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 MARCH 31, 2002
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 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 April 30, 2002 there were 13,549,500 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
Unaudited Balance Sheets at March 31, 2002 and December 31,
2001 1
Unaudited Statements of Operations for the three months
ended March 31, 2002 and 2001 2
Unaudited Statements of Cash Flows for the three months
ended March 31, 2002 and 2001 3
Notes to Financial Statements (unaudited) 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 11
PART II OTHER INFORMATION
Item 1: Legal Proceedings 11
Item 2, 3
and 4: Not Applicable 11
Item 5: Other Information 11
Item 6: Exhibits and Reports on Form 8-K 11
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ONLINE RESOURCES CORPORATION
UNAUDITED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2002 2001
--------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,381,242 $ 2,120,252
Investments 4,344,743 5,583,370
Accounts receivable (net of allowance of approximately $105,000
and $35,000 at March 31, 2002 and December 31, 2001,
respectively) 3,305,507 2,635,738
Deferred implementation costs 772,697 918,885
Prepaid expenses and other current assets 944,908 795,864
------------ ------------
Total current assets 11,749,097 12,054,109
Property and equipment, net 7,393,696 6,813,123
Deferred implementation costs, less current portion 587,210 707,960
Debt issuance costs 870,398 983,248
Other assets 564,233 963,174
------------ ------------
Total assets $ 21,164,634 $ 21,521,614
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 590,219 $ 724,684
Accrued expenses and other current liabilities 1,604,364 739,358
Accrued compensation expenses 292,692 613,848
Deferred revenues 793,495 880,380
Current portion of capital lease obligations 254,009 310,638
------------ ------------
Total current liabilities 3,534,779 3,268,908
Capital lease obligation, less current maturities 339,924 348,552
Deferred revenues, less current portion 499,438 566,539
Notes payable 12,000,000 13,000,000
------------ ------------
Total liabilities 16,374,141 17,183,999
Commitments
Series B redeemable convertible preferred stock; 100,000 shares
designated, none issued at March 31, 2002 and December 31, 2001 -- --
Series C redeemable convertible preferred stock; 287,000 shares
designated, none issued at March 31, 2002 and December 31, 2001 -- --
Stockholders' equity:
Series A convertible preferred stock, $.01 par value; 1,000,000 shares
authorized, none issued at March 31, 2002 and December 31, 2001 -- --
Common stock, $.0001 par value; 35,000,000 shares authorized,
13,621,177 issued and 13,545,652 outstanding at March 31, 2002;
and 13,293,238 issued and 13,248,390 outstanding at December 31,
2001, respectively 1,355 1,325
Additional paid-in capital 91,163,516 89,937,671
Accumulated deficit (86,101,587) (85,294,865)
Deferred stock compensation (43,807) (60,924)
Treasury stock, 75,525 shares and 44,848 shares at March 31, 2002 and
December 31, 2001, respectively (227,800) (148,581)
Receivable from the sale of common stock -- (122,381)
Accumulated other comprehensive (loss) income (1,184) 25,370
------------ ------------
Total stockholders' equity 4,790,493 4,337,615
------------ ------------
Total liabilities and stockholders' equity $ 21,164,634 $ 21,521,614
============ ============
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
1
ONLINE RESOURCES CORPORATION
UNAUDITED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
2002 2001
------------ ------------
Revenues:
Service fees $ 6,858,261 $ 4,929,950
Implementation and other
revenues 969,118 633,540
------------ ------------
Total revenues 7,827,379 5,563,490
Costs and expenses:
Service costs 3,343,261 3,211,048
Implementation and other
costs 590,491 436,731
------------ ------------
Costs of revenues 3,933,752 3,647,779
------------ ------------
Gross profit 3,893,627 1,915,711
General & administrative 1,705,562 1,745,432
Sales and marketing 1,263,515 1,511,153
Systems and development 1,201,247 1,502,342
Non-recurring charges -- 209,434
------------ ------------
Total expenses 4,170,324 4,968,361
------------ ------------
Loss from operations (276,697) (3,052,650)
Other (expenses) income:
Interest income 47,016 204,850
Interest expense (351,440) (514,165)
Other (33,794) --
Debt conversion expense (191,807) --
------------ ------------
Total other expense (530,025) (309,315)
------------ ------------
Net loss $ (806,722) $ (3,361,965)
============ ============
Loss per share:
Net loss $ (0.06) $ (0.29)
Shares used in calculation of loss per share:
Basic and diluted net loss per share 13,278,464 11,646,321
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
2
ONLINE RESOURCES CORPORATION
UNAUDITED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net loss $ (806,722) $ (3,361,965)
Adjustments to reconcile net loss to net
cash used in operating activities:
Debt conversion expense 191,807 --
Depreciation 562,540 513,008
Amortization of debt issuance costs 62,891 93,538
Stock compensation expense 58,246 23,019
Provision for losses on accounts receivable 24,000 5,967
Realized gain on investments (4,190) (36,389)
Amortization of bond premium (discount) on investment 3,232 (20,638)
Changes in assets and liabilities:
Accounts receivable (693,769) (395,580)
Prepaid expenses and other current assets (149,044) (105,472)
Deferred implementation costs 266,938 (50,024)
Other assets 398,941 (59,583)
Accounts payable (134,465) (94,072)
Accrued expenses 543,850 36,037
Deferred revenues (153,986) (215,953)
------------ ------------
Net cash provided by (used in) operating activities 170,269 (3,668,107)
INVESTING ACTIVITIES
Purchase of available for sale securities (1,634,401) (12,101,879)
Sales of available for sale securities 2,847,432 17,717,557
Purchases of property and equipment (1,143,113) (676,037)
------------ ------------
Net cash provided by investing activities 69,918 4,939,641
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 86,060 221,979
Repayment of capital lease obligations (65,257) (94,492)
Payment of long-term debt costs -- (45,379)
------------ ------------
Net cash provided by financing activities 20,803 82,108
------------ ------------
Net increase in cash and cash equivalents 260,990 1,353,642
Cash and cash equivalents at beginning of period 2,120,252 1,771,477
------------ ------------
Cash and cash equivalents at end of period $ 2,381,242 $ 3,125,119
============ ============
Supplemental information to statement of cash flows:
Cash paid for interest 28,548 10,582
Conversion of notes payable 1,000,000 --
Unrealized (loss) gain on investment (26,554) 91,001
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
3
ONLINE RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Online Resources Corporation (the "Company") is a leading outsourcer of
e-financial services with over 500 bank and credit union clients. The Company's
comprehensive Quotien SM suite of services provides Internet banking, electronic
bill presentment and payment, commercial cash management and other consumer and
business e-financial applications. The Company supports its products with 24x7
customer care and targeted consumer marketing services, training services and
other network and technical professional services, giving clients the benefit of
a single, integrated solution with real-time banking transaction capabilities.
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, 2001, included in the Annual Report on Form 10-K filed by the Company with
the Securities and Exchange Commission on March 29, 2002. 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.
RECENT PRONOUNCEMENTS
In July 2001, the Securities and Exchange Commission issued staff
announcement, D-98, Classification and Measurement of Redeemable Securities. The
Company adopted the announcement on January 1, 2002 and the adoption of this
announcement does not have a significant effect on the earnings or the financial
position of the Company.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". This statement replaces SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". This statement applies to all long-lived assets, including
discontinued operations, and replaces the provisions of APB Opinion No. 30,
Reporting Results of Operations-Reporting the Effects of Disposal of a segment
of a Business, for the disposal of segments of a business. This statement
requires that those long-lived assets be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. The Company adopted this statement on
January 1, 2002 and the adoption of this statement does not have a significant
impact on its results of operations, financial position and cash flows.
The FASB issued Statement No. 145, "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS
No. 145"). SFAS No. 145 revisits the accounting for gains and losses from the
extinguishment of debt. SFAS No. 145 rescinds Statement 4, which required all
gains and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria in Opinion 30 will now be used to classify those gains and
losses. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002.
Provisions related to FASB Statement No. 13 are effective for transactions
occurring after May 15, 2002 and all other provisions are effective for
financial statements issued on or after May 15, 2002. The Company expects that
the impact of adopting SFAS No. 145 will result in restating prior year
extraordinary losses from extinguishment of debt so that they are reflected as
part of ordinary income. The Company is currently assessing the impact of this
pronouncement.
2. NON-RECURRING CHARGES
The Company incurred and paid a one-time charge of $209,434 including
severance and benefit payments during the three months ended March 31, 2001 as a
result of the staff reduction of 23 employees, approximately 9% of the total
employees, on January 3, 2001.
4
3. NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share is calculated by dividing the
net loss by the weighted average number of common shares outstanding.
THREE MONTHS ENDED
MARCH 31,
---------
2002 2001
------------ -------------
Net loss $ (806,722) $ (3,361,965)
Weighted average number of common shares 13,278,464 11,646,321
Loss per share:
Basic and diluted $ (0.06) $ (0.29)
============ ============
Due to their antidulitive effects, shares underlying outstanding stock
options, warrants and convertible subordinated notes to purchase shares of
common stock were excluded from the computation of diluted earnings per share
for all periods presented.
4. EQUITY
During the three months ended March 31, 2002, employees purchased 14,160
shares of common stock under the Company's employee stock purchase plan and
exercised 44,422 shares of common stock under the Company's stock option plan
with net proceeds to the Company of approximately $86,000. On March 27, 2002,
$1.0 million of the 8% convertible subordinated notes (the "Convertible Notes")
was converted at $3.3895 per share of common stock (Note 5). This conversion
resulted in an issuance of 295,031 shares of common stock. No cash proceeds were
obtained from the conversion.
5. NOTES PAYABLE
On September 28, 2000, the Company completed the private placement of $20
million in Convertible Notes to a group of accredited investors and received
proceeds of $18.7 million net of debt issuance costs of $1.3 million including
commission of $917,200. The proceeds have been and will continue to be used for
working capital. The Convertible Notes carry an 8% coupon and interest payment
dates are April 1 and October 1, commencing April 1, 2001. The Convertible Notes
were initially convertible at a price of $4.75 per share but are subject to an
annual reset under certain circumstances. In no event can the conversion price
be less than $4.00 per share. Subject to certain conditions, the Company may
redeem all or part of the Convertible Notes prior to maturity. There were
4,210,526 shares authorized and issuable upon conversion of the Convertible
Notes. Jefferies & Company, Inc., one of the underwriters of the private
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.
On May 22, 2001 and May 24, 2001, the Company paid $2.2 million to repurchase
$3,000,000 and $500,000, respectively, of the Convertible Notes in privately
negotiated transactions. After $289,000 of debt issuance costs was written off,
the Company recognized an extraordinary gain of $1.1 million as a result of the
transaction.
On September 28, 2001, November 2, 2001 and March 27, 2002, $2.5 million, $1.0
million and $1.0 million of the Convertible Notes were converted at $2.00, $3.05
and $3.3895 per common share, respectively, instead of the $4.00 conversion
price that otherwise existed under the Convertible Notes. These induced
conversions resulted in the issuance of 1,250,000, 327,869 and 295,031 shares or
625,000, 77,869 and 45,031 additional shares, respectively, had the Convertible
Notes been converted at the $4.00 per common share conversion price. The Company
recognized $731,250, $175,205 and $141,848 non-cash debt conversion expense and
wrote off $157,157, $51,970 and $49,959 of related debt issuance costs in
September 2001, November 2001 and March 2002, respectively, in connection with
the transactions. Accordingly, as of March 31, 2002, $12.0 million of the
Convertible Notes remains outstanding and matures on September 30, 2005.
Interest expense related to the Convertible Notes for the three months ended
March 31, 2002 and 2001 was $260,000 and $400,000, respectively. As of March 31,
2002 and 2001, accrued interest on notes payable totaled $480,000 and $813,000,
respectively.
5
6. COMPONENTS OF COMPREHENSIVE INCOME
Comprehensive income includes the Company's net loss adjusted for changes,
net of tax, of unrealized losses on investments in marketable securities.
Comprehensive income for the three months ended March 31, 2002 and 2001 is as
follows:
THREE MONTHS ENDED
MARCH 31,
2002 2001
------------ ------------
Comprehensive income:
Net loss $ (806,722) $(3,361,965)
Unrealized (loss) gain
on investments in marketable
securities
(26,554) 34,926
Total comprehensive loss: ----------- -----------
$ (833,276) $(3,327,039)
=========== ===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF 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;
- 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 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
6
- 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 29, 2002. These risks include, among others, the following:
- our history of losses and anticipation of future losses;
- significant fluctuations of our quarterly financial results;
- our potential need for additional capital to stay in business;
- our dependence on the marketing efforts of third parties;
- our dependence on our financial institution clients to market our
services;
- the potential uncertainty of our co-marketing efforts and the risk that
such efforts may not be successful;
- the possibility that we may not be able to expand to meet increased
demand for our services and related products;
- the potential adverse impact as a result of loss of a material client or
restructure of our agreement with a material customer;
- our potential inability to compete with larger, more established
businesses offering similar products or services;
- the possibility of a failure to successfully implement a system upgrade
or conversion;
- our inability to attract and retain skilled personnel;
- possible security breaches or system failures disrupting our business
and the liability associated with these disruptions;
- the lack of success in promoting our services for broad use and
acceptance by consumers and the possibility of the development of
defective new products ;
- the potential obsolescence of our technology or the offering of new,
more efficient means of conducting Internet banking and bill payment;
- 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;
- the potential litigation and liability claims;
- 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;
7
- the possibility that we fail to meet listing standards for continued
listing on The NASDAQ National Market;
- 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
Online Resources Corporation is a leading outsourcer of e-financial
services with over 500 bank and credit union clients. Our comprehensive Quotien
SM suite provides Internet banking, electronic bill presentment and payment,
commercial cash management, and other consumer and business e-financial
applications. We support our services with 24x7 customer care and targeted
consumer marketing services, training services and other network and technical
professional services giving clients the benefit of a single, integrated
solution and real-time banking transaction capabilities. We back our services
with an end to end service guaranty that we believe is unique to our industry.
We process approximately 80 million transactions annually, including $3.8
billion in consumer bill payments.
We primarily derive revenue from long-term service contracts with our
financial institution clients, who pay us recurring fees based primarily on the
number of their billable customers enrolled and transaction volumes, as well as
an up-front implementation fees. Our financial institution clients typically
subsidize some or all of our fees when reselling our services to their
customers, as they derive significant potential benefits including account
retention, delivery and paper cost savings, account consolidation and
cross-selling of other products through the use of 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 current sources of revenue are from service fees, implementation fees
and other revenues.
- Service fees. Our primary source of revenues is derived from recurring
monthly fees by providing services which include banking and bill
payment, customer service, consumer marketing, information reporting,
and administrative services, to financial institution clients, typically
based on the number of billable customers. These services are priced on
a monthly per billable customer basis, and in some cases, on a
transaction basis. We recognize these revenues as services are provided.
- Implementation and other revenues. 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. We recognize nonrefundable implementation fees for all
contracts over the contract term as the services are provided, which
typically range from one to five years. We also derive revenue from
sales of related enabling products and software, including cash
management, Quicken and customer service software.
We expect that our primary source of revenue growth will come from service
fees as a result of continued growth of billable customers.
Historically, the majority of our resources have been directed to creating
and upgrading our proprietary system. Our proprietary system enables us to
provide a broad range of services to our financial institution clients including
Internet banking, bill paying, and access to complementary financial services
supported by our customer call center, targeted consumer 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 that have been increasing in
amount over the past several years. As a result, we have historically
experienced large operating losses and negative cash flow. At March 31, 2002, we
had an accumulated deficit of $86.1 million and net property and equipment of
$7.4 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 system. We
expect to continue to incur losses in the foreseeable future although as a
result of our improving revenues and
8
gross margins the amount of our losses has been decreasing.
As of March 31, 2002, we had $2.4 million in cash and cash equivalents and
$4.3 million in investments as compared to $2.1 million in cash and cash
equivalents and $5.6 million in investments as of December 31, 2001. The
decrease in cash and investments results primarily from cash used for capital
expenditures in the amount of $1.1 million. Total liabilities decreased from
$17.2 million as of December 31, 2001 to $16.4 million as of March 31, 2002
primarily as a result of the conversion of $1.0 million of the 8% convertible
subordinated notes (the "Convertible Notes"). Accordingly, as of March 31, 2002,
$12.0 million of the Convertible Notes remains outstanding and matures on
September 30, 2005.
Even though our financial trends have been favorable and indicate the
potential for our operations becoming profitable, we have not yet attained
profitable operations. Therefore, until we reach and sustain profitability our
prospects for success remain unproven.
RESULTS OF OPERATIONS
The following table presents certain items derived from our statements of
operations expressed as a percentage of revenue.
THREE MONTHS ENDED
MARCH 31,
2002 2001
---- ----
Statement of Operations Data:
Revenues:
Service fees 87.6% 88.6%
Implementation and other
revenues 12.4 11.4
----- -----
Total revenues 100.0 100.0
Expenses:
Cost of revenues 50.3 65.6
----- -----
Gross margin 49.7 34.4
General and administrative 21.8 31.4
Sales and marketing 16.1 27.2
Systems and development 15.3 27.0
Non-recurring charges -- 3.7
----- -----
Total expenses 53.2 89.3
----- -----
Loss from operations (3.5) (54.9)
Other (expenses) (4.3) (5.5)
Debt conversion expense (2.5) --
----- -----
Net loss (10.3)% (60.4)%
===== =====
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2001.
Revenues. We derive revenues from service fees, implementation fees and
other revenues. Revenues grew $2.2 million, or 40.7%, to $7.8 million for the
three months ended March 31, 2002 as compared to $5.6 million for the same
period in 2001. This growth was primarily attributable to a 39.3% increase in
service fees which were largely recurring and driven by an increase of 50.7% in
the number of billable customers and an increase of 75.6% in the number of
transactions partially offset by lower service fees per user measured for the
periods ended March 31, 2002 and 2001. Additionally, implementation and other
revenues increased $335,000, or 52.8%, to $969,000 for the three months ended
March 31, 2002 as compared to $634,000 for the same period in 2001 mainly as a
result of an increase of $442,000 in non-recurring cancellation fees offset in
part by a decrease of $107,000 in professional service and other revenues.
Cost of Revenues. Cost of revenues primarily includes telecommunications,
payment processing, systems operations, customer service, implementation and
related products. Cost of revenues increased $286,000, or 7.9%, to $3.9 million
for the three months ended March 31, 2002 as compared to $3.6 million for the
same period in 2001. This increase primarily reflected an increase in
telecommunication charges and higher implementation expenses.
Gross Profit. Gross profit increased to $3.9 million from $1.9 million for
the three months ended March 31, 2002 and 2001, respectively. Gross margin for
the same periods improved to 50% from 34% mainly due to increased service fees
from billable customer growth that was leveraged over our relatively fixed costs
of revenue. Gross margin for services fees also improved as a result of improved
efficiency from technology development and cost control initiatives.
9
General and Administrative. General and administrative expenses are comprised
primarily of salaries for executive, administrative and financial personnel,
consulting expenses and facilities costs such as office leases, insurance, and
depreciation. General and administrative expenses decreased $40,000, or 2.3%, to
$1.7 million as compared to $1.7 million for the three months ended March 31,
2002 and 2001, respectively. General and administrative expenses as a percentage
of revenue decreased to 21.8% as compared to 31.4% for the three months ended
March 31, 2002 and 2001, respectively. This decrease was a result of improved
operational efficiencies and cost control initiatives.
Sales and Marketing. Sales and marketing expenses consist of 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 decreased $248,000, or 16.4%, to $1.3
million for the three months ended March 31, 2002 as compared to $1.5 million
for the same period in 2001. The principal reason for the decrease in sales and
marketing expenses was a reduction in staffs as a result of consolidating
certain client service responsibilities.
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 research and development of new
services and products, and new technology to enhance existing products. Systems
and development expenses decreased $301,000, or 20.0%, to $1.2 million for the
three months ended March 31, 2002 as compared to $1.5 million for the same
period in 2001. The decrease in our systems and development expenses was mainly
due to the capitalization of payroll related costs for projects that qualified
for computer software developed for internal use. The payroll-related costs
incurred for the quarter ended March 31, 2001 for certain projects that
otherwise qualify for capitalization were immaterial and, therefore no such
costs in such quarter were capitalized.
Loss from Operations. Loss from operations decreased $2.8 million, or 90.3%,
to $277,000 as compared to $3.1 million for the three months ended March 31,
2002 and 2001, respectively. Loss from operations significantly decreased
between the two periods, primarily as a result of increases in services fees and
gross profit driven by growth in our customer base, decreases in various
expenditures and savings derived from our cost-cutting initiatives and our
leveraging of technology.
Other Income and Expenses. Interest income decreased $158,000, or 77.1%, to
$47,000 for the three months ended March 31, 2002 as compared to $205,000 for
the same period in 2001, primarily due to a decrease in average cash and
investment balances and lower interest rates. Interest and other expenses
decreased $129,000, or 25.1%, to $385,000 for the three months ended March 31,
2002 as compared to $514,000 for the same period in 2001 as the result of a
decrease in Convertible Notes outstanding in connection with the repurchases and
conversions of Convertible Notes. The induced conversion of $1.0 million
Convertible Notes on March 27, 2002 resulted in a non-cash debt conversion
expense of $192,000 that was attributable to the issuance of 45,031 incremental
shares of common stock issued to holders in conformance with accounting rules
for induced conversions of convertible debt.
Net Loss and Loss Per Share. Net loss was $807,000 compared to a loss of
$3.4 million for the three months ended March 31, 2002 and 2001, respectively.
For the three months ended March 31, 2002 and 2001 the basic and diluted loss
per share were $(0.06) and $(0.29), respectively. Excluding debt conversion
expense, we would have reported loss per share of $(0.05) and $(0.29), for the
three months ended March 31, 2002 and 2001, respectively, as a result of the
various factors noted above.
Significant Event. We have previously announced and reported that in January
2002 we restructured our service agreement with California Federal Bank, our
major client. The restructured agreement is for four years and is effective in
September 2002. Starting then, we will only be providing to the customers of
California Federal Bank our bill presentment and payment services. Had this
restructured agreement become effective on January 1, 2002, our revenue for the
quarter ended March 31, 2002 would have been reduced approximately 9.9% and the
amount of our gross profit would have declined approximately 3.7%.
LIQUIDITY AND CAPITAL RESOURCES
Cash and investments in available for sale securities decreased $1.0 million
to $6.7 million from $7.7 million as of March 31, 2002 and December 31, 2001,
respectively, primarily as a result of capital expenditures of $1.1 million.
Net cash provided by operating activities was $170,000 for the three
months ended March 31, 2002. The increase resulted primarily from our normal
business operations for the three months ended March 31, 2002.
Net cash provided by investing activities for the three months ended March
31, 2002 was $70,000, which reflected the net reduction of $1.2 million in
available for sale securities offset in part by capital expenditures of $1.1
million.
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Net cash provided by financing activities was $21,000 for the three months
ended March 31, 2002 relating primarily to proceeds of $86,000 from issuance of
common stock partially offset by capital lease payments of $65,000. At March 31,
2002, we had cash and cash equivalents of $2.4 million, investments in available
for sale securities of $4.3 million, working capital of $8.2 million, long-term
obligations of $12.8 million and stockholder equity of $4.8 million.
We currently believe that cash, cash equivalents and investment balances
will be sufficient to meet our current anticipated operating requirements for at
least the next twelve months. However, 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 marketable government, corporate, and
mortgage-backed debt securities. 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, 2002
------------------------------------------
BOOK VALUE FAIR VALUE INTEREST RATE
---------- ---------- -------------
U.S. government treasury
obligations ............. $2,808,832 $2,804,823 2.53%
Commercial bonds ......... 1,537,095 1,539,920 2.53%
---------- ----------
Total investments $4,345,927 $4,344,743
========== ==========
The long-term debts on March 31, 2002 are comprised of convertible
subordinated notes with an 8% fixed interest rate and capital lease obligations
with interest rates ranging from 4% to 13%. We do not believe a fluctuation of
100 basis points in the prime rate would have a material adverse effect on us.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not a party to any pending material litigation nor are we aware of
any pending or threatened litigation that would have a material adverse effect
on the Company, our business or results of operation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits required to be filed by Item 601 of Regulation S-K.
Exhibit No. Description of Exhibit
----------- ----------------------
4.1 Registration Rights Agreement dated January 11, 2002 among the Registrant and
American Stock Transfer & Trust Company as Rights agent (Filed as Exhibit 4.1 to our Form 8-K
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filed on January 15, 2002 and incorporated herein by reference.)
(B) Reports on Form 8-K
On January 15, 2002, Registrant filed a current report on Form 8-K
disclosing that, effective January 11, 2002, its Board of Directors adopted a
stockholder rights plan designed to protect the interest of the stockholders in
the event of an unsolicited attempt to acquire the Company.
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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 CORPORATION
Date: May 15, 2002 By: /s/ Matthew P. Lawlor
-------------------------
Matthew P. Lawlor
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2002 By: /s/ Catherine A. Graham
---------------------------
Catherine A. Graham
Chief Financial Officer and Executive Vice
President (Principal Financial Officer)
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