-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ThQPHiujULoMDycNxYkdPpmEuY1IGSgrANNLRwnBwCejsVgPo/n6AUN57kHpC6l/ JzNG9PidYlEgEgnRBrJJ+Q== 0000927356-96-000977.txt : 19980629 0000927356-96-000977.hdr.sgml : 19980629 ACCESSION NUMBER: 0000927356-96-000977 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961105 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ONLINE SYSTEM SERVICES INC CENTRAL INDEX KEY: 0001011901 STANDARD INDUSTRIAL CLASSIFICATION: 7373 IRS NUMBER: 841293864 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-28462 FILM NUMBER: 96654016 BUSINESS ADDRESS: STREET 1: 1800 GLENARM PLACE STREET 2: SUITE 800 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3032969200 MAIL ADDRESS: STREET 1: 1800 GLENARM PL STREET 2: SUITE 800 CITY: DENVER STATE: CO ZIP: 80202 10QSB 1 FORM 10-QSB FORM 10-QSB - Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of l934. For the period ended September 30, 1996. ------------------- [ ] 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 0-28462. ---------------- ONLINE SYSTEM SERVICES, INC. - - ---------------------------- (Exact name of registrant as specified in its charter) COLORADO 84-1293864 - - ---------------------------------------------------------------- (State or other jurisdiction I.R.S. Employer of incorporation or organization Identification No.) 1800 GLENARM PLACE, SUITE 800, DENVER, CO 80202 - - ------------------------------------------------ (Address of principal executive offices) (Zipcode) (303)296-9200 - - ---------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - - -------------- Former name, former address and former fiscal year, if changed since last report.) 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. [ X ] YES [ ] NO APPLICABLE ONLY TO CORPORATE ISSUERS: As of October 22, 1996, Registrant had 3,097,245 shares of common stock outstanding. ONLINE SYSTEM SERVICES, INC. INDEX ----- Page ---- PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS Balance Sheets as of September 30, 1996 (Unaudited) and December 31, 1995. 3,4 Unaudited Statements of Operations, three months and nine months ended September 30, 1996 and 1995 5 Unaudited Statements of Stockholders' Equity, nine months ended September 30, 1996 6 Unaudited Statements of Cash Flows, nine months ended September 30, 1996 and 1995 7,8 Notes to Financial Statements (unaudited) 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-13 PART II. OTHER INFORMATION ITEM 1-5. NOT APPLICABLE 14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14 SIGNATURES 15 2 PART I - FINANCIAL INFORMATION - - ------------------------------ Item 1. Financial Statements ONLINE SYSTEM SERVICES, INC. BALANCE SHEETS
September 30, December 31, 1996 1995 -------------- ------------ (unaudited) ASSETS - - ------ Current assets: Cash and cash equivalents $6,218,315 $ 25,241 Restricted cash (Note 6) 222,693 Accounts receivable, net 271,727 98,282 Hardware and software inventory 84,082 --- Prepaid expense 13,474 5,000 Interest receivable 88,403 --- ---------- -------- Total current assets 6,898,694 128,523 ---------- -------- Equipment, net 397,113 97,215 ---------- -------- Other assets Deposits 2,082 956 Intangibles, net 898 1,038 ---------- -------- Total other assets 2,980 1,994 ---------- -------- Total assets $7,298,787 $227,732 ========== ========
The accompanying notes are an integral part of these financial statements. 3 ONLINE SYSTEM SERVICES, INC. BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ---------------------------------------------
September 30, December 31, ------------- ----------- 1996 1995 ---- ---- (unaudited) Current liabilities: Accounts payable $ 252,880 $ 74,990 Accrued expenses 35,783 11,020 Accrued salaries and taxes payable 76,938 19,403 Short-term notes payable --- 50,814 Current portion of capital lease 32,355 17,017 and notes Note payable-related party 12,707 12,707 Deferred revenue 14,013 --- ----------- --------- Total current liabilities 424,676 185,951 ----------- --------- Long-term liabilities: Note and capital leases payable 39,887 42,232 ----------- --------- Total long-term liabilities 39,887 42,232 ----------- --------- Total liabilities 464,563 228,183 ----------- --------- Stockholders' equity (deficit) Common stock, 3,097,245 and 1,625,000 shares outstanding 7,921,015 272,864 Stock subscriptions (1,248) (57,269) Accumulated deficit (1,085,543) (216,046) ----------- --------- Total stockholders' equity (deficit) 6,834,224 (451) ----------- --------- Total liabilities and stockholders' equity $ 7,298,787 $ 227,732 =========== =========
The accompanying notes are an integral part of these financial statements. 4 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 1996 1995 1996 1995 ---- ---- ---- ---- (UNAUDITED) (UNAUDITED) Net sales: Service sales $ 273,043 $ 69,689 $ 709,223 $ 94,986 Hardware and software sales 134,272 2,031 266,031 53,346 ---------- ---------- ---------- ---------- Total net sales 407,315 71,720 975,254 148,332 Cost of sales: Cost of services 174,808 42,793 443,531 79,501 Cost of hardware and software 97,647 1,366 201,827 42,033 ---------- ---------- ---------- ---------- Cost of sales 272,455 44,159 645,358 121,534 ---------- ---------- ---------- ---------- Gross profit 134,860 27,561 329,896 26,798 ---------- ---------- ---------- ---------- Operating expenses: Sales and marketing expense 203,357 25,290 395,503 49,591 Product development expense 129,826 31,824 299,388 73,891 General and administrative expense 263,969 157,773 554,445 242,961 Depreciation and amortization 30,366 7,233 56,881 13,312 ---------- ---------- ---------- ---------- Total operating expenses 627,518 222,120 1,306,217 379,755 ---------- ---------- ---------- ---------- Loss from operations (492,658) (194,559) (976,321) (352,957) Interest income (expense) 82,462 (726) 106,824 (727) ---------- ---------- ---------- ---------- Loss before provision for income taxes (410,196) (195,285) (869,497) (353,684) Provision for income taxes --- --- --- --- ---------- ---------- ---------- ---------- Net loss $ (410,196) $ (195,285) $ (869,497) $ (353,684) ========== ========== ========== ========== Net loss per share $(0.11) $(0.08) $(0.31) $(0.14) ========== ========== ========== ========== Common shares and equivalents outstanding 3,822,760 2,550,695 2,766,538 2,550,695 ========== ========== ========== ========== 5
The accompanying notes are an integral part of these financial statements. 5 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ------------- STOCK ACCUMULATED SHARES AMOUNT SUBSCRIPTIONS DEFICIT --------- ------------- -------------- ------------- Balance, March 22, 1994 --- --- --- --- Net loss for the period ended December 31, 1994 --- --- --- --- Issuance of common stock to founder for cash at an average price of $0.0002 per share 480,000 $ 100 --- --- Common stock issued for services rendered at $0.05 per share 125,000 6,250 --- Common stock issued for services rendered at $0.56 per share 370,000 207,707 --- --- Stock subscriptions receivable --- --- $(57,269) --- Issuance of common stock for cash at $0.50 per share 650,000 325,000 --- --- Net loss for the year ended December 31, 1995 --- --- --- $ (482,239) Subchapter S corporation losses allocated to individual shareholders --- (266,193) --- 266,193 --------- ----------- ----------- ----------- Balance, December 31, 1995 1,625,000 272,864 (57,269) (216,046) --------- ----------- ----------- ----------- Issuance of common stock for cash at $2.25 per share (unaudited) 182,245 410,000 --- --- Less costs of issuance (unaudited) --- (6,330) --- --- Issuance of common stock for cash at $6.75 per unit (unaudited) 1,265,000 8,538,751 --- --- Less costs of issuance (unaudited) --- (1,306,770) --- --- Exercise of stock options (unaudited) 25,000 12,500 --- --- Stock subscriptions receivable (unaudited) --- --- 56,021 --- Net loss for the nine months ended September 30, 1996 (unaudited) --- --- --- (869,497) --------- ----------- ------------- ----------- Balance, September 30, 1996 (unaudited) 3,097,245 $ 7,921,015 $ (1,248) $(1,085,543) ========= =========== ============= ===========
The accompanying notes are an integral part of these financial statements. 6 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 1996 1995 ------------ -------------- (UNAUDITED) Cash flows from operating activities Net loss $ (869,497) $(353,684) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 56,881 13,312 Stock issued for services 56,021 137,604 Changes in operating assets and liabilities: Decrease (increase) in restricted cash (222,693) --- Decrease (increase) in accounts receivable (173,445) (33,973) Decrease (increase) in hardware & software inventory (84,082) --- Decrease (increase) in prepaid expense (8,475) --- Decrease (increase) in interest receivable (88,403) --- Decrease (increase) in deposits (1,127) (3,069) Increase (decrease) in accounts payable 177,890 60,666 Increase (decrease) in accrued expenses 82,298 13,709 Increase (decrease) in short-term notes payable (50,814) 24,000 Increase (decrease) in deferred revenue 14,013 --- ----------- --------- Net cash (used) by operating activities (1,111,433) (141,435) ----------- --------- Cash flows from investing activities Purchase of fixed assets (314,358) (71,705) ----------- --------- Net cash (used) by investing activities (314,358) (71,705) ----------- --------- Cash flows from financing activities: Payments on capital lease and (29,286) --- notes payable Issuance of common stock 7,648,151 214,350 ----------- --------- Net cash provided by financing 7,618,865 214,350 activities ----------- --------- Net increase in cash $ 6,193,074 $ 1,210 ----------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 7 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- 1996 1995 (UNAUDITED) Cash at beginning of period 25,241 --- Cash at end of period $6,218,315 $ 1,210 =========== ======== Supplemental cash flow information Cash paid for Interest $ 9,553 $ --- Income taxes --- --- Non cash investing and financing activities Stock issued for services 36,021 137,604 Fixed assets acquired from related parties --- 75,051 Capital lease for equipment 35,764 10,500 Note payable for related party for fixed assets purchased --- 15,929 Intangibles acquired from related parties --- 1,271
The accompanying notes are an integral part of these financial statements. 8 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND SEPTEMBER 30, 1996 NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated condensed interim financial statements reflect, in the opinion of management, all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the financial position and results of operations for the periods presented. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the accompanying consolidated condensed financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. NOTE 2 - REVENUE RECOGNITION Hardware and software sales revenue is recognized upon shipment. Service revenue is recognized using the percentage of completion method on an individual contract basis. Percentage completion is determined based upon the ratio of costs incurred to total estimated costs. The Company's use of the percentage of completion method of revenue recognition requires estimates of the degree of project completion. To the extent these estimates prove to be inaccurate, the revenues and gross profits, if any, reported for periods during which work on the project is ongoing many not accurately reflect the final results of the project, which can only be determined upon project completion. Provisions for any estimated losses on completed contracts are made in the period in which such losses are determinable. Expenses are recognized when incurred. NOTE 3 - NET LOSS PER SHARE Net loss per share has been computed based upon the weighted average number of common stock and common stock equivalents outstanding during each period. NOTE 4 - INITIAL PUBLIC OFFERING In May and June 1996, the Company completed an initial public offering of 1,265,000 Units at a price to the public of $6.75 per Unit, before deduction of commissions and offering expenses. Each Unit consisted of one share of common stock and one warrant. Two warrants included in the Units entitle the holder to purchase one share of common stock, at an exercise price of $9.00 per share during the three year period commencing May 23, 1996, unless previously redeemed. NOTE 5 - CONCENTRATION OF CREDIT RISK The Company sells computer hardware and software and related services from its Denver offices to the surrounding states. The Company extends credit to its customers. Credit losses, if any, have been provided for in the financial statements and are based on management's expectations. The Company's accounts receivable are subject to potential concentrations of credit risk. The Company does not believe that it is subject to any unusual risks or significant risks in the normal course of it's business. The Company has one major customer for the first nine months of 1996, which accounted for 15% of the Company's net sales during this period. At September 30, 1996 that customer accounted for 24% of the accounts receivable balance. NOTE 6 - OPERATING LEASE In August, 1996 the Company entered into an operating lease for equipment. The total value of the lease is $305,077 over thirty-six months. The base monthly payments are $9,823. The Company made a security deposit of $222,693. In consideration for the security deposit, the monthly payments will be reduced by $1,601 for the first twelve months of the lease. After the first twelve months the lessor will refund $61,015 to the Company, reducing the security deposit to $161,678. The base monthly payments will be reduced by $1,144 for the second twelve months. After twenty-four months, the lessor will refund an additional $61,015 to the Company, reducing the deposit to $100,663. The base monthly payments will be reduced by $686 for the final twelve months. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Online System Services, Inc. was formed in March 1994, commenced sales in February 1995 and was in the development stage through December 31, 1995. The Company develops, markets and supports sophisticated, high-end Web sites for customers' use on the Internet or Intranets. As a part of the anticipated development of interactive, self service, Web applications for its customers, the Company has a non-exclusive value added reseller agreement with Edify Corporation to use and sublicense the Edify "Electronic Workforce" software. The Company is developing an interactive Web design process called "WebQuest" to expedite the design of Web sites with customers both locally and by use of remote computer access. Also, the Company has developed a specialization in the healthcare industry with the introduction of an integrated network or "marketspace" of Web sites called "MD Gateway" In addition, the Company markets and supports "Community Access America", a turnkey package of hardware, software, documentation, marketing, and technical assistance that enables a local cable company, telephone company, newspaper or other entity to provide Internet access and Web site development to smaller, non-urban communities. Results of Operations The Company generates net sales through the sale of consulting services for Web site development, resale of software licenses, mark-ups on computer hardware and software sold to customers, maintenance fees charged to customers to maintain computer hardware and Web sites, license fees based on a percentage of revenues from the Community Access America program, training course fees, and monthly fees paid by customers for Internet access provided by the Company in the Denver market. The following table sets forth for the periods indicated the percentage of net sales by items contained in the statements of operations. All percentages are calculated as a percentage of total net sales with the exception of cost of services and cost of hardware and software which are calculated as a percentage of service sales and hardware and software sales, respectively.
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED ENDED SEPTEMBER 30 SEPTEMBER 30 --------------------- ------------------- 1996 1995 1996 1995 ---- ---- ---- ---- (UNAUDITED) (UNAUDITED) Net sales: Service sales 67.0% 97.2% 72.7% 64.0% Hardware and software sales 33.0 2.8 27.3 36.0 ------ ------ ------ ------ Total net sales 100.0 100.0 100.0 100.0 Cost of sales: Cost of services 64.0 61.4 62.5 83.7 Cost of hardware and software 72.7 67.3 75.9 78.8 ------ ------ ------ ------ Cost of sales 66.9 61.6 66.2 81.9 Gross profit 33.1 38.4 33.8 18.1 ------ ------ ------ ------ Operating expenses: Marketing and sales expense 49.9 35.3 40.6 33.4 Product development expense 31.9 44.4 30.7 49.8 General and administrative expense 64.8 220.0 56.9 163.8 Depreciation and amortization expense 7.5 10.0 5.7 9.0 ------ ------ ------ ------ Total operating expenses 154.1 309.7 133.9 256.0 Loss from operations (121.0) (271.3) (100.1) (237.9) Net Loss (100.7%) (272.3%) (89.2%) (238.4%) ====== ====== ====== ======
10 Three Months and Nine Months Ended September 30, 1996 and l995 (Unaudited) The comparisons of the three-month and nine-month periods for fiscal 1996 to the similar periods in fiscal 1995 reflect the fact that the Company commenced business operations in February 1995 and was in the early development stage of its operations during fiscal 1995. Net losses were $410,196 and $195,285 for the three months ended September 30, 1996 and 1995, respectively, and were $869,497 and $353,684 for the nine months ended September 30, 1996 and 1995, respectively. The Company expects that expenses during the next several months will increase at a faster rate than net sales as the Company develops the infrastructure required to service an expected higher level of operations. It is therefore, more likely than not that the Company will continue to incur operating losses in the fourth quarter of 1996 and for the first two or three quarters of 1997. The Company expects to report an operating loss for the full year ending December 31, 1996. Net sales for the three months ended September 30, 1996 totaled $407,315, including $273,043 for service sales and $134,272 for hardware and software sales. A sale of a combined package of hardware, software, and services was made to one customer totalling $143,750 representing approximately 35% of net sales for the quarter. Net sales for the three months ended September 30, 1995 were predominantly from two initial customers and totaled $71,720, including $69,689 for service sales and $2,031 for hardware and software sales. Net sales for the nine months ended September 30, 1996 totaled $975,254, including $709,223 for service sales and $266,031 for hardware and software sales. The sale to the one customer amounting to $143,750 represented 15% of total net sales for this nine month period. The Company does not believe that its business is substantially dependent on any one customer. Net sales for the nine months ended September 30, 1995, were predominantly from two initial customers and totaled $148,332, including $94,986 for service sales and $53,346 for hardware and software sales. The increase in net sales for the three and nine-month periods in 1996 compared to the similar periods in 1995 were due to the development of the Company's current product and service offerings that were not available in the prior year periods and to a substantial increase in marketing and sales activities in general. Cost of sales as a percentage of net sales was 66.9% for the three months ended September 30, 1996 and 61.6% for three months ended September 30, 1995. Cost of sales as a percentage of net sales was 66.2% for the nine months ended September 30, 1996 and 81.9% for the nine months ended September 30, 1995. The Company's gross profit margin on service sales has fluctuated and has been lower during periods when the Company has hired additional service personnel and incurred other fixed costs in anticipation of future growth. Cost of sales on hardware and software sales are generally higher than on service sales, therefore, the Company's overall gross profit margin is higher during time periods when service sales are a greater percentage of total net sales. The decrease in the cost of sales as a percentage of net sales in the nine month period of 1996 is due to the higher level of service sales in the 1996 period and the fixed costs associated with providing initial services while the Company was in the early development stage during the first nine months of 1995. Sales and marketing expenses were $203,357 and $25,290 for the three months ended September 30, 1996 and 1995, respectively, and were $395,503 and $49,591 for the nine months ended September 30, 1996 and 1995, respectively. The increases during the 1996 periods were due to the hiring of new sales and marketing personnel and associated expenditures. The Company also increased the promotion and marketing of its MD Gateway and Community Access America products. Sales and marketing expenses also increased during the three months ended September 30, 1996 as the Company continued to hire and train people for the sale of Edify Electronic Workforce products. Because of the potentially long sales cycle for the sale of the Company's products and services, sales and marketing expenses are expected to increase at a faster rate than net sales during the next three to six months resulting in an increased percentage of net sales for these costs. Product development expenses were $129,826 and $31,824 for the three months ended September 30, 1996 and 1995 respectively, and were $299,388 and $73,891 for the nine months ended September 30, 1996 and 1995, respectively. This increase reflects the continued development of the Company's products and services since commencement of sales in February 1995. Product development expenses during the three and nine month periods ended September 30, 1996 include enhancements to the Community Access America products, continued development work on WebQuest and MD Gateway, and initial feasibility studies on various broadband data transmission products and services. Product development expenses during the nine month period of 1995 included the development of the Company's training courses entitled "The Internet Game" and "The Businessperson's Guide to the Internet" which are primarily being utilized as a marketing tool to enhance Web development sales activities. Product development expenses are expected to continue to increase during the remainder of 1996 as the Company continues to develop the WebQuest and MD Gateway products and investigate the feasibility of other products and services. 11 General and administrative expenses were $263,969 and $157,773 for the three months ended September 30, 1996 and 1995, respectively, and were $554,445 and $242,961 for the nine months ended September 30, 1996 and 1995, respectively. This increase reflects the continued development of the Company's infrastructure including finance, accounting, business development and investor relations capabilities since commencement of sales in February 1995. Depreciation and amortization expenses were $30,366 and $7,233 for the three months ended September 30, 1996 and 1995, respectively, and were $56,881 and $13,312 for the nine months ended September 30, 1996 and 1995, respectively. This increase reflects the increase in fixed assets purchased to support higher levels of Web site and Internet Access services as well as to support the growth in the number of employees. During the three months ended September 30, 1996, the Company enhanced its training facility utilized to educate potential customers. Interest income (expense) was $82,462 during the three-month period ended September 30, 1996 and $106,826 during the nine-month period ending September 30, 1996, and was ($726) for the same periods in 1995. On completion of the Company's initial public offering in May 1996, the company paid a portion of its outstanding debt resulting in a reduction of future interest expense and began earning interest income on the invested net proceeds. During 1995, the Company began incurring interest expense related to a capital lease. Liquidity and Capital Resources As of September 30, 1996 the Company had cash and cash equivalents of $6,218,315 and net working capital of $6,474,018 due to the completion during May and June 1996 of an initial public offering including the exercise of the underwriters' overallotment option which resulted in net proceeds to the Company of $7,231,981 and the issuance of an additional 1,265,000 shares of common stock. During the nine months ended September 30, 1996, the Company also completed a private placement of common stock that resulted in net proceeds of $403,670 and the Company also received $12,500 from the exercise of stock options. During the nine months ended September 30, 1996, the Company's investing activities consisted of the purchase of $314,358 of fixed assets. These amounts are primarily comprised of computer equipment, communications equipment and software necessary to provide Internet access and training to host Web sites and to develop Web sites for customers. In addition to these amounts, during the three month period ending September 30, 1996, the Company entered into an operating lease with Norwest Bank in the amount of $305,000 in order to make significant upgrades to its web server, access server, and internet communications capabilities including a state of the art, climate controlled computer room. As part of this lease agreement the Company has interest bearing, restricted cash of $222,693 which will be released over time as lease payments are made. In anticipation of future growth, the Company expects to invest in additional computer equipment, software and office equipment during the remainder of 1996. The Company's hardware and software inventory of $84,082 as of September, 1996 consists of Edify software licenses purchased by the company for resale and are now being sold as part of its high end interactive Web services as well as hardware and software components of its Community Access America program. Accounts receivable balances increased from $98,282 at December 31, 1995 to $271,727 on Sepember 30, 1996 due to the increased sales level during the quarter ended September 30, 1996 and a concentration of sales towards the end of the three month period. The Company has $88,403 of interest receivable on September 30, 1996 due to interest earned but not received on Treasury Bills and other short-term investment securities outstanding. Trade accounts payables as of September 30, 1996 increased to $252,880 from $74,990 as of December 31, 1995 due to the increased level of business activity and associated expenses. During the nine months ended September 30, 1996, the Company paid $50,814 of short-term notes that were utilized to help finance the Company's operations before the private placement and public offering proceeds were available. As of September 30, 1996, the Company had deferred revenue of $14,013 resulting from service revenue billed but not earned based on the Company's percentage of completion revenue recognition policy. The Company incurred an additional capital lease for expanded telephone equipment of $5,441 during the nine months ended September 30, 1996 and also incurred a debt obligation of $30,323 in conjunction with the purchase of hardware and software during March of 1996. The Company believes that its cash and cash equivalents and working capital are adequate to sustain operations for a minimum of the next twelve-month period. If sufficient cash flow is not being generated at the end of this twelve-month period, the Company will be required to seek additional funds through equity, debt or other external financing. There is no assurance that any additional capital resources, which the Company may need, will be available if and when required, and on terms that will be acceptable to the Company. 12 Forward Looking Information Information contained in this report, other than historical information, should be considered forward looking and reflects management's current views of future events and financial performance that involve a number of risks and uncertainties. The factors that could cause actual results to differ materially include, but are not limited to, the following: general economic conditions and developments within the Internet and Intranet industries; product development and technology changes; competition and pricing pressures; length of sales cycle; variability of sales order flow; and management of growth. 13 PART II.-- OTHER INFORMATION - - ---------------------------- ITEMS 1-5. NOT APPLICABLE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (b) Reports on Form 8-K Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 a current report on Form 8-K was filed October 7, 1996 reporting a change in the Company's certifying accountant. 14 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ONLINE SYSTEM SERVICES, INC. Date: November 1, 1996 By /S/Thomas S. Plunkett --------------------- Vice President and Chief Financial Officer 15 November 1, 1996 Via EDGAR Securities and Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549 RE: Online System Services, Inc. Quarterly Report of Form 10-QSB for the Quarter Ended September 30, 1996 Commission File No. 0-28462 Ladies and Gentlemen: The registrant, Online System Services, Inc. (The Company), first became subject to the reporting requirements under the Securities Exchange Act of 1934, as amended, on May 23, 1996. Enclosed for filing with the Commission via EDGAR is the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1996. Very truly yours, ONLINE SYSTEM SERVICES, INC. By /S/Thomas S. Plunkett --------------------- Vice President and Chief Financial Officer enclosure cc: Nasdaq Stock Market Nasdaq Regulatory Filings 1735 K. Street, N.W. Washington, D.C. 2006-1500 Cohig & Associates, Inc. 6300 S. Syracuse Way, Suite 430 Englewood, CO 80111 Gray Plant Mooty Attn: Bruce McPheeters 3400 City Center 33 South 6/th/ Street Minneapolis, MN 55402 Arthur Andersen LLP Attn: Michael Berup 1225 17/th/ St. Denver, CO 80202-5531 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 6,218,315 0 408,214 48,084 84,082 6,898,694 514,790 117,677 7,298,787 424,676 39,887 0 0 7,921,015 1,085,543 7,298,787 975,254 975,254 645,358 1,951,575 0 0 (106,824) (869,497) 0 0 0 0 0 (869,497) (.31) (.31)
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