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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 0-26123
ONLINE RESOURCES &
COMMUNICATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1623052
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
7600 COLSHIRE DRIVE
MCLEAN, VIRGINIA 22102
(Address of principal executive offices) (Zip code)
(703) 394-5100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
Common Stock, $0.0001 par value per share
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the common stock of the registrant held by
nonaffiliates as of March 29, 2000 was $153,018,000. There were 11,180,019
shares of common stock outstanding as of March 29, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders
are incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Online Resources & Communications Corporation is a leading Internet
banking, bill payment and e-finance application service provider to financial
institutions. We provide our clients, primarily regional and community banks,
thrifts and credit unions, with an end-to-end outsourced service, which is
branded in their name. This enables cost-effective delivery of Internet-based
financial services to consumer, small business and other retail customers of our
clients. By packaging our transaction services with our call center, database
and support services, we offer an integrated financial hub and a single point of
accountability for our clients and their retail customers.
We believe retail financial institutions, in all forms, are an attractive
distribution channel for our Internet retail financial services. In particular,
our company targets regional and community financial institutions with assets of
$10 billion or less. These institutions serve approximately two-thirds of the
nation's retail checking accounts, and often lack the internal resources to
build, operate, market and support new Internet-based delivery technology,
related products and services, and supporting infrastructure.
Through our integrated financial hub, retail customers of our clients may
obtain our proprietary banking service, which allows them to view account
statements and balances obtained from our clients, and perform funds transfers
and certain cash management functions. Retail customers may also use our
proprietary bill payment services, allowing retail customers to pay any bill.
Our transaction services are complemented by our call center, database, consumer
marketing and other support services. In addition, we aggregate e-finance
services provided by third-party partners for Internet-based securities trading,
loan applications, insurance shopping, investment analysis, credit reports, and
personalized start-pages.
Our client financial institutions typically pay us a one-time
implementation fee to link our respective computer systems, allowing their
retail customers to connect to us through the Internet. In addition, we are
typically paid a recurring monthly fee based on the number of retail customers
of the client financial institution using our services. As of December 31, 1999,
we provided our services to 135,000 retail customers of our client financial
institutions, many of which have recently launched our services. Our financial
institution clients collectively serve an aggregate of approximately 8 million
retail checking accounts.
INDUSTRY BACKGROUND
The Internet has emerged as the fastest growing global communications
medium, enabling millions to connect to a world wide network to conduct business
and share information electronically and is changing the way individuals and
business communicate and conduct commerce. International Data Corporation (IDC)
estimates that the number of Internet users in the U.S. alone will increase from
approximately 56 million in 1998 to 177 million by the end of 2003.
GROWTH OF FINANCIAL ELECTRONIC COMMERCE
Consumer acceptance of easy-to-use electronic media has had a significant
impact on the financial services industry. Since most financial transactions
require transferring only information, rather than tangible goods, the financial
services industry is particularly well suited for electronic commerce. The
combination of the following trends is driving the adoption of financial
electronic commerce:
- Expanding PC Ownership. Declining prices for PCs and rapid growth in the
number of computer-literate consumers are driving increased penetration
of PCs in U.S. homes. The Yankee Group estimates that by 1998 the
percentage of U.S. consumer households owning a PC had grown to 44% and
expects this number to increase to 54% by the year 2001.
- Increasing Internet Accessibility. Reduced communications costs, improved
Web browsers, and faster connection speeds have made the Internet
increasingly accessible to consumers and to businesses offering products
and services online.
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- Increasing Acceptance of Electronic Commerce. Consumers have grown
increasingly comfortable with the security of electronic commerce and are
willing to conduct large transactions online. IDC estimates that goods
and services purchased over the Internet in the U.S. will increase from
approximately $26 billion in 1998 to over $268 billion in 2002.
EMERGENCE OF ONLINE FINANCIAL SERVICES
Financial institutions have begun to recognize the advantages offered by
online delivery systems. Financial electronic commerce provides these
institutions the opportunity to offer their services to targeted audiences.
Additionally, these solutions provide financial institutions with the
opportunity to reduce or eliminate personnel, paper and other back office
expenses associated with traditional distribution channels.
Banks, thrifts and credit unions have responded by offering customers
convenient at-home or at-work access to a range of financial services. Retail
customers now have the capability to execute a wide array of online
transactions, including funds transfers, billpaying, and consumer and
residential loan processing. IDC estimates that the number of users banking
online in the U.S. will expand from 6.6 million in 1998 to 32 million by 2003.
With the rapid growth of the online banking market, financial institutions
can no longer rely exclusively on traditional retail delivery methods. Financial
institutions that are unable to offer competitive electronic banking, as part of
their overall services will find it increasingly difficult to attract and retain
customers.
A number of Web-based financial service specialists such as Charles
Schwab's E-Schwab, E*Trade, DLJdirect, and Datek are taking advantage of these
trends in financial electronic commerce. According to IDC, the number of online
brokerage accounts grew 73% over 1997 to 6.4 million by December 31, 1998. IDC
expects this figure to reach 24 million by the end of 2002. IDC further
estimates that the percentage of individual investors trading online will
increase from 8% of the total trading population in 1998 to 30% in 2002.
CHALLENGES FOR REGIONAL AND COMMUNITY FINANCIAL INSTITUTIONS
SNL Securities estimates that of 19,400 depository financial institutions
in the U.S., all but approximately 77 are regional and community institutions
with assets of less than $10 billion. Approximately 66% of U.S. retail deposits,
which excludes deposit accounts of $100,000 or more, are held in these
institutions. While the online banking trend is being driven primarily by very
large financial institutions, regional and community financial institutions are
being compelled to offer competitive products. IDC estimates the number of
financial institutions offering online banking services will increase from 1,150
in 1998 to 15,845 by 2003.
These financial institutions face many obstacles in making electronic
commerce services available to their customers. In particular, they often lack
the capital and human resources to:
- develop the substantial technology infrastructure necessary to provide
their customers with Internet and other online banking services;
- develop the operating and technical expertise to deliver online services
and manage rapidly changing technologies;
- design and execute consumer marketing campaigns necessary to promote the
use of online banking services; and
- provide integrated customer support for their online banking services.
We believe that these limitations present a significant impediment to
retaining and attracting customers and put these financial institutions at a
distinct disadvantage.
THE ONLINE RESOURCES SOLUTION
We provide a single source fully integrated solution, which we believe,
enables regional and community financial institutions to offer the breadth of
services needed to remain competitive. We bring economies of scale and technical
expertise to our clients that would otherwise lack the resources to compete in
the rapidly
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changing, complex financial services industry. We differentiate ourselves by
internally developing, integrating and controlling many critical services, such
as billpaying and call center support, rather than relying primarily on
third-party providers for these services. As a single source vendor, we believe
our clients benefit from one point of accountability and control. We believe our
solution to the obstacles faced by our clients in connection with electronic
commerce provides them with a cost-effective means to retain and expand their
customer base, deliver their services more efficiently and strengthen their
customer relationships.
We provide our services through our (1) technology infrastructure, (2)
operating and technical expertise, (3) marketing services, and (4) support
services.
Our Technology Infrastructure. Regional and community financial
institutions often lack the resources to develop the substantial infrastructure
necessary to provide their customers with Internet and other online banking
services. We provide our services through our proprietary Opus(sm) system. This
system integrates our communications, systems, processing and support
capabilities. We serve as a financial electronic commerce hub by connecting our
financial institution clients, their retail customers and other financial
service providers. Our middleware component enables us to integrate customer and
financial data gathered through our electronic commerce hub. This unifying
software co-ordinates customer authorization, transactions, settlement,
security, user profiles, data warehousing, registration, fulfillment,
administrative support and our customer call center services. These functions
operate substantially in real-time and provide an integrated application for our
clients and their retail customers.
In summary our propriety solution includes three critical components:
A dynamic Web server platform that allows retail customers of our client
financial institutions to review and transact their services.
A set of high quality, Internet-based-financial products like our
propriety banking and bill payment services, as well as other e-finance
services offered through our third-party partners. These other services
presently include loan approval, insurance, investment information and
securities trading.
An integrated support infrastructure, including middleware to unify data
and processes, a 24x7 consumer and client support call center, and our
patented electronic funds transfer (EFT) gateway for real time
electronic funds transfer with substantially all U.S. depository
financial institutions.
Our Operating and Technical Expertise. We provide regional and community
financial institutions with our operating and technical expertise. We believe
that our industry focus and outsourcing capabilities add value for our clients
by simplifying complex processes and technologies. After seven years of
operating experience, we have established the processes, procedures, controls
and staff necessary to keep our systems running reliably and securely. At the
same time, we have developed the organizational flexibility and inter-
disciplinary staff skills necessary to adjust to a rapidly changing environment.
Our Marketing Services. We actively support the retail customer marketing
programs of our clients. We supply privately branded marketing support material,
such as standardized retail customer applications, signage, media templates and
promotional programs. During 1999, we created a consumer marketing department
whose main focus is creating cost-effective programs to increase the percentage
of our clients' retail customers using our services. The marketing programs
include Web-based marketing, direct marketing, telemarketing, statement stuffers
and branch incentives. We plan to underwrite these programs for any client that
requests them. The marketing programs will be privately branded by the financial
institutions so they may take advantage of their existing relationships.
Our Support Services. We provide a comprehensive set of support services
to complement our banking and billpaying services. These support services
include our customer service center, Web site design and hosting, billing,
administrative services, security and communications services. We provide each
of these services on an optional basis and have fully integrated them into our
banking, billpaying and related products.
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STRATEGY
Our goal is to become the vendor of choice for regional and community
financial institutions that are looking to outsource Internet banking and other
e-finance services. As our business grows, we believe we can lower costs through
economies of scale and create new opportunities for marketing and distribution.
Our strategy includes the following key elements:
Continue Rapid Expansion of Our Financial Institution Client Base. We seek
to expand our universe of financial institution clients through a multiple
channel sales strategy. Our direct sales force focuses on the mid-sized
financial institution within our target client base. In addition, we intend to
leverage our growing network of marketing partners to resell our services to the
smaller and larger financial institution market.
Increase Retail Customer Usage. We intend to increase retail customer
usage by accelerating the launches of our financial institution clients using
our system and increasing the percentage of their retail customers using our
services. The recently completed connections or certifications with 64 ATM
networks and processors provide us with a platform that allows us to more
aggressively launch signed financial institution clients. This essentially
constitutes all major regional ATM networks, such as Star, Honor and NYCE, and
most major core banking processors, including EDS, Fiserv and Alltel. We are
also expanding our consumer marketing services to increase the percentage of our
clients' retail customers using our services. We have hired a senior consumer
marketing director and have begun a direct marketing program with approximately
115 of our financial institution clients. The marketing programs include
Web-based marketing, direct marketing, telemarketing, statement stuffers and
branch incentives. We plan to underwrite these programs for any client that
requests them. Additionally, we launched our free Internet banking initiatives
in early 2000. This program will allow new and existing clients to receive the
Internet banking portion of our services free of monthly service charges.
Enhance Our Services. We believe our financial institution clients and
their retail customers represent an attractive distribution channel for
additional financial services and content provided by us and by our third-party
partners. We expect to integrate bill presentment into our billpaying services
through alliances with companies who specialize in servicing billers. Our
patented method for target advertising will allow us to support our clients'
efforts to cross-sell financial services. We also intend to expand our
electronic commerce hub to include additional retail services and content. Our
partnership with Intuit will further support retail customers with their "small
office/home office" business banking needs. The alliance with CMGI's MyWay.com
will enable client financial institutions to offer custom-branded Web portal
pages to their retail customers and members.
Maintain Superior Service Quality and Support Services. We believe that
providing superior quality service is important in attracting and retaining
financial institutions and their retail customers. This is imperative to our
clients since our online banking services and customer call center are branded
in their name. Despite the challenges of building our infrastructure to meet the
demands of our rapidly growing client base, we believe our quality of service is
currently among the highest in the industry. Our system availability now exceeds
99.5%. Approximately 53% of our billpayments are made electronically and our
billpaying error rate is .06%. We also expanded our customer call center from 57
to 94 employees during 1999 and we have invested substantially in specialized
call center systems, software and management. We believe that we are able to
provide our technology-based services with a high level of proficiency and
interaction that could not easily be attained and controlled when outsourced to
third parties.
Strengthen Integration of Financial Data. We believe that a key to
assisting our clients in remaining competitive in electronic commerce will hinge
on their ability to package and seamlessly integrate multiple services and
products. This ability will allow our clients' retail customers to conduct and
control all of their financial affairs conveniently. We expect that this will
further strengthen the relationships between our clients and their retail
customers. We recently upgraded our proprietary middleware and made substantial
investments in software tools and technical staffs to further enhance our
integration capabilities. Using these resources, we plan to create a more fully
integrated application with third-party financial service providers, such as by
performing real-time debits and credits for their services.
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SERVICES AND RELATED PRODUCTS
We offer a single source solution to the electronic commerce challenges of
our financial institution clients. Typically, we contract with our clients to
provide a fully integrated set of Internet and other online banking and
financial services and related products.
Core Services. Our banking and billpaying services allow a financial
institution to offer to its retail customers and "small office/home office"
business customers 24 hours a day, seven days a week account access and
transaction capabilities. Retail customers are able to access their accounts
anytime and anywhere either through the Internet or through a private
communications networks using our PC software or other access devices.
Our banking and billpaying services offer retail customers the following
features:
- viewing transaction histories and real-time account balances;
- transferring funds within and between financial institutions either
immediately or in the future;
- initiating immediate and future bill payments or transfers; and
- viewing projected balances based upon billpaying and account activities.
Using our PC software, our clients' retail customers may import and export
data with popular personal financial management software such as Quicken and
Microsoft Money. We also offer "small office/home office" capabilities and have
partnered with Intuit to support QuickBooks and other popular small business
services. We have a reseller arrangement with Politzer & Haney, which will allow
our client financial institutions to offer a Web-based cash management solution
to their business customers.
Using our billpaying service, retail customers may pay any merchant biller
or individual. Approximately 51% of our billpayments are currently made
electronically to merchants. We guarantee electronic billpayments will be
received within two business days of initiation by the retail customer. We
guarantee paper payment will be received within five business days. Paper and
electronic payments are drawn on our escrow account. As of February 29, 2000, we
had a billpaying database of approximately 742,000 merchant-user links to
approximately 96,000 discreet merchant billers.
We believe our real-time debit process, described under "-- Systems and
Technology" below, offers substantial cost and quality advantages in our
billpaying services. Under alternative batch-oriented debit systems, the
billpaying processor cannot immediately verify the availability of sufficient
funds to cover the bill payment. This may result in potential collections
issues, the need to assess credit risk and increased use of paper versus
electronic payments. We therefore believe that real-time debit capability
results in a higher percentage of electronic payments, lower operating costs and
a higher quality of service.
Our banking and billpaying services generate revenues from recurring
monthly fixed fees charged to financial institution clients, typically based on
the number of enrolled retail customers. Banking and billpaying services are
priced on a monthly per retail customer basis, and in limited cases, on a
transaction basis. Pricing ranges from $1.95 to $7.45 per month per retail
customer depending upon the level of services we provide to the financial
institution. The pricing of these services to retail customers is at the
discretion of each financial institution. Because our clients generally derive
internal cost savings, account retention and other marketing benefits by
offering our services, the majority of our clients do not pass all of these
charges through to their retail customers, and an increasing number of clients
offer the banking portion of our services free-of-charge. We recently revised
our pricing to offer free Internet banking to financial institution clients that
also sign up for our billpaying service and use our consumer marketing program.
Internet banking relates to our services that allow consumers to view statements
and balances and transfer funds among accounts.
Support Services. We complement our banking and billpaying services with
the following comprehensive support services:
- Customer Service Center. We maintain a customer service center for
financial institution clients that choose to outsource this service to
us. Retail customers can access the customer service operation by
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phone or e-mail 24 hours a day, seven days a week. As of December 31,
1999, our customer service center had 94 employees available to respond
to retail customers' questions relating to enrollment, transactions or
technical support. Customer services generate revenues from recurring
monthly fixed fees charged to financial institution clients, typically
based on the number of enrolled retail customers. For those clients that
choose not to use our customer service bureau, we license our proprietary
software for their customer service operations.
- Web Site Design and Hosting. We offer web site design and hosting
services to our financial institution clients. We charge an upfront fee
for design and a recurring monthly maintenance fee for hosting the web
site.
- Consumer Marketing. We provide packaged and customized marketing
materials to our financial institution clients, which are, in turn,
privately labeled by them. These materials include customer applications,
signage, regulatory compliance forms, demonstration software, and devices
and advertising templates for a variety of media, including television
and radio. Standard marketing services are bundled with our
implementation services.
- Administrative Services. We provide administrative support services to
our financial institution clients including the compilation of customized
reports regarding their retail customers' account activity. We charge our
clients on an hourly basis for these services.
- Communications and Security Services. We provide communications network
management and related security support for financial institution clients
that use our non-Internet-based services. In some cases, we bundle the
cost of these services with our banking and billpaying services fees. In
other cases, we unbundle these costs and charge on a usage basis.
Implementation. Initially, we contract with a financial institution to
provide services and products tailored to meet its specific needs. At the time
of entering into a contract, a financial institution client pays a one-time fee,
which generally ranges from $3,000 to $50,000 based on certain factors,
including the size of the financial institution and the scope of services.
Implementation consists of systems integration and a pilot testing period.
A project management team is assembled to integrate our hub with a financial
institution client's legacy host system, typically via an ATM network. A
financial institution's legacy host system houses its transaction accounts. Upon
completion of systems integration, we conduct a pilot testing period using
selected customers and employees. Following the pilot, the financial institution
client is fully launched and services are made generally available to its retail
customers. At this point, the financial institution client begins to pay at
least the minimum user fees.
In cases where a financial institution is testing and certifying or
connecting to an ATM network or processor that we have not been either certified
with or previously connected to, the launch period is prolonged as a result of
the certification or connection process. Historically, we have experienced
certification or connection periods with ATM networks or processors requiring
between 6 to 24 months. As we have completed and substantially expanded the
number of certifications or connections to ATM networks and processors, there
have been fewer recent financial institution launches involving initial
certifications with an ATM network or processor. Accordingly, launch times are
improving. Our contracts with financial institution clients do not provide any
limits or penalties based on the time period before launch.
Third-Party Services. We facilitate retail customers' linking to
additional financial services beyond our proprietary banking and billpaying
services. We provide our clients' retail customers with a comprehensive suite of
financial services through our electronic commerce hub, which currently supports
Internet-based delivery of:
- investment tools and access to major online investment brokerage services
(Thomson Financial);
- loans (Bisys Marketing Solutions);
- insurance (InsWeb);
- financial planning tools for home buying, college education and
retirement; and
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- shopping services (Amazon.com, Proflowers and the Travel Page).
We have also developed business arrangements and links to third parties for
expanded retail customer access. We currently have such arrangements, in various
stages of development, with third-party access providers, such as America
Online, UltraData (a banking software provider of hosting and server solutions),
Voice Access (a voice response system provider to financial institutions), and
Aftech (a core banking processor subsidiary of Fiserv serving credit unions). In
early 2000 we entered into a strategic partnership with U.S. Clearing, a
division of Fleet Securities, to provide financial institutions with privately
branded online brokerage services integrated with real-time online banking and
billpayment.
In addition, by aggregating the retail customers of our financial
institution clients into a large online community, we believe we have begun to
assemble an attractive audience for third parties to market their products and
services. In cooperation with our financial institution clients, we believe that
over time this aggregated community will generate significant buying power and
could attract many additional third-party providers.
Related Products. We also derive revenue from sales of related enabling
products and software at fixed prices, including PC software, screen-based
telephone and customer service software. These have not been a significant
source of revenue.
SALES AND MARKETING
We have adopted a multiple channel institutional sales strategy, covering
both direct and indirect sales. Our direct sales team focuses on mid-sized
financial institutions. Our indirect sales team supports our marketing partners,
who sell to small or very large financial institutions. In addition to our
institutional sales strategy, we also actively assist with or assume the
consumer marketing programs of our clients.
Direct Marketing to Financial Institutions. As of December 31, 1999, we
had a six person direct sales force focusing on our target market: depository
institutions with 10,000 to 350,000 transaction accounts. Members of the direct
sales team have an average of over 12 years of industry experience. Our direct
sales team operates out of seven field locations throughout the U.S. and is
geographically organized with some specialization by industry and account size.
Sales representatives earn a base salary plus commission and are offered
incentives to support indirect sales with our marketing partners.
Indirect Sales to Financial Institutions. We support an indirect sales
channel by partnering with third parties who sell complementary services or
products to financial institutions. As of December 31, 1999, we had an
experienced four-person indirect sales team coordinating 41 marketing partners
covering approximately 15,000 financial institutions. These alliances leverage
the established vending relationships of our marketing partners and reduce
marketing costs by replacing the need for a larger direct sales force. Our
marketing partners include ATM networks such as MAC and Honor, software
providers such as Intuit, communications server vendors such as UltraData, core
banking processors such as Affiliated Computer Systems, credit union processors
such as Symitar, payment services such as Deluxe Payment Systems, and endorsers
such as America's Community Bankers. Fee arrangements for our marketing partners
vary and are based on the value-added and scope of responsibilities assumed by
the marketing partner. Typically, marketing partners earn a portion of our
implementation fee. If the marketing partner performs additional on-going
account management and other support services, then the marketing partner may
earn a small portion of our on-going operating fees. Additionally, marketing
partners may benefit from the direct sales of their products and services, such
as transaction fees for ATM networks and processors.
Consumer Marketing Support for Financial Institution Clients. During 1999,
we created a consumer marketing department whose main focus is creating
cost-effective programs to increase the percentage of our clients' retail
customers using our services. The marketing programs include web-based
marketing, direct marketing, telemarketing, statement stuffers and branch
incentives. We plan to underwrite these programs for any client that requests
them. The marketing programs will be privately branded by the financial
institutions so they may take advantage of their existing relationships. We
believe this will be a critical factor to the success of our marketing programs.
We also developed and support our BankOnline.com web site. This site is
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being used as a co-marketing vehicle to attract and expand the number of retail
customers of our financial institution clients.
SYSTEMS AND TECHNOLOGY
Overview. We designed our systems and technology around real-time
communications and processing, which optimizes quality, scalability and cost.
Our systems are based on a multi-tiered architecture consisting of:
- Enabling technology -- proprietary and commercial software and hardware
enabling retail customers to easily access our hub;
- Front-end servers -- proprietary and commercial communications software
and hardware providing Internet and private communications access to our
hub for retail customers;
- Middleware -- proprietary and commercial software and hardware used to
integrate customer and financial data and to process financial
transactions;
- Back-end systems -- databases and proprietary software which support our
banking and billpaying services; and
- Support systems -- proprietary and commercial systems supporting our
customer service and other support services.
Our systems architecture is designed to provide retail customer access
across multiple devices and communications channels, into a common database
integrated with our banking and billpaying services and our proprietary support
services software. Third-party financial services are linked to our systems
through the Internet, which we plan to more fully integrate into our retail
customer application and transaction processing. Our proprietary enabling PC
software is designed to export and import data to popular personal financial
management software, such as Quicken and Microsoft Money. By incorporating such
third-party capabilities into our system, we are able to focus our technical
resources on our proprietary middleware and integrating capabilities.
Real-Time ATM Network-Based Process. We typically link to financial
institution clients through an ATM network. By using an ATM network or processor
to link into a financial institution client's primary database for retail
customer accounts, we take advantage of established electronic funds transfer
infrastructure. This includes all telecommunications and software links,
security, settlements and other critical operating rules and processes. Using
this ATM architecture, financial institution clients avoid the substantial
additional costs necessary to expand their existing infrastructure. The net
result of using this architecture is that high quality remote financial
electronic commerce services can be provided, enabling retail customers to
access their financial account information and pay bills by debiting funds from
their accounts.
The following steps illustrate our patented ATM network-based process:
- Step 1: The retail customer accesses our services either through the
Internet or through a private network using our PC software or other
access devices. Once connected, the retail customer has the ability to
execute transactions and view banking and billpaying information on a
real-time basis.
- Step 2: Once the retail customer authorizes payment to a merchant, we
verify availability of sufficient funds in the customer's account via the
ATM network.
- Step 3: Upon verification of funds availability, the customer's account
is debited immediately and the guaranteed payment amount is transferred
into our escrow account at the end of the day.
- Step 4: We forward the funds with remittance information to the merchant
biller for processing.
In addition to quality and cost benefits associated with billpaying, we
believe that our real-time architecture is more scalable than traditional batch
systems, which warehouse and store duplicate data. Instead of duplicating each
financial institution's host system by daily batch transmittal of customer
balance information, we communicate in real-time through online ATM networks and
processors to retrieve account
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balances as needed. We are therefore working with ATM networks and processors to
expand their transaction support to include retail customer account histories,
access to additional information and interest-related security standards.
Security and Systems Integrity. Our services and related products provide
security and system integrity, which are based on proven Internet and other
communications standards, ATM network transaction processing procedures and
banking industry standards for control and data processing. Prevailing security
standards for Internet-based transactions are incorporated into our Internet
services, including but not limited to, Secure Socket Layer 128K encryption,
using public-private key algorithms developed by RSA, along with firewall
technology for secured transactions. In the case of payment and transaction
processing, we meet security transaction processing and other operating
standards for each ATM network through which we route transactions. We also
employ Digital Encryption Standards technology for transactions processed
through our screen-based telephone and PC software. Our interactive voice
response system performs transactions only if the retail customer is first
verified through the financial institution client's interactive voice response
security system. Finally, in conformance with industry standards promulgated by
applicable financial institution regulatory bodies, we adhere to SAS 70 types I
and II requirements for control, data processing and disaster recovery.
PROPRIETARY RIGHTS
In June 1993, we were awarded U.S. patent number 5,220,501 covering our
real-time ATM network-based payments process. Our patent covers billpaying and
other online payments made from the home using any enabling device where the
transaction is routed in real-time through an ATM network. We have licensed this
patent to other parties for limited use. In March 1995 we cross-licensed our
patent to Citibank for their internal use in settlement of litigation.
On February 9, 1999, we were awarded U.S. patent number 5,870,724 for
targeting advertising in a home retail banking delivery service. This patent
provides for the targeting of advertising or messaging to home banking users,
using their confidential billpayment and other financial information, while
preserving consumer privacy. Acting in co-operation and on behalf of a financial
institution client, we first analyze their billpaying and other financial data
to determine an advertising profile or purchasing power. The patent provides for
the targeted advertisement or other message to the selected person or group
based on their profile. No third parties have access to the retail customers'
sensitive financial data. Through interactive messaging, selected retail
customers of our financial institutions receiving the advertisement or message
then have the choice of releasing their names to the advertiser or messenger.
The confidentiality of their sensitive financial information is thereby
preserved and released only with the approval of the financial institution
client and their retail customers.
In addition to our patent we have registered trademarks. We also have
Internet domain names including BankOnline.com. A significant portion of our
systems, software and processes are proprietary. So, as a matter of policy, all
management and technical employees execute non-disclosure agreements as a
condition of employment.
COMPETITION
We believe that the principal competitive factors in our market are
industry trust, technical capabilities, operating effectiveness, cost and
scalability, customer service, security, speed to market, and capital. Many of
our competitors have the financial, technical and marketing resources, plus
established industry relationships, to better compete based on these factors.
Competitive pressures we face may have a material adverse effect on our
business, financial condition or operating results.
We are not aware of any other company that offers a similar financial
electronic commerce hub that integrates multiple consumer access channels into a
common database, in-sources banking and billpaying services, fully integrates
support services and links to other financial service providers. However, many
of our current and potential competitors have longer operating histories,
greater name recognition, larger installed customer bases and significantly
greater financial, technical and marketing resources. Further, some of our
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competitors, namely CheckFree and TransPoint (the joint venture between
Microsoft, First Data Corporation and Citibank and now part of Checkfree), while
currently targeting billpaying and presentment services to large financial
institutions, do provide or have the ability to provide the same range of
services we offer and could determine to direct their marketing initiatives
towards our targeted smaller financial institution client base.
Other competitors such as M&I Data, EDS, Fiserv and other core banking
processors have broad distribution channels that bundle competing products
directly to financial institutions. These competitors also have developed or
acquired extensive online banking capabilities of their own, including a bill
paying service in the case of M&I Data, which may be further expanded to exceed
or meet our capabilities.
In addition, a significant number of companies offer portions of the
services provided by us and compete directly with us to provide such services.
For example, the Web servers of companies such as Broadvision, Digital Insight,
Edify, Funds Express, nFront and Q-Up compete with our front-end Internet access
capabilities. These and other software providers, such as Security First
Technologies, First Data Direct Banking and CFI ProServices, have created
outsourced units to provide a portion of our services. These companies may in
turn use billpayers, such as CheckFree, Princeton Telecom, M&I Data (which
acquired Travelers Express), who often team with access providers. Finally,
there are networks, such as Integrion and NYCE, who facilitate connectivity by
some of our competitors to certain larger financial institutions. Also, certain
services such as Intuit's Quicken.com and Yahoo! Finance may be available to
retail customers independent of financial institutions.
GOVERNMENT REGULATION
We are not licensed by the Office of the Comptroller of the Currency, the
Federal Reserve Board, the Office of Thrift Supervision or other Federal or
state agencies that regulate or monitor banks or other types of providers of
financial electronic commerce services. Federal, state or foreign agencies may
attempt to regulate our activities. Congress could enact legislation that would
require us to comply with data, record keeping, processing and other
requirements. We may be subject to additional regulation as the market for our
business continues to evolve. For example, Regulation E that is promulgated by
the Federal Reserve Board, governs certain electronic funds transfers made by
regulated financial institutions and providers of access devices and electronic
fund transfer services, including many aspects of our services. Under Regulation
E, we are required, among other things, to provide certain disclosure to retail
customers, to comply with certain notification periods regarding changes in the
terms of service provided and to follow certain procedures for dispute
resolutions. The Federal Reserve Board may adopt new rules and regulations for
electronic funds transfers that could lead to increased operating costs and
could also reduce the convenience and functionality of our services, possibly
resulting in reduced market acceptance. Because of the growth in the electronic
commerce market, Congress has held hearings on whether to regulate providers of
services and transactions in the electronic commerce market, and Federal or
state authorities could enact laws, rules or regulations affecting our business
operations. We also may be subject to Federal, state and foreign money
transmitter laws, encryption and security export laws and regulations and state
and foreign sales and use tax laws. If enacted or deemed applicable to us, such
laws, rules or regulations could be imposed on our activities or our business
thereby rendering our business or operations more costly, burdensome, less
efficient or impossible, any of which could have a material adverse effect on
our business, financial condition and operating results.
The market we currently target, the financial services industry, is subject
to extensive and complex Federal and state regulation. Our current and
prospective clients, which consist of financial institutions such as commercial
banks, thrifts, credit unions, brokerage firms, credit card issuers, consumer
finance companies, other loan originators, insurers and other providers of
retail financial services, operate in markets that are subject to extensive and
complex Federal and state regulations and oversight. While we are not generally
subject to such regulations, our services and related products must be designed
to work within the extensive and evolving regulatory constraints in which our
clients operate. These constraints include Federal and state truth-in-lending
disclosure rules, state usury laws, the Equal Credit Opportunity Act, the
Electronic Funds Transfer Act, the Fair Credit Reporting Act, Bank Secrecy Act
and the Community Reinvestment Act. Because many of these regulations were
promulgated before the development of our system, the application of
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such regulations to our system must be determined on a case-by-case basis. We do
not make representations to clients regarding the applicable regulatory
requirements, but instead rely on each such client making its own assessment of
the applicable regulatory provisions in deciding whether to become a client.
Furthermore, some consumer groups have expressed concern regarding the privacy,
security and interchange pricing of financial electronic commerce services. It
is possible that one or more states or the federal government may adopt laws or
regulations applicable to the delivery of financial electronic commerce services
in order to address these or other privacy concerns. It is not possible to
predict the impact that any such regulations could have on our business.
We currently offer services on the Internet. Due to the increasing
popularity of the Internet, it is possible that laws and regulations may be
enacted with respect to the Internet, covering issues such as user privacy,
pricing, content, characteristics and quality of services and products. The
adoption of any such laws or regulations may limit the growth of the Internet,
which could affect our ability to utilize the Internet to deliver financial
electronic commerce services.
EMPLOYEES
At December 31, 1999, we had 257 employees. None of our employees are
represented by a collective bargaining arrangement. We believe our relationship
with our employees is good.
RISK FACTORS
In addition to the other information provided in this report, the following
risk factors should be considered carefully in evaluating Online Resources and
its business.
WE HAVE A HISTORY OF LOSSES AND COULD CONTINUE TO LOSE MONEY
We have not yet had an operating profit for any quarterly or annual period
and are unsure when we will become profitable, if ever. We may not be able to
attract and retain enough financial institutions and retail customers to reach
profitable levels. We were established in 1989 and a significant portion of our
existence has been devoted to developing the proprietary systems and
infrastructure needed to implement our business. Profitability in the future
will depend upon a number of factors, including our ability to continue to
contract with new financial institution clients and to develop and retain a
larger retail customer base that uses our services on a regular basis.
OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS
Our quarterly revenues, expenses and operating results have varied
significantly in the past and are likely to vary significantly from quarter to
quarter in the future. As a result, our operating results may fall below market
analysts' expectations in some future quarters, which could have a material
adverse effect on the market price of our stock.
WE MAY NEED TO RAISE CAPITAL TO STAY IN BUSINESS
We may not achieve cash flow break-even and may require additional
infusions of capital to sustain operations. This capital may not be available.
We may need to raise additional funds sooner than we expect if we incur
unforeseen required capital expenditures or substantial operating losses. If
adequate funds are not available or are not available on acceptable terms, we
may not be able to develop or enhance our services, take advantage of future
opportunities or respond to competitive pressures, which could have a material
adverse effect on our business.
WE SIGNIFICANTLY RELY ON THIRD PARTIES FOR THE SUCCESS OF OUR MARKETING EFFORTS
We depend upon the assistance of marketing partners who include some or all
of our services and related products as a part of their offerings to financial
institutions. To date, approximately 59% of our financial institution clients
were signed as a result of leads from these marketing partners. Failure by these
marketing
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partners to continue to offer our services and related products could have a
material adverse effect on our business.
WE DEPEND UPON OUR FINANCIAL INSTITUTION CLIENTS TO MARKET OUR SERVICES
To market our services to retail customers, we depend primarily upon our
financial institution clients. We charge our clients fees based on the number of
their retail customers who have enrolled with our clients for online banking
services. Therefore, retail customer enrollment affects our revenue and is
important to us. Because our clients offer our services under their name, we
must depend on those clients to get their customers to use our services. Our
financial institution clients may not effectively market our services to their
retail customers. Any failure of our clients to effectively market our services
could have a material adverse effect on our business.
OUR CO-MARKETING EFFORTS MAY NOT BE SUCCESSFUL
We have recently spent substantial financial and human resources to
co-market our services and related products with our financial institution
clients to their retail customers. These marketing efforts may not result in the
desired increase in acceptance by retail customers.
WE MAY NOT BE ABLE TO EXPAND TO MEET INCREASED DEMAND
We may not be able to expand or adapt our services and related products to
meet the demands of our financial institution clients and their retail customers
quickly or at a reasonable cost. The type and volume of transactions processed
through our system and the number of financial institution clients connected to
it have been relatively limited to date. We will need to continue to expand and
adapt our infrastructure, services and related products to accommodate
additional financial institution clients and their retail customers, increased
transaction volumes and changing customer requirements. This will require
substantial financial, operational and management resources. In the past as we
have developed our infrastructure, clients have experienced periods when they
were unable to utilize our services. If we are unable to scale our system and
processes to support the variety and number of transactions and retail customers
who ultimately use our services, our business may be materially adversely
affected.
IF WE LOSE A MATERIAL CLIENT, OUR BUSINESS MAY BE ADVERSELY IMPACTED
One of our financial institution clients, California Federal Bank,
accounted for 14% of revenue for the year ended December 31, 1999. The loss of
this contract in the near term, or the loss of any other material contracts in
the future, either directly to a competitor, or indirectly in the event that a
financial institution client is acquired by an institution not utilizing our
services, or decides to provide these services in-house, could have a material
adverse effect on revenues. Loss of any material financial institution contract
in the future could also negatively impact our ability to attract and retain
other financial institution clients.
WE MAY NOT BE ABLE TO COMPETE WITH LARGER, MORE ESTABLISHED BUSINESSES OFFERING
SIMILAR PRODUCTS OR SERVICES
We may not be able to compete with current and potential competitors, many
of whom have longer operating histories, greater name recognition, larger, more
established customer bases and significantly greater financial, technical and
marketing resources. Further, some of our competitors provide or have the
ability to provide the same range of services we offer. They could market to our
targeted regional and community financial institution client base. Other
competitors, such as core banking processors, have broad distribution channels
that bundle competing products directly to financial institutions. Also,
competitors may compete directly with us by adopting a similar business model or
through the acquisition of companies, such as resellers, who provide
complimentary products or services.
A significant number of companies offer portions of the services we provide
and compete directly with us. For example, the Web servers of some companies
compete with our front-end Internet access capabilities. Other software
providers have created units to provide on an outsource basis a portion of
services like ours.
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These companies may use billpayers who team with access providers. Also, certain
services may be available to retail customers independent of financial
institutions such as Intuit's Quicken.com and Yahoo! Finance. Finally, there are
some ATM and other networks who provide similar services in addition to
connecting to financial institutions.
Many of our competitors may be able to afford more extensive marketing
campaigns and more aggressive pricing policies in order to attract financial
institutions. Our failure to compete effectively in our markets would have a
material adverse effect on our business.
FAILURE TO SUCCESSFULLY IMPLEMENT A SYSTEMS UPGRADE OR CONVERSION MAY ADVERSELY
AFFECT OUR REPUTATION AND OUR BUSINESS
A failure to implement a systems upgrade or conversion would delay
implementation of some of our financial institution clients, could cause us to
divert significant resources and could negatively impact our reputation in the
banking industry. We are currently upgrading our system from software version
2.0 to version 3.0. We may be unable to successfully complete this conversion
and any future systems upgrades or conversions.
WE DEPEND ON OUR OFFICERS AND SKILLED EMPLOYEES DUE TO OUR COMPLEX BUSINESS
If we fail to attract, assimilate or retain highly qualified managerial and
technical personnel and, in particular, software developers for whom demand is
high in all industry markets, our business could be materially adversely
affected. Our performance is substantially dependent on the performance of our
executive officers and key employees who must be knowledgeable and experienced
in both banking and technology. We are also dependent on our ability to retain
and motivate high quality personnel, especially management and highly skilled
technical teams. The loss of the services of any executive officers or key
employees could have a material adverse effect on our business. Our future
success also depends on the continuing ability to identify, hire, train and
retain other highly qualified managerial and technical personnel. Competition
for such personnel is intense.
SYSTEM FAILURES COULD HURT OUR BUSINESS -- WE COULD BE LIABLE FOR SOME TYPES OF
FAILURES
Like other system operators, our operations are dependent on our ability to
protect our system from interruption caused by damage from fire, earthquake,
power loss, telecommunications failure, unauthorized entry or other events
beyond our control. Our back-up site is located approximately one mile from our
headquarters, where most of our computer systems, including processing
equipment, is currently operated and maintained. In the event of major
disasters, both locations could be equally impacted. Loss of all or part of our
systems for a period of time could have a material adverse effect on our
business. We may be liable to our clients for breach of contract for
interruptions in service. Due to the numerous variables surrounding system
disruptions, we cannot predict the extent or amount of any potential liability.
SECURITY BREACHES COULD DISRUPT OUR BUSINESS
Like other system operators, our computer systems may also be vulnerable to
computer viruses, hackers, and other disruptive problems caused by unauthorized
parties entering our system. Computer attacks or disruptions may jeopardize the
security of information stored in and transmitted through the computer systems
of our financial institution clients and their retail customers using our
services, which may result in significant losses or liability. This, or the
perception that our systems may be vulnerable to such attacks or disruptions,
also may deter retail customers from using our services.
Data networks are also vulnerable to attacks and disruptions. For example,
in a number of public networks, hackers have bypassed firewalls and
misappropriated confidential information. It is possible, that despite existing
safeguards, an employee could divert retail customer funds while these funds are
in our control, exposing us to a risk of loss or litigation and possible
liability. In dealing with numerous consumers, it is possible that some level of
fraud or error will occur, which may result in erroneous external payments.
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Losses or liabilities that we incur as a result of any of the foregoing could
have a material adverse effect on our business.
WE RELY ON OUR INTELLECTUAL PROPERTY RIGHTS AND PROPRIETARY INFORMATION
We rely on patent trade secret laws to protect our intellectual property,
such as the software and processes which we have developed in connection with
our business. If we fail to adequately protect our intellectual property rights
and proprietary information or if we become involved in litigation relating to
our intellectual property rights, our business could be harmed. Any actions we
take may not be adequate to protect our intellectual property rights and other
companies may develop technologies that are similar or superior to our
intellectual property. Although we believe that our services do not infringe on
the intellectual property rights of others and that we have all rights needed to
use the intellectual property employed in our business, it is possible that we
could become subject to claims alleging infringement of third-party intellectual
property rights. Any claims could subject us to litigation, and could require us
to pay damages or develop non-infringing intellectual property, any of which
could be expensive, or require us to acquire licenses to the intellectual
property that is the subject of the alleged infringement.
OUR CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS MAY PREVENT OR DELAY THIRD
PARTIES FROM BUYING YOUR STOCK
Our Restated Certificate of Incorporation authorizes the Board of Directors
to issue up to 3,000,000 shares of preferred stock and to determine the price,
rights, preferences and privileges, including voting rights, of those shares
without any further vote or action by the stockholders. The rights of the
holders of common stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. The Certificate of Incorporation provides for staggered terms for the
members of the Board of Directors. In addition, the Certificate of Incorporation
provides that directors can be removed only for cause and only by a majority of
the other directors or by vote of stockholders owning 80% or more of the voting
power. Some provisions of our Certificate of Incorporation and Bylaws could have
a depressive effect on our stock price or make it more difficult for a third
party to acquire a majority of our outstanding voting stock or delay, prevent or
deter a merger, acquisition, tender offer or proxy contest.
OUR SERVICES MAY NOT BE BROADLY USED AND ACCEPTED BY CONSUMERS
There is no established history of broad acceptance by retail customers of
services like ours and those services may not be accepted in the future. Because
our fee structure is designed to establish recurring revenues through monthly
usage by retail customers of our financial institution clients, our recurring
revenues are dependent on the acceptance of our services by retail customers and
their continued use of online banking, billpaying and other financial services.
CONSOLIDATION OF THE BANKING AND FINANCIAL SERVICES INDUSTRY COULD NEGATIVELY
IMPACT OUR BUSINESS
The continuing consolidation of the banking and financial services industry
could result in a smaller market for our services. Consolidation frequently
results in a complete change in the electronic infrastructure of the combined
entity. This could result in the termination of our services and related
products if the acquiring institution has its own in-house system or outsources
to competitive vendors. This would also result in the loss of revenue from
actual or potential retail customers of the acquired financial institution.
GOVERNMENT REGULATION COULD INTERFERE WITH OUR BUSINESS
Federal or state agencies may attempt to regulate our activities. In
addition, Congress could enact legislation that would require us to comply with
data, record keeping, processing and other requirements. We may be subject to
additional regulation as the market for our business continues to evolve. The
Federal Reserve Board or other Federal or state agencies may adopt new rules and
regulations for electronic funds transfers that could lead to increased
operating costs and could also reduce the convenience and functionality of our
services, possibly resulting in reduced market acceptance.
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MANAGEMENT AND DIRECTORS MAY CONTROL OUR MANAGEMENT AND AFFAIRS
As of March 20, 2000, management and directors beneficially owned
approximately 29% of our outstanding common stock. As a result, they may have
the ability to effectively control us and direct our affairs and business,
including the election of directors and approval of significant corporate
transactions. Such concentration of ownership may also have the effect of
delaying, deferring or preventing a change in control of Online Resources, and
make some transactions more difficult or impossible without the support of such
stockholders, including proxy contests, mergers involving Online Resources,
tender offers, open-market purchase programs or other purchases of common stock
that could give our stockholders the opportunity to realize a premium over the
then-prevailing market price for shares of common stock.
OUR STOCK PRICE IS VOLATILE
The trading price of our common stock has been subject to significant
fluctuations and may continue to be volatile in response to:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
- new products or services offered by Online Resources or our competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet and online commerce industries;
- changes in the economic performance and/or market valuations of other
Internet, online service industries;
- announcements by Online Resources of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
- additions or departures of key personnel;
- sales of common stock; and
- other events or factors, many of which are beyond our control.
The stock market has experienced extreme price and volume fluctuations and
volatility that has particularly affected the market prices of many technology,
emerging growth and developmental stage companies. Such fluctuations and
volatility have often been unrelated or disproportionate to the operating
performance of such companies. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been instituted against a company. Litigation, if instituted, whether
or not successful, could result in substantial costs and a diversion of
management's attention and resources, which would have a material adverse effect
on our business.
ITEM 2. PROPERTIES
We are headquartered in McLean, Virginia where we lease approximately
51,000 square feet of office space. The lease has a five-year term and expires
July 31, 2002. We also lease approximately 3,000 square feet of office space in
McLean, Virginia for our back-up site. We have field offices located in Atlanta,
Chicago, Denver, Fort Worth, Orlando, Sacramento, and St. Louis.
ITEM 3. LEGAL PROCEEDINGS
From time to time we may be involved in litigation arising in the normal
course of our business. We are not a party to any litigation, individually or in
the aggregate, that we believe would have a material adverse effect on our
financial condition or results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Our common stock trades on the Nasdaq National Market under the symbol
"ORCC". The following table sets forth the range of high and low closing sales
prices of our common stock for the periods indicated:
FISCAL QUARTER ENDED HIGH LOW
-------------------- ------- -------
June 30, 1999 (commencing June 4, 1999)..................... $17.375 $10.625
September 30, 1999.......................................... 21.250 12.000
December 31, 1999........................................... 17.000 7.937
The market price of our common stock is highly volatile and fluctuates in
response to a wide variety of factors. See "Business -- Risk Factors -- Our
Stock Price is Volatile."
HOLDERS
On March 1, 2000, we had approximately 372 holders of record of common
stock. This does not reflect persons or entities who hold their stock in nominee
or "street" name through various brokerage firms.
DIVIDENDS
We have not paid any cash dividends on our common stock. We expect to
invest any future earnings to finance growth, and therefore do not intend to pay
dividends in the foreseeable future. Our board of directors will determine if we
pay any future dividends.
USE OF PROCEEDS
Proceeds to Online Resources, from its initial public offering in June,
1999, net of offering costs from the offering, totaled approximately $39
million. As of December 31, 1999, Online Resources had used $9.4 million of the
proceeds for the repayment of debt, $7.6 million for working capital, $500,000
for consumer marketing expenditures and $21.5 million was held in cash and
investments.
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal quarter ended December 31, 1999, the following securities
were sold pursuant to the exercise of warrants upon reliance of the exemption
provided by Section 4(2) of the Securities Act:
DATE AMOUNT SOLD PRICE
---- ----------- ------
10/01/99.................................................... 16,445 $ 8.42
10/31/99.................................................... 3,469 $ 8.42
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ITEM 6. SELECTED FINANCIAL DATA
You should read the following selected financial information in conjunction
with our financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this report.
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ------------ ------------ ------------
Statement of Operations
Data:
Revenues:
Core services............ $ 372,573 $ 417,590 $ 1,011,161 $ 2,221,230 $ 4,362,695
Support services......... 307,423 176,653 207,697 644,818 2,015,480
Implementation fees...... 66,620 417,116 1,310,950 1,200,158 1,772,290
Related products......... 237,654 119,150 324,736 259,898 295,070
----------- ----------- ------------ ------------ ------------
Total revenues... 984,270 1,130,509 2,854,544 4,326,104 8,445,535
Cost of revenues......... 1,853,486 1,864,991 5,128,584 6,289,462 9,081,269
----------- ----------- ------------ ------------ ------------
(869,216) (734,482) (2,274,040) (1,963,358) (635,734)
General and
administration........ 1,699,363 2,208,218 2,508,058 2,705,029 3,894,475
Sales and marketing...... 1,423,255 2,249,405 3,257,725 3,377,728 5,266,044
Systems and
development........... 1,241,874 1,469,272 2,682,261 2,444,615 3,998,936
----------- ----------- ------------ ------------ ------------
Total expenses... 4,364,492 5,926,895 8,448,044 8,527,372 13,159,455
----------- ----------- ------------ ------------ ------------
Loss from operations....... (5,233,708) (6,661,377) (10,722,084) (10,490,730) (13,795,189)
Other income (expense)..... 6,251 (315,014) (323,727) (1,067,739) (34,045)
----------- ----------- ------------ ------------ ------------
Loss before extraordinary
loss..................... (5,227,457) (6,976,391) (11,045,811) (11,558,469) (13,829,234)
Extraordinary loss from
extinguishment of debt
(1)...................... -- -- -- -- (885,407)
Net loss................... (5,227,457) (6,976,391) (11,045,811) (11,550,469) (14,714,641)
Preferred stock
accretion................ -- -- (1,998,665) (3,779,169) (2,236,716)
Beneficial return on
preferred shares (2)..... -- -- -- -- (2,668,109)
----------- ----------- ------------ ------------ ------------
Net loss available for
common................... (5,227,457) (6,976,391) (13,044,476) (15,337,638) (19,619,466)
Net loss per share basic
and diluted.............. $ (1.52) $ (1.86) $ (3.38) $ (3.83) $ (2.10)
=========== =========== ============ ============ ============
Shares used in calculation
of basic and diluted loss
per share................ 3,427,844 3,742,648 3,858,366 4,009,713 9,327,202
- ---------------
(1) On June 10, 1999, we used $9.4 million of the net proceeds from our initial
public offering to pay off corporate debt which resulted in a one time
charge.
(2) We recorded a deemed beneficial return on the Series C preferred stock
issued during the first three months of 1999, due to these shares being
convertible into common stock at a discount from fair value at the date of
issuance.
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YEAR ENDED DECEMBER 31
----------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ------------ ------------ ------------
Balance Sheet Data:
Cash and equivalents....... $ 762,738 $ 41,142 $ 1,855,161 $ 3,471,620 $ 1,588,187
Working capital............ 1,265,745 (1,399,022) (144,592) 580,376 20,895,369
Total assets............... 2,429,060 2,082,436 4,681,995 9,421,428 29,217,175
Notes payable, less current
portion.................. 475,000 4,555,808 1,199,225 8,525,467 --
Capital lease obligations,
less current portion..... 92,154 -- 352,956 605,322 329,480
Put option liability....... -- -- -- 362,700 --
Other non-current
liabilities.............. -- -- -- 193,400 --
Total liabilities.......... 993,447 6,927,011 4,217,590 14,833,950 3,750,141
Redeemable convertible
preferred stock.......... -- 645,000 16,836,016 25,776,254 --
Series A Convertible
Preferred Stock.......... 7,950 7,950 7,950 7,950 --
Stockholders' equity
(deficit)................ 1,435,613 (5,489,575) (16,371,611) (31,188,776) 25,467,034
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes included elsewhere in this report. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from the results anticipated in these
forward-looking statements as a result of factors including, but not limited to,
those under "Business--Risk Factors" and elsewhere in this report.
OVERVIEW
We are a leading application service provider for Internet banking and
other e-finance services to regional and community financial institutions. We
offer our client's a cost-effective outsourced service, branded in their name,
by seamlessly integrating Internet banking, electronic bill payment, and other
e-financial services into a single-vendor, end-to-end solution. As part of our
services, we provide customer support through our call center, marketing
services, web site design, implementation and other services.
We derive revenue from long-term service contracts with our financial
institution clients, who pay us recurring fees based primarily on the number of
their retail customers enrolled and transaction volumes, as well as an up-front
implementation fee. Our financial institution clients typically subsidize some
or all of our fees when reselling our services to their retail customers, as
they derive significant potential benefits including account retention, delivery
and paper cost savings, account consolidation and cross-selling of other
products. As a network-based service provider, we have made substantial up-front
investments in infrastructure. We believe our financial performance and
operating leverage will be based primarily on increasing retail customer
subscriptions and transaction volumes over a relatively fixed cost base.
Our current sources of revenue are from core services, support services,
implementations and selling related products. We expect that our primary source
of revenue growth will come from core services and support services as a result
of continued growth of retail customers.
- Core Services. Our primary source of revenue is from providing core
services which include banking and billpaying for which we charge our
financial institution clients a fixed monthly fee based on the number of
retail customers who use our service. We recognize revenue from core
services as provided.
- Support Services. Support services include our customer service center,
Web page design and hosting, consumer marketing, information reporting,
administrative services, and communications services. Fees for these
services are closely tied to the number of retail customers and are
bundled as either fixed price monthly charges, fixed price project fees,
or hourly billings.
- Implementation. We generate revenue from implementation of our fully
integrated services to our financial institution clients. Implementation
fees are paid on a one time basis at signing and recognized as revenue
using the percentage of completion method.
- Related Products. We also derive revenue from sales of related enabling
products and software at fixed prices, including our PC software,
screen-based telephone and customer service software. These have not been
a significant source of revenue.
Historically, the majority of our resources have been directed to creating
our proprietary Opus(SM) system. Our proprietary system enables us to provide a
broad range of services to our financial institution clients including online
banking, billpaying, and access to complementary financial services supported by
our customer call center, marketing services and other support services. While
investment to date has been significant, we believe the infrastructure we have
built will enable us to support our anticipated growth over the next several
years with only nominal incremental cost for additional retail customers.
FINANCIAL CONDITION
Since our founding, we have incurred high costs to create our
infrastructure, while generating low revenues. As a result we have historically
experienced large operating losses and negative cash flow. At December 31, 1999
we had accumulated deficits of $56.7 million, cash and investments of $21.5
million and
19
21
net property and equipment of $4.6 million. We have funded our operations
primarily through the issuance of equity and debt securities. Ongoing working
capital requirements will primarily consist of personnel costs related to
enhancing and maintaining our Opus(SM) system. We expect to continue to incur
losses in the near future.
As of December 31, 1999, we had $1.6 million in cash and cash equivalents
and $19.9 million in investments in available for sale securities as compared to
$3.5 million in cash and cash equivalents as of December 31, 1998. The increase
in cash and investments results from our initial public offering of 3.1 million
shares of common stock at an initial public offering price of $14.00 per share.
We received proceeds, net of underwriting commissions, of approximately $40
million in cash and this was further reduced by an additional $1 million of
other related offering costs. On June 10, 1999 we used $9.4 million of the net
proceeds to pay off corporate debt. Total liabilities decreased from $14.8
million as of December 31, 1998 to $3.8 million as of December 31, 1999
primarily as a result of the $9.4 million debt payment during the second
quarter. During the six month period, prior to the debt extinguishment, we had
already paid down $344,000 of debt. Concurrent with our initial public offering,
all 1,071,779 shares of our convertible preferred stock automatically converted
into 3,571,559 shares of common stock which resulted in a $25.8 million decrease
in redeemable convertible preferred stock from $25.8 million as of December 31,
1998 to $0 as of December 31, 1999.
Our limited operating history makes it difficult to evaluate our prospects
for success and our revenue and profitability potential is unproven.
RESULTS OF OPERATIONS
The following table presents certain items derived from our statements of
operations expressed as a percentage of revenue.
YEAR ENDED DECEMBER 31
--------------------------------
1997 1998 1999
------ ------ ------
Statement of Operations Data:
Revenues:
Core services............................................. 35.4% 51.3% 51.7%
Support services.......................................... 7.3 14.9 23.9
Implementation fees....................................... 45.9 27.7 21.0
Related products.......................................... 11.4 6.1 3.4
Total revenues.................................... 100.0 100.0 100.0
Expenses:
Cost of revenues.......................................... 179.7 145.4 108.0
Gross (loss)................................................ (79.7) (45.4) (7.5)
General and administrative................................ 87.9 62.5 46.1
Sales and marketing....................................... 114.1 78.1 62.4
Systems and development................................... 94.0 56.5 47.3
Total expenses.................................... 296.0 197.1 155.8
Loss from operations........................................ (375.7) (242.5) (163.3)
Total other income (expense)................................ (11.3) (24.7) --
Extraordinary loss from the extinguishment of debt.......... -- -- (10.5)
Net loss.................................................... (387.0)% (267.2)% (174.2)%
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Revenues. We derive revenues from providing core services, support
services, implementations and from selling related products. Revenues increased
95.2% to $8.4 million in 1999 as compared to $4.3 million in 1998. This increase
was attributable to core services revenue increasing 96.4% to $4.4 million and
support services revenue increasing 212.6% to $2.0 million due to a 273.7%
increase in the number of retail customers. Additionally, implementation fees
increased 47.7% to $1.8 million as a result of clients launched onto our
20
22
system. Related product revenue increased 13.5% to $295,000 as we delivered
additional fulfillment material to a small percentage of new retail customers
accessing the service using either our PC software or our screen-based
telephone.
Cost of Revenues. Cost of revenues primarily includes telecommunications,
payment processing, systems operations, customer service, implementation and
related products. Cost of revenues increased 44.4% to $9.1 million in 1999 as
compared to $6.3 million in 1998. This increase was primarily attributable to a
$1.5 million increase in customer service costs and a $800,000 increase in
billpaying processing costs. These increases resulted from the increased number
of retail customers and an increase in staff to support the growth of our
operations.
General and Administrative. General and administrative expenses primarily
consist of salaries for executive, administrative and financial control
personnel and facilities costs such as office leases, insurance, and
depreciation. General and administrative expenses increased 44% to $3.9 million
in 1999 as compared to $2.7 million in 1998. The increase in general and
administrative expenses is attributable to increased headcount and increased
rent and depreciation expenses associated with the expansion of the corporate
facilities. General and administrative headcount increased 33% from December 31,
1998 to December 31, 1999.
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. We have 41 marketing partners who act as resellers of our services. We
have no obligation to these marketing partners other than to provide services
sold to financial institutions by the marketing partners and to pay commissions
to them on the sales. The marketing partners have no obligations to us other
than to re-sell our services. We do not expect to incur materially less sales
commissions when financial institutions sign with our marketing partners versus
when financial institutions sign through our own sales force. Sales and
marketing expenses increased 56% to $5.3 million in 1999 as compared to $3.4
million in 1998. The principal reasons for the increase in sales and marketing
expenses were increased headcount, increased consumer marketing expenditures,
increases in commissions as a result of higher revenue levels, and increases in
related travel costs. The increase in consumer marketing expenditures are
attributable to promoting the adoption of our services by the retail customers
of the growing number of launched financial institution clients.
Systems and Development. Systems and development expenses include salaries
of personnel in the systems and development department, consulting fees and all
other expenses incurred in supporting the development of new services and
products, and new technology to enhance existing products. Systems and
development expenses increased 64% to $4.0 million in 1999 as compared to $2.4
million in 1998. This was primarily attributable to costs associated with a
technical staff expansion and the use of third party consultants to support the
enhancement of our Opus(SM) system. The costs of third party consultants is
generally higher than the cost of internal resources. Headcount in the systems
and development groups increased 18% from December 31, 1998 to December 31,
1999.
Other Income and Expense. Interest income increased 949% to $990,000 in
1999 as compared to $94,000 in 1998. The increase was due to the investment of
the initial public offering proceeds in available for sale securities over the
second half of the fiscal year. Additionally interest expense decreased 16% to
$959,000 in 1999 as compared to $1.1 million in 1998 as the result of the
extinguishment of $9.4 million of corporate debt on June 10, 1999. We recognized
an extraordinary loss of $885,000 on the early extinguishment of the $9.4
million of corporate debt related to unamortized debt discounts and loan fees.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues increased 51.6% to $4.3 million in 1998 as compared to
$2.9 million in 1997. This increase was primarily attributable to a 119.7%
increase in core services fees and a 210.5% increase in support services fees,
which were driven by a 151.0% increase in the number of retail customers. The
increase in retail customers was driven primarily by the launch of an additional
60 clients during 1998.
21
23
Cost of Revenues. Cost of revenues increased 22.6% to $6.3 million in 1998
as compared to $5.1 million in 1997. This increase was primarily due to a 110.6%
increase in payment processing costs as a result of increased support staff and
transactional costs associated with the 151.0% increase in retail customers.
Additionally, telecommunications costs increased 57.5% and customer service
costs increased 34.1% as a result of the increase in retail customers. Related
product costs decreased 78.5% as the result of the recognition of a $496,721
reserve on screen-based telephones taken in 1997.
General and Administrative. General and administrative expenses increased
by 7.9% to $2.7 million in 1998 as compared to $2.5 million in 1997. The
increase was due to a 480.1% increase in professional services and a 49.6%
increase in rent expense, which were partially offset by a 22.9% decrease in
salaries expenses. In 1997, a one-time charge of $137,000 was incurred for
severance costs paid to terminated employees. This reduction in employees
contributed to the reduction in salaries expense in 1998.
Sales and Marketing. Sales and marketing expenses increased 3.7% to $3.4
million in 1998 as compared to $3.3 million in 1997. This increase was due to a
3.8% increase in personnel expenses, a significant increase in advertising
expenses and expenses related to the distribution of marketing materials.
Systems and Development. Systems and development expenses decreased by
8.9% to $2.4 million in 1998 as compared to $2.7 million in 1997. This decrease
was attributable to a 7.5% decrease in personnel expenses and a 74.4% decrease
in recruiting expenses as hiring growth slowed and we relied less on external
recruiting services, which were partially offset by a 39.1% increase in
consulting services.
Other Income and Expense. Interest expense increased 143.3% to $1.1
million in 1998 as compared to $471,187 in 1997 as we continued to finance our
working capital through equipment financing loans in late 1997 and financings in
1998.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have primarily financed our operations through private
placements of our common and preferred stock and the issuance of debt. We have
also entered into various capital lease financing agreements. In June 1999, we
closed our initial public offering of 3.1 million shares of common stock at an
initial public offering price of $14.00 per share. Net of underwriting
commissions, we received cash proceeds of approximately $40 million in cash,
which was reduced further by an additional $1 million of other related offering
costs. At December 31, 1999 we had $1.6 million in cash and cash equivalents and
$19.9 million in investments in available for sale securities.
Net cash used in operating activities was $14.2 million for the year ended
December 31, 1999 as compared to $10.4 million in the year ended December 31,
1998. Cash used in operating activities in the year ended December 31, 1999
resulted primarily from a net loss of $14.7 million. Cash used in operating
activities in the year ended December 31, 1998 was primarily attributable to a
net loss of $11.6 million.
Net cash used in investing activities for the year ended December 31, 1999
was $22.4 million, of which $20.3 million related to the purchase of investments
in available for sale securities and $2 million was used to purchase fixed
assets.
Net cash provided by financing activities was $34.6 million in the year
ended December 31, 1999 as compared to $12.6 million in the year ended December
31, 1998. Net proceeds from our initial public offering, net of underwriting
discounts and offering costs, were $39.0 million, of which $9.4 million was used
to pay down existing debt. During the period, prior to the debt extinguishment
payment, we had preciously paid down $344,000 of debt. In addition, during 1999
cash proceeds from the sale of Series C Preferred Stock was $5.3 million. Prior
to our initial public offering, we financed our operations primarily through the
sale of equity securities and debt securities in private placements. During the
year ended December 31, 1998 the $12.6 million in cash provided by financing
activities was the result of a loan of $8.4 million and proceeds of $4.6 million
from the sale of Series C Preferred Stock. At December 31, 1999, we had cash and
cash equivalents of $1.6 million, investments in available for sale securities
of $19.9 million, working capital of $20.9 million, and stockholders' equity of
$25.5 million.
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24
Online Resources currently believes that cash balances will be sufficient
to meet anticipated cash requirements through at least 2000. However, there can
be no assurance that additional capital beyond the amounts currently forecasted
by Online Resources 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.
In addition, until cash generated from operations is sufficient to satisfy
our future liquidity requirements, we believe that we will be required to seek
additional funds through issuance of additional equity or debt securities or
through credit facilities. The sale of additional equity will result in dilution
to our stockholders. Financing may not be available in the future in amounts or
on terms acceptable to us, if at all.
YEAR 2000 READINESS DISCLOSURE
Our business operations were not adversely affected by any year 2000
issues. Prior to the end of 1999, we acted to ensure that our products and
critical internal business systems were year 2000 compliant.
We have funded the costs to become year 2000 compliant from operating cash
flows and have not separately accounted for these costs in the past. To date,
these costs have not been material. However, we may incur significant costs in
unanticipated year 2000 compliance problems arise. These unanticipated costs, or
our failure to correct any unanticipated year 2000 problems in a timely manner,
could have a material adverse effect on our business, financial condition,
results of operations and prospects for growth.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have operations subject to risks of foreign currency
fluctuations, nor do we use derivative financial instruments in our operations
or investment portfolio. The long-term debt at December 31, 1999 is comprised of
capital lease obligations with interest rates ranging from 9% to 13%. A
fluctuation of 100 basis points in the prime rate would not have an adverse
material effect on us.
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25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors........... 25
Balance Sheets.............................................. 26
Statements of Operations.................................... 27
Statements of Stockholders' Equity.......................... 28
Statements of Cash Flows.................................... 29
Notes to Financial Statements............................... 30
24
26
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Online Resources & Communications Corporation
We have audited the accompanying balance sheets of Online Resources &
Communications Corporation as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Online Resources &
Communications Corporation at December 31, 1998 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG, LLP
McLean, Virginia
February 10, 2000
25
27
BALANCE SHEETS
DECEMBER 31,
---------------------------
1998 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents (Note 2)........................ $ 3,471,620 $ 1,588,187
Escrow deposit............................................ 400,985 --
Investments (Note 3)...................................... -- 19,905,929
Accounts receivable (net of allowance of $52,000,and
$152,000 at December 31, 1998 and 1999,
respectively).......................................... 933,585 1,875,707
Prepaid expenses and other current assets................. 921,247 946,207
------------ ------------
Total current assets.............................. 5,727,437 24,316,030
Property and equipment, net (Note 4)........................ 3,166,019 4,616,672
Other assets................................................ 527,972 284,473
------------ ------------
Total assets...................................... $ 9,421,428 $ 29,217,175
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 1,707,675 $ 812,082
Accrued expenses and other current liabilities............ 617,929 565,384
Accrued wages............................................. 425,703 537,553
Accrued vacation.......................................... 191,090 378,640
Deferred revenues......................................... 678,117 417,926
Current portion of capital lease obligation............... 614,585 709,076
Current portion of long term debt (Note 5)................ 711,962 --
Current portion of notes payable to related parties....... 200,000 --
------------ ------------
Total current liabilities......................... 5,147,061 3,420,661
Capital lease obligation.................................. 605,322 329,480
Long Term debt (net of unamortized discount of $506,861 at
December 31, 1998) less current portion................ 8,525,467 --
Put option liability...................................... 362,700 --
Other Noncurrent Liabilities.............................. 193,400 --
------------ ------------
Total Liabilities................................. 14,833,950 3,750,141
Commitments (Note 6)
Redeemable convertible Preferred Stock, $.01 par value (Note
8)
Series B redeemable convertible preferred stock; 100,000
shares designated, 1,000 shares issued and outstanding
at December 31, 1998................................... 120,854 --
Series C redeemable convertible preferred stock; 287,000
shares designated, 224,700 shares issued and
outstanding at December 31, 1998....................... 25,655,400 --
------------ ------------
Total redeemable convertible Preferred Stock...... 25,776,254 --
Stockholders' equity (deficit) (Note 9)
Series A convertible preferred stock, $0.1 par value;
1,000,000 shares authorized, 795,000 shares issued and
outstanding at December 31, 1998....................... 7,950 --
Common stock, $.0001 par value; 35,000,000 shares
authorized, 4,053,653 and 11,050,456 issued and
outstanding at December 31, 1998 and 1999,
respectively........................................... 405 1,105
Additional paid-in capital................................ 11,078,308 83,035,825
Accumulated deficit....................................... (41,937,066) (56,651,707)
Deferred stock compensation............................... -- (267,949)
Receivable from the sale of common stock.................. (338,373) (650,240)
------------ ------------
Total stockholders' equity (deficit).............. (31,188,776) 25,467,034
------------ ------------
Total liabilities and stockholders' equity........ $ 9,421,428 $ 29,217,175
============ ============
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28
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
------------ ------------ ------------
Revenues:
Core services.................................... $ 1,011,161 $ 2,221,230 $ 4,362,695
Support services................................. 207,697 644,818 2,015,480
Implementation fees.............................. 1,310,950 1,200,158 1,772,290
Related products................................. 324,736 259,898 295,070
------------ ------------ ------------
Total revenues........................... 2,854,544 4,326,104 8,445,535
Expenses:
Cost of revenues................................. 5,128,584 6,289,462 9,081,269
------------ ------------ ------------
(2,274,040) (1,963,358) (635,734)
General and administrative....................... 2,508,058 2,705,029 3,894,475
Selling and marketing............................ 3,257,725 3,377,728 5,266,044
Systems and development.......................... 2,682,261 2,444,615 3,998,936
------------ ------------ ------------
Total expenses........................... 8,448,044 8,527,372 13,159,455
Loss from operations............................... (10,722,084) (10,490,730) (13,795,189)
Other income (expense):
Interest income.................................. 147,988 94,312 989,520
Interest expense................................. (471,187) (1,146,614) (958,852)
Other............................................ (528) (15,437) (64,713)
------------ ------------ ------------
Total other income (expense)............. (323,727) (1,067,739) (34,045)
Loss before extraordinary loss..................... (11,045,811) (11,558,469) (13,829,234)
Extraordinary loss from the extinguishment of
debt............................................. -- -- (885,407)
------------ ------------ ------------
Net loss........................................... (11,045,811) (11,558,469) (14,714,641)
Preferred stock accretion.......................... (1,998,665) (3,779,169) (2,236,716)
Beneficial return on preferred shares.............. -- -- (2,668,109)
------------ ------------ ------------
Net loss available to common shareholders.......... $(13,044,476) $(15,337,638) $(19,619,466)
============ ============ ============
Loss per share:
Net loss per share from continuing operations
(including accretion and beneficial return on
preferred shares)............................. $ (3.38) $ (3.83) $ (2.00)
Net loss per share -- extraordinary loss......... -- -- (0.10)
Net loss per share attributable to common
shareholders.................................. $ (3.38) $ (3.83) $ (2.10)
Shares used in calculation of loss per share:
Basic and diluted................................ 3,858,366 4,009,713 9,327,202
27
29
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
SERIES A
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED
------------------ ------------------- PAID-IN ACCUMULATED STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION
-------- ------- ---------- ------ ----------- ------------ ------------
Balance at December 31, 1996... 795,000 $7,950 3,816,467 $ 382 $13,834,879 $(19,332,786) $ --
Issuance of common stock...... -- -- 151 -- 1,454 -- --
Exercise of common stock
options..................... -- -- 75,038 7 234,491 -- --
Issuance of common stock
warrants.................... -- -- -- -- 2,145,986 -- --
Series B preferred stock
accretion................... -- -- -- -- (10,331) -- --
Series C preferred stock
accretion................... -- -- -- -- (1,988,334) -- --
Net loss...................... -- -- -- -- -- (11,045,811) --
-------- ------- ---------- ------ ----------- ------------ ---------
Balance at December 31, 1997... 795,000 7,950 3,891,656 389 14,218,145 (30,378,597) --
Issuance of common stock...... -- -- 694 -- 5,400 -- --
Exercise of common stock
options..................... -- -- 208,587 20 674,041 -- --
Purchase of treasury stock.... -- -- (64,392) (6) (517,997) -- --
Issuance of common stock
options..................... -- -- -- -- 333,890 -- --
Conversion of Series C
preferred stock to common
stock....................... -- -- 17,108 2 143,998 -- --
Series B preferred stock
accretion................... -- -- -- -- (10,523) -- --
Series C preferred stock
accretion................... -- -- -- -- (3,768,646) -- --
Net loss...................... -- -- -- -- -- (11,558,469) --
-------- ------- ---------- ------ ----------- ------------ ---------
Balance at December 31, 1998... 795,000 7,950 4,053,653 405 11,078,308 (41,937,066) --
Issuance of common stock...... -- -- 3,100,072 310 38,645,647 -- --
Conversion of preferred
stock....................... (795,000) (7,950) 3,571,559 357 35,751,430 -- --
Exercise of common stock
options..................... -- -- 296,382 29 1,324,995 -- --
Exercise of common stock
warrants.................... -- -- 36,066 4 165,191 -- --
Issuance of common stock
options..................... -- -- -- -- 448,661 -- (448,661)
Issuance of common stock
warrants.................... -- -- -- -- 3,191 -- --
Amortization of deferred stock
compensation................ -- -- -- -- -- -- 180,712
Extinguishment of put
option...................... -- -- -- -- 584,477 -- --
Purchase of treasury stock.... -- -- (7,276) -- (61,250) -- --
Repayment of stock
subscription................ -- -- -- -- -- -- --
Beneficial return on preferred
shares...................... -- -- -- -- (2,668,109) -- --
Series B preferred stock
accretion................... -- -- -- -- (4,689) -- --
Series C preferred stock
accretion................... -- -- -- -- (2,232,027) -- --
Net loss...................... -- -- -- -- -- (14,714,641) --
-------- ------- ---------- ------ ----------- ------------ ---------
Balance at December 31, 1999... -- $ -- 11,050,456 $1,105 $83,035,825 $(56,651,707) $(267,949)
======== ======= ========== ====== =========== ============ =========
EMPLOYEE STOCK TOTAL
SUBSCRIPTION STOCKHOLDERS'
RECEIVABLE EQUITY
-------------- -------------
Balance at December 31, 1996... $ -- $ (5,489,575)
Issuance of common stock...... -- 1,454
Exercise of common stock
options..................... (219,498) 15,000
Issuance of common stock
warrants.................... -- 2,145,986
Series B preferred stock
accretion................... -- (10,331)
Series C preferred stock
accretion................... -- (1,988,334)
Net loss...................... -- (11,045,811)
--------- ------------
Balance at December 31, 1997... (219,498) (16,371,611)
Issuance of common stock...... -- 5,400
Exercise of common stock
options..................... (118,875) 555,186
Purchase of treasury stock.... -- (518,003)
Issuance of common stock
options..................... -- 333,890
Conversion of Series C
preferred stock to common
stock....................... -- 144,000
Series B preferred stock
accretion................... -- (10,523)
Series C preferred stock
accretion................... -- (3,768,646)
Net loss...................... -- (11,558,469)
--------- ------------
Balance at December 31, 1998... (338,373) (31,188,776)
Issuance of common stock...... -- 38,645,957
Conversion of preferred
stock....................... -- 35,743,837
Exercise of common stock
options..................... (321,250) 1,003,774
Exercise of common stock
warrants.................... -- 165,195
Issuance of common stock
options..................... -- --
Issuance of common stock
warrants.................... -- 3,191
Amortization of deferred stock
compensation................ -- 180,712
Extinguishment of put
option...................... -- 584,477
Purchase of treasury stock.... -- (61,250)
Repayment of stock
subscription................ 9,383 9,383
Beneficial return on preferred
shares...................... -- (2,668,109)
Series B preferred stock
accretion................... -- (4,689)
Series C preferred stock
accretion................... -- (2,232,027)
Net loss...................... -- (14,714,641)
--------- ------------
Balance at December 31, 1999... $(650,240) $ 25,467,034
========= ============
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30
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1998 1999
------------ ------------ -------------
OPERATING ACTIVITIES
Net loss.......................................... $(11,045,811) $(11,558,469) $ (14,714,641)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation................................. 496,745 813,988 1,095,228
Amortization................................. 47,063 166,009 199,488
Compensation expense related to issuance of
common stock............................... 1,454 333,890 180,712
Provision for losses on accounts
receivable................................. 53,553 (28,118) 100,000
Extraordinary loss on debt extinguishment.... -- -- 885,407
Reserve for inventory obsolescence........... 496,721 -- --
Loss on write-off of long-term receivable.... 100,000 -- --
Changes in assets and liabilities:
Accounts receivable........................ (342,025) (389,411) (1,042,122)
Inventory.................................. 85,215 -- --
Prepaid expenses and other current
assets.................................. (27,434) (322,294) (474,960)
Escrow deposit............................. -- (400,985) 400,985
Other assets............................... -- (352,009) 104,114
Accounts payable........................... 151,219 718,273 (895,593)
Accrued expenses........................... 299,476 339,687 246,854
Deferred revenues.......................... 15,650 295,917 (260,191)
------------ ------------ -------------
Net cash used in operating activities............. (9,668,174) (10,383,522) (14,174,719)
INVESTING ACTIVITIES
Purchase of property and equipment................ (1,096,582) (559,787) (2,004,993)
Purchases of available for sale securities........ -- -- (195,468,564)
Sales of available for sale securities............ -- -- 175,119,313
------------ ------------ -------------
Net cash used in investing activities............. (1,096,582) (559,787) (22,354,244)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock........ 15,000 43,065 39,763,059
Net proceeds from issuance of Series B Preferred
Stock........................................... 360,000 -- --
Net proceeds from issuance of Series C Preferred
Stock........................................... 7,598,750 4,589,791 5,349,000
Proceeds from issuance of long-term debt.......... 4,020,000 8,434,000 --
Proceeds from issuance of long-term debt to
related parties................................. 750,000 450,000 --
Repayment of capital lease obligations............ (114,327) (568,026) (722,239)
Repayment of long-term debt....................... (50,000) (189,710) (9,744,290)
Repayment of long-term debt to related parties.... -- (200,000) --
------------ ------------ -------------
Net cash provided by financing activities......... 12,579,423 12,559,120 34,645,530
------------ ------------ -------------
Net increase (decrease) in cash and Cash
equivalents..................................... 1,814,667 1,615,811 (1,883,433)
Cash and cash equivalents at beginning of
period.......................................... 41,142 1,855,809 3,471,620
------------ ------------ -------------
Cash and cash equivalents at end of period........ $ 1,855,809 $ 3,471,620 $ 1,588,187
============ ============ =============
29
31
ONLINE RESOURCES & COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Online Resources & Communications Corporation (the "Company") is a leading
application service provider for Internet banking and other e-finance services
to regional and community financial institutions. The Company offers its
client's a cost-effective outsourced service, branded in their name, by
seamlessly integrating Internet banking, electronic bill payment, and other
e-financial services into a single-vendor, end-to-end solution. As part of its
services, the Company provides customer support through its call center,
marketing services, web site design, implementation and other services. The
Company operates in one business segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. Cash held for
bill payments in process is immediately disbursed on behalf of users and no net
cash balance is reflected on the Company's financial statements.
Cash paid for interest during the years ended December 31, 1997, 1998 and
1999 was approximately $151,000, $953,000, and $1,016,000, respectively.
REVENUE RECOGNITION
The Company generates revenues from several sources including
implementation fees, core services, support services and related products.
Revenues from core services include account access and transaction fees. Support
services include customer service, communications, web page design and other
services. Implementation revenues are generated from the linking of the
Financial Institution client's to the Company's proprietary Opus(SM) system
through various networks and the Company's gateways. The Company earns revenues
from related products through the sale of devices used to access the Opus(SM)
system.
Core and support service revenues are recognized over the term of the
contract as the services are provided. Revenues from implementation fees are
recognized under the percentage of completion method in accordance with
Statement of Position ("SOP") 81-1, "Accounting for performance of
Construction-Type and Certain Production Type Contracts" as certain milestone
output measures are completed. Related product sales revenue is recognized as
products are shipped. Deferred revenues result from advance receipts on product
sales and implementation services while complying with the aforementioned
revenue recognition policies. For the years ended December 31, 1997, 1998 and
1999, the Company derived 36%, 11% and 14% of its revenue from three, one and
one customers, respectively.
SYSTEMS AND DEVELOPMENT
Systems and development costs are charged to expense as incurred.
30
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are recorded at
cost. Depreciation is calculated using the straight-line method over the
estimated useful lives of the related assets which range from five to seven
years. Equipment recorded under capital leases is amortized over the shorter of
the estimated useful life of the asset or the lease term.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1999, the carrying value of the following financial
instruments: cash and cash equivalents, investments in available for sale
securities, accounts receivable, accounts payable and accrued liabilities
approximates their fair value based on the liquidity of these financial
instruments or based on their short term nature. The carrying value of capital
lease obligations approximates fair value based on the market interest rates
available to the Company for debt of similar risk and maturities.
EARNINGS (LOSS) PER SHARE
Net loss per share is computed by dividing the net loss applicable to
common shareholders for the period by the weighted average number of common
shares outstanding. Shares associated with stock options, warrants and
convertible preferred stock are not included to the extent they are
anti-dilutive.
STOCK BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123). The provisions of SFAS
No. 123 allow companies to either expense the estimated fair value of stock
options or to continue to follow the intrinsic value method set forth in APB
Opinion 25, "Accounting for Stock Issued to Employees" (APB No. 25) but disclose
the pro forma effects on net loss had the fair value of the options been
expensed. The Company has elected to continue to apply APB No. 25 in accounting
for its stock option incentive plans and, accordingly, recognizes compensation
expense for the difference between the fair value of the underlying common stock
and the grant price of the option at the date of grant.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of
("SFAS 121"). SFAS 121 requires impairment losses to be recognized for
long-lived assets when indicators of impairment are present and the undiscounted
cash flows are not sufficient to recover the assets' carrying amount. The
impairment loss of these assets is measured by comparing the carrying amount of
the asset to its fair value, with any excess of carrying value over fair value
written off. Fair value is based on market prices where available, an estimate
of market value, or determined by various valuation techniques including
discounted cash flow.
3. INVESTMENTS
The Company classifies its investments as available-for-sale. Investments
in securities that are classified as available-for-sale and have readily
determinable fair values are measured at fair market value in the balance
sheets. Any unrealized gains or losses, net of taxes, are reported as a separate
component of stockholders' equity. Realized gains and losses and declines in
market value judged to be other than temporary are included in investment
income. Interest and dividends are included in investment income. For purposes
of determining gross realized gains and losses, the cost of securities sold is
based on the average cost method. As of December 31, 1999, there are no material
unrealized gains or losses on investments. The contractual maturities on the
investments are generally greater than twelve months.
31
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3. INVESTMENTS (CONTINUED)
The following is a summary of the estimated fair value of
available-for-sale securities at December 31, 1999:
US Government Treasury Obligations.......................... $ 8,343,786
Commercial Bonds............................................ 11,562,143
-----------
$19,905,929
===========
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
----------------------
1998 1999
---------- ---------
Central processing systems and terminals.................... $2,348,465 3,273,148
Office furniture and equipment............................ 643,895 1,167,033
Central processing systems and terminals under capital
leases................................................. 1,212,103 1,752,991
Office furniture and equipment under capital leases....... 781,698 781,698
Leasehold improvements.................................... 483,687 1,040,859
---------- ---------
5,469,848 8,015,729
Less accumulated depreciation............................. 2,303,829 3,399,057
---------- ---------
$3,166,019 4,616,672
========== =========
5. LONG TERM DEBT
From November 1995 to May 1996, the Company issued $4,500,000 of long-term
notes payable (the "Bridge Notes"), $360,000 of which was to related parties.
Each bridge unit consisted of a 10% promissory note with a face value ranging
from $10,000 to $500,000, convertible into shares of preferred stock at a price
per share achieved in future equity placements, and warrants to purchase 519,195
shares of common stock (12,830 of which are held by directors of the Company)
ranging from $7.01 to $7.72 per share which approximated the fair value of the
warrants (Note 9). Payments of $50,000 plus $51,900 in accrued interest, were
made during 1997. In addition, during 1997, $4,250,000 of the Bridge Notes plus
accrued interest of approximately $443,000 were converted into 46,920 shares of
Series C redeemable convertible Preferred Stock ("Series C Preferred Stock").
Upon conversion into Series C Preferred Stock, each stockholder received a
warrant with a five year term to purchase common stock equal to 40% of the
stockholder's investment at $8.42 per share (Notes 8 and 9).
From January 1997 through May 1997, the Company obtained $3,270,000 in
bridge financing (The "1997 Bridge Notes") through the sale of bridge units.
Each bridge unit consisted of an 8% promissory note with a face value ranging
from $10,000 to $750,000 and warrants to purchase common stock equal to 40% of
the principal amount of the underlying note at $8.42 per share (Note 9). The
Company allocated $405,000 of the 1997 Bridge Notes to the fair value of the
warrants issued using the Black - Scholes pricing model and recorded a
corresponding debt discount which was amortized using the effective interest
method. Upon successful completion of a Series C Preferred Stock offering during
1997 (Note 8), the Company converted $3,270,000 in principal plus $60,741 in
accrued interest less the unamortized discount of $392,000 into 33,301 shares of
Series C Preferred Stock.
In June 1997, the Company entered into a $2,000,000 four year note secured
by inventory and equipment (the "Equipment Note"). The Equipment Note called for
interest at 9% per annum with interest only to be paid in the first twelve
months and with principal and interest starting in month thirteen. The Company
drew $1,500,000 of proceeds under the agreement in June 1997 and $434,000 in
April 1998. In connection with this note, the Company issued warrants to
purchase 10,500 shares of Series C Preferred Stock at $100.00 per share
32
34
5. LONG TERM DEBT (CONTINUED)
(Note 9). The Company allocated $325,000 of the Equipment Note proceeds to the
fair value of the warrants issued using the Black - Scholes method and recorded
a corresponding debt discount which was amortized using the effective interest
method over the term of the debt. The discount to the debt resulted in an
effective interest rate of 14%, which is consistent with debt instruments having
similar risks had no warrants been attached. During the years ended December 31,
1997, 1998 and 1999, the Company recognized additional interest expense of
$47,000, $82,000 and $41,000, respectively, related to this allocation. The
Company repaid the entire outstanding balance of this note in June 1999.
Accordingly, the Company recorded an extraordinary loss of $286,419 from the
extinguishment of debt related to the unamortized discounts and loan fees.
In March 1998, the Company issued $250,000 of promissory notes to certain
stockholders which bear interest at 8% per annum. The principal and accrued
interest was converted into 2,653 shares of Series C Preferred Stock in December
1998.
In March 1998, the Company entered into a $6,000,000 Loan Agreement with
Sirrom Capital Corporation ("Sirrom"). In June 1998, the Company entered into an
additional $2,000,000 Loan Agreement with Sirrom, collectively the "Sirrom
Loan". The Sirrom Loan was secured by a second lien on the Company's existing
secured assets and a first lien on the balance of the Company's assets. The
Sirrom Loan called for interest at a stated annual rate of 12.75% payable
monthly through February 2003, with principal and any remaining interest due in
March 2003. In connection with the Sirrom Loan, the Company issued stock
purchase warrants expiring in May 2003, granting Sirrom the right to purchase a
total of 165,736 shares of the Company's common stock at $8.42 per share. The
Sirrom Loan required the Company to maintain cash in an escrow account to be
used by the lender for the first year of interest payments.
The stock purchase warrants were subject to a put option whereby Sirrom can
sell the warrants to the Company in the 30-day period prior to the warrants
expiration date. The put option is terminated in the event of an initial public
offering. The put option price was equal to the fair market value of the common
stock issuable under the warrants less the exercise price of $8.42 per share.
The Company allocated $584,477 of the proceeds to the fair value of the 165,736
warrants issued using the Black - Scholes method. The discount to the debt
resulted in an effective interest rate of 14%, which is consistent with debt
instruments having similar risks had no warrants been attached. The allocation
of value to the warrants resulted in a corresponding debt discount and put
option liability. The $584,477 debt discount was being amortized to interest
expense using the effective interest method over the term of the loan. During
the years ended December 31, 1998 and 1999, the Company recognized additional
interest expense of approximately $52,000 and $49,000 related to this
allocation, respectively.
In June, 1999, the Company repaid the entire $8,000,000 face amount of the
Sirrom Loan. Accordingly, the Company recognized an extraordinary loss on the
extinguishment of debt of $598,000 related to the unamortized debt discount and
loan fees.
As of December 31, 1997, 1998, and 1999, accrued interest on notes payable
totaled approximately $333,000, $57,000 and $0, respectively.
33
35
5. LONG TERM DEBT (CONTINUED)
The following table summarizes the notes payable activity:
DECEMBER 31,
-----------------------
1998 1999
---------- ----------
Related Party Notes......................................... $ 200,000 $ --
Equipment Note (net of unamortized discount of $196,481 at
December 31, 1998...................................... 1,547,809 --
Sirrom Notes (net of unamortized discount of $310,380 at
December 31, 1998)..................................... 7,689,620 --
---------- ----------
9,437,429 --
Less current portion...................................... 911,962 --
---------- ----------
Long term debt, less current portion...................... $8,525,467 $ --
========== ==========
6. COMMITMENTS
OFFICE SPACE
The Company leases office space and equipment under operating leases. Rent
expense under the operating leases was approximately $500,000, $676,000 and
$921,000 for the years ended December 31, 1997, 1998, and 1999, respectively.
The office leases provide for escalating rent over the respective lease term.
EQUIPMENT
The Company also leases equipment under capital leases. In 1998 and 1999,
the Company incurred capital lease obligations of $1,259,000 and $541,000,
respectively, for the purchase of equipment. Amortization of assets held under
capital leases is included in depreciation and amortization in the statements of
cash flows.
Future minimum lease payments on operating and capital leases are as
follows:
OPERATING CAPITAL
---------- ------------
DECEMBER DECEMBER 31,
31, 1999 1999
---------- ------------
2000........................................................ $ 984,069 $ 753,200
2001........................................................ 1,013,590 318,229
2002........................................................ 609,000 63,765
---------- ----------
Total minimum lease payments...................... $2,606,659 1,135,194
==========
Less amount representing interest........................... (96,638)
----------
Present value of minimum lease payments..................... 1,038,556
Less current portion........................................ 709,076
----------
Long-term portion of minimum lease payments................. $ 329,480
==========
7. INCOME TAXES
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $57 million that expire at varying dates from 2010 to 2019. Of
that $57 million, approximately $2 million relates to the exercise of stock
options, an equity item. The use of these losses may be subject to significant
limitations due to ownership changes pursuant to Section 382 of the Internal
Revenue Code resulting from the issuances of Preferred and Common Stock.
34
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7. INCOME TAXES (CONTINUED)
Significant components of the Company's net deferred tax assets are as
follows:
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
Deferred tax assets:
Inventory allowance...................................... $ 322,000 $ 290,000
Net operating loss carryforwards......................... 16,348,000 22,877,000
Deferred wages........................................... 446,000 235,000
Other deferred tax assets................................ 49,000 91,000
----------- -----------
Total deferred tax assets........................ 17,165,000 23,493,000
Deferred liabilities:
Depreciation............................................. (161,000) (265,000)
Other deferred tax liabilities........................... -- --
----------- -----------
Total deferred tax liabilities................... (161,000) (265,000)
Valuation allowance for net deferred tax assets............ (17,004,000) (23,228,000)
----------- -----------
Net deferred tax assets.................................... $ -- $ --
=========== ===========
The Company had not paid income taxes during 1997, 1998 or 1999 due to its
net operating loss position.
The following is a summary of the items that caused recorded income taxes
to differ from taxes computed using the statutory federal income tax rate for
the years ended December 31, 1997, 1998 and 1999:
DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
Tax expense (benefit) at statutory Federal
rate........................................ $(3,756,000) $(3,930,000) $(5,003,000)
Effect of:
State income tax, net.................... (663,000) (693,000) --
Non-statutory stock options exercise..... (26,000) (16,000) (421,000)
Other.................................... 8,000 10,000 18,000
Increase in valuation allowance.......... 4,437,000 4,629,000 5,406,000
----------- ----------- -----------
Income tax expense............................ $ -- $ -- $ --
=========== =========== ===========
8. PREFERRED STOCK
Of the 3,000,000 authorized preferred shares of the Company, 100,000 shares
have been designated as Series B redeemable convertible Preferred Stock ("Series
B Preferred Stock") and 287,000 have been designated as Series C Preferred
Stock. In addition, 1,000,000 shares have been designated as Series A
convertible Preferred Stock ("Series A Preferred Stock"). Upon liquidation of
the Company, the following represents the order of preference given to holders
of the Company's Preferred Stock: Series C Preferred Stock, Series B Preferred
Stock and Series A Preferred Stock. The Company has not designated for any
series the remaining 1,613,000 preferred shares.
SERIES A PREFERRED STOCK
Each share of Series A Preferred Stock is convertible into .35642 of one
share of common stock. Holders of Series A Preferred Stock shares are entitled
to receive dividends at the same rate as holders of common stock and have voting
rights equal to their common stock equivalent on an as if converted basis.
Additionally, each Series A Preferred Stock holder is entitled to a liquidation
preference equal to $1.00 plus declared but unpaid dividends. Concurrent with
the closing of the Company's initial public offering in June 1999, all shares of
Series A Preferred Stock converted automatically into 283,343 shares of common
stock.
35
37
8. PREFERRED STOCK (CONTINUED)
SERIES B PREFERRED STOCK
In the fourth quarter of 1996 and during 1997, the Company issued 6,700 and
3,350 shares of Series B Preferred Stock at $100 per share for total proceeds of
$670,000 and $335,000, respectively. During 1997, Series B Preferred Stock
stockholders converted 9,050 shares of Series B Preferred Stock into an
equivalent number of shares of Series C Preferred Stock. Additionally, as an
incentive to convert to Series C Preferred Stock, the Series B Preferred Stock
stockholders received in aggregate an additional consideration of 322 shares of
Series C Preferred Stock which was included in the calculation of the discount
for purposes of accretion. At December 31, 1998 holders of 1,000 shares of
Series B Preferred Stock had the option of converting their investment into an
equivalent number of shares of Series C Preferred Stock. During the first
quarter of 1999, a stockholder converted 250 shares of Series B Preferred Stock
into an equivalent number of shares of Series C Preferred Stock. The stockholder
received an additional seven shares of Series C Preferred Stock and 1,222
warrants to purchase common stock at $8.42 per share expiring on June 1, 2002
(Note 9). Each share of the Series B Preferred Stock was convertible at the
holder's option and automatically in an IPO, as defined into 11.880 shares of
common stock. The Series B Preferred Stock holders were also entitled to vote
and receive dividends and distributions on an as if converted basis and were
entitled to a liquidation preference of $175 per share plus declared but unpaid
dividends. Additionally, the holders of the Series B Preferred Stock could
demand redemption of their shares at the greater of $175 per share or the fair
market value of the preferred stock. The excess of the redemption value over the
carrying value was being accreted using the interest method so that the carrying
value will equal the redemption value of $175 per share plus cumulative unpaid
dividends on the scheduled redemption date of December 31, 2003. The Company
recorded accretion on the Series B Preferred Stock of $10,331, $10,523, and
$4,689 during the years ended December 31, 1997, 1998 and 1999 respectively.
Concurrent with the closing of the Company's initial public offering in June
1999, the remaining 750 shares of Series B Preferred Stock converted into 8,910
shares of common stock.
SERIES C PREFERRED STOCK
During 1997, the Company issued 173,036 shares of Series C Preferred Stock
at $100 per share. Of the 173,036 shares issued, 9,050 shares were issued
related to the conversion of Series B Preferred Stock; 42,500 shares were issued
related to the conversion of $4,250,000 of the 1996 Bridge Notes; 32,700 shares
were issued related to the conversion of $3,270,000 of 1997 Bridge Notes; 5,343
shares were issued to satisfy approximately $504,000 of accrued interest and
additional consideration, and 83,443 shares were issued resulting in cash
proceeds of $7,750,000. During 1998, 1,440 shares of Series C issued in
connection with the conversion of the Bridge Notes were converted into 17,108
shares of common stock. In conjunction with the 1997 Series C financings and
conversions, each stockholder received a warrant with a five-year term to
purchase common stock equal to 40% of the stockholder's investment at $8.42 per
share. Total warrants issued in connection with the Series C Preferred Stock
were 664,133. The Company allocated $1,732,977 to the value of the warrants
based on their estimated fair value at the date of issuance (Note 9).
During December 1998, the Company issued 50,451 shares of Series C
Preferred Stock for total proceeds of $5,039,791. Included in the $5,039,791 of
proceeds is a receivable balance of $450,000 which is classified in prepaid
expenses and other current assets at December 31, 1998. In addition to the
Series C Shares, the shareholders received warrants to purchase a total of
126,056 Shares of common stock at $8.42 per share (Note 9). These warrants have
a five year life.
From January through March 1999, the Company sold 49,034 shares of Series C
Preferred Stock resulting in net proceeds of $4,899,000. The Company also
converted the $200,000 related party note outstanding at December 31, 1998 plus
accrued interest of $3,800 into 2,038 shares of Series C Preferred Stock. In
addition to the Series C shares, the shareholders received warrants to purchase
a total of 121,420 shares of the Company's common stock at $8.42 per share (Note
9). These warrants have a five year life. The Company recorded a deemed
beneficial return on these shareholders of approximately $2.7 million due to the
Series C Preferred Stock being convertible into common stock at a discount from
fair value at the date of issuance.
36
38
8. PREFERRED STOCK (CONTINUED)
Each share of Series C Preferred Stock was convertible at the holder's
option and automatically in an IPO, as defined into 11.880 shares of common
stock. The Series C Preferred Stock holders were also entitled to vote and
receive dividends and distributions on an as if converted basis and were
entitled to a liquidation preference of $100 per share plus $17,500,000
allocated based on the percentage of shares owned, and declared but unpaid
dividends. Additionally, the holders of the Series B Preferred Stock could
demand redemption of their shares at the greater of $200 per share or the fair
market value of the preferred stock. The excess of the redemption value over the
carrying value was being accreted using the interest method so that the carrying
value will equal the redemption value of $200 per share plus cumulative unpaid
dividends on the scheduled redemption date of January 1, 2004. The Company
recorded accretion on the Series C Preferred Stock of $1,988,334, $3,768,646,
and $2,232,027 during the years ended December 31, 1997, 1998 and 1999
respectively.
Concurrent with the consummation of the initial public offering in June
1999, all outstanding shares of Series C Preferred Stock converted into
3,279,306 shares of common stock.
9. STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
Effective May 2, 1999, the Board of Directors and stockholders of the
Company approved a 1 for 2.8056787 reverse stock split of the Company's $0.0001
par value common stock. All references in the accompanying financial statements
to the number of shares of common stock and per share amounts have been restated
to reflect the split.
On June 4, 1999, the Company completed an initial public offering of
3,100,000 shares of its common stock. The offered shares generated proceeds, net
of underwriting commissions, to the Company of approximately $40 million and
this was further reduced by an additional $1 million of other related offering
costs.
37
39
9. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
WARRANTS
The Company's common stock warrant activity is as follows:
EXERCISE EXPIRATION
WARRANTS PRICE DATE
--------- -------- --------------
Outstanding at January 1, 1996.................... 124,833
Warrants issued in connection with debt
financing.................................. 44,552 7.01 Mar. 31, 2000
Warrants issued in connection with debt
financing.................................. 611,611 7.01 Apr. 30, 2001
Warrants issued in connection with debt
financing.................................. 4,859 7.72 Dec. 31, 2000
---------
Balance at December 31, 1996...................... 785,855
Warrants issued in connection with conversion
of Series B Preferred Stock................ 44,591 8.42 June 1, 2002
Warrants issued in connection with conversion
of the Bridge Notes........................ 225,888 8.42 June 1, 2002
Warrants issued in connection with the
issuance of the 1997 Bridge Notes.......... 155,388 8.42 June 1, 2002
Warrants issued in connection with issuance
of Series C Preferred Stock................ 396,540 8.42 June 1, 2002
---------
Balance at December 31, 1997...................... 1,608,262
Warrants issued in connection with issuance of
the Sirrom Loan.............................. 139,004 8.42 May 31, 2003
---------
Balance at December 31, 1998...................... 1,747,266
Warrants issued in connection with Sirrom
Loan......................................... 26,732 8.42 May 31, 2003
Warrants issued in connection with conversion of
Series B Preferred Stock..................... 1,222 8.42 June 1, 2002
Warrants issued in connection with issuance of
Series C Preferred Stock..................... 247,476 8.42 Dec. 31, 2003
Conversion of Series C Preferred Stock Warrants
issued in connection with the Equipment Note
into Common Stock Warrants................... 124,717 8.42 June 3, 2002
Exercise of warrants during 1999................ (36,066)
---------
Balance at December 31, 1999...................... 2,111,347
=========
During 1999, warrants to purchase 19,621 shares of common stock were
exercised for net proceeds of approximately $165,000. Additionally, certain
holders exercised warrants to purchase 31,093 shares of common stock by electing
to receive 16,445 shares.
STOCK OPTIONS
In February 1989, the Company adopted an Incentive Stock Option Plan (the
Plan). During June 1997, the Company's Board of Directors authorized an increase
of 124,747 shares of common stock that can be issued under the Plan. During
1998, the Company's Board of Directors increased the number of shares of common
stock that can be issued under the plan to 2,316,730. The option price under the
Plan will not be less than fair market value, as determined by the Board of
Directors, on the date of grant. The vesting period of the options is determined
by the Board of Directors and is generally four years. Outstanding options
expire after ten years.
During 1999, the Company adopted the 1999 Stock Option Plan (the "1999
Plan"). The 1999 Plan permits the granting of both incentive stock options and
nonqualified stock options to employees, directors and consultants. The
aggregate number of shares that can be granted under the 1999 Plan is 757,708.
The option price under the 1999 Plan will not be less than fair market value, as
determined by the Board of Directors, on
38
40
9. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
the date of grant. The vesting period of the options is determined by the Board
of Directors and is generally four years. Outstanding options expire after ten
years.
During 1998, three employees tendered a total of 64,392 shares of common
stock to the Company at prices ranging from $7.01 to $8.42 per share. The
proceeds were used to exercise 156,109 options to purchase shares of common
stock. During 1999, an employee tendered 1,336 shares of common stock to the
Company for $8.42 per share. The proceeds were used to exercise options to
purchase 2,673 shares of common stock.
During the year ended December 31, 1997, two employees exercised 27,088
options in exchange for notes receivable totaling $71,244. During 1998, four
employees exercised 40,451 options in exchange for $118,875 of notes receivable.
During 1999, five employees exercised 79,302 options in exchange for notes
receivable totaling $321,250. As of December 31, 1997, 1998 and 1999, 27,088,
167,539 and 244,168, respectively, of these shares of common stock were held by
the Company as collateral for the notes receivable.
Additional information with respect to incentive stock option activity
under the stock option plans is summarized as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1998 1999
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
Outstanding at beginning of period....... 1,448,906 $5.15 1,532,993 $5.20 1,779,382 $ 6.77
Options granted.......................... 235,811 8.58 551,787 8.42 1,068,491 13.14
Options exercised........................ (75,038) 3.13 (208,588) 3.23 (296,670) 4.60
Options canceled or expired.............. (76,686) 7.04 (96,810) 6.55 (110,291) 9.28
--------- ----- --------- ----- --------- ------
Outstanding at end of period............. 1,532,993 $5.68 1,779,382 $6.77 2,440,912 $ 9.68
========= ===== ========= ===== ========= ======
Options exercisable at end of period..... 1,273,467 $5.20 1,487,480 $6.48 1,355,198 $ 7.30
========= ===== ========= ===== ========= ======
The following table summarizes information about stock options outstanding
at December 31, 1999
DECEMBER 31, 1999
OPTIONS OUTSTANDING DECEMBER 31, 1999
------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED- -----------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
----------- ---------------- --------- ----------- ---------
$0.06 to $7.00........................ 691,896 2.91 $ 5.65 662,636 $ 5.63
$7.01 to $8.39........................ 3,212 3.42 7.70 3,212 7.70
$8.40 to $8.49........................ 651,708 6.20 8.40 543,837 8.40
$8.50 to $13.99....................... 434,446 6.35 11.10 140,513 10.68
$14.00 to $21.13...................... 659,650 7.34 14.25 5,000 16.00
--------- ---------
2,440,912 5.60 $ 9.68 1,355,198 $ 7.30
========= =========
In 1996, the Company adopted the disclosure-only provisions of SFAS No.
123. Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant date for awards under the plan consistent
with the methodology prescribed under SFAS No. 123, the Company would have
incurred an additional expense of approximately $580,000, $933,000 and
$2,412,000 resulting in a net loss in 1997, 1998, and 1999 of approximately
$11,376,000, $12,491,500 and $17,126,000, respectively. The resulting basic and
diluted pro forma net loss per share would be $(3.01), $(3.12) and $(1.84) for
the years ended December 31, 1997, 1998 and 1999, respectively. The effect of
applying SFAS No. 123 on 1997, 1998, and 1999 pro forma net loss as stated above
is not necessarily representative of the effects on reported net loss for future
years due to, among other things, (1) the vesting period of the stock options
and (2) the fair value of additional stock options in future years. The fair
value of each option grant is estimated on the date of grant
39
41
9. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
using the Black-Scholes option-pricing model with the following assumptions:
expected life of four years, dividend yield of 0%, risk free interest rate of
6.625% and a volatility of 25% for option grants in 1997 and 1998 and a
volatility of 108% for option grants in 1999. The weighted average fair values
of the options granted during 1997, 1998 and 1999 with a stock price equal to
the exercise price are estimated as $2.61, $2.61 and $10.56 per share,
respectively, on the date of grant. The weighted average fair value of the
options granted during 1999 with a stock price greater than the exercise price
is $10.12 per share.
10. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share:
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
------------ ------------ ------------
Net loss................................... $(11,045,811) $(11,558,469) $(14,714,641)
Beneficial return on preferred shares...... -- -- (2,668,109)
Preferred stock accretion.................. (1,998,665) (3,779,169) (2,236,716)
------------ ------------ ------------
Net loss available for common
shareholders............................. (13,044,476) (15,337,638) (19,619,466)
============ ============ ============
Weighted average number of common shares... 3,858,366 4,009,713 9,327,202
Effect of dilutive securities:
Stock options.............................. -- -- --
Warrants................................... -- -- --
Redeemable convertible preferred stock..... -- -- --
------------ ------------ ------------
Adjusted weighted average shares and
assumed conversions...................... 3,858,366 4,009,713 9,327,202
============ ============ ============
Loss per share:
Basic and diluted........................ $ (3.38) $ (3.83) $ (2.10)
Due to their antidilutive effects, outstanding shares of preferred stock,
stock options and warrants to purchase 5,616,962, 6,616,096 and 4,552,259 shares
of common stock at December 31, 1997, 1998 and 1999, respectively, were excluded
from the computation of diluted earnings per share.
40
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information regarding directors and executive officers of the Company
appearing under the caption "Election of Directors" in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission (the "2000 Proxy Statement") is hereby
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the caption "Executive Compensation" in the
2000 Proxy Statement is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information setting forth the security ownership of certain beneficial
owners and management appearing under the captions "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Management" in the 2000
Proxy Statement is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information setting forth certain relationships and related transactions
appearing under the caption "Certain Related Party Transactions" in the 2000
Proxy Statement is hereby incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) EXHIBITS AND FINANCIAL STATEMENTS AND SCHEDULES.
(1) Financial Statements. The Company's financial statements are included
in Part II, Item 8 of this report on Form 10-K.
(2) Schedule II -- Valuation and Qualifying Accounts.
41
43
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
We have audited the financial statements of Online Resources &
Communications Corporation as of December 31, 1998 and 1999, and for each of the
three years in the period ended December 31, 1999, and have issued our report
thereon dated February 10, 2000 (included elsewhere in the Annual Report on Form
10-K). Our audits also included the financial statement schedule listed in Item
14(a)(2) of the Form 10-K. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
McLean, Virginia
February 10, 2000
42
44
SCHEDULE II -- VALIDATION AND QUALIFYING ACCOUNT AND RESERVE
BALANCE AT BALANCE AT
BEGINNING OF END OF
CLASSIFICATION PERIOD ADDITIONS DEDUCTIONS PERIOD
-------------- ------------ --------- ---------- ----------
Allowance for doubtful accounts:
Year ended December 31, 1997..................... $ 26,000 $ 53,553 -- $ 79,553
Year ended December 31, 1998..................... $ 79,553 -- $28,118 $ 51,435
Year ended December 31, 1999..................... $ 51,435 $100,000 -- $151,435
Inventory Reserve:
Year ended December 31, 1997..................... $402,638 $496,721 -- $899,359
Year ended December 31, 1998..................... $899,359 -- $83,542 $815,817
Year ended December 31, 1999..................... $815,817 -- $90,321 $725,496
All other schedules set forth in the applicable accounting regulations of
the Securities and Exchange Commission either are not required under the related
instructions or are not applicable and, therefore, have been omitted.
(3) List of Exhibits.
3.1 Form of Amended and Restated Certificate of Incorporation of
the Company (Incorporated by reference from our registration
statement on Form S-1; Registration No. 333-74777)
3.2 Form of Amended and Restated Bylaws of the Company
(Incorporated by reference from our registration statement
on Form S-1; Registration No. 333-74777)
4.1 Specimen of Common Stock Certificate of the Company
(Incorporated by reference from our registration statement
on Form S-1; Registration No. 333-74777)
4.2 Form of warrants issued in 1995 in conjunction with bridge
notes (Incorporated by reference from our registration
statement on Form S-1; Registration No. 333-74777)
4.3 Form of warrants issued in 1995 and 1996 to purchasers of
notes due December 31, 1997 (Incorporated by reference from
our registration statement on Form S-1; Registration No.
333-74777)
4.4 Form of warrants issued to purchasers of senior notes due
June 30, 1999 (Incorporated by reference from our
registration statement on Form S-1; Registration No.
333-74777)
4.5 Form of warrants issued to purchasers of Series C preferred
stock in 1997 (Incorporated by reference from our
registration statement on Form S-1; Registration No.
333-74777)
4.6 Form of warrants issued to Dominion Fund IV (Incorporated by
reference from our registration statement on Form S-1;
Registration No. 333-74777)
4.7 Form of warrants issued in 1998 to Sirrom Capital
Corporation (Incorporated by reference from our registration
statement on Form S-1; Registration No. 333-74777)
4.8 Form of warrants issued to purchasers of Series C preferred
stock in 1998 and 1999 (Incorporated by reference from our
registration statement on Form S-1; Registration No.
333-74777)
4.9 Form of warrants issued to placement agents (Incorporated by
reference from our registration statement on Form S-1;
Registration No. 333-74777)
4.10 Registration Rights Agreement for purchasers of common stock
in 1995 (Incorporated by reference from our registration
statement on Form S-1; Registration No. 333-74777)
4.11 Registration Rights Agreement for purchasers of Series C
preferred stock and Sirrom Capital Corporation (Incorporated
by reference from our registration statement on Form S-1;
Registration No. 333-74777)
10.1 Lease Agreement for premises at 7600 Colshire Drive, McLean,
Virginia (Incorporated by reference from our registration
statement on Form S-1; Registration No. 333-74777)
10.2 Online Resources & Communications Corporation 1989 Stock
Option Plan (Incorporated by reference from our registration
statement on Form S-1; Registration No. 333-74777)
10.3 Loan Agreement dated June 3, 1997 with Dominion Fund IV
(Incorporated by reference from our registration statement
on Form S-1; Registration No. 333-74777)
43
45
10.4 Security Agreement dated June 3, 1997 with Dominion Fund IV
(Incorporated by reference from our registration statement
on Form S-1; Registration No. 333-74777)
10.5 Loan Agreement dated March 31, 1998 and amendment thereto
with Sirrom Capital Corporation (Incorporated by reference
from our registration statement on Form S-1; Registration
No. 333-74777)
10.6 Security Agreement dated March 31, 1998 with Sirrom Capital
Corporation (Incorporated by reference from our registration
statement on Form S-1; Registration No. 333-74777)
10.7 Form of Stock Option Plan (Incorporated by reference from
our registration statement on Form S-1; Registration No.
333-74777)
23.1 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
The registrant has filed no Forms 8-K during the quarter ended December 31,
1999.
44
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ONLINE RESOURCES & COMMUNICATIONS
CORPORATION
Date: March 30, 2000 By: /s/ MATTHEW P. LAWLOR
------------------------------------
Matthew P. Lawlor
Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MATTHEW P. LAWLOR Chairman and Chief Executive March 30, 2000
- ------------------------------------------------ Officer
Matthew P. Lawlor
/s/ CARL D. BLANDINO Executive Vice President and Chief March 30, 2000
- ------------------------------------------------ Financial Officer (Principal
Carl D. Blandino Financial and Accounting Officer)
/s/ THOMAS S. JOHNSON Director March 30, 2000
- ------------------------------------------------
Thomas S. Johnson
/s/ JOSEPH J. SPALLUTO Director March 30, 2000
- ------------------------------------------------
Joseph J. Spalluto
/s/ DAVID A. O'CONNOR Director March 30, 2000
- ------------------------------------------------
David A. O'Connor
/s/ ERVIN R. SHAMES Director March 30, 2000
- ------------------------------------------------
Ervin R. Shames
/s/ GEORGE M. MIDDLEMAS Director March 30, 2000
- ------------------------------------------------
George M. Middlemas
/s/ MICHAEL K. LEE Director March 30, 2000
- ------------------------------------------------
Michael K. Lee
/s/ MICHAEL H. HEATH Director March 30, 2000
- ------------------------------------------------
Michael H. Heath