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

OR

     
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.

1


 

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.

2


 

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.

3


 

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.

4


 

     Professional services revenues consist of implementation fees associated with the linking of the Company’s financial institution clients to the Company’s QuotienSM 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.

5


 

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  
 
   
 
     
 
 

6


 

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

7


 

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,
    2004
  2003
Statement of Operations Data:
               
Revenues:
               
Banking services
    8.0 %     11.9 %
Payment services
    64.9       41.6  
Consumer contact services
    19.8       21.9  
Professional services and other
    7.3       24.6  
 
   
 
     
 
 
Total revenues
    100.0       100.0  
Costs and Expenses:
               
Service costs
    40.9       32.3  
Implementation and other costs
    3.0       2.7  
 
   
 
     
 
 
Costs of revenues
    43.9       35.0  
 
   
 
     
 
 
Gross margin
    56.1       65.0  
General and administrative
    23.3       21.0  
Sales and marketing
    19.1       14.0  
Systems and development
    9.6       8.1  
 
   
 
     
 
 
Total expenses
    52.0       43.1  
 
   
 
     
 
 
Income from operations
    4.1       21.9  
Interest income
    0.3       0.2  
Interest expense
          (2.8 )
 
   
 
     
 
 
Total other income (expense)
    0.3       (2.6 )
 
   
 
     
 
 
Income before income taxes
    4.4       19.3  
Income tax provision
    0.1        
 
   
 
     
 
 
Net income
    4.3 %     19.3 %
 
   
 
     
 
 

9


 

by a decline in the average monthly recurring cost per user. Although the average monthly recurring revenue per user decreased by 21% compared to the first quarter of 2003, the average monthly recurring gross margin per user remained relatively flat as a result of an 18% decrease in the average monthly recurring cost of revenues per user.

     We have long-term service contracts with our financial institution clients. The majority of our revenue is recurring, though these contracts also provide for implementation, set-up and other non-recurring fees. Internet banking services revenue is based either on a monthly license fee allowing our financial institution client to register an unlimited number of customers, or on a monthly fee for each registered customer. Payment services revenue is based on either a monthly fee for each customer enrolled, a fee per executed transaction, or a combination of the two. Our financial institution clients pay all of our fees and then determine if or how they want to pass these costs on to their customers. They typically provide Internet banking services to customers free of charge, as they derive significant potential benefits including account retention, delivery and paper cost savings, account consolidation and cross-selling of other products. However, almost all of our financial institution clients charge their customers for providing payment services.

     As a network-based service provider, we have made substantial up-front investments in infrastructure, particularly for our proprietary systems. While we continue to incur ongoing development and maintenance costs, we believe the infrastructure we have built provides us with significant operating leverage. In 2003 we began an effort to upgrade and rewrite certain of our applications infrastructure that will span a period of two to three years. We expect that this effort will require incremental capital expenditures, primarily for additional development labor, of between $3.0 million and $5.0 million over that period.

     We continue to automate processes and develop applications that allow us to make only small increases in labor and other operating costs relative to increases in customers and transactions. We believe our financial and operating performance will be based primarily on our ability to leverage additional users and transactions over this relatively fixed cost base.

FINANCIAL CONDITION

     While we have achieved net income profitability for the past three quarters and expect our profitability to be sustainable, we have historically experienced operating losses and negative cash flow due to the initial costs of developing our infrastructure and the early revenues typical of an emerging market segment. As a result, at March 31, 2004 we had an accumulated deficit of $82.5 million. We have funded our operations primarily through the issuance of equity and debt securities. Our ongoing working capital requirements consist primarily of personnel costs related to providing our services and operating, enhancing and maintaining our systems.

     Cash and investments in securities available for sale were $14.0 and $13.6 million as of March 31, 2004 and December 31, 2003, respectively. The $0.4 million increase in cash and investments resulted primarily from cash provided by operating activities of $1.1 million and cash provided by financing activities of $0.3 million, partially offset by cash used for capital expenditures of $1.0 million. Total liabilities decreased slightly from $3.9 million as of December 31, 2003 to $3.6 million as of March 31, 2004, primarily as a result of a reduction in accrued compensation expense.

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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.

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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.

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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.

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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)   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

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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 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)

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