus accrued
interest of approximately $443,000 were converted into 46,920 shares of Series C
redeemable convertible Preferred Stock ("Series C Preferred Stock"). Upon
conversion into Series C Preferred Stock, each stockholder received a warrant
with a five year term to purchase common stock equal to 40% of the stockholder's
investment at $3.00 per share (Notes 7 and 8).
From January 1997 through May 1997, the Company obtained $3,270,000 in bridge
financing, through the sale of bridge units. Each bridge unit consisted of an 8%
promissory note with a face value ranging from $10,000 to $750,000 (The "1997
Bridge Notes") and warrants to purchase common stock equal to 40% of the
principal amount of the underlying note at $3.00 per share. In conjunction with
the 1997 Bridge Notes, warrants to purchase 436,000 shares of common stock at
$3.00 per share were issued (Note 8). The Company allocated $413,000 of the 1997
Bridge Notes to the warrants issued and recorded a corresponding debt discount
which was amortized using the effective interest method. The effect of this
allocation results in an effective interest rate of 11% until conversion of the
notes. The terms of these 1997 Bridge Notes provided for the automatic
conversion of principal plus accrued interest into Series C redeemable
convertible Preferred Stock ("Series C Preferred Stock") at a purchase price of
$100.00 per share upon the successful completion of an equity offering of at
least $5,000,000. Upon successful completion of a Series C Preferred Stock
offering during 1997 (Note 7), the Company converted $3,270,000 in principal
plus $60,741 in accrued interest less the unamortized discount of $392,000 into
33,301 shares of Series C Preferred Stock.
In June 1997, the Company entered into a $2,000,000 four year note secured by
inventory and equipment (the "Equipment Note"). The Equipment Note bears
interest at 9% per annum with interest only to be paid in the first twelve
months and with principal and interest starting in month thirteen. The Company
must pay a loan fee equal to 10% of the total advances under the agreement on
the due date of the last monthly payment. At December 31, 1998, this $193,000 is
included in noncurrent liabilities. The Company drew $1,500,000 of proceeds
under the agreement in June 1997 and $434,000 in April 1998. No further advances
were available under this agreement subsequent to June 1, 1998. In connection
with this note, the Company issued warrants to purchase 10,500 shares of Series
C Preferred Stock at $100.00 per share (Note 8). The Company allocated $325,000
of the Equipment Note proceeds to the warrants issued. The $325,000 allocated to
the warrants is being amortized to interest expense using the effective interest
method over the term of the debt. The effect of this allocation results in an
effective interest rate of 14%. During the years ended December 31, 1997 and
1998, the Company recognized additional interest expense of $47,000 and $82,000
respectively, related to this allocation.
In March 1998, the Company issued $250,000 promissory notes to certain
stockholders which bear interest at 8% per annum. The principal and accrued
interest was converted into 2,653 shares of Series C Preferred Stock in December
1998.
In March 1998, the Company entered into a $6,000,000 Loan Agreement with Sirrom
Capital Corporation ("Sirrom"), which is secured by a second lien on the
Company's existing secured assets and a first lien on the balance of the
Company's assets. The Loan Agreement bears interest at a stated annual rate of
12.75% payable monthly from May 1998 through February 2003, with principal and
any remaining interest due in March 2003. In connection with the Loan Agreement,
the Company issued stock purchase warrants expiring in May 2003, granting Sirrom
the right to purchase 250,000 shares of the Company's common stock at $3.00 per
share. In the event the note remains outstanding on March 31, 1999 and for each
year thereafter, Sirrom receives an additional warrant to purchase 75,000 shares
of the Company's common stock at $3.00 per share until maturity or prepayment of
the loan up to a maximum of 625,000 warrants. In June 1998, the Company entered
into an additional $2,000,000 Loan Agreement with Sirrom, collectively the
"Sirrom Loan" which is secured by a second lien on the Company's
F-9
<PAGE> 65
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. LONG TERM DEBT (CONTINUED)
existing secured assets and a first lien on the balance of the Company's assets.
The Loan Agreement bears interest at a stated annual rate of 12.75% payable
monthly from July 1998 through February 2003, with principal and any remaining
interest due in March 2003. In connection with the Loan Agreement, the Company
issued stock purchase warrants expiring in May 2003, granting Sirrom the right
to purchase 100,000 shares of the Company's common stock at $3.00 per share. On
December 31, 1998 Sirrom received an additional warrant to purchase 40,000
shares of the Company's common stock which resulted in an additional discount of
$37,200. In the event the note remains outstanding on June 30, 1999 and for
every six months thereafter, Sirrom receives an additional warrant to purchase
40,000 shares of the Company's common stock until maturity or prepayment of the
loan up to a maximum of 460,000 warrants. The unissued warrants could result in
an additional discount if the notes are not paid in accordance with the terms
above. The Sirrom loans require the Company to maintain cash in an escrow
account to be used by the lender for the first year of interest payments.
The stock purchase warrants are subject to a put option whereby Sirrom can sell
the warrants to the Company in the 30-day period prior to the warrants
expiration date. The put option price is equal to the fair market value of the
common stock issuable under the warrants. The Company allocated $362,700 to the
warrants which resulted in a corresponding debt discount and put option
liability included in noncurrent liabilities. The $362,700 debt discount will be
amortized to interest expense using the effective interest method over the term
of the loan. During the year ended December 31, 1998, the Company recognized
additional interest expense of $52,320 related to this allocation.
As of December 31, 1996, 1997, and 1998, accrued interest on notes payable
totaled approximately $333,000, $57,000, and $125,000, respectively.
The following table summarizes the notes payable activity:
<TABLE>
<CAPTION>
-----------------------
DECEMBER 31,
1997 1998
---------- ----------
<S> <C> <C>
Related Party Notes (8% notes at December 31, 1997, 10%
convertible demand notes at December 31, 1998) $ 200,000 $ 200,000
Equipment Note (net of unamortized discount of $277,936 and
$196,481 at December 31, 1997 and 1998, respectively) 1,222,063 1,547,809
Sirrom Notes (net of unamortized discount of $310,380 at
December 31, 1998) -- 7,689,620
---------- ----------
1,422,063 9,437,429
Less current portion 222,838 911,962
---------- ----------
Long term debt, less current portion $1,199,225 $8,525,467
========== ==========
</TABLE>
Annual maturities of notes payable at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
------------
DECEMBER 31,
1998
------------
<S> <C>
1999 911,962
2000 672,423
2001 359,905
2002 --
2003 8,000,000
---------
9,944,290
=========
</TABLE>
F-10
<PAGE> 66
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS
Office Space
In July 1997, the Company entered into a new operating lease for its office
space which expires in July 2002. Rent expense under this lease and other
operating leases was approximately $193,000, $500,000 and $676,000 for the years
ended December 31, 1996, 1997, and 1998, respectively. These leases provide for
escalating rent over the lease term.
Equipment
The Company also leases equipment under capital leases. The net book value of
equipment under the capital leases was approximately $566,000 and $1,496,000 at
December 31, 1997 and 1998, respectively. In 1998, the Company incurred a
capital lease obligation of $1,259,043 for the purchase of equipment.
Amortization of assets held under capital leases is included in depreciation and
amortization in the statements of cash flows.
Future minimum lease payments on operating and capital leases are as follows:
<TABLE>
<CAPTION>
---------------------------
OPERATING CAPITAL
DECEMBER 31, DECEMBER 31,
1998 1998
------------ ------------
<S> <C> <C>
1999 $ 642,305 $ 673,682
2000 658,153 470,821
2001 677,897 165,994
2002 407,304 62,279
2003 0 0
---------- ----------
Total minimum lease payments $2,385,659 1,372,776
==========
Less amount representing interest 152,869
----------
Present value of minimum lease payments 1,219,907
Less current portion 614,585
----------
Long-term portion of minimum lease payments $ 605,322
==========
</TABLE>
6. INCOME TAXES
At December 31, 1998, the Company has net operating loss carryforwards of
approximately $40 million that expire at varying dates from 2010 to 2018. The
use of these losses may be subject to significant limitations due to ownership
changes pursuant to Section 382 of the Internal Revenue Code resulting from the
issuances of Preferred and Common Stock.
F-11
<PAGE> 67
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES (CONTINUED)
Significant components of the Company's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
-----------------------------
AT DECEMBER 31,
1997 1998
------------- -------------
<S> <C> <C>
Deferred tax assets:
Inventory allowance $ 360,000 $ 322,000
Net operating loss carryforwards 11,766,000 16,348,000
Accrued expenses 257,000 446,000
Other deferred tax assets 97,000 49,000
------------- -------------
Total deferred tax assets 12,480,000 17,165,000
Deferred liabilities:
Depreciation (93,000) (161,000)
Other deferred tax liabilities (12,000) --
------------- -------------
Total deferred tax liabilities (105,000) (161,000)
Valuation allowance for net deferred tax assets (12,375,000) (17,004,000)
------------- -------------
Net deferred tax assets $ -- $ --
============= =============
</TABLE>
The Company had not paid income taxes during 1996, 1997 or 1998 due to its net
operating loss position.
The following is a summary of the items that caused recorded income taxes to
differ from taxes computed using the statutory federal income tax rate for the
years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
--------------------------------------------
DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Tax expense (benefit) at statutory Federal rate............. $ (2,372,000) $ (3,756,000) $ (3,930,000)
Effect of:
State income tax, net..................................... (419,000) (663,000) (693,000)
Non-statutory stock options exercise...................... (228,000) (26,000) (16,000)
Other..................................................... (109,000) 8,000 10,000
Increase in valuation allowance........................... 3,128,000 4,437,000 4,629,000
------------ ------------ ------------
Income tax expense.......................................... $ -- $ -- $ --
============ ============ ============
</TABLE>
7. PREFERRED STOCK
Of the 3,000,000 authorized preferred shares of the Company, 100,000 shares have
been designated as Series B redeemable convertible Preferred Stock ("Series B
Preferred Stock") and 287,000 have been designated as Series C Preferred Stock.
In addition, 1,000,000 shares have been designated as Series A convertible
Preferred Stock ("Series A Preferred Stock"). Upon liquidation of the Company,
the following represents the order of preference given to holders of the
Company's Preferred Stock: Series C Preferred Stock, Series B Preferred Stock
and Series A Preferred Stock. The Company has not designated for any series the
remaining 1,613,000 preferred shares.
Series A Preferred Stock
Each share of Series A Preferred Stock is convertible, at the holder's option,
into one share of common stock and is entitled to one vote per share on that
basis. Holders of Series A Preferred Stock shares are entitled to receive
dividends at the same rate as holders of common stock. Additionally, each Series
A Preferred Stock holder is entitled to a liquidation preference equal to $1.00
plus declared but unpaid dividends.
F-12
<PAGE> 68
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. PREFERRED STOCK (CONTINUED)
Series B Preferred Stock
Each share of Series B Preferred Stock is convertible, at the holder's option
into 33.333 shares of common stock and is entitled to votes based on the
equivalent number of common stock shares. Series B Preferred Stock stockholders
are entitled to receive, on an equivalent share for share basis, any dividends
or distributions paid to holders of common stock. Each share of Series B
Preferred Stock will automatically convert into common stock upon (i) an initial
public offering of at least $30 million or (ii) a change of control, provided
such change of control is at an equivalent price per share of at least 175% of
the Series B Preferred Stock purchase price until December 31, 1998, thereafter
increasing by 10% annually. Series B Preferred stockholders are entitled to a
liquidation preference of $175 per share plus declared but unpaid dividends.
Additionally, on December 31, 2003, the holders of Series B Preferred Stock may
demand redemption at the greater of (i) $175 per share or (ii) the fair market
value of the preferred stock. The excess of the redemption value over the
carrying value of $75,000 is being accreted using the interest method so that
the carrying value will equal the redemption value of $175 per share plus
cumulative unpaid dividends on the scheduled redemption date. In the fourth
quarter of 1996 and during 1997, the Company issued 6,700 and 3,350 shares of
Series B Preferred Stock at $100 per share for total proceeds of $670,000 and
$335,000, respectively. During 1997, Series B Preferred Stock stockholders
converted 9,050 shares of Series B Preferred Stock into an equivalent number of
shares of Series C Preferred Stock. Additionally, as an incentive to convert to
Series C Preferred Stock, the Series B Preferred Stock stockholders received in
aggregate an additional consideration of 322 shares of Series C Preferred Stock
which was included in the calculation of the discount for purposes of accretion.
As of December 31, 1998 holders of 1,000 shares of Series B Preferred Stock have
the option of converting their investment into an equivalent number of shares of
Series C Preferred Stock.
Series C Preferred Stock
Each Series C Preferred Stock share is convertible, at the holder's option, into
33.333 shares of common stock and is entitled to votes based on the equivalent
number of common stock shares. Series C Preferred Stock stockholders are
entitled to receive, on an equivalent share for share basis, any dividends or
distributions paid to holders of common stock. Series C Preferred Stock
stockholders have a liquidation preference of $100 per share plus $17,500,000
allocated based on the percentage of shares owned, and any declared but unpaid
dividends. Each share of Series C Preferred Stock will automatically convert
into common stock upon an initial public offering of at least $30 million.
Commencing on the earlier of January 1, 2004 or the occurrence of a defined
change in control, any holders of Series C Preferred Stock may demand redemption
at a per share redemption price equal to declared but unpaid dividends thereon
plus the greater of (i) $200 or (ii) the fair market value of such share as
determined by the board of directors. The excess of the redemption value over
the carrying value of $24,764,329 is being accreted using the interest method so
that the carrying value will equal the redemption value of $200 per share plus
cumulative unpaid dividends on January 1, 2004 since no change of control is
present.
In conjunction with the 1997 Series C financings and conversions, each
stockholder received a warrant with a five-year term to purchase common stock
equal to 40% of the stockholder's investment at $3 per share. Total warrants
issued in connection with the Series C Preferred Stock were 1,863,416. The
Company allocated $1,732,977 to the value of the warrants based on their
estimated fair value at the date of issuance (Note 8). During 1997, the Company
issued 173,036 shares of Series C Preferred Stock at $100 per share. Of the
173,036 shares issued, 9,050 shares were issued related to the conversion of
Series B Preferred Stock; 42,500 shares were issued related to the conversion of
$4,250,000 of the 1996 Bridge Notes; 32,700 shares were issued related to the
conversion of $3,270,000 of 1997 Bridge Notes; 5,343 shares were issued to
satisfy approximately $504,000 of accrued interest, and 83,443 shares were
issued resulting in cash proceeds of $7,750,000. During 1998, 1,440 shares of
Series C issued in connection with the conversion of the Bridge Notes were
converted into 48,000 shares of common stock.
During December 1998, the Company issued 50,451 shares of Series C Preferred
Stock for total proceeds of $5,039,791. Included in the $5,039,791 of proceeds
is a receivable balance of $450,000 which is classified in prepaid expenses and
other current assets at December 31, 1998. In addition to the Series C Shares,
each stockholder received a warrant to purchase common stock up to 30% of the
stockholder's investment at $3 per share. The number of shares each warrant
holder is able to purchase is contingent upon the Company selling shares
pursuant to an initial public offering prior to July 12, 1999 and the average
price of the stock for the first twenty days subsequent to the sale date. The
maximum number of shares that could be purchased under the warrant agreements is
531,040. These warrants have a five year life.
F-13
<PAGE> 69
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. PREFERRED STOCK (CONTINUED)
Series C Preferred Stock (continued)
From January through March 1999, the Company sold 47,490 shares of Series C
Preferred Stock resulting in net proceeds of $4,749,000. The Company also
converted the $200,000 related party note outstanding at December 31, 1998 plus
accrued interest of $3,800 into 2,038 shares of Series C preferred stock during
this period. Up to 495,280 warrants to purchase the Company's common stock at
$3.00 per share are attached to the Series C Preferred Stock and are issuable
based upon the same events as discussed above. These warrants have a five year
life.
8. STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
During May 1996, the Company created the Online Resources & Communications
Corporation Employee Equity Incentive Plan (the EEIP Plan). The EEIP Plan is
designed to provide a convenient means by which eligible employees of the
Company may (i) save regularly through voluntary systematic payroll deductions
and four times each year use such savings to acquire shares of the Company's
$.0001 par value common stock and/or (ii) elect a salary reduction not to exceed
15% of an eligible employee's regular payroll compensation based upon the
employee's regular rate of pay and receive options not more than four times each
year having an aggregate exercise price of 200% of the amount of the salary
reduction. The exercise price for such options will equal fair market value at
date of grant. The Company has reserved 200,000 shares of common stock for
issuance under the EEIP Plan. During 1997 and 1998, respectively, employees
purchased 432 and 1,959 shares of common stock for total proceeds of $1,454 and
$5,400, respectively.
Warrants
The Company's common stock warrant activity is as follows:
<TABLE>
<CAPTION>
EXERCISE EXPIRATION
WARRANTS PRICE DATE
--------- -------- -------------
<S> <C> <C> <C>
Outstanding at January 1, 1996.............................. 350,300
Warrants issued in connection with debt financing......... 125,000 2.50 Mar. 31, 2000
Warrants issued in connection with debt financing......... 1,716,000 2.50 Apr. 30, 2001
Warrants issued in connection with debt financing......... 13,637 2.75 Dec. 31, 2000
---------
Balance at December 31, 1996................................ 2,204,937
Warrants issued in connection with conversion of Series B
Preferred Stock........................................ 125,134 3.00 June 1, 2002
Warrants issued in connection with conversion of the
Bridge Notes........................................... 625,710 3.00 June 1, 2002
Warrants issued in connection with the issuance of the
1997 Bridge Notes...................................... 444,098 3.00 June 1, 2002
Warrants issued in connection with issuance of Series C
Preferred Stock........................................ 1,112,572 3.00 June 1, 2002
---------
Balance at December 31, 1997................................ 4,512,451
Warrants issued in connection with issuance of the Sirrom
debt................................................... 390,000 3.00 May 31, 2003
---------
Balance at December 31, 1998.............................. 4,902,451
=========
</TABLE>
The Company also issued 10,500 warrants to acquire Series C preferred stock in
connection with the Equipment Note. These warrants are convertible into 350,000
shares of Common Stock and expire on June 3, 2002.
F-14
<PAGE> 70
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Reserve for Issuance
At December 31, 1998, the Company has authorized the following shares of Common
Stock for issuance upon conversion of the Series A Preferred Stock, Series B
Preferred Stock, and Series C Preferred Stock, exercise of options and warrants:
<TABLE>
<S> <C>
Series A Preferred Stock (795,000 shares) 795,000
Series B Preferred Stock (1,000 shares) 33,333
Series C Preferred Stock (224,700) 7,490,000
Common Stock Options Outstanding 4,993,149
Common Stock Options Available to Grant 403,565
Common Stock Warrants 4,902,451
Contingent Common Stock Warrants 1,226,040
Series C Preferred Stock Warrants 350,000
----------
Total shares of authorized Common Stock reserved 20,193,538
==========
</TABLE>
During 1994, a customer was granted an unrestricted right to purchase up to
$100,000 of the Company's Common Stock at the initial public offering price in
the event of an initial public offering.
Stock Options
In February 1989, the Company adopted an Incentive Stock Option Plan (the Plan).
During June 1997, the Company's Board of Directors authorized an increase of
350,000 shares of common stock that can be issued under the Plan. During 1998,
the Company's Board of Directors increased the number of shares of common stock
that can be issued under the plan to 6,500,000. The option price under the Plan
will not be less than fair market value, as determined by the Board of
Directors, on the date of grant. The vesting period of the options is determined
by the Board of Directors and is generally four years. Outstanding options
expire after ten years.
During 1998, three employees tendered a total of 180,668 shares of common stock
to the Company at prices ranging from $2.50 to $3.00 per share. The proceeds
were used to exercise 437,996 options to purchase shares of common stock.
During the year ended December 31, 1997, two employees exercised 76,004 options
in exchange for notes receivable totaling $71,244. During 1998, four employees
exercised 113,500 options in exchange for $118,875 of notes receivable. As of
December 31, 1997 and 1998, 76,004 and 189,504, respectively, of these shares of
Common Stock were held by the Company as collateral for the notes receivable.
Additional information with respect to incentive stock option activity under the
Plan is summarized as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1996 1997 1998
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 3,721,740 $1.53 4,065,568 $1.84 4,301,642 2.02
Options granted 702,249 2.79 661,839 3.05 1,548,480 3.00
Options exercised (307,500) .13 (210,540) 1.11 (585,246) 1.15
Options canceled or expired (50,921) 2.05 (215,225) 2.51 (271,727) 2.33
--------- --------- ---------
Outstanding at end of period 4,065,568 $1.85 4,301,642 $2.02 4,993,149 2.41
========= ========= =========
Options exercisable at end of period 3,154,523 $1.63 3,573,400 $1.85 4,174,093 $2.31
========= ========= =========
</TABLE>
F-15
<PAGE> 71
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Stock Options (continued)
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1998
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ------------------------
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
----------------------- ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.02 to $2.00 1,467,883 2.47 $1.41 1,457,883 $1.40
$2.25 to $2.50 1,263,491 3.89 2.45 1,134,916 2.44
$2.75 9,000 4.42 2.75 9,000 2.75
$3.00 to $3.50 2,252,775 7.2 3.05 1,572,294 3.05
--------- ---------
4,993,149 4.97 $2.41 4,174,093 $2.31
========= =========
</TABLE>
In 1996, the Company adopted the disclosure-only provisions of SFAS No. 123. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant date for awards under the plan consistent with the
methodology prescribed under SFAS No. 123, the Company would have incurred an
additional expense of approximately $378,000, $580,000 and $933,000 resulting in
a net loss in 1996, 1997, and 1998 of approximately $7,354,000, $11,626,000 and
$12,491,500, respectively. The resulting basic and diluted pro forma net loss
per share would be $(.70), $(1.26) and $(1.45) for the years ended December 31,
1996, 1997 and 1998, respectively. The effect of applying SFAS No. 123 on 1996,
1997, and 1998 pro forma net loss as stated above is not necessarily
representative of the effects on reported net loss for future years due to,
among other things, (1) the vesting period of the stock options and (2) the fair
value of additional stock options in future years. The fair value of the options
granted during 1996, 1997 and 1998 are estimated as $0.89, $0.93 $ and $0.93 per
share, respectively, on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: dividend yield of 0%, risk-free interest
rate of 6.625%, volatility of 25% and expected life of four years.
9. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per
share:
<TABLE>
<CAPTION>
-------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Net loss $(6,976,391) $(11,045,811) $(11,558,469)
Preferred stock accretion -- (1,998,665) (3,779,169)
----------- ------------ ------------
Net loss available for common shareholders (6,976,391) (13,044,476) (15,337,638)
=========== ============ ============
Weighted average number of common shares 10,500,930 10,825,662 11,250,270
Effect of dilutive securities:
Stock options -- -- --
Warrants -- -- --
Redeemable convertible preferred stock -- -- --
----------- ------------ ------------
Adjusted weighted average shares and assumed conversions 10,500,930 10,825,662 11,250,270
=========== ============ ============
Pro forma adjustment for redeemable convertible preferred
stock 5,790,079
Pro forma weighted average shares 17,040,349
Loss per share:
Basic and Diluted $ (0.66) $ (1.20) $ (1.36)
Pro forma basic and diluted $ (0.68)
</TABLE>
F-16
<PAGE> 72
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. NET LOSS PER SHARE (CONTINUED)
Due to their antidilutive effects, outstanding stock options, warrants and
shares of Series A Preferred Stock to purchase 7,065,505, 9,609,093 and
10,690,600 shares of common stock at December 31, 1996, 1997 and 1998,
respectively, were excluded from the computation of diluted earnings per share.
10. INITIAL PUBLIC OFFERING
The Board of Directors of the Company has authorized management to pursue an
underwritten sale of shares of the Company's common stock in an initial public
offering ("IPO") pursuant to the Securities Act of 1933.
Upon closing of an IPO, all outstanding shares of Series B and Series C
Preferred will automatically convert into an aggregate of 7,523,333 shares of
common stock.
F-17
<PAGE> 73
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Online Resources & Communications Corporation (the "Registrant") estimates that
expenses (other than underwriting discounts and commissions) in connection with
the offering described in this Registration Statement will be as set forth in
the following table. All amounts shown are estimates except for the Securities
and Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 12,788
National Association of Securities Dealers, Inc. filing
fee....................................................... 5,100
Nasdaq National Market listing fees......................... *
Printing and engraving expenses............................. *
Accountants' fees and expenses.............................. *
Legal fees and expenses..................................... *
Fees and expenses for qualifications under state securities
laws (including legal fees)............................... *
Transfer agent fees......................................... *
Miscellaneous............................................... *
----------
Total............................................. $ *
==========
</TABLE>
- ---------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with General Corporation Law of the State of Delaware (being
Chapter 1 of Title 8 of the Delaware Code), Articles TENTH and ELEVENTH of the
Registrant's Certificate of Incorporation provide as follows:
TENTH:
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a Director or
an Officer of the Corporation or is or was serving at the request of the
Corporation as a Director, Officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan (hereinafter an
"indemnitee"), whether the basis of such proceeding is alleged action in an
official capacity as a Director, Officer, employee or agent or in any other
capacity while serving as a Director, Officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to
the extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide
prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered
by such indemnitee in connection therewith; provided, however, that, except
as provided in Section C hereof with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such
indemnitee in connection with a proceeding (or part thereof) initiated by
such indemnitee only if such proceeding (or part thereof) was authorized by
the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of this Article
TENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final
disposition (hereinafter and "advancement of expenses"); provided, however,
that, if the Delaware General Corporation Law requires, an advancement of
expenses incurred by an indemnitee in his or her capacity as a Director or
Officer (and not in any other capacity in which service was or is rendered
by such indemnitee, including, without limitation, services to an employee
benefit plan) shall be made only upon delivery to the Corporation of an
undertaking (hereinafter an "undertaking"), by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right
to appeal (hereinafter a "final adjudication") that such indemnitee is not
entitled to be indemnified for such expenses under this Section or
otherwise. The rights to indemnification and to the advancement of expenses
conferred in Sections A and B of this Article TENTH shall be contract
rights and such rights shall continue as
II-1
<PAGE> 74
to an indemnitee who has ceased to be a Director, Officer, employee or
agent and shall inure to the benefit of the indemnitee's heirs, executors
and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be
twenty days, the indemnitee may at any time thereafter bring suit against
the Corporation to recover the unpaid amount of the claim. If successful in
whole or in part in any such suit, or in a suit brought by the Corporation
to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee shall be entitled to be paid also the expenses
of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a
suit brought by the indemnitee to enforce a right to an advancement of
expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of
an undertaking the Corporation shall be entitled to recover such expenses
upon a final adjudication that, the indemnitee has not met any applicable
standard for indemnification set forth in the Delaware General Corporation
Law. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification
of the indemnitee is proper in the circumstances because the indemnitee has
met the applicable standard of conduct set forth in the Delaware General
Corporation Law, nor an actual determination by the Corporation (including
its Board of Directors, independent legal counsel, or its stockholders)
that the indemnitee has not met such applicable standard of conduct, shall
create a presumption that the indemnitee has not met the applicable
standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the burden of proving
that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article TENTH or otherwise shall be on
the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, the
Corporation's Certificate of Incorporation, Bylaws, agreement, vote of
stockholders or Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
subsidiary or Affiliate or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether
or not the Corporation would have the power to indemnify such person
against such expense, liability or loss under the Delaware General
Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement
of expenses to any employee or agent of the Corporation to the fullest
extent of the provisions of this Article TENTH with respect to the
indemnification and advancement of expenses of Directors and Officers of
the Corporation.
ELEVENTH: A Director of this Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability: (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under Section 174 of the Delaware General Corporation
Law; or (iv) for any transaction from which the Director derived an improper
personal benefit. If the Delaware General Corporation Law is amended to
authorize corporate action further eliminating or limiting the personal
liability of Directors, then the liability of a Director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of the
Corporation shall not adversely affect any right or protection of a Director of
the Corporation existing at the time of such repeal or modification.
The underwriting agreement to be filed as Exhibit 1.1 to the Registration
Statement provides for indemnification by the underwriters of Online Resources
and its directors and certain officers, and by Online Resources of the
underwriters, for certain liabilities arising under the Securities Act or
otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In accordance with Item 701 of Regulation S-K, the following information is
presented with respect to securities sold by the Registrant within the past
three years which were not registered under the Securities Act.
II-2
<PAGE> 75
(i) 1995 Convertible Note Financing.
(a) Between November, 1995 through April, 1996, the Registrant sold $1.18
million of 10% Convertible Notes due on December 31, 1997 convertible at
$2.75 per share along with 128,727 detachable warrants expiring on December
31, 2000, exercisable at $2.75 per share.
(b) The notes and warrants were sold to individuals, all of whom qualified
as accredited investors within the meaning of Regulation D promulgated
under the Securities Act.
(c) The notes and warrants were sold for a total aggregate consideration of
$1.18 million.
(d) Based upon representations of the purchasers of the notes and warrants,
the notes and warrants were offered and sold in reliance upon an exemption
from registration under Section 4(2) of the Securities Act and in
compliance with Rules 502 and 506 of Regulation D promulgated thereunder.
(e) Not applicable.
(f) Not applicable.
(ii) 1996 Convertible Note Financing.
(a) On May 8, 1996, the Registrant sold $3 million of 10% Convertible Notes
due June 30, 1999 with 1.2 million detachable warrants expiring on April
30, 2001, exercisable at $2.50 per share. The conversion price of the notes
has been established under a formula at $3.00 per share. Thereafter,
through the remainder of 1996, the Registrant sold $0.3 million of
additional notes and holders of $1.1 million of the notes due on December
31, 1997 exchanged their notes along with the detachable warrants issued in
conjunction with such notes for the notes due June 30, 1999 and the
detachable warrants issued with such notes. Therefore, a total of 1.75
million warrants were issued with the notes due June 30, 1999.
(b) The initial $3.0 million of the notes with warrants were sold to
venture capital funds each of which constituted an accredited investor
within the meaning of Regulation D under the Securities Act. All additional
notes with their detachable warrants were issued to individuals, all of
whom qualified as accredited investors within the meaning of Regulation D
under the Securities Act.
(c) The Company raised $3.3 million of additional capital from the sale of
the notes and converted approximately $1.1 million of the notes due on
December 31, 1997 for the notes due on June 30, 1999.
(d) Based upon representations of the purchasers of the notes and
accompanying warrants, the notes and such warrants were offered and sold in
reliance upon an exemption from registration under Section 4(2) of the
Securities Act and in compliance with Rules 502 and 506 of Regulation D
promulgated thereunder.
(e) Not applicable.
(f) Not applicable.
(iii) 1996 Series B Convertible Preferred Stock Financing.
(a) Commencing in November, 1996 through January, 1997, the Registrant sold
10,050 shares of $.01 par value Series B Convertible Preferred Stock
("Series B preferred stock"). The conversion price was tied to certain
future events subject to a minimum price of $3.00 and a maximum price of
$6.00 per share.
(b) The shares of Series B preferred stock were sold to individuals, all of
whom qualified as accredited investors within the meaning of Regulation D
promulgated under the Securities Act.
(c) The Registrant raised a total of $1 million from the sale of shares of
Series B preferred stock.
(d) Based upon representations of the purchasers of the shares of Series B
preferred stock, such shares were offered and sold in reliance upon an
exemption from registration under Section 4(2) of the Securities Act and in
compliance with Rules 502 and 506 promulgated thereunder.
(e) Not applicable.
(f) Not applicable.
(iv) 1997 Note Financings.
II-3
<PAGE> 76
(a) From January, 1997 through May, 1997, the Registrant sold 8% short term
notes having an aggregate face amount of $3.3 million which were
automatically convertible into equity securities to be issued in the
registrant's subsequent financing.
(b) The notes were sold to individuals and others, all of whom qualified as
accredited investors within the meaning of Regulation D promulgated under
the Securities Act.
(c) The Registrant raised $3.3 million from the sale of the Notes.
(d) Based upon representations of the purchasers of the notes, such notes
were offered and sold in reliance upon an exemption from registration under
Section 4(2) of the Securities Act and in compliance with Rules 502 and 506
promulgated thereunder.
(e) Not applicable.
(f) Not applicable.
(v) 1997 Series C Convertible Preferred Stock Financing.
(a) Effective as May 30, 1997, the Registrant sold 77,500 shares of $.01
par value Series C Convertible Preferred Stock ("Series C Preferred Stock")
along with 1.03 million detached warrants expiring on June 1, 2002
exercisable at $3.00 per share. The Series C Preferred Stock was
convertible at a rate of $3.00 per share. Additionally, 33,272 shares were
issued in exchange for $3 million of the notes due on June 30, 1999. After
such initial sale, the holders of the Series B Preferred Stock and the
convertible notes due June 30, 1999 were provided the right to exchange
their notes and shares for shares of Series C Preferred Stock and the
warrants issued in conjunction therewith. The short term notes issued
between January and May were also exchanged. As a result of these exchanges
an additional 56,321 shares of Series C Preferred Stock and .75 million
warrants were issued.
(b) The shares were sold to individuals and institutional investors, all of
whom were accredited investors within the meaning of Regulation D
promulgated under the Securities Act.
(c) The initial 77,500 shares of Series C Preferred Stock which were issued
were sold to institutional investors, consisting of venture capital funds
and a strategic investor, all of whom qualified as accredited investors
within the meaning of Regulation D promulgated under the Securities Act.
(d) Based upon representations of the purchasers of the shares of Series C
Preferred Stock and warrants issued in conjunction therewith, such shares
and warrants were offered and sold in reliance upon an exemption from
registration under Section 4(2) of the Securities Act and in compliance
with Rules 502 and 506 of Regulation D promulgated thereunder.
(e) Not applicable.
(f) Not applicable.
(vi) 1997 Equipment Lease Facility.
(a) On June 3, 1997, the Registrant sold a $2 million 9% Senior Secured
Equipment Note due on June 1, 2001, along with detachable warrants for
10,500 shares of Series C Preferred Stock expiring on June 3, 2002,
exercisable at $100 per share.
(b) Dominion Fund IV, a Delaware limited partnership, purchased the notes
and warrants.
(c) The Registrant received an initial draw of $1.5 million upon the sale
of the note and has subsequently drawn an additional $.4 million under the
note.
(d) Dominion Fund IV qualifies as an accredited investor within the meaning
of Regulation D promulgated under the Securities Act and, therefore, the
notes and warrants sold to Dominion Fund IV were sold in reliance upon an
exemption from registration under Section 4(2) of the Securities Act and in
compliance with the Rules 502 and 506 promulgated under Regulation D.
(e) Not applicable.
(f) Not applicable.
(vii) March 31, 1998 Note Financing.
II-4
<PAGE> 77
(a) On March 31, 1998, the Registrant issued a $6 million 12.75% secured
promissory note due on March 30, 2003 with up to 625,000 detachable
warrants expiring on May 31, 2003, exercisable at $3.00 per share.
(b) Sirrom Capital Corporation purchased the notes and warrants.
(c) The Registrant netted $5.13 million from the sale of the note after the
escrow of the first year's interest due under the note of $765,000 and the
payment of certain expenses.
(d) Sirrom Capital Corporation qualifies as an accredited investor within
the meaning of Regulation D promulgated under the Securities Act and,
therefore, the notes and warrants sold to Sirrom Capital Corporation were
sold in reliance upon an exemption from registration under Section 4(2) of
the Securities Act and in compliance with the Rules 502 and 506 promulgated
under Regulation D.
(e) Not applicable.
(f) Not applicable.
(viii) June 30, 1998 Note Financing.
(a) On June 30, 1998, the Registrant issued a $2 million 12.75% secured
promissory note due on March 30, 2003 with up to 460,000 detachable
warrants expiring on May 31, 2003 exercisable at $3.00 per share.
(b) Sirrom Capital Corporation purchased the note along with the warrants.
(c) After escrow of the first year's interest due under the note of
$255,000 and payment of certain expenses, the Registrant received $1.7
million upon the sale of the note.
(d) Sirrom Capital Corporation qualifies as an accredited investor within
the meaning of Regulation D promulgated under the Securities Act and,
therefore, the notes and warrants sold to Sirrom Capital Corporation were
sold in reliance upon an exemption from registration under Section 4(2) of
the Securities Act and in compliance with the Rules 502 and 506 promulgated
under Regulation D.
(e) Not applicable.
(f) Not applicable.
(ix) 1998-1999 Series C Convertible Preferred Stock Financing.
(a) Between December 1998 and March 1999, the Registrant issued an
additional 102,632 shares of Series C Preferred Stock and contingent
warrants expiring in December 31, 2003 exercisable at $3.00 per share.
(b) The shares were issued to accredited investors within the meaning of
Regulation D.
(c) The Registrant received $10.3 million from the sale of the shares.
(d) Based upon representations of the purchasers of the shares of Series C
Preferred Stock and warrants issued in conjunction therewith, such shares
were sold in reliance upon an exemption from registration under Section
4(2) of the Securities Act and in reliance on Rules 502 and 506 of
Regulation D promulgated thereunder.
(e) Not applicable.
(f) Not applicable.
II-5
<PAGE> 78
ITEM 16. EXHIBITS
The exhibits and financial statement schedules filed as a part of the
Registration Statement are as follows:
<TABLE>
<S> <C>
(a) List of Exhibits
1.1* Form of Underwriting Agreement
3.1* Restated Certificate of Incorporation of Online Resources &
Communications Corporation
3.2* Bylaws of Online Resources & Communications Corporation
4.1* Specimen of Common Stock Certificate of Online Resources &
Communications Corporation
4.2* Form of warrants issued in 1995 in conjunction with bridge
notes
4.3* Form of warrants issued in 1995 and 1996 to purchasers of
notes due December 31, 1997
4.4* Form of warrants issued to purchasers of senior notes due
June 30, 1999
4.5* Form of warrants issued to purchasers of Series C preferred
stock in 1997
4.6* Form of warrants issued to Dominion Fund IV
4.7* Form of warrants issued in 1998 to Sirrom Capital
Corporation
4.8* Form of warrants issued to purchasers of Series C preferred
stock in 1998 and 1999
4.9* Form of warrants issued to placement agents
4.10* Registration Rights Agreement for purchasers of common stock
in 1995
4.11* Registration Rights Agreement for purchasers of Series C
preferred stock and Sirrom Capital Corporation
5.1* Opinion of Patton Boggs LLP regarding legality
10.1* Lease Agreement for premises at 7600 Colshire Drive, McLean,
Virginia
10.2* Online Resources & Communications Corporation 1989 Stock
Option Plan
10.3* Loan Agreement dated June 3, 1997 with Dominion Fund IV
10.4* Security Agreement Dated June 3, 1997 with Dominion Fund IV
10.5* Loan Agreement dated March 31, 1998 and amendment thereto
with Sirrom Capital Corporation
10.6* Security Agreement dated March 31, 1998 with Sirrom Capital
Corporation
23.1 Consent of Ernst & Young LLP
23.2* Consent of Patton Boggs LLP (included in Exhibit 5.1)
24.1 Powers of Attorney (located on the signature page hereto)
27.1 Financial Data Schedule
</TABLE>
- ------------------
* To be filed by amendment
(b) Financial Statement Schedule
Schedule II -- Valuation and Qualifying Account and Reserve is included in this
Registration Statement beginning on Page II-9.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes:
(1) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(2) To provide to the underwriter at the closing specified in the
underwriting agreements certificates in such denominations and registered
in such names as required by the underwriter to permit prompt delivery to
each purchaser.
II-6
<PAGE> 79
(3) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(4) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE> 80
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the County of Fairfax, State of
Virginia, on March 19, 1999.
ONLINE RESOURCES & COMMUNICATIONS
CORPORATION
By: /s/ MATTHEW P. LAWLOR
---------------------------------------
Name: Matthew P. Lawlor Title:
Chairman and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Matthew P. Lawlor in his own capacity, as his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for such person and in such person's name, place and stead, in
any and all capacities, to sign any and all amendments to this Registration
Statement and any registration statement for the same offering covered by this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, and all post-effective amendments
thereto, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ MATTHEW P. LAWLOR Chief Executive Officer and Chairman (Principal March 19, 1999
- -------------------------------------------------------- Executive Officer)
Matthew P. Lawlor
/s/ GEORGE E. NORTHUP Senior Vice President, Chief Financial Officer March 19, 1999
- -------------------------------------------------------- (Principal Financial and Accounting Officer)
George E. Northup
/s/ THOMAS S. JOHNSON Director March 19, 1999
- --------------------------------------------------------
Thomas S. Johnson
/s/ JOSEPH J. SPALLUTO Director March 19, 1999
- --------------------------------------------------------
Joseph J. Spalluto
/s/ DAVID A. O'CONNOR Director March 19, 1999
- --------------------------------------------------------
David A. O'Connor
/s/ BARRY F. FINGERHUT Director March 19, 1999
- --------------------------------------------------------
Barry F. Fingerhut
/s/ GEORGE M. MIDDLEMAS Director March 19, 1999
- --------------------------------------------------------
George M. Middlemas
/s/ MICHAEL K. LEE Director March 19, 1999
- --------------------------------------------------------
Michael K. Lee
/s/ MICHAEL H. HEATH Director March 19, 1999
- --------------------------------------------------------
Michael H. Heath
</TABLE>
II-8
<PAGE> 81
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS, ON
FINANCIAL STATEMENT SCHEDULE
We have audited the financial statements of Online Resources & Communications
Corporation as of December 31, 1997 and 1998, and for each of the three years in
the period ended December 31, 1998, and have issued our report thereon dated
February 26, 1999 (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedule listed in Item 16(b) of
this Registration Statement. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statements schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Vienna, Virginia
February 26, 1999
<PAGE> 82
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNT AND RESERVE
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF END OF
CLASSIFICATION PERIOD ADDITIONS DEDUCTIONS PERIOD
- -------------- ------------ --------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1996............................ $ -- $ 26,000 $ -- $ 26,000
Year ended December 31, 1997............................ $ 26,000 $ 53,553 -- $ 79,553
Year ended December 31, 1998............................ $ 79,553 -- $28,118 $ 51,435
Inventory Reserve:
Year ended December 31, 1996............................ $324,897 $ 77,741 -- $402,638
Year ended December 31, 1997............................ $402,638 $496,721 -- $899,359
Year ended December 31, 1998............................ $899,359 -- $83,542 $815,817
</TABLE>
<PAGE> 83
Graphic - p 27
Circular graphic illustrating Online's financial electronic commerce hub
which depicts the connectivity of clients, retail customers and financial
service providers, as well as the integration of data among such parties.
Graphic - p 31
Graphic depicting how Online integrates data and links financial
institutions, financial service providers and retail customers of financial
institutions.
Graphic p 32
Graphic depicting flow chart of Online's patented ATM network-based process
by illustrating the steps involved when a retail customer uses our services.
Prospectus Cover Page
- -------------------
Graphic displaying a map of the United States with a list of representative
clients.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 26, 1999, in the Registration Statement (Form
S-1 No. 333-[_____]) and related Prospectus of Online Resources & Communications
Corporation dated March 19, 1999.
/s/ Ernst & Young LLP
Vienna, Virginia
March 19, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENT OF OPERATIONS AND STATEMENT OF CASH FLOWS INCLUDED IN THE
COMPANY'S FORM S-1 FOR THE PERIOD ENDING DECEMBER 31, 1998, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,471,620
<SECURITIES> 0
<RECEIVABLES> 985,585
<ALLOWANCES> 52,000
<INVENTORY> 0
<CURRENT-ASSETS> 5,727,437
<PP&E> 5,469,848
<DEPRECIATION> 2,303,829
<TOTAL-ASSETS> 9,421,428
<CURRENT-LIABILITIES> 5,147,061
<BONDS> 0
25,776,254
7,950
<COMMON> 1,138
<OTHER-SE> (31,188,776)
<TOTAL-LIABILITY-AND-EQUITY> 9,421,428
<SALES> 4,326,104
<TOTAL-REVENUES> 4,326,104
<CGS> 6,289,462
<TOTAL-COSTS> 6,289,462
<OTHER-EXPENSES> (15,437)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,146,614
<INCOME-PRETAX> (11,558,469)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,558,469)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,558,469)
<EPS-PRIMARY> (1.36)
<EPS-DILUTED> (1.36)
</TABLE>
