Edgar Filing: ONLINE RESOURCES CORP

e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004


o		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 CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


DELAWARE		52-1623052

(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)		(I.R.S. EMPLOYER 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		o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).


YES		x		NO		o

As of April 30, 2004 there were 17,945,467 shares of the issuer’s common stock outstanding.

ONLINE RESOURCES CORPORATION

FORM 10-Q

TABLE OF CONTENTS


		Page
PART I	FINANCIAL INFORMATION
Item 1:	Financial Statements
	Balance Sheets at March 31, 2004 (unaudited) and December 31, 2003		1
	Statements of Operations for the three months ended March 31, 2004 and 2003 (unaudited)		2
	Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (unaudited)		3
	Notes to Financial Statements (unaudited)		4
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		7
Item 3:	Quantitative and Qualitative Disclosures about Market Risk		12
Item 4:	Controls and Procedures		12
PART II	OTHER INFORMATION
Item 1:	Legal Proceedings		13
Item 2:	Changes in Securities and Use of Proceeds		13
Item 3:	Defaults Upon Senior Securities		13
Item 4:	Submission of Matters to a Vote of Security Holders		13
Item 5:	Other Information		13
Item 6:	Exhibits and Reports on Form 8-K		13

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

ONLINE RESOURCES CORPORATION

BALANCE SHEETS


	MARCH 31,			DECEMBER 31,
	2004			2003
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	7,654,884		$	7,650,057
Investments		6,326,978			5,983,869
Accounts receivable (net of allowance of approximately $67,000 and $67,000 at March 31, 2004 and December 31, 2003, respectively)		4,192,836			3,935,513
Deferred implementation costs		450,904			493,689
Prepaid expenses and other current assets		798,062			910,631

Total current assets		19,423,664			18,973,759
Property and equipment, net		7,394,635			7,344,170
Deferred implementation costs, less current portion		421,151			416,518
Other assets		98,808			117,512

Total assets	$	27,338,258		$	26,851,959

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	968,300		$	646,531
Accrued expenses and other current liabilities		923,347			660,473
Accrued compensation		799,724			1,526,926
Deferred revenues		510,525			585,804
Current portion of capital lease obligations		41,083			97,031

Total current liabilities		3,242,979			3,516,765
Capital lease obligation, less current maturities		10,521			10,521
Deferred revenues, less current portion		326,009			302,535
Other long term liabilities		59,148			51,219

Total liabilities		3,638,657			3,881,040
Commitments and contingencies
Stockholders’ equity:
Series A convertible preferred stock, $.01 par value; 1,000,000 shares authorized, none issued at March 31, 2004 and December 31, 2003		—			—
Series B junior participating preferred stock, $0.01 par value; 297,500 shares authorized, none issued at March 31, 2004 and December 31, 2003		—			—
Common stock, $.0001 par value; 35,000,000 shares authorized, 18,020,871 issued and 17,945,346 outstanding at March 31, 2004; and 17,887,727 issued and 17,812,202 outstanding at December 31, 2003, respectively		1,794			1,781
Additional paid-in capital		106,435,545			106,128,290
Accumulated deficit		(82,517,568	)		(82,936,679	)
Treasury stock, 75,525 shares at March 31, 2004 and December 31, 2003		(227,800	)		(227,800	)
Accumulated other comprehensive income		7,630			5,327

Total stockholders’ equity		23,699,601			22,970,919

Total liabilities and stockholders’ equity	$	27,338,258		$	26,851,959

See accompanying notes to unaudited financial statements.

ONLINE RESOURCES CORPORATION

STATEMENTS OF OPERATIONS


	THREE MONTHS ENDED
	MARCH 31,
	2004			2003
	(unaudited)			(unaudited)
Revenues:
Banking services	$	785,257		$	1,307,911
Payment services		6,335,990			4,574,793
Consumer contact services		1,931,228			2,415,496
Professional services and other		714,892			2,711,798

Total revenues		9,767,367			11,009,998
Costs and expenses:
Service costs		3,996,375			3,549,493
Implementation and other costs		287,124			300,996

Costs of revenues		4,283,499			3,850,489

Gross profit		5,483,868			7,159,509
General and administrative		2,277,627			2,311,646
Sales and marketing		1,866,548			1,544,653
Systems and development		935,367			890,654

Total expenses		5,079,542			4,746,953

Income from operations		404,326			2,412,556
Other income (expense):
Interest income		26,403			22,724
Interest expense		(2,618	)		(312,108	)

Total other income (expense)		23,785			(289,384	)

Income before income taxes		428,111			2,123,172
Income tax provision		9,000			—

Net income	$	419,111		$	2,123,172

Net income per share:
Basic	$	0.02		$	0.15
Diluted	$	0.02		$	0.15
Shares used in calculation of net income per share:
Basic		17,883,065			13,707,749
Diluted		20,097,459			14,289,870

See accompanying notes to unaudited financial statements.

ONLINE RESOURCES CORPORATION

STATEMENTS OF CASH FLOWS


	THREE MONTHS ENDED MARCH 31,
	2004			2003
	(unaudited)			(unaudited)
OPERATING ACTIVITIES
Net income	$	419,111		$	2,123,172
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		957,942			738,221
Amortization of debt issuance costs		—			63,688
Net realized gain on investments		—			(5,158	)
Amortization of bond (discount) premium		(6,424	)		2,008
Changes in assets and liabilities:
Accounts receivable		(257,323	)		(608,257	)
Prepaid expenses and other current assets		112,569			(76,217	)
Deferred implementation costs		38,152			(3,901	)
Other assets		18,704			103,149
Accounts payable		321,769			(454,389	)
Accrued expenses		(464,328	)		472,983
Deferred revenues		(51,805	)		(67,042	)
Other long term liabilities		7,929			—

Net cash provided by operating activities		1,096,296			2,288,257
INVESTING ACTIVITIES
Purchase of available for sale securities		(3,952,072	)		(4,804,948	)
Sales of available for sale securities		3,617,690			4,792,767
Purchases of property and equipment		(1,008,407	)		(511,769	)

Net cash used in investing activities		(1,342,789	)		(523,950	)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock		307,268			31,694
Repayment of capital lease obligations		(55,948	)		(53,827	)

Net cash provided by (used in) financing activities		251,320			(22,133	)

Net increase in cash and cash equivalents		4,827			1,742,174
Cash and cash equivalents at beginning of period		7,650,057			2,290,950

Cash and cash equivalents at end of period	$	7,654,884		$	4,033,124

Supplemental information to statement of cash flows:
Cash paid for interest		2,608			8,400
Net unrealized gain (loss) on investments		2,303			(10,275	)

See accompanying notes to unaudited financial statements.

ONLINE RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Online Resources Corporation, a Delaware corporation, (the “Company”) is a leading outsourcer of Internet banking, payment and customer contact services to financial institution clients nationwide. The Company offers services, branded in the clients’ name, that integrate seamlessly into a single-vendor, end-to-end solution, supported by 24x7 customer care, targeted consumer marketing, training and other network and technical professional products and services. The Company operates in one business segment.

INTERIM FINANCIAL INFORMATION

The accompanying unaudited financial statements have been prepared in conformity with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, 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, 2003 included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission on March 12, 2004. The results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

2. STOCK BASED COMPENSATION

The Company accounts for stock option grants using the intrinsic value method in accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees for stock-based compensation and furnishes the pro forma disclosures required under SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. In electing to continue to follow APB No. 25 for expense recognition purposes, the Company has provided below the expanded disclosures required under SFAS No. 148 for stock-based compensation granted, including, if materially different from reported results, disclosure of pro forma net earnings or losses and earnings or losses per share had compensation expense relating to grants been measured under the fair value recognition provisions of SFAS No. 123.

The weighted-average fair values at date of grant for options granted during the three months ended March 31, 2004 and 2003 were $4.72 and $2.00, respectively, and were estimated using the Black-Scholes option valuation model with the following weighted-average assumptions:


	THREE MONTHS ENDED
	MARCH 31,
	2004			2003
Dividend yield		—			—
Expected volatility		88	%		93	%
Risk-free interest rate		2.63	%		3.03	%
Expected life in years		5.6			5.0

A reconciliation of the Company’s net income to pro forma net income (loss) and the related basic and diluted pro forma net income (loss) per share amounts for the three months ended March 31, 2004 and 2003 is provided below. For purposes of pro forma disclosure, stock-based compensation expense is recognized in accordance with the provisions of SFAS No. 123. Further, pro forma stock-based compensation expense is amortized to expense on a straight-line basis over the vesting period.


	THREE MONTHS ENDED
	MARCH 31,
	2004			2003
Net income as reported	$	419,111		$	2,123,172
Adjustment to net income for:
Pro forma stock-based compensation expense		(500,980	)		(532,866	)

Pro forma net (loss) income	$	(81,869	)	$	1,590,306

Basic net (loss) income per share:
As reported	$	0.02		$	0.15
Pro forma	$	0.00		$	0.12
Diluted net (loss) income per share
As reported	$	0.02		$	0.15
Pro forma	$	0.00		$	0.11

3. REVENUE RECOGNITION

The Company generates revenues from service fees, professional services and other supporting services. Service fees are primarily composed of three business lines, Internet banking services, payment services and consumer contact services. Revenues from service fees include new user registration fees, account access fees, transaction fees, customer service fees and relationship marketing support fees. Revenue from service fees are recognized over the term of the contract as the services are provided.

Professional services revenues consist of implementation fees associated with the linking of the Company’s financial institution clients to the Company’s Quotien^SM e-financial suite through various networks, web development and hosting fees, training fees and communication services. In accordance with Staff Accounting Bulletin No. 101 — Revenue Recognition in Financial Statements (“SAB 101”), as superseded by SAB 104, which the Company adopted effective January 1, 2000, implementation fees and related direct implementation costs are recognized on a straight line basis over the contract term as the services are provided, which typically range from one to five years (generally three years). Prior to 2000, the Company recognized nonrefundable implementation fees as revenue under the percentage of completion method as certain milestone output measures were completed. Due to the adoption of SAB 101, revenue that was previously recognized under the Company’s prior revenue recognition policy will be recognized under the Company’s revised revenue recognition policy through periods up to 2004 because some contract periods extend through 2004. During the quarters ended March 31, 2004 and 2003, the Company recognized revenue of $2,400 and $13,500, respectively, and related direct incremental costs that were included in the cumulative effect adjustment at January 1, 2000. Revenue from web development, web hosting and training are recognized over the term of the contract as the services are provided.

Other revenue consists of service fees associated with enhanced third-party solutions and termination fees. Service fees for enhanced third-party solutions include fully integrated bill payment and account retrieval through Intuit’s Quicken, check ordering, inter-institution funds transfer, account aggregation and check imaging. Revenue from these service fees are recognized over the term of the contract as the services are provided. Termination fees are recognized upon termination of a contract.

4. MAJOR CUSTOMER

One of the Company’s financial institution clients, California Federal Bank or Cal Fed, accounted for approximately $3.3 million, or 30% of the Company’s total revenues, for the quarter ended March 31, 2003. During 2002, Citigroup acquired Cal Fed and converted the Cal Fed customers to the Citigroup banking and bill payment platform in the first quarter of 2003. The $3.3 million received from Cal Fed in the first quarter of 2003 was a combination of service and termination fee revenue. No other customer accounts for more than 10% of the Company’s revenue.

5. NET INCOME PER SHARE

The following table sets forth the computation of basic and diluted net income per share:


	THREE MONTHS ENDED
	MARCH 31,
	2004		2003
Net income	$	419,111	$	2,123,172
Shares used in calculation of net income per share:
Basic		17,883,065		13,707,749
Dilutive warrants		87,026		—
Dilutive employee options		2,127,368		582,121

Diluted		20,097,459		14,289,870
Net Income per share:
Basic	$	0.02	$	0.15
Diluted	$	0.02	$	0.15

Due to their anti-dilutive effects, outstanding shares from the conversion of stock options and warrants to purchase shares of common stock were excluded from the computation of diluted earnings per share.

6. NOTES PAYABLE

On September 28, 2000, the Company completed the private placement of $20 million in convertible subordinated notes (the “Convertible Notes”) to a group of accredited investors. The Company received proceeds of $18.7 million net of debt issuance costs of $1.3 million including commission of $917,200. The Convertible Notes carried an 8% coupon. Interest payment dates were April 1 and October 1, commencing April 1, 2001. The Convertible Notes were initially convertible at a price of $4.75 per share but were subject to an annual reset under certain circumstances. In no event could the price be less than $4.00 per share. Subject to certain conditions, the Company was able to redeem all or part of the Convertible Notes prior to maturity. Jefferies & Company, Inc., one of the underwriters of the placement, also obtained 200,000 warrants that expire on September 30, 2005 that are exercisable at the same price as the conversion price under the Convertible Notes.

During 2001, the Company repurchased $3.5 million and induced the conversion of $3.5 million of the Convertible Notes. During 2002, the Company induced the conversion of $1.0 million of the Convertible Notes. In the second quarter of 2003, the Company repurchased $3.9 million of the Convertible Notes, and Noteholders converted the remaining $8.1 million of the Convertible Notes in the fourth quarter of 2003.

Interest expense and amortization of the debt issuance costs related to the Convertible Notes were approximately $304,000 for the quarter ended March 31, 2003.

7. COMPONENTS OF COMPREHENSIVE INCOME

Comprehensive income includes the Company’s net income adjusted for changes, net of tax, of unrealized gains (losses) on investments in marketable securities. Comprehensive income for the three months ended March 31, 2004 and 2003 is as follows:


	THREE MONTHS ENDED
	MARCH 31,
	2004		2003
Comprehensive income:
Net income	$	419,111	$	2,123,172
Unrealized gain (loss) on investments in marketable securities		2,303		(10,275	)

Total comprehensive income:	$	421,414	$	2,112,897

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OPERATIONS.

CAUTIONARY NOTE

The following management’s discussion and analysis should be read in conjunction with the accompanying Financial Statements and Notes thereto. 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:

•		Any statements in this document that are not statements of historical fact may be considered forward-looking;

•		Statements regarding trends in our revenues, expense levels, and liquidity and capital resources;

•		Statements about the sufficiency of the proceeds from the sale of securities and cash balances to meet currently planned working capital and capital expenditure requirements for at least the next twelve months; 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 our best judgment as of the date of the Quarterly Report on Form 10-Q, and we caution 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 our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2004. These risks include, among others, the following:

•

our history of prior losses and lack of certainty as to our continuing profitability;

•

possible fluctuations of our quarterly financial results;

•

our potential need for additional capital to accelerate revenue and profit growth;

•

our customer base may not continue to increase;

•

our dependence on the marketing efforts of third parties;

•

our dependence on our financial institution clients to market our services;

•

the possibility that we may not be able to expand to meet increased demand for our services and related products;

•

the potential adverse impact that a loss of a material client or restructure of our agreement with a material customer may have on our financial results;

•

our potential inability to compete with larger, more established businesses offering similar products or services;

•

our inability to attract and retain qualified management and technical personnel and our dependence on our executive officers and key employees;

•

possible security breaches or system failures disrupting our business and the liability associated with these disruptions;

•

the possibility of the development of defective new products;

•

reduction or elimination of the fees we charge for some services due to the consumer demand for low-cost or free online financial services;

•

the potential impact of the consolidation of the banking and financial services industry;

•

interference with our business from the adoption of government regulations;

•

our need to maintain satisfactory ratings from federal depository institution regulators;

•

the potential of litigation;

•

the potential control of the management and affairs of the Company by our executives and directors;

•

our volatile stock price;

•

the trading of a substantial number of shares adversely impacting the price of our shares;

•

the possibility of discouraging a takeover as a result of the adoption of a Stockholder Rights Plan; and

•

the possibility of terrorism and further acts of violence.

OVERVIEW

We are a leading outsourcer of Internet banking, payment and customer contact services to financial institution clients nationwide. Our services, branded in the clients’ name, integrate seamlessly into a single-vendor, end-to-end solution, supported by 24x7 customer care, targeted consumer marketing, training and other network and technical professional products and services. Our Annual Report on Form 10-K discusses the critical accounting policies considered by management to be critical for an understanding of our financial statements.

Registered customers using Internet banking, bill payment or both, are the major driver of our revenue. Since the first quarter of 2003, the number of customers using our banking services increased by 7% and the number of customers using our payment services increased 70%, for an overall 40% increase in customers. This resulted in a 11% increase in revenue exclusive of the $2.2 million termination payment we received from Cal Fed during the first quarter of 2003. While we have seen some reduction in average monthly recurring revenue per user, due largely to our decision to fix price the banking service to our clients, this has been more than offset

The following table presents certain items derived from our Statements of Operations expressed as a percentage of revenue.

THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2003.

Revenues

We generate revenue from Internet banking services, payment services, consumer contact services and professional services and other revenue. Revenue decreased $1.2 million, or 11%, to $9.8 million for the three months ended March 31, 2004, from $11.0 million for the same period of 2003. This decrease was attributable to 40%, 20% and 74% decreases in Internet banking services, consumer contact services and professional and other services revenue, respectively, partially offset by a 38% increase in payment services revenue. Overall, the reduction in revenues was principally caused by the non-recurring $2.2 million termination fee we received from Cal Fed in the first quarter of 2003.


	Three Months Ended
	December 31,						Change
	2004			2003			Difference			%
Revenues (in millions):
Banking services	$	0.8		$	1.3		$	(0.5	)		(40	)%
Payment services		6.4			4.6			1.8			38	%
Consumer contact services		1.9			2.4			(0.5	)		(20	)%
Professional services and other		0.7			2.7			(2.0	)		(74	)%

Total revenues	$	9.8		$	11.0		$	(1.2	)		(11	)%
Users and transactions (000s):
Internet banking services users		450			420			30			7	%
Payment services users		592			349			243			70	%
All services users		926			661			265			40	%
Payment transactions		8,377			4,912			3,465			71	%
Average monthly revenue per user:
Internet banking services	$	0.60		$	1.04		$	(0.44	)		(42	)%
Payment services		3.71			4.47			(0.76	)		(17	)%
Adoption rates:
Internet banking services(1)		18.5	%		11.2	%		7.3	%		65	%
Payment services(2)		5.7	%		4.3	%		1.4	%		33	%

Notes:

(1)		Represents the percentage of users subscribing to our Internet banking service out of the total number of checking accounts enabled for banking services.

(2)		Represents the percentage of users subscribing to our payment services out of the total number of checking accounts enabled for payment services.

Internet Banking Services. Compared to the first quarter of 2003, Internet banking services revenue decreased $0.5 million to $0.8 million, driven by a loss of Internet banking services revenue resulting from the departures of Cal Fed and First Virginia in March and October 2003, respectively. Internet banking services revenue generated by our remaining client base decreased 5% from the first quarter of 2003 even though the number of quarter-end Internet banking services users increased by 7% compared to the prior quarter-end. This was the result of a 42% decrease in the average monthly revenue per Internet banking services user. This decrease was attributable to our decision to move from a monthly user fee pricing model to a monthly license fee pricing model for Internet banking services in an effort to drive adoption of those services. This allows our financial institution clients to register an unlimited number of Internet banking services users (as evidenced by the 65% increase in Internet banking services adoption since March 31, 2003) to whom we can then attempt to up-sell our higher margin bill pay products and other services.

Payment Services. Payment services revenue increased to $6.4 million for the three months ended March 31, 2004 compared to $4.6 million for the same period of the prior year. Even with the departures of Cal Fed and First Virginia during 2003, payment services revenue increased 38%, driven by a 70% increase in the number of quarter-end payment services users and a 71% increase in the number of payment transactions processed during the quarter. The increases in quarter-end payment services users and the number of payment transactions processed were driven by two factors: an increase in financial institution clients using our payment services and an increase in payment services adoption. Compared to the first quarter of 2003, the number of financial institution clients using our payment services increased from 550 clients to 670 clients. Additionally, even with the increased pool of potential customers to which to sell, we were able to increase the adoption rate of our payment services from 4.3% at March 31, 2003 to 5.7% at March 31, 2004.

Consumer Contact Services. Consumer contact services revenue decreased from $2.4 million in the first quarter of 2003 to $1.9 million in the same period of 2004 as a result of the departures of Cal Fed and First Virginia in March and October 2003, respectively. However, these losses were partially offset by increased consumer contact services revenue from our remaining client base driven by an increase of 40% in the number of quarter-end customers utilizing either Internet banking or payment services.

Professional Services and Other. Professional services and other revenue decreased $2.0 million from $2.7 million in the first quarter of 2003 to $0.7 million in the first quarter of 2004. This decrease was primarily the result of a $2.2 million termination payment received from Cal Fed in the first quarter of 2003. We received $27,000 and $2.2 million in termination payments during the quarters ended March 31, 2004 and 2003, respectively.

Costs and Expenses


	Quarter Ended
	March 31,						Change
	2004(1)			2003(1)			Difference(1)			% Difference
Revenues	$	9.8		$	11.0		$	(1.2	)		(11	)%
Costs of revenues		4.3			3.9			0.4			11	%

Gross profit	$	5.5		$	7.1		$	(1.6	)		(23	)%
Gross margin		56	%		65	%		(9	)%		(14	)%
Operating expenses
General & administrative	$	2.3		$	2.3		$	—			(1	)%
Sales & marketing		1.9			1.5			0.4			21	%
Systems & development		0.9			0.9			—			5	%

Total operating expenses		5.1			4.7			0.4			7	%

Income from operations		0.4			2.4			(2.0	)		(83	)%
Other expense, net		—			(0.3	)		0.3

Net income	$	0.4		$	2.1		$	(1.7	)		(80	)%

Diluted income per share	$	0.02		$	0.15		$	(0.13	)		(87	)%
Average monthly metrics per user:
Recurring revenues(2)	$	3.38		$	4.26		$	(0.88	)		(21	)%
Recurring costs of revenues(2)		1.47			1.79			(0.32	)		(18	)%

Gross profit	$	1.91		$	2.47		$	(0.56	)		(23	)%
Gross margin		57	%		58	%		(1	)%		(2	)%

Notes:

(1)		In millions except for diluted income per share and per user metrics.

(2)		Calculation excludes revenues and costs associated with professional services and implementation activities.

Costs of Revenues. Costs of revenues encompasses the direct expenses associated with providing our services. These expenses include telecommunications, payment processing, systems operations, customer service, implementation and professional service work. Costs of revenues increased by $0.4 million, or 11%, to $4.3 million for the quarter ended March 31, 2004, from $3.9 million for the same period in 2003. This increase was primarily attributable to a $0.4 million increase in bill payment processing costs. The increase in payment processing costs resulted from an increase in the number of payment services users and payment transactions. Although total costs of revenues increased by 11% compared to the first quarter of 2003, the average monthly recurring costs of revenues per user decreased by 18% due to a 40% increase in the number of customers using our services. Additionally, beginning in the third quarter of 2003, we began to offset payment costs with idle funds we recapture from bill payment transactions that have not been completed after 12 or 24 months from the authorization of the transactions. Our policy is to recognize as assets funds from checks that have been outstanding more than a year and are less than $200 as an offset to payment processing costs. Checks greater than $200 will be recognized as assets after they are outstanding for two years. The amount of funds recovered and recognized in the quarter ended March 31, 2004 was $0.2 million.

Gross Profit. Gross profit decreased to $5.5 million compared to $7.1 million for the quarter ended March 31, 2003. Gross margin fell from 65% to 56% due primarily to the $2.2 million termination fee received from Cal Fed in the first quarter of 2003.

General and Administrative. General and administrative expenses primarily consist of salaries for executive, administrative and financial personnel, consulting expenses and facilities costs such as office leases, insurance, and depreciation. General and administrative expenses remained unchanged at $2.3 million for the quarter ended March 31, 2004.

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. Sales and marketing expenses increased $0.4 million, or 21%, to $1.9 million in the first quarter of 2004. The primary reasons for the increase in sales and marketing expenses was a $175,000 increase in salary expenses due to headcount increases and a $150,000 increase in corporate and consumer marketing programs.

Systems and Development. Systems and development expenses include salaries, consulting fees and all other expenses incurred in supporting the research and development of new services and products and new technology to enhance existing products. Systems and development expenses remained unchanged at $0.9 million in the first quarter of 2004. Although salary expense and consulting costs were higher in the first quarter of 2004, systems and development expenses remained constant due to an increase in work associated with capitalizable projects as defined by Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” These projects included major enhancements to our applications infrastructure and development of our Money HQSM product. We capitalized $0.6 million of development costs associated with software developed or obtained for internal use in the first quarter of 2004, compared to $0.4 million in 2003.

Income from Operations. Income from operations decreased $2.0 million, or 83%, to $0.4 million for the quarter ended March 31, 2004. The significant decrease in income from operations was due to the $2.2 million termination fee received from Cal Fed in 2003, partially offset by increases in service fee revenue leveraged over relatively fixed costs.

Other Expense, Net. Interest income increased $4,000, or 16%, to $26,000 in the first quarter of 2004. The increase was due to higher average cash balances compared to the first quarter of 2003. Interest and other expense decreased $0.3 million, or 99%, to $3,000 in the first quarter of 2004. This was the result of the conversion in October and November 2003 of the remaining $8.1 million of outstanding 8% Convertible Notes.

Net Income Per Share. Net income was $0.4 million for the quarter ended March 31, 2004, compared to $2.2 million for the quarter ended March 31, 2003. Basic and diluted income per share was $0.02 and $0.15 for the quarters ended March 31, 2004 and 2003, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have primarily financed our operations through private placements and public offerings of our common and preferred stock and the issuance of debt. We have also entered into various capital lease financing agreements. Cash and investments in available for sale securities were $14.0 million and $13.6 million as of March 31, 2004 and December 31, 2003, respectively. The $0.4 million increase in cash and investments results from cash provided by operating activities and financing activities of $1.1 and $0.3 million, respectively, partially offset by capital expenditures of $1.0 million.

Net cash provided by operating activities was $1.1 million for the three months ended March 31, 2004, compared to $2.3 million for the three months ended March 31, 2003. While cash provided by operating activities during the first quarters of 2004 and 2003 resulted from income from operations net of non-cash charges, $2.2 million of the cash provided by operating activities in the first quarter of 2003 was the result of the termination payment received from Cal Fed.

Net cash used in investing activities for the three months ended March 31, 2004 was $1.3 million, which was the result of a net increase of $0.3 million in securities available-for-sale and $1.0 million in capital expenditures. For the three months ended March 31, 2003, net cash used in investing activities was $0.5 million, which was the result of $0.5 million in capital expenditures.

Net cash provided by financing activities was $0.3 million for the three months ended March 31, 2004, compared to net cash used in financing activities of $22,000 for the three months ended March 31, 2003. The net cash provided by financing activities for the quarter ended March 31, 2004 was the result of cash generated by the issuance of common stock, while the net cash provided by financing activities for the quarter ended March 31, 2003 was due to the issuance of $32,000 of common stock offset by the repayment of capital lease obligations.

Our contractual obligations are as follows:


	Total		2004		2005		2006		Thereafter
Capital lease obligations	$	51,604	$	41,083	$	10,521	$	—	$	—
Operating lease		364,729		364,729		—		—		—
Purchase obligations		930,000		312,500		515,000		102,500		—

Total obligations	$	1,346,333	$	718,312	$	525,521	$	102,500		—

Future capital requirements will depend upon many factors, including the timing of research and product development efforts and the expansion of our marketing effort. We expect to continue to expend significant amounts on expansion of facility infrastructure, ongoing research and development, computer and related equipment, and personnel.

We currently believe that cash on hand, investments and the cash we expect to generate from operations will be sufficient to meet our current anticipated cash requirements for at least the next twelve months. We expect to have additional cash requirements over the next two to three years because of efforts we are undertaking to upgrade and rewrite certain of our infrastructure applications. We forecast that all incremental expenses related to this undertaking can be financed out of cash provided by operating activities.

There can be no assurance that additional capital beyond the amounts currently forecasted by us will not be required or that any such required additional capital will be available on reasonable terms, if at all, at such time as required. We intend to invest our cash in excess of current operating requirements in marketable government, corporate and mortgage-backed securities.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We invest primarily in short-term, investment grade, marketable government, corporate, and mortgage-backed debt securities. Our interest income is most sensitive to changes in the general level of U.S. interest rates and given the short-term nature of our investments, our exposure to interest rate risk is not material. 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. We have classified all of our investments as available-for-sale financial instruments. The following table provides information about our available-for-sale investments that are sensitive to changes in interest rates.


	MARCH 31, 2004
	AMORTIZED				INTEREST
	COST		FAIR VALUE		RATE
U.S. government treasury obligations	$	2,245,029	$	2,250,235		1.08	%
Mortgage backed securities		2,322,006		2,324,306		1.06	%
Commercial obligations		1,752,310		1,752,437		1.01	%

Total investments	$	6,319,345	$	6,326,978

ITEM 4. CONTROLS AND PROCEDURES.

(a) As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, the CEO and CFO have concluded that our disclosure controls and procedures were adequate and effective to ensure that material information relating to us, was made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

(b) The CEO and CFO have indicated that there have been no significant changes in our internal control over financial reporting, identified in connection with the above-mentioned evaluation of such internal control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(a)		Exhibit 31.1 — Rule 13a-14a Certification of Chief Executive Officer

		Exhibit 31.2 — Rule 13a-14a Certification of Chief Financial Officer

		Exhibit 32 — Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

(b)		Report on Form 8-K — February 4, 2004 Financial result for the quarter ended December 31,2003


		ONLINE RESOURCES CORPORATION

Date: May 7, 2004		By: /s/ Matthew P. Lawlor

		Matthew P. Lawlor
		Chairman and Chief Executive Officer
		(Principal Executive Officer)

		ONLINE RESOURCES CORPORATION

Date: May 7, 2004		By: /s/ Catherine A. Graham

		Catherine A. Graham
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)