10-Q 1 b37248one10-q.txt ONESOURCE INFORMATION SERVICES, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended September 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the Transition period from ______ to ______ Commission File Number 0-25849 ONESOURCE INFORMATION SERVICES, INC. (Exact name of registrant as specified in its charter) Delaware 04-3204522 -------------------------------- ------------------------------------ (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 300 BAKER AVENUE, CONCORD, MA 01742 ------------------------------------------------------------ (Address of principal executive offices, including Zip Code) (978) 318-4300 --------------- (Registrant's telephone number, including area code) ---------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of the issuer's Common Stock, $0.01 par value per share, outstanding as of November 10, 2000 was 12,113,808. 2 ONESOURCE INFORMATION SERVICES, INC. CONTENTS
PAGE -------------------------------------------------------------------------------- PART I FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheet as of September 30, 2000 and December 31, 1999 3 Consolidated Statement of Operations for the Three months and nine months ended September 30, 2000 and 1999 4 Consolidated Statement of Cash Flows for the Nine months ended September 30, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 PART II OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 18 Item 6. Exhibits and Reports on Form 8-K 19 Signature 20 Exhibit Index 21
3 PART I FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS ONESOURCE INFORMATION SERVICES, INC. CONSOLIDATED BALANCE SHEET (In thousands, except share data) (unaudited)
September 30, December 31, 2000 1999 ------------- ------------ Assets Current assets: Cash and cash equivalents .................................... $ 16,729 $ 13,598 Accounts receivable, net of allowance for doubtful accounts of $375 and $348 at September 30, 2000 and December 31, 1999 respectively ............................ 8,841 14,420 Restricted time deposit ...................................... -- 100 Deferred subscription costs .................................. 5,300 7,225 Prepaid expenses and other current assets .................... 342 272 ------------- ------------ Total current assets ...................................... 31,212 35,615 Property and equipment, net .........,,,,,......................... 5,260 3,422 Intangible assets, net ............................................ 8,478 9,606 Restricted time deposits .......................................... 603 603 Other assets ...................................................... 414 452 ------------- ------------ Total assets ........................................... $ 45,967 $ 49,698 ============= ============ Liabilities and Stockholders' Equity Current liabilities: Current portion of capital lease obligations ................. $ 63 $ 205 Accounts payable ............................................. 1,183 1,501 Accrued expenses ............................................. 4,382 4,618 Accrued royalties ............................................ 4,189 5,760 Deferred revenues ............................................ 21,808 24,222 ------------- ------------ Total current liabilities ................................. 31,625 36,306 Capital lease obligations, net of current portion ................. -- 29 ------------- ------------ Total liabilities ...................................... 31,625 36,335 ------------- ------------ Stockholders' equity: Preferred stock, $0.01 par value: 1,000,000 shares authorized, no shares issued and outstanding at September 30, 2000 and December 31, 1999 .... -- -- Common stock, $0.01 par value: 20,000,000 shares authorized, 11,702,762 and 10,381,109 shares issued and outstanding at September 30,2000 and December 31, 1999, respectively ........................ 117 104 Additional paid-in capital ................................... 29,423 28,504 Deferred compensation ........................................ (198) (271) Accumulated deficit .......................................... (15,185) (14,891) Accumulated other comprehensive income (loss) ................ 185 (83) ------------- ------------ Total stockholders' equity ............................. 14,342 13,363 ------------- ------------ Total liabilities and stockholders' equity ............. $ 45,967 $ 49,698 ============= ============
The accompanying notes are an integral part of these consolidated financial statements. - 3 - 4 ONESOURCE INFORMATION SERVICES, INC. CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share data) (unaudited)
For the three months ended For the nine months ended September 30, September 30, ------------------------- ------------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Revenues: Web-based product ............................. $ 12,674 $ 8,383 $ 34,278 $ 22,799 CD Rom product and other ...................... 982 335 3,507 2,442 -------- -------- -------- -------- 13,656 8,718 37,785 25,241 -------- -------- -------- -------- Cost of revenues: Web-based product ............................. 3,977 3,466 11,485 9,767 CD Rom product and other ...................... 563 197 1,809 1,038 -------- -------- -------- -------- 4,540 3,663 13,294 10,805 -------- -------- -------- -------- Gross profit .................................. 9,116 5,055 24,491 14,436 -------- -------- -------- -------- Operating expenses: Selling and marketing ......................... 5,472 3,284 15,409 9,205 Platform and product development .............. 2,113 2,074 6,563 5,739 General and administrative .................... 1,208 1,068 3,719 4,185 Amortization of intangible assets ............. 376 -- 1,128 -- -------- -------- -------- -------- Total operating expenses ................... 9,169 6,426 26,819 19,129 -------- -------- -------- -------- Loss from operations ....................... (53) (1,371) (2,328) (4,693) Interest expense ................................... (58) (70) (88) (624) Interest income .................................... 264 270 699 525 Other income ....................................... 500 500 1,500 1,500 -------- -------- -------- -------- Income (loss) before provision for income taxes 653 (671) (217) (3,292) Provision for income taxes ......................... 17 -- 77 -- -------- -------- -------- -------- Net income (loss) ............................. $ 636 $ (671) $ (294) $ (3,292) ======== ======== ======== ======== Basic and diluted net income (loss) per share ...... $ 0.05 $ (0.07) $ (0.03) $ (0.39) Weighted average common shares outstanding: Basic ......................................... 11,664 10,061 11,352 8,340 Diluted ....................................... 13,734 10,061 11,352 8,340
The accompanying notes are an integral part of these consolidated financial statements. - 4 - 5 ONESOURCE INFORMATION SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) (unaudited)
For the nine months ended September 30, ------------------------- 2000 1999 -------- -------- Increase (Decrease) in Cash and Cash Equivalents Cash flows relating to operating activities: Net loss .............................................. ($ 294) ($ 3,292) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization ...................... 1,813 1,212 Amortization of intangible assets .................. 1,128 -- Amortization of deferred compensation relating to grants of stock options ......................... 73 78 Amortization of debt discount ...................... -- 52 Changes in assets and liabilities: Accounts receivable .............................. 5,296 3,380 Deferred subscription costs ...................... 1,925 689 Prepaid expenses and other assets ................ (25) 86 Accounts payable ................................. (189) 144 Accrued expenses ................................. (268) (127) Accrued royalties ................................ (1,571) (434) Deferred revenues ................................ (1,891) (2,531) -------- -------- Net cash provided (used) by operating activities ...... 5,997 (743) -------- -------- Cash flows relating to investing activities: Investment in restricted time deposits ................ -- (415) Proceeds from maturity of restricted time deposit ..... 100 -- Purchases of property and equipment ................... (3,549) (2,020) Capitalization of software development costs .......... (120) (169) Deposit for subsequent acquisition .................... -- (7,610) -------- -------- Net cash used by investing activities .............. (3,569) (10,214) -------- -------- Cash flows relating to financing activities: Proceeds from issuance of common stock ................ 932 26,985 Repurchase of common stock ............................ -- (3,387) Repayment of long-term debt ........................... -- (6,284) Repayments of capital lease obligations ............... (171) (360) -------- -------- Net cash provided by financing activities .......... 761 16,954 -------- -------- Effect of exchange rate changes on cash and cash equivalents (58) 3 -------- -------- Increase in cash and cash equivalents ...................... 3,131 6,000 Cash and cash equivalents, beginning of period ............. 13,598 8,665 -------- -------- Cash and cash equivalents, end of period ................... $ 16,729 $ 14,665 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. - 5 - 6 ONESOURCE INFORMATION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation The accompanying consolidated financial statements as of September 30, 2000 and for the three and nine months ended September 30, 2000 and 1999 are unaudited. In the opinion of OneSource's management, the September 30, 2000 and 1999 unaudited interim consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for those periods. The results of operations for the nine months ended September 30, 2000 are not necessarily indicative of the results of operations for the year ending December 31, 2000. The balance sheet as of December 31, 1999 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in OneSource's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 29, 2000. 2. Net Income (Loss) Per Share Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential common stock. Shares used in calculating basic and diluted net income (loss) per share are as follows (in thousands):
Three months Nine months ended September 30, ended September 30, ------------------------ ------------------------ 2000 1999 2000 1999 -------- -------- -------- -------- Weighted average shares outstanding used for basic net income (loss) per share 11,664 10,061 11,352 8,340 Dilutive stock options 2,070 -- -- -- -------- -------- -------- -------- Weighted average shares outstanding used for dilutive net income (loss) per share 13,734 10,061 11,352 8,340 ======== ======== ======== ========
Options to purchase 85,579 shares were outstanding at September 30, 2000 but not included in the computation of diluted net income (loss) per share because the exercise prices of the options were greater than the average market price of the Company's common stock during the three months ended September 30, 2000. - 6 - 7 All potential common stock have been excluded from the calculation of diluted earnings per share for the three months ended September 30, 1999 and the nine months ended September 30, 2000 and 1999 since its inclusion would be anti-dilutive. Total potential common stock consists of 3,346,771 and 3,931,069 shares of common stock issuable upon the exercise of stock options outstanding with a weighted average exercise price of $4.12 and $2.27 per share as of September 30, 2000 and 1999, respectively. 3. Comprehensive Income (Loss) Total comprehensive income (loss), which includes net income (loss) and the foreign currency translation adjustment, was $733,000 and ($26,000) for the three and nine months ended September 30, 2000, respectively, and ($725,000) and ($3,286,000) for the three and nine months ended September 30, 1999, respectively. 4. Geographic Information Revenue was distributed geographically as follows (in thousands):
For the three months For the nine months ended September 30, ended September 30, ------------------------- ------------------------- 2000 1999 2000 1999 -------- -------- -------- -------- United States ..................... $ 10,630 $ 6,680 $ 29,894 $ 19,283 United Kingdom .................... 3,026 2,038 7,891 5,958 -------- -------- -------- -------- $ 13,656 $ 8,718 $ 37,785 $ 25,241 ======== ======== ======== ========
Substantially all of OneSource's identifiable assets are located in the United States. 5. Recently Issued Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective date of FASB Statement No. 133" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133", which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. OneSource, to date, has not engaged in derivative and hedging activities, and accordingly does not believe that the adoption of SFAS No. 133 will have a material impact on the financial reporting and related disclosures. OneSource will adopt SFAS No. 133 as required by SFAS No. 137 in fiscal year 2001. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," as amended by SAB No. 101A and 101B, which is effective no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. SAB No. 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. OneSource does not expect the application of SAB No.101 to have a significant impact on its financial position or results of operations. In March 2000, the Financial Accounting Standard Board issued FASB Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25." FIN No. 44 primarily clarifies (a) the definition of an employee for purposes of applying APB Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of previously fixed stock options or awards, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN No. 44 was effective July 1, 2000, but certain conclusions in FIN No. 44 cover specific events that occurred after either December 15, 1998 or January 12, 2000. The application of FIN No. 44 did not impact OneSource's financial position or results of operations. - 7 - 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion and analysis below contain trend analysis and other forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth below under "Certain Factors That May Affect Future Results" and in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 29, 2000. OVERVIEW OneSource provides Web-based business and financial information to professionals who need quick access to reliable corporate, industry and market intelligence. OneSource was formed as a division of Lotus Development Corporation in 1987 and became an independent company when it was purchased in a management buy-out in 1993. In December 1996, OneSource introduced Business Browser, which today represents over 90% of revenues. OneSource's Business Browser product line is designed to be a comprehensive and easy-to-use business and financial information resource, integrating over 2500 sources of business information from more than 25 category-leading business and financial information providers. On October 1, 1999, OneSource acquired Corporate Technology Information Services, Inc. ("Corporate Technology"). Corporate Technology is a provider of high technology company profiles with a focus on emerging private companies. The consideration paid by OneSource was $7.6 million in cash. A portion of the cash consideration is being held in escrow to be released in accordance with the Agreement and Plan of Merger and an Escrow Agreement. For financial statement purposes, this acquisition was accounted for as a purchase and, accordingly, the results of operations of Corporate Technology subsequent to October 1, 1999 have been included in OneSource's consolidated statement of operations. Revenues from Web-based products accounted for $34.3 million, or 91% of total revenues, for the nine months ended September 30, 2000, an increase from $22.8 million, or 90% of total revenues, for the nine months ended September 30, 1999. In the same period, CD Rom product and other revenues, which consist of printed directories and mailing lists (products acquired as part of the Corporate Technology acquisition) increased to $3.5 million, or 9% of total revenues, from $2.4 million, or 10% of total revenues. As of September 30, 2000, 831 organizations subscribed to our Business Browser product line, and the annualized contract value for these organizations was $53.8 million. Our revenues for both CD Rom and Web-based products consist of monthly subscription fees from customer contracts. Customer contracts span varying periods of time but are generally for one year, are renewable for like periods, and are payable in advance. Subscription fees generally are quoted to clients on an annual basis but are earned as revenues on a monthly basis over the subscription period. Invoices are recorded as accounts receivable until paid and as deferred revenues until earned. Deferred revenues attributable to Web-based products decreased 6% to $21.5 million as of September 30, 2000 from $22.8 million as of December 31, 1999 and increased 41% from $15.2 million as of September 30, 1999. Other revenues are recognized when goods and services are delivered. Cost of revenues consists primarily of royalties to information providers and, to a lesser extent, employee salaries and benefits, facilities allocation and related expenses, depreciation - 8 - 9 associated with computers for data processing and on-line requirements, and Web hosting expenses. We enter into contracts with our information providers, which generally are for a term of at least one year and are automatically renewable if not canceled with advance notice. These contracts may be terminated under certain circumstances. Under these arrangements, royalties are typically paid on a quarterly basis to information providers. Royalties generally are calculated either as a flat percentage of our revenues, as a fixed fee per period, or in some cases, we pay a calculated fee based upon product growth compared to like periods from the prior year. Selling and marketing expense consists primarily of employee salaries and benefits and sales commissions paid to our sales force, customer support organization and marketing personnel, as well as facilities allocation and related expenses, direct marketing promotional materials, trade show exhibitions and advertising. Sales commissions are paid when customers are invoiced and are recorded as deferred subscription costs, which are amortized ratably over the term of the contract, typically 12 months, as the associated revenues are recognized. All other selling and marketing costs are expensed as incurred. Platform and product development expense consists primarily of employee salaries and benefits, facilities allocation and related expenses, as well as outside contractor expenses, relating to the development of our "platform" of core software supporting our products and the development of new products based upon that platform. Platform and product development expense also includes expenses relating to our KeyID technology to integrate disparate information sources into our Web-based products. General and administrative expense consists primarily of employee salaries and benefits, facilities allocation and related expenses associated with OneSource's management, finance, human resources, management information systems and administrative groups. Other income consists of revenue generated in conjunction with the May 1998 sale of our CD-Insurance division. In connection with the disposition, we licensed certain of our CD Rom software to the acquiror in exchange for $4.0 million of license fees. These license fees are being paid in eight equal quarterly installments which began January 1, 1999 and running through December 31, 2000 and will be recognized ratably as other income. During each of the three-month periods ended September 30, 2000 and 1999, OneSource recorded $0.5 million of other income related to the software license agreement. COMPARISON OF RESULTS FOR THE QUARTER ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999 Revenues. Total revenues increased 57% to $13.7 million for the quarter ended September 30, 2000 from $8.7 million for the quarter ended September 30, 1999. Web-based product revenues increased 51% to $12.7 million for the quarter ended September 30, 2000 from $8.4 million for the quarter ended September 30, 1999. The increase was attributable to the addition of new customers, an increase in the number of user seats purchased by existing customers and the sale of new products to existing customers. At the same time, CD Rom product and other revenues, which consist of printed directories and mailing lists, increased by 193% to $1.0 million in the third quarter of 2000 from $0.3 million in the third quarter of 1999. Included in other revenues for the quarter ended September 30, 2000 are $0.9 million of revenue recognized from products related to the acquired Corporate Technology business. Excluding revenues attributable to Corporate Technology, CD Rom revenues decreased 67% to $0.1 million in the third quarter of 2000 from $0.3 million in the third quarter of 1999, as OneSource continued to transition away from its legacy CD Rom business. - 9 - 10 Cost of Revenues. Total cost of revenues increased 24% to $4.5 million for the quarter ended September 30, 2000 from $3.7 million for the quarter ended September 30, 1999. As a percentage of total revenues, total cost of revenues decreased to 33% for the quarter ended September 30, 2000 from 42% for the quarter ended September 30, 1999. The increase in total cost of revenues was principally due to increased royalty expense for our Web-based products and costs associated with the acquired Corporate Technology business. The decrease as a percentage of total revenues is the result of lower effective royalty rates paid to information providers. Cost of Web-based product revenues increased 15% to $4.0 million for the quarter ended September 30, 2000 from $3.5 million for the quarter ended September 30, 1999, primarily due to the growth in revenue. As a percentage of Web-based product revenues, cost of Web-based product revenues decreased to 31% for the quarter ended September 30, 2000 from 41% for the quarter ended September 30, 1999, and was principally due to lower costs of acquiring data from information providers. Cost of CD Rom product and other revenues increased 186% to $0.6 million for the quarter ended September 30, 2000 from $0.2 million for the quarter ended September 30, 1999. This increase was solely due to costs associated with the acquired Corporate Technology business, but was partially offset by a decrease in CD Rom costs attributable to decreased revenues resulting from OneSource's continued shift away from its legacy CD Rom product line. As a percentage of CD Rom product and other revenues, cost of CD Rom product and other revenues decreased to 57% for the quarter ended September 30, 2000 from 59% for the quarter ended September 30, 1999. Selling and Marketing Expense. Selling and marketing expense increased 67% to $5.5 million for the quarter ended September 30, 2000 from $3.3 million for the quarter ended September 30, 1999, principally due to increased headcount and expenses incurred to hire and train new sales personnel as well as the addition of a telesales group associated with the acquired Corporate Technology business. Selling and marketing expense increased as a percentage of total revenues to 40% for the quarter ended September 30, 2000 from 38% for the quarter ended September 30, 1999. We expect to see further increases in selling and marketing expense as we continue to build our international market presence. Platform and Product Development Expense. Platform and product development expense was consistent at $2.1 million for the three months ended September 30, 2000 and September 30, 1999. Platform and product development expense decreased as a percentage of total revenues to 15% for the quarter ended September 30, 2000 from 24% for the quarter ended September 30, 1999. General and Administrative Expense. General and administrative expense increased 13% to $1.2 million for the quarter ended September 30, 2000 from $1.1 million for the quarter ended September 30, 1999. This increase was due principally to additional headcount associated with the acquired Corporate Technology business. General and administrative expense decreased as a percentage of total revenues to 9% for the quarter ended September 30, 2000 from 12% for the quarter ended September 30, 1999. Amortization of Intangible Assets. Amortization of intangible assets for the quarter ended September 30, 2000 was $0.4 million. This expense is the result of the acquisition of Corporate Technology and the associated amortization of intangible assets acquired as part of that transaction. - 10 - 11 Interest Income, Net. Interest income, net of interest expense, was consistent at $0.2 million of net interest income for both the quarter ended September 30, 2000 and the quarter ended September 30, 1999. Other Income. Other income was $0.5 million for each of the quarters ended September 30, 2000 and 1999 and was attributable to a software license agreement in connection with the May 1998 sale of our CD-Insurance division for the license and support services provided during the period. COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999 Revenues. Total revenues increased 50% to $37.8 million for the nine months ended September 30, 2000 from $25.2 million for the nine months ended September 30, 1999. Web-based product revenues increased 50% to $34.3 million for the nine months ended September 30, 2000 from $22.8 million for the nine months ended September 30, 1999. The increase was attributable to the addition of new customers, an increase in the number of user seats purchased by existing customers and the sale of new products to existing customers. At the same time, CD Rom product and other revenues, which consist of printed directories and mailing lists, increased by 44% to $3.5 million in the first nine months of 2000 from $2.4 million in the first nine months of 1999. Included in revenues for the nine months ended September 30, 2000 were $3.2 million of revenue recognized from products related to the acquired Corporate Technology business. Excluding revenues attributable to Corporate Technology, CD Rom revenues decreased 87% to $0.3 million in the first nine months of 2000 from $2.4 million in the first nine months of 1999, as OneSource continued to transition away from its legacy CD Rom business. Cost of Revenues. Total cost of revenues increased 23% to $13.3 million for the nine months ended September 30, 2000 from $10.8 million for the nine months ended September 30, 1999. As a percentage of total revenues, total cost of revenues decreased to 35% for the nine months ended September 30, 2000 from 43% for the nine months ended September 30, 1999. The increase in total cost of revenues was due to increased royalty expense for our Web-based products and costs associated with the acquired Corporate Technology business. The decrease as a percentage of total revenues is the result of lower effective royalty rates paid to information providers. Cost of Web-based product revenues increased 18% to $11.5 million for the nine months ended September 30, 2000 from $9.8 million for the nine months ended September 30, 1999, primarily due to the growth in revenue. As a percentage of Web-based product revenues, cost of Web-based product revenues decreased to 34% for the nine months ended September 30, 2000 from 43% for the nine months ended September 30, 1999, due to an increase in our customer base and expansion of existing customers, which enabled OneSource to lower its effective royalty rates and infrastructure expenses. Cost of CD Rom and other product revenues increased 74% to $1.8 million for the nine months ended September 30, 2000 from $1.0 million for the nine months ended September 30, 1999. This increase was solely due to costs associated with the acquired Corporate Technology business, but was partially offset by a decrease in CD Rom costs attributable to decreased revenues resulting from OneSource's continued shift away from its legacy CD Rom product line. As a percentage of CD Rom product revenues, cost of CD Rom and other product revenues - 11 - 12 increased to 52% for the nine months ended September 30, 2000 from 43% for the nine months ended September 30, 1999. Selling and Marketing Expense. Selling and marketing expense increased 67% to $15.4 million for the nine months ended September 30, 2000 from $9.2 million for the nine months ended September 30, 1999, principally due to increased headcount and expenses incurred to hire and train new sales personnel as well as the addition of a telesales group associated with the acquired Corporate Technology business. Selling and marketing expense increased as a percentage of total revenues to 41% for the nine months ended September 30, 2000 from 36% for the nine months ended September 30, 1999. We expect sales and marketing expenses to increase as we continue to hire and train additional sales personnel. Platform and Product Development Expense. Platform and product development expense increased 14% to $6.6 million for the nine months ended September 30, 2000 from $5.7 million for the nine months ended September 30, 1999. This increase was due principally to additional headcount to meet new product development demands. Platform and product development expense decreased as a percentage of total revenues to 17% for the nine months ended September 30, 2000 from 23% for the nine months ended September 30, 1999. General and Administrative Expense. General and administrative expense decreased 11% to $3.7 million for the nine months ended September 30, 2000 from $4.2 million for the nine months ended September 30, 1999. General and administrative expense decreased as a percentage of total revenues to 10% for the nine months ended September 30, 2000 from 17% for the nine months ended September 30, 1999. These decreases were primarily the result of non-recurring expenses incurred by OneSource, which relate to arrangements which were terminated upon the completion of our initial public offering in May 1999. Amortization of Intangible Assets. Amortization of intangible assets for the nine months ended September 30, 2000 was $1.1 million. This expense is the result of the acquisition of Corporate Technology and the associated amortization of intangible assets acquired as part of that transaction. Interest Income, Net. Interest income, net of interest expense, increased 717% to $0.6 million of net interest income for the nine months ended September 30, 2000 from $0.1 million of net interest expense for the nine months ended September 30, 1999. This increase was primarily due to invested cash balances from the public offering proceeds and cash generated from operations. Other Income. Other income was $1.5 million for each of the nine months ended September 30, 2000 and 1999 and was attributable to a software license agreement in connection with the May 1998 sale of our CD-Insurance division for the license and support services provided during the period. ANNUALIZED CONTRACT VALUE One measure of the performance of our business is "annualized contract value." This is a measurement we use for normalized period-to-period comparisons to indicate business volume and growth in terms of new customers, upgrades and expansions at existing customers. Our presentation and calculation of annualized contract value may not be comparable to similarly titled measures used by other companies. It is not an absolute indicator and we cannot guarantee that any annualized contract value will be ultimately realized as revenues. We use annualized contract value as a measure of our business because it shows the growth or decline in our customer base in a way that revenues cannot. Since our business is a subscription business, revenues are recognized not when a sale is made, but in ratable portions over the term - 12 - 13 of the subscription (which is usually twelve months). As a result, from a revenue viewpoint the addition or loss of even a major customer contract may not have a dramatic impact on a quarter-to-quarter basis. On the other hand, by looking at the value of customer contracts in hand at the end of each quarter, we can more readily see trends in our business. For example, the addition of a one-year subscription contract with total payments of $1.0 million may only increase revenues by approximately $250,000 ($1.0 million divided by four) in the quarter in which the sale is made, but would increase annualized contract value by $1.0 million. Similarly, if the customer did not renew that contract, revenues in the next quarter would only decrease by $250,000, while annualized contract value would decrease by $1.0 million. In calculating annualized contract value, we include only those contracts where the customer has actually been invoiced. Since amounts invoiced are included in deferred revenues on our balance sheet for all customer contracts with terms extending beyond the month of invoice, this demonstrates that annualized contract value is based on actual customer contracts reflected in our historical financial statements. To compute annualized contract value, we multiply by twelve the total amount of fees invoiced for one month and included in deferred revenues. Annualized contract value is not intended to be an absolute indicator of future revenues. We only annualize existing, invoiced contracts, but we do so without regard to the remaining term of those contracts. Most of our contracts are for twelve months, but as of the date that we calculate annualized contract value the remaining term of nearly all of our contracts will be less than twelve months. If a customer fails to pay its invoiced fees or terminates the contract or if we are unable to renew a contract, our revenues in subsequent periods may be less than expected based solely on annualized contract values. Conversely, if we add additional customers or renew existing contracts at higher rates, our revenues in future periods may exceed expectations based solely on annualized contract value. The calculation of annualized contract value for our Web-based products is illustrated below:
ONE MONTH OF INVOICED WEB-BASED FEES IN DEFERRED DEFERRED ANNUALIZED MEASUREMENT DATE REVENUES REVENUES CONTRACT VALUE ---------------- -------- ----------- -------------- (IN THOUSANDS) September 30, 1999........................ $ 15,164 $2,846.6 $ 34,159 September 30, 2000........................ 21,517 4,479.8 53,757
We have increased annualized contract value attributable to Web-based products 57% to $53.8 million as of September 30, 2000 from $34.2 million as of September 30, 1999. The number of Web-based customers has increased 56% to 831 at September 30, 2000 from 531 at September 30, 1999. At the same time, the average annualized contract value of all Web-based product customers has increased to $64,700 per customer at September 30, 2000 from $64,300 per customer at September 30, 1999. LIQUIDITY AND CAPITAL RESOURCES Since acquiring our business from Lotus Development Corporation in 1993, we have funded our operations through a combination of seller financing, proceeds received from the sale of Class P common stock and common stock in connection with the purchase of the business from Lotus Development Corporation, bank debt, proceeds received from the sale of non-strategic lines of business, capitalized equipment leases, cash flows from operations and our initial public offering which closed in May 1999. - 13 - 14 Our cash and cash equivalents totaled $16.7 million at September 30, 2000, compared to $13.6 million at December 31, 1999, and $14.7 million at September 30, 1999. The increase of $3.1 million from December 31,1999 is primarily due to funds provided by operating activities. Net cash provided by operating activities was $6.0 million for the nine months ended September 30, 2000, compared to net cash used in operating activities of $0.7 million for the nine months ended September 30, 1999. The net change of $6.7 million period to period is the result of a lower net loss of $3.0 million, increased depreciation and amortization of $1.7 million and a favorable net change of assets and liabilities of $2.0 million. Net cash used in investing activities was $3.6 million for the nine months ended September 30, 2000, compared to $10.2 million for the nine months ended September 30, 1999. During the nine months ended September 30, 2000, cash used in investing activities was primarily used for the purchase of property and equipment of $3.6 million. During the nine months ended September 30, 1999, cash used in investing activities was primarily used for $7.6 million of funds placed in escrow for the purchase of Corporate Technology Information Services, Inc., the purchase of property and equipment for $2.0 million, as well as $0.4 million of cash used to purchase a restricted time deposit used to guarantee a letter of credit related to our new headquarters. Net cash provided by financing activities was $0.8 million for the nine months ended September 30, 2000, compared to $17.0 million for the nine months ended September 30, 1999. Net cash provided by financing activities in 2000 primarily consisted of net proceeds from the sale of common stock, offset in part by repayments of capital lease obligations. Net cash provided by financing activities in 1999 primarily consisted of net proceeds from the sale of common stock, offset in part by the repurchase and retirement of common stock and repayments of debt and capital lease obligations. We do not currently have a line of credit but intend to enter into a revolving line of credit for letters of credit and general working capital. We believe that our current cash and cash equivalents and funds anticipated to be generated from operations will be sufficient to satisfy working capital and capital expenditure requirements for at least the next twelve months. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133", which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. OneSource, to date, has not engaged in derivative and hedging activities, and accordingly does not believe that the adoption of SFAS No. 133 will have a material impact on the financial reporting and related disclosures. OneSource will adopt SFAS No. 133 as required by SFAS No. 137 in fiscal year 2001. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," as amended by SAB No. 101A and 101B, which is effective no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. SAB No. 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. OneSource does not expect the application of SAB No.101 to have a significant impact on their financial position or results of operations. - 14 - 15 In March 2000, the Financial Accounting Standard Board issued FASB Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25." FIN No. 44 primarily clarifies (a) the definition of an employee for purposes of applying APB Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of previously fixed stock options or awards, (d) and the accounting for an exchange of stock compensation awards in a business combination. FIN No. 44 is effective July 1, 2000, but certain conclusions in FIN No. 44 cover specific events that occurred after either December 15, 1998 or January 12, 2000. The application of FIN No. 44 did not impact OneSource's financial position or results of operations. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS This Quarterly Report on Form 10-Q contains forward-looking statements, which involve risks and uncertainties. OneSource's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including without limitation, those set forth in the following risk factors discussed below and in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 29, 2000. The following risk factors should be considered carefully in evaluating OneSource and its business. WE HAVE A LIMITED OPERATING HISTORY WITH BUSINESS BROWSER AND THE PRODUCTS ACQUIRED FROM CORPORATE TECHNOLOGY ON WHICH TO EVALUATE OUR PROSPECTS. We began operations as an independent company in 1993. We began to migrate our business to the Web from CD Rom-based products in early 1996, and launched the Web-based Business Browser product line in December 1996. In 1999, we acquired several products, primarily consisting of CD Rom, printed directories and mailing lists from Corporate Technology. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies transitioning to a new product line, particularly companies in the new and rapidly evolving market for Internet and Web-based business information products. WE HAVE A CUMULATIVE DEFICIT AND EXPECT TO CONTINUE TO HAVE A CUMULATIVE DEFICIT FOR THE FORESEEABLE FUTURE. We incurred losses from operations of approximately $1.6 million in 1996, $1.4 million in 1997, $5.0 million in 1998, $6.4 million in 1999 and $2.3 million for the nine months ended September 30, 2000. In addition, we have not reached the critical mass of users of Web-based products, that we believe is necessary to effectively leverage our royalty payments and infrastructure expenses, which may not allow OneSource to sustain and increase profits. As of September 30, 2000 we had an accumulated deficit of $15.2 million. WE RELY ON OUR BUSINESS BROWSER PRODUCT LINE, AND WE WILL NOT SUCCEED UNLESS DEMAND FOR OUR BUSINESS BROWSER PRODUCTS CONTINUES TO GROW. Subscription revenues from our Business Browser product line accounted for 91% of total revenues for the nine months ended September 30, 2000, 90% of total revenues in 1999, 53% of total revenues in 1998 and 11% in 1997. We are phasing out our legacy CD Rom products that are not part of the Business Browser product line. As a result, our future financial condition will depend heavily on the success or failure of our Business Browser product line. Business Browser products were introduced in December 1996 and it is difficult to predict demand and market acceptance for these products in the new and rapidly evolving Web-based - 15 - 16 business information services market. If the demand for Business Browser products does not grow, whether due to competition, lack of market acceptance, failure of Internet or Web use to grow in general, technological change or other factors, our business would suffer significantly. ANNUALIZED CONTRACT VALUE MAY NOT BE AN ACCURATE INDICATION OF OUR PERFORMANCE. We use "annualized contract value" as a measurement for normalized period-to-period comparisons to indicate business volume and growth. Our presentation and calculation of annualized contract value may not be comparable to similarly titled measures used by other companies. It is not an absolute indicator and we cannot guarantee that any annualized contract value will be ultimately realized as revenues. COMPETITION IN OUR INDUSTRY IS INTENSE AND MANY OF OUR COMPETITORS HAVE GREATER RESOURCES THAN WE DO; THIS COMPETITION MAY ADVERSELY AFFECT OUR FINANCIAL RESULTS. The business information services industry is intensely competitive. We face direct or indirect competition from the following types of companies: - large, well-established business and financial information providers such as Dow Jones, Lexis-Nexis, Pearson, Reuters, Factiva, Thomson, Primark and McGraw-Hill - on-line information services or Websites targeted to specific markets or applications, such as NewsEdge, Factset and Bloomberg - providers of sales, marketing and credit information such as Dun & Bradstreet, InfoUSA, iMarket, Siebel - Web retrieval, Web "portal" companies and other free or low-cost mass market on-line services such as Excite, Infoseek, Lycos, Yahoo! and AOL/Netscape - free or low-cost specialized business and financial information Websites such as Hoovers.com, Marketwatch.com, Multex.com and TheStreet.com Based on reported operating results, industry reports and other publicly available information, we believe that many of our existing competitors, as well as a number of prospective competitors, have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. As a result, they may be able to respond more quickly to new or emerging technologies and changes in user requirements, or to devote greater resources to the development, promotion and sale of their products than we can. These competitors may be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to potential employees, customers and information providers. Our competitors also may develop products that are equal or superior to our products or that achieve greater market acceptance than our products. IF OUR INFORMATION PROVIDERS STOPPED DOING BUSINESS WITH US, WE COULD NOT CONTINUE TO SELL BUSINESS BROWSER. We do not own or create all of the original content distributed through our products. We depend significantly on information providers to supply information and data feeds to us on a timely basis. Our products could - 16 - 17 experience interruptions due to any failure or delay in the transmission or receipt of this information. IF OUR SOFTWARE IS DEFECTIVE, IT MIGHT BE COSTLY TO CORRECT; WE COULD GET SUED AND OUR REPUTATION COULD BE HARMED. Complex software like the software we develop for our products may contain errors or defects, especially when first implemented, that may be very costly to correct. Defects or errors also could result in downtime and our business could suffer significantly from potential adverse customer reaction, negative publicity and harm to our reputation. WE MAY HAVE DIFFICULTY IDENTIFYING AND COMPETING FOR ACQUISITION OPPORTUNITIES. Our business strategy includes the pursuit of strategic acquisitions. From time to time we may engage in discussions with third parties concerning potential acquisitions of niche expertise, business and proprietary rights. In executing our acquisition strategy, we may be unable to identify suitable companies as acquisition candidates, making it more difficult to acquire suitable companies on favorable terms. PURSUING AND COMPLETING POTENTIAL ACQUISITIONS COULD DIVERT MANAGEMENT ATTENTION AND FINANCIAL RESOURCES AND MAY NOT PRODUCE THE DESIRED BUSINESS RESULTS. If we pursue any acquisition, our management could spend a significant amount of time and management and financial resources in the acquisition process and to integrate the acquired business with our existing business. To pay for an acquisition, we may use capital stock, cash, or a combination of both. Alternatively, we may borrow money from a bank or other lender. If we use cash or debt financing, our financial liquidity will be reduced. In addition, from an accounting perspective, an acquisition may involve nonrecurring charges or involve amortization of significant amounts of goodwill that could adversely affect our results of operations. Despite the investment of these management and financial resources and completion of due diligence with respect to these efforts, an acquisition may not produce the revenue, earnings or business synergies that we anticipated, and an acquired technology or proprietary right may not perform as expected for a variety of reasons, including: - difficulty in the assimilation of the operations, technologies, rights, products and personnel of the acquired company - risks of entering markets in which we have no or limited prior experience - expenses of any undisclosed or potential legal liabilities of the acquired company - the potential loss of key employees of the acquired company WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY RESULTS, WHICH MAKES IT DIFFICULT FOR INVESTORS TO MAKE RELIABLE PERIOD-TO-PERIOD COMPARISONS AND CONTRIBUTES TO VOLATILITY IN THE MARKET PRICE FOR OUR COMMON STOCK. Our quarterly revenues, gross profits and results of operations have fluctuated significantly in the past and we expect them to continue to fluctuate significantly in the future. In addition, we believe that an important measure of our business is the annualized contract value at the end of each period, which also may fluctuate. Causes of such fluctuations have included and may include, among other factors: - changes in demand for our products - 17 - 18 - the dollar value and timing of both new and renewal subscriptions - competition (particularly price competition) - increases in selling and marketing expenses, as well as other operating expenses - technical difficulties or system downtime affecting our products or the Web generally - economic conditions specific to the Web, as well as general economic conditions - consolidation of our customers In addition, a substantial portion of our expenses, including most product development and selling and marketing expenses, must be incurred in advance of revenue generation. If our projected revenue does not meet our expectations, then we are likely to experience an even larger shortfall in our operating profit (loss) relative to our expectations. Any one or more of these factors could affect our business, financial condition and results of operations, and this makes the prediction of results of operations on a quarterly basis unreliable. As a result, we believe that period-to-period comparisons of our historical results of operations and annualized contract values are not necessarily meaningful and should not be relied upon as an indication for future performance. Also, due to these and other factors, it is possible that our quarterly results of operations (including the annualized contract value) may be below expectations. If this happens, the price of our common stock would likely decrease. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK OneSource is exposed to various market risks, including changes in foreign currency exchange rates and interest rates. However, our exposure to currency exchange rate fluctuations has been and is expected to continue to be modest due to the fact that the operations of our United Kingdom subsidiary are almost exclusively conducted in local currency. Operating results are translated into United States dollars and consolidated for reporting purposes. The impact of currency exchange rate movements on intercompany transactions was not significant for the nine months ended September 30, 2000. OneSource also owns financial instruments that are sensitive to market risks as part of its investment portfolio. The investment portfolio is used to preserve OneSource's capital until it is required to fund operations, including the Company's marketing and product development activities. None of these market-risk sensitive instruments are held for trading purposes. The investment portfolio contains instruments that are subject to the risk of a decline in interest rates. We do not enter into derivatives or any other financial instruments for trading or speculative purposes. PART II- OTHER INFORMATION Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. On May 19, 1999, we commenced an initial public offering of 3,636,000 shares of common stock, $0.01 par value per share, pursuant to a final prospectus dated May 19, 1999. - 18 - 19 The prospectus was contained in OneSource's registration statement on Form S-1, which was declared effective by the Securities and Exchange Commission (SEC File No. 333-73263) on May 18, 1999. Of the 3,636,000 shares of common stock offered, 2,500,000 shares were offered and sold by OneSource and 1,136,000 shares were offered and sold by certain stockholders of OneSource. The offering closed on May 24, 1999 upon the sale of all 3,636,000 shares. The aggregate offering price of the offering to the public was $43,632,000, with proceeds to OneSource and the selling stockholders, after deduction of the underwriting discount, of $27,900,000 and $12,677,760, respectively. The aggregate amount of expenses incurred by OneSource in connection with the issuance and distribution of the shares of common stock sold in the offering were approximately $3.9 million, including approximately $3.0 million in underwriting discounts and commissions and $0.9 million in other offering expenses. The net proceeds to OneSource from the offering, after deducting underwriting discounts and commissions and other offering expenses was approximately $27.0 million. The net proceeds from the offering, less $6.8 million used to pay off long-term debt and $7.6 million used to acquire Corporate Technology Information Services, Inc., have been invested in interest bearing, investment grade securities. Since the initial public offering, OneSource has produced positive cash flow and has not needed to further draw from these funds for day-to-day operations. Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS. Exhibit Number Description ------ ----------- 27.1 Financial Data Schedule (b) REPORTS ON FORM 8-K. There were no reports on Form 8-K filed by OneSource for the quarter ending September 30, 2000. - 19 - 20 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ONESOURCE INFORMATION SERVICES, INC. Date: November 13, 2000 By: /s/ Roy D. Landon ----------------------------------------- Roy D. Landon Senior Vice President, Chief Financial Officer (Principal Financial Officer) - 20 - 21 EXHIBIT INDEX Sequentially Exhibit Numbered Number Description Page --------- ------------------------------------------------------- ------------ 27.1 Financial Data Schedule * * Exhibit included in EDGAR filing with Securities and Exchange Commission. - 21 -