<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO ___________________
COMMISSION FILE NUMBER 0-26123
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
---------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1623052
-------- ----------
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
7600 COLSHIRE DRIVE, McLEAN, VIRGINIA 22102
------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(703) 394-5100
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----------- -----------
As of July 31, 2000 there were 11,592,632 shares of the issuer's common
stock outstanding.
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ONLINE RESOURCES & COMMUNICATIONS CORPORATION
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I. FINANCIAL INFORMATION
Item 1: Financial statements
Balance Sheets at June 30, 2000 and December 31, 1999 1
Statements of Operations for the quarter and six months ended June 30, 2000 and 1999 2
Statements of Cash Flows for the six months ended June 30, 2000 and 1999 3
Notes to Financial Statements 4
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 6
Item 3: Quantitative and Qualitative Disclosures about Market Risk 10
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 10
Item 2: Changes in Securities and Use of Proceeds 11
Item 3, 4, and 5: 11
Item 6: Exhibits and Reports on Form 8-K 11
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,308,698 $ 1,588,187
Investments 10,918,497 19,905,929
Accounts receivable (net of allowance of approximately $108,000
and $152,000 at June 30, 2000, and December 31, 1999,
respectively) 2,319,587 1,875,707
Prepaid expenses and other current assets 847,668 946,207
---------------- ------------
Total current assets 15,394,450 24,316,030
Property and equipment, net 5,419,253 4,616,672
Other assets 276,630 284,473
---------------- ------------
Total assets $ 21,090,333 $ 29,217,175
================ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 319,728 $ 812,082
Accrued expenses and other current liabilities 1,107,287 565,384
Accrued wages 663,141 537,553
Accrued vacation 268,639 378,640
Deferred revenues 515,250 417,926
Current portion of capital lease obligations 408,781 709,076
---------------- ------------
Total current liabilities 3,282,826 3,420,661
Capital lease obligation, less current maturities 297,493 329,480
---------------- ------------
Total Liabilities 3,580,319 3,750,141
Stockholders' equity
Common stock, $.0001 par value; 35,000,000 shares authorized,
11,581,922, and 11,050,456 issued and outstanding at June 30,2000 and
December 31, 1999, respectively 1,158 1,105
Additional capital 84,474,330 83,035,825
Deferred stock compensation (224,524) (267,949)
Accumulated deficit (66,376,666) (56,651,707)
Receivable from the sale of common stock (335,604) (650,240)
Unrealized loss on available for sale securities (28,680) -
----------------- ------------
Total stockholders' equity 17,510,014 25,467,034
---------------- ------------
Total liabilities and stockholders' equity $ 21,090,333 $ 29,217,175
================ ============
</TABLE>
See accompanying notes to unaudited interim financial statements.
1
<PAGE> 4
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Service fees $2,865,471 $1,479,284 $5,182,286 $2,624,912
Implementation and other revenues 805,851 500,297 1,635,710 858,365
-------------- -------------- -------------- --------------
Total revenues 3,671,322 1,979,581 6,817,996 3,483,277
Expenses:
Cost of revenues 3,229,181 2,099,272 6,327,734 4,005,188
-------------- -------------- -------------- --------------
Gross profit (loss) 442,141 (119,691) 490,262 (521,911)
General and administrative 1,501,391 757,640 3,163,708 1,552,814
Selling and marketing 2,162,027 1,229,147 4,428,841 2,212,428
Systems and development 1,684,762 945,903 3,111,715 1,850,258
-------------- -------------- -------------- --------------
5,348,180 2,932,690 10,704,264 5,615,500
-------------- -------------- -------------- --------------
Loss from operations (4,906,039) (3,052,381) (10,214,002) (6,137,411)
Other income (expense):
Interest Income 237,547 105,458 538,551 147,167
Interest expense (20,808) (401,413) (49,508) (843,114)
-------------- -------------- -------------- --------------
Total other income (expense) 216,739 (295,955) 489,043 (695,947)
-------------- -------------- -------------- --------------
Loss before extraordinary loss (4,689,300) (3,348,336) (9,724,959) (6,833,358)
Extraordinary debt extinguishments loss - (885,407) - (885,407)
-------------- -------------- -------------- --------------
Net loss (4,689,300) (4,233,743) (9,724,959) (7,718,765)
Preferred stock accretion - (970,532) - (2,236,716)
Beneficial return on preferred shares - - - (2,668,109)
-------------- -------------- -------------- --------------
Net loss available to common
stockholders $(4,689,300) $(5,204,275) $(9,724,959) $(12,623,590)
============== ============== ============== ==============
Basic and diluted loss per share:
Available to common stockholders before
extraordinary item $(0.41) $(0.71) $(0.86) $(2.31)
Extraordinary loss - (0.15) - (0.17)
Basic and diluted loss per share (0.41) (0.86) (0.86) (2.48)
Shares used in calculation of loss per share:
Basic and diluted 11,541,131 6,076,225 11,338,162 5,080,538
</TABLE>
See accompanying notes to interim unaudited financial statements.
2
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ONLINE RESOURCES & COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
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<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(9,724,959) $(7,718,765)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation 814,234 490,291
Amortization - 199,488
Extraordinary debt extinguishments loss - 885,407
Compensation expense related to
issuance of common stock 128,350 146,733
Provision for losses on accounts receivable (44,000) -
Changes in assets and liabilities:
Accounts receivable (399,880) (456,561)
Prepaid expenses and other current assets 20,286 36,180
Escrow deposit - 400,985
Other assets 86,096 (69,996)
Accounts payable (492,354) (93,841)
Accrued expenses 557,490 (475,144)
Deferred revenues 97,324 (2,564)
------------ ------------
Net cash used in operating activities (8,957,413) (6,657,787)
INVESTING ACTIVITIES
Investments in available for sale securities (15,106,538) -
Sale of available for sale securities 24,065,290 -
Purchase of property and equipment (1,616,815) (337,467)
------------ ------------
Net cash provided by (used in) investing activities 7,341,937 (337,467)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,353,633 38,978,615
Purchase of treasury stock - (50,000)
Repayment of stock subscription receivable 314,636
Net proceeds from issuance of Series C 5,349,000
redeemable convertible preferred stock -
Repayment of capital lease obligations (332,282) (282,216)
Repayment of long-term debt - (9,744,290)
------------ ------------
Net cash provided by financing activities 1,335,987 34,251,109
------------ ------------
Net (decrease) increase in cash and
cash equivalents (279,489) 27,255,855
Cash and cash equivalents at
beginning of period 1,588,187 3,471,620
------------ ------------
Cash and cash equivalents at end of period $ 1,308,698 $ 30,727,475
============ ============
</TABLE>
See accompanying notes to unaudited interim financial statements.
3
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ONLINE RESOURCES & COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
Online Resources & Communications Corporation (the "Company") is a leading
Internet banking, bill payment and e-finance application service provider to
financial institutions. We provide our clients, primarily regional and
community banks, thrifts and credit unions, with an end-to-end outsourced
service, which is branded in their name. This enables cost-effective delivery
of Internet-based financial services to the consumer, small business and other
retail customers of our clients. By packaging our transaction services with our
call center, database and support services, we offer an integrated financial
hub and a single point of accountability for our clients and their retail
customers.
2. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles for interim financial
information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed, or omitted, pursuant to the
rules and regulations of the Securities and Exchange Commission. In our
opinion, the statements include all adjustments necessary (which are of a
normal and recurring nature) for the fair presentation of the results of the
interim periods presented. These financial statements should be read in
conjunction with our audited financial statements for the year ended December
31, 1999, included in the amended Annual Report on Form 10-K/A filed by
the Company with the Securities and Exchange Commission on June 30, 2000. Our
results of operations for any interim period are not necessarily indicative of
the results of operations for any other interim period or for a full fiscal
year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements. Actual results may differ from those estimates.
3. NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition," which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosure
related to revenue recognition policies. At this time, the Company is still
assessing the impact of SAB 101 and its effect, if any, on the Company's
financial position, results of operations and cash flows.
4. NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share is calculated by dividing the
net loss by the weighted average number of common shares outstanding.
4
<PAGE> 7
The following table summarizes the average number of common shares used
in the calculation of basic and diluted net loss per common share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ---------------------------------
2000 1999 2000 1999
------------------------------ ---------------------------------
<S> <C> <C> <C> <C>
Loss before extraordinary item $(4,689,300) $(3,348,336) $(9,724,959) $ (6,833,358)
Preferred stock accretion - (970,532) - (2,236,716)
Beneficial return on preferred shares - - - (2,668,109)
------------ ------------ ------------ --------------
Net loss available for common
Stockholders before extraordinary item (4,689,300) (4,318,868) (9,724,959) (11,738,183)
Extraordinary item - (885,407) - (885,407)
------------ ------------ ------------ --------------
Net loss available for common stockholders $(4,689,300) $(5,204,275) $(9,724,959) $ (12,623,590)
============ ============ ============ ==============
Weighted average number of common
shares 11,541,131 6,076,225 11,338,162 5,080,538
Effect of dilutive securities:
Stock options - - - -
Warrants - - - -
Redeemable convertible preferred stock - - - -
------------ ------------ ------------ --------------
Adjusted weighted average shares and assumed
Conversions 11,541,131 6,076,225 11,338,162 5,080,538
============ ============ ============ ==============
Loss per share:
Basic and diluted before extraordinary item $ (0.41) $ (0.71) $ (0.86) $ (2.31)
Extraordinary loss $ - $ (0.15) $ - $ (0.17)
Basic and diluted $ (0.41) $ (0.86) $ (0.86) $ (2.48)
</TABLE>
Due to their antidulitive effects, outstanding shares of preferred stock,
stock options and warrants to purchase shares of common stock were excluded
from the computation of diluted earnings per share for all periods presented.
5. EQUITY
During the quarter ended June 30, 2000, individuals exercised options and
warrants to purchase 66,459 shares of common stock with net proceeds to the
Company of approximately $210,000. For the six months ended June 30, 2000,
individuals exercised options and warrants to purchase 531,466 shares of
common stock with net proceeds to the Company of approximately $1.4 million.
6. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes the Company's net loss adjusted for
changes, net of tax, of unrealized losses on investments in marketable
securities. Comprehensive income (loss) for the three months and six months
ended June 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Comprehensive income (loss):
Net loss $(4,689,300) $(4,233,743) $(9,724,959) $(7,718,765)
Unrealized gain (loss) on investments in
marketable securities 13,813 - (28,680) -
------------ ------------ ------------ ------------
Total comprehensive income (loss): $(4,675,487) $(4,233,743) $(9,753,639) $(7,718,765)
============ ============ ============ ============
</TABLE>
5
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY NOTE
This Quarterly Report on Form 10-Q may contain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, including,
but not limited to:
- Forecasts of growth in business-to-business electronic commerce, and
growth in the number of consumers using online banking and billpaying
services;
- Statements regarding trends in Online Resources' revenues, expense
levels, and liquidity and capital resources;
- Statements about the sufficiency of the proceeds from Online Resources'
IPO and cash balances to meet currently planned working capital and
capital expenditure requirements; and
- Other statements identified or qualified by words such as "likely",
"will", "suggest", "may", "would", "could", "should", "expects",
"anticipates", "estimates", "plans", "projects", "believes", "seek",
"intend" and other similar words that signify forward-looking statements.
These forward-looking statements represent the best judgment of Online
Resources as of the date of the Quarterly Report on Form 10-Q, and Online
Resources cautions readers not to place undue reliance on such statements.
Actual performance and results of operations may differ materially from those
projected or suggested in the forward-looking statements due to certain risks
and uncertainties, including but not limited to, the risks and uncertainties
described or discussed in the section "Risk Factors" in the 10-K filed March
31, 2000 of Online Resources. These risks include, among others, the following:
- our history of losses and anticipation of future losses;
- our dependence on the marketing efforts of third parties;
- the potential fluctuations in our operating results;
- our potential need for additional capital;
- our potential inability to expand our services and related products in
the event of substantial increases in demand for these services and
related products;
- our competition;
- our ability to attract and retain skilled personnel;
- our reliance on our patents and other intellectual property;
- the early stage of market adoption of the services we offer;
- consolidation of the banking and financial services industry;
- our failure to successfully implement a system upgrade or conversion may
adversely affect our business;
- our co-marketing efforts may not be successful;
- government regulation could interfere with our business;
- security breaches or system failures could disrupt our business; and
- if we lose a material client our business may be adversely impacted
6
<PAGE> 9
OVERVIEW
We derive revenue primarily from long-term service contracts with our
financial institution clients, who pay us recurring fees based primarily
on the number of their retail customers enrolled and transaction volumes. We
also derive revenue from upfront implementation fees.
As a network-based service provider, we have made substantial up-front
investments in infrastructure. We believe our financial performance and
operating leverage will be based primarily on increasing retail customer
subscriptions and transaction volumes over a relatively fixed cost base.
Our current sources of revenue include service fees, implementations and
selling related products. We expect that our primary source of revenue growth
will come from service fees as a result of continued growth of retail
customers.
Service fees: Our primary source of revenue is from providing services
which include banking, billpaying, customer service, web page hosting, consumer
marketing, information reporting, administrative services, and communications
services. We charge our financial institution clients a fixed monthly fee based
on the number of their retail customers who use our banking, billpaying and
customer support services. Fees for web page hosting, consumer marketing,
information reporting, administrative services, and communications services are
closely tied to the number of retail customers and are bundled as either fixed
price monthly charges, fixed price project fees, or hourly billings.
Implementation and other: We generate revenue from implementation of our
systems to our financial institution clients. Implementation fees are paid on
a one time basis at signing and recognized as revenue using the percentage of
completion method. Additionally, we also derive revenue from sales of related
enabling products and software at fixed prices, including our PC software,
screen-based telephone and customer service software. These have not been a
significant source of revenue and continue to decline as retail customers
migrate to the web service.
Historically, the majority of our resources have been directed to creating
our proprietary Opus(SM) system. This system enables us to provide a broad
range of services to our financial institutional clients including online
banking, billpaying, and access to complementary financial services supported
by our customer call center, marketing services and other support services.
While investment to date has been significant, we believe the infrastructure we
have built will enable us to support our anticipated growth over the next
several years with only nominal incremental cost for additional retail
customers.
FINANCIAL CONDITION
Since our founding, we have incurred high costs to create our
infrastructure, while generating low revenues. As a result, we have
historically experienced large operating losses and negative cash flow. At June
30, 2000, we had accumulated deficits of $66.4 million and net property and
equipment of $5.4 million. We have funded our operations primarily through the
issuance of equity and debt securities. Ongoing working capital requirements
will primarily consist of personnel costs related to enhancing and maintaining
our Opus(SM) system. We expect to continue to incur losses in the near future.
As of June 30, 2000 the Company had $1.3 million in cash and cash
equivalents and $10.9 million in investments as compared to $1.6 million in
cash and cash equivalents and $19.9 million in investments as of December 31,
1999. The decrease in cash and investments results from cash used for operating
purposes. Total liabilities decreased from $3.8 million as of December 31, 1999
to $3.6 million as of June 30, 2000 primarily as a result of a decrease in
current capital lease obligations.
Our limited operating history makes it difficult to evaluate our prospects
for success and our revenue and profitability potential is unproven.
7
<PAGE> 10
RESULTS OF OPERATIONS
The following table presents certain items derived from our statements of
operations expressed as a percentage of revenue.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30,
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2000 1999 2000 1999
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Service fees 78.1% 74.7% 76.0% 75.4%
Implementation and other revenues 21.9 25.3 24.0 24.6
------- ------- ------- -------
Total revenues 100.0 100.0 100.0 100.0
Expenses:
Cost of revenues 88.0 106.0 92.8 115.0
------- ------- ------- -------
Gross margin (loss) 12.0 (6.0) 7.2 (15.0)
General and administrative 40.9 38.3 46.4 44.6
Sales and marketing 58.8 62.1 65.0 63.5
Systems and development 45.9 47.8 45.6 53.1
------- ------- ------- -------
Total expenses 145.6 148.2 157.0 161.2
------- ------- ------- -------
Loss from operations (133.6) (154.2) (149.8) (176.2)
Total other income (expense) 5.9 (15.0) 7.2 (20.0)
Extraordinary loss - (44.7) - (25.4)
------- ------- ------- -------
Net loss (127.7)% (213.9)% (142.6)% (221.6)%
======= ======= ======= =======
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999.
Revenues: We derive revenues from service fees, implementations and from
selling other products. Revenues increased 86% to $3.7 million for the three
months ended June 30, 2000 as compared to $2.0 million for the three months
ended June 30, 1999. This increase was primarily attributable to a 94% increase
in service fees which were driven by an increase of 169% in retail customers
measured at June 30, 2000 and June 30, 1999 and an increase of 217% in the
number of transactions. Additionally, implementation and other fees grew 61% as
a result of increases in the number of financial institutions contracted for our
service. We signed 51 financial institutions for the quarter ending June 30,
2000 compared to 35 financial institutions for the same period last year,
increasing the total number of financial institutions under contract to 453 as
of June 30, 2000.
Cost of Revenues: Cost of revenues primarily includes telecommunications,
payment processing, system operations, customer service, implementation and
related products. Cost of revenues increased 54% to $3.2 million for the three
months ended June 30, 2000 as compared to $2.1 million for the three months
ended June 30, 1999. This increase was primarily attributable to a $535,000
increase in customer service costs and a $478,000 increase in payment
processing costs. These increases resulted from a 169% increase in the number
of retail customers generating a 217% increase in transactions and a required
increase in staff to support the growth of our operations.
Gross Margin: Gross margin increased from a gross loss of $120,000 for the
quarter ended June 30, 1999 to a gross profit of $442,000 for the quarter ended
June 30, 2000. Gross margin improved from a loss of 6% to a profit of 12%
primarily due to increased service fee revenue and implementation revenue
leveraged over our relatively fixed operating cost base. Service fees margin
improved as a result of increased end user growth without a corresponding
incremental increase in costs.
General and Administrative: General and administrative expenses primarily
consist of salaries for executives, administrative and financial control
personnel and facilities costs such as office leases, insurance, and
depreciation. General and administrative expenses increased 98% to $1.5 million
for the three months ended June 30, 2000 as compared to $758,000 for the three
months ended June 30, 1999. The increase in general and administrative expenses
results from a 54% increase in headcount, increased rent and depreciation
expenses associated with the expansion of corporate facilities.
Sales and Marketing: Sales and marketing expenses include salaries and
commissions paid to sales and marketing personnel, consumer marketing costs,
public relations costs, and other costs incurred in marketing our services and
products. As of June 30, 2000, we had 41 marketing partners who act as
resellers of our services. We have no obligation to these marketing partners
other than to provide services sold to financial institutions by the marketing
partners and to pay commissions to them on the sales. The marketing partners
have no obligations to us other than to re-sell our services. Sales and
marketing expenses increased 76% to $2.2 million for the three months ended
June 30, 2000 as compared to $1.2 million for the three months ended June 30,
1999. Increased personnel costs, consumer marketing expenses, commissions, and
travel costs contributed to the escalation in sales and marketing expenses. The
8
<PAGE> 11
increase in commissions is associated with higher revenues and the increases in
consumer marketing expenditures are attributable to promoting the adoption of
our services by the retail customers of the growing number of launched
financial institution clients.
Systems and Development: Systems and development expenses include salaries
of personnel in the systems and development department, consulting fees and all
other expenses incurred in supporting the development of new services and
products, and new technology to enhance existing products. System and
development expenses increased 78% to $1.7 million for the three months ended
June 30, 2000 as compared to $946,000 for the three months ended June 30, 1999.
This was primarily attributable to costs associated with a technical staff
expansion and the use of third party consultants. The cost of third party
consultants is generally higher than the cost of internal resources.
Other Income and Expense: Interest income increased 125% to $238,000 for
the three months ended June 30, 2000 as compared to $105,000 for the three
months ended June 30, 1999. The increase was primarily due to higher average
cash and investment balances in the quarter ended June 30, 2000. Interest
expense decreased 95% to $21,000 for the three months ended June 30, 2000 as
compared to $401,000 for the three months ended June 30, 1999. The decrease in
interest expense is a result of the Company extinguishing $9.4 million of
corporate debt on June 10, 1999.
For the three months ended June 30, 2000 and 1999 the basic and diluted
loss per share from operations was $(0.43) and $(0.50), respectively.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999.
Revenues: Revenues increased 96% to $6.8 million for the six months ended
June 30, 2000 as compared to $3.5 million for the six months ended June 30,
1999. This increase was primarily attributable to a 97% increase in service
fees which were driven by an increase of 169% in retail customers and an
increase of 202% in the number of transactions for the six months ended June
30, 2000. Additionally, implementation and other fees grew 91% as a result of
increases in the number of financial institutions contracted for our service.
We signed 91 financial institutions for the six months ended June 30,
2000 compared to 64 financial institutions for the same period last year,
increasing the total number of financial institutions under contract to 453 as
of June 30, 2000.
Cost of Revenues: Cost of revenues increased 58% to $6.3 million for the
six months ended June 30, 2000 as compared to $4.0 million for the six months
ended June 30, 1999. This increase was primarily attributable to a $1.0 million
increase in customer service costs and a $886,000 increase in payment
processing costs. These increases resulted from the increased number of retail
customers and transactions and a required increase in staff to support the
growth of our operations.
Gross Margin: Gross margin increased from a gross loss of $522,000 for the
six months ended June 30, 1999 to a gross profit of $490,000 for the six months
ended June 30, 2000. Gross margin improved from a loss of 15% to a profit of 7%
primarily due to increased service fee revenue and implementation revenue
leveraged over our relatively fixed operating cost base. Service fees margin
improved as a result of increased end user growth without a corresponding
incremental increase in costs.
General and Administrative: General and administrative expenses increased
104% to $3.2 million for the six months ended June 30, 2000 as compared to $1.6
million for the six months ended June 30, 1999. The increase in general and
administrative expenses results from an increase in staffing for finance and
accounting, required after the Company went public in June 1999 and increased
rent and depreciation expenses associated with the expansion of corporate
facilities.
Sales and Marketing expenses: Sales and marketing expenses increased 100%
to $4.4 million for the six months ended June 30, 2000 as compared to $2.2
million for the six months ended June 30, 1999. Increased personnel costs,
consumer marketing expenses, commissions, and travel costs contributed to the
escalation in sales and marketing expenses. The increase in commissions is
associated with higher revenue and the increases in consumer marketing
expenditures are attributable to promoting the adoption of our services by the
retail customers of the growing number of launched financial institution
clients.
Systems and Development: System and development expenses increased 68% to
$3.1 million for the six months ended June 30, 2000 as compared to $1.9 million
for the six months ended June 30, 1999. This was primarily attributable to
costs associated with a technical staff expansion and the use of third party
consultants. The cost of third party consultants is generally higher than the
cost of internal resources. The technical staff expansion supports
developmental efforts associated with system maintenance, product enhancements
and the development of new products.
Other Income and Expense: Interest income increased 266% to $539,000 for
the six months ended June 30, 2000 as compared to $147,000 for the six months
ended June 30, 1999. The increase was primarily due to higher average cash and
investment balances for the six months ended June 30, 2000. Interest expense
decreased 94% to $50,000 for the six months ended June 30, 2000 as compared
9
<PAGE> 12
to $843,000 for the six months ended June 30, 1999. The decrease in interest
expense is a result of the Company extinguishing $9.4 million of corporate debt
on June 10, 1999.
For the six months ended June 30, 2000 and 1999 the basic and diluted loss
per share from operations was $(0.90) and $(1.21), respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since inception and until our initial public offering, we have primarily
financed our operations through private placements of our common and preferred
stock and the issuance of debt. We have also entered into various capital lease
financing agreements. In June 1999, we closed our initial public offering of
3.1 million shares of common stock at an initial public offering price of
$14.00 per share. Net of underwriting commissions, we received cash proceeds of
approximately $40 million in cash, which was reduced further by an additional
$1 million of other related offering costs. At June 30, 2000 we had $1.3
million in cash and cash equivalents and $10.9 million in investments in
available for sale securities.
Online Resources currently believes that cash balances will be sufficient to
meet anticipated cash requirements through January 2001 assuming the net loss
we are forecasting throughout the remainder of 2000 does not materially
increase and we do not obtain any asset based credit facility. There can be no
assurance, however, that the net losses we incur will not exceed our forecasts
and that additional capital will not be required prior to the date we
anticipate or that such capital will be available on reasonable terms, if at
all, at such time as required.
We recognize that in order to sustain our operations until our business
achieves positive cash flow we will be required to raise additional capital
through additional offering of equity or debt with equity participation rights
or further credit facilities or a combination of any of the above. The sale of
additional equity or debt with equity participation rights will cause our
stockholders to incur additional dilution of the interests that they hold in the
Online Resources. Additional capital may not be available to the Online
Resources on reasonable terms if at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have operations subject to risks of foreign currency
fluctuations, nor do we use derivative financial instruments in our operations
or investment portfolio. Our exposure to market risk related changes in
interest rates relates primarily to our investment portfolio. At June 30, 2000
our investment portfolio consisted of $1.3 million of cash and cash equivalents
invested in demand deposit and overnight investment accounts and $10.9 million
invested in available for sale securities. The fair value of our investment
portfolio or related income would not be significantly impacted by either a 100
basis point increase or decrease in interest rates due mainly to the short-term
nature of the major portion of our investment portfolio. All of the potential
changes noted above are based on sensitivity analysis performed on our balances
as of June 30, 2000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not a party to any pending material litigation nor is it
aware of any pending or threatened litigation that would have a material
adverse effect on the Company or its business.
10
<PAGE> 13
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Proceeds to Online Resources, from its initial public offering in June 4,
1999, net of offering costs from the offering, totaled approximately $39
million. As of June 30, 2000, Online Resources had used $9.4 million of the
proceeds for the repayment of debt, $17.4 million for working capital and $12.2
million was held in cash and temporary investments.
During the fiscal quarter ended June 30, 2000, individuals exercised
options and warrants to purchase 66,459 shares of common stock with net
proceeds to the Company of approximately $210,000. For the six months ended
June 30, 2000, individuals exercised options and warrants to purchase 531,466
shares of common stock with net proceeds to the Company of approximately $1.4
million.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 10, 2000, the Company held its annual meeting of shareholders (the
"Annual Meeting"). There were five proposals submitted to a vote of the
shareholders at the Annual Meeting: (i) to elect three Directors; (ii) to
approve the Online Resources & Communications Corporation Employee Stock
Purchase Plan; (iii) to approve the Amendment to the Online Resources &
Communications Corporation's Amended and Restated Certificate of Incorporation
to change its name to "Online Resources Corporation"; (iv) to approve an
amendment to the 1999 Stock Option Plan to increase the number of shares of
Common Stock reserved for issuance thereunder by 700,000 shares; and (v) to
ratify the appointment of the independent auditors for the fiscal year ending
December 31, 2000.
At the Annual Meeting each of the following persons were elected to serve
as directors of the Company until the next annual meeting or until their
successors are elected and qualified: Michael H. Heath, Thomas S. Johnson and
Barry D. Wessler were each elected with 8,927,095 votes cast in favor of
election and 11,297 cast against election. The directors whose terms continued
after the Annual Meeting are Matthew P. Lawlor, Ervin R. Shames, George M.
Middlemas, David A. O'Connor and Joseph J. Spalluto. The shareholders approved
the adoption of the Online Resources & Communications Corporation Employee
Stock Purchase Plan with 6,198,460 votes cast in favor of the proposal, 155,795
votes against, 133,405 votes abstaining and 2,490,732 votes not voted. The
shareholders also approved the amendment to the Company's Amended and Restated
Certificate of Incorporation to change the name of the Company. There were
8,849,181 votes cast in favor of this proposal, 10,300 votes against and 78,911
votes abstaining. Next, the shareholders approved the amendment to the 1999
Stock Option Plan with 5,073,983 votes in favor, 1,285,969 votes against,
134,100 votes abstaining and 2,444,340 votes not voted. Finally, the
shareholders ratified the appointment of Ernst & Young, LLP, as the Company's
independent certified public accountants, with 8,928,444 votes cast in favor of
this proposal, 9,548 votes against and 400 votes abstaining.
No other matters were submitted to the shareholders for a vote.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(A) Exhibits required to be filed by Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
<S> <C>
10.1 Online Resources & Communications Corporation Employee Stock
Purchase Plan (Incorporated by reference from our registration
statement on Form S-1; Registration No. 333-40674)
27 Financial Data Schedule
</TABLE>
(B) Reports on Form 8-K
Online Resources did not file any Form 8-K reports during the
quarter ended June 30,2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ONLINE RESOURCES & COMMUNICATIONS
CORPORATION
Date: August 4, 2000 By: /s/ Matthew P. Lawlor
------------------------------- -------------------------
Matthew P. Lawlor
Chairman and Chief Executive
Officer (Principal Executive Officer)
Date: August 4, 2000 By: /s/ Carl D. Blandino
------------------------------- ------------------------
Carl D. Blandino
Chief Financial Officer, Executive
Vice President
(Principal Financial Officer)
11
