-----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, AG0bB1wzyMe+7GvV93L5CU2Th4wFKXShSGlVsk7hHOWG4QBSxYmNlzTs0z9997x+ uE7ifVOb0RLVyVtjTetNUQ== 0000927356-97-000534.txt : 19970512 0000927356-97-000534.hdr.sgml : 19970512 ACCESSION NUMBER: 0000927356-97-000534 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970509 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ONLINE SYSTEM SERVICES INC CENTRAL INDEX KEY: 0001011901 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 841293864 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 333-03282-D FILM NUMBER: 97599375 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 10QSB 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 March 31, 1997. --------------- [ ] 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) (Zip code) (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 March 8, 1997, Registrant had 3,179,761 shares of common stock outstanding. ONLINE SYSTEM SERVICES, INC. Index -----
Page ---- Part I. Financial Information Item I. Financial Statements Unaudited Balance Sheets as of March 31, 1997 and December 31, 1996 3 Unaudited Statements of Operations, three months March 31, 1997 and 1996 4 Unaudited Statements of Stockholders' Equity, three months ended March 31, 1997 5 Unaudited Statements of Cash Flows, three months ended March 31, 1997 6,7 Notes to Financial Statements (unaudited) 8,9 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 ONLINE SYSTEM SERVICES, INC. BALANCE SHEETS
March 31, December 31, 1997 1996 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 1,847,476 $ 1,645,163 Short-term investments 2,701,625 3,855,343 Accounts receivable, net 400,138 229,350 Accrued revenue receivables 140,252 90,337 Inventory 181,415 195,941 Prepaid expenses 235,494 132,544 Short-term deposit 61,015 61,015 ----------- ------------ Total current assets 5,567,415 6,209,693 ----------- ------------ Equipment, net 504,742 486,344 Other assets 164,688 164,616 ----------- ------------ $ 6,236,845 $ 6,860,653 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 359,611 $ 331,809 Accrued expenses 23,677 17,684 Accrued salaries and taxes payable 87,961 82,806 Short-term notes payable -- -- Current portion of note and capital leases payable 29,812 30,437 Note payable-related party -- -- Deferred revenue 30,869 48,669 ----------- ------------ Total current liabilities 531,930 511,405 ----------- ------------ Note and capital leases payable 24,717 32,647 ----------- ------------ Total Long-Term Liabilities 24,717 32,647 ----------- ------------ Total Liabilities 556,647 544,052 ----------- ------------ Stockholders' equity: Preferred stock, no par value, 5,000,000 shares authorized, no shares issued or outstanding -- -- Common stock, no par value, 10,000,000 shares authorized, 3,177,995 and 3,162,545 shares issued and outstanding, respectively 7,965,140 7,953,665 Stock subscriptions receivable -- (586) Accumulated deficit (2,284,942) (1,636,478) ----------- ------------ Total stockholders' equity 5,680,198 6,316,601 ----------- ------------ Total Liabilities and Equity $ 6,236,845 $ 6,860,653 =========== ============
The accompanying notes to financial statements are an integral part of these balance sheets. 3 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF OPERATIONS
For Three Months Ended March 31, 1997 1996 (Unaudited) (Unaudited) ----------- ----------- Net sales: Service sales $ 402,890 $ 243,336 Hardware and software sales 113,582 23,513 ----------- ----------- 516,472 266,849 Cost of sales: Cost of services 238,745 141,027 Cost of hardware and software 96,293 21,271 ----------- ----------- 335,038 162,298 ----------- ----------- Gross margin 181,434 104,551 ----------- ----------- Operating expenses: Sales and marketing expenses 285,868 63,173 Product development expenses 209,944 66,551 General and administrative expenses 356,902 131,132 Depreciation and amortization 36,838 10,044 ----------- ----------- 889,552 270,900 ----------- ----------- Loss from operations (708,118) (166,349) Other income (expense): Interest income (expense) 59,654 (2,695) ----------- ----------- Loss before provision for income taxes (648,464) (169,044) Provision for income taxes -- -- ----------- ----------- Net loss $ (648,464) $ (169,044) =========== =========== Net loss per common and common equivalent share (Note 3) $( 0.20) $(0.07) =========== =========== Weighted average common and common equivalent shares outstanding (Note 3) 3,172,715 2,550,695 =========== ===========
The accompanying notes to financial statements are an integral part of these statements. 4 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock Stock Stockholders' ------------------------- Subscriptions Accumulated Equity Shares Amount Receivable Deficit (Deficit) --------- ----------- ----------- ------------ ----------- Balances, December 31, 1994 -- $ -- $ -- $ -- $ -- Common stock issued to founder for cash at an average price of $0.0002 per share 480,000 100 -- -- 100 Common stock issued to founders for services rendered at $0.05 per share 125,000 125,000 6,250 -- -- 6,250 Common stock issued for services rendered at $0.56 per share 370,000 207,707 -- -- 207,707 Stock subscriptions receivable -- -- (57,269) -- (57,269) Common stock issued in private placement for cash at $0.50 per share 650,000 650,000 325,000 -- -- 325,000 Net loss -- -- -- (482,239) (482,239) Subchapter S corporation losses allocated to individual shareholders -- (266,193) -- 266,193 -- --------- ----------- ----------- ------------ ----------- Balances, December 31, 1995 1,625,000 272,864 (57,269) (216,046) (451) Common stock issued in conjunction with private placement 182,245 410,000 -- -- 410,000 Less offering costs -- (6,330) -- -- (6,330) Common stock issued in conjunction with initial public offering for cash at $6.75 per unit 1,265,000 8,538,750 -- -- 8,538,750 Less offering costs -- (1,306,769) -- -- (1,306,769) Exercise of stock options and warrants 90,300 45,150 -- -- 45,150 Stock subscriptions receivable -- -- 56,683 -- 56,683 Net loss -- -- -- (1,420,432) (1,420,432) --------- ----------- ----------- ------------ ----------- Balances, December 31, 1996 3,162,545 7,953,665 (586) (1,636,478) 6,316,601 Exercise of stock options (unaudited) 15,450 11,475 -- -- 11,475 Stock subscriptions receivable (unaudited) -- -- 586 -- 586 Net loss for the three months ended March 31, 1997 (unaudited) -- -- -- (648,464) (648,464) --------- ----------- ----------- ------------ ----------- Balances, March 31, 1997 (unaudited) 3,177,995 $ 7,965,140 $ -- $ (2,284,942) $ 5,680,198 ========= =========== =========== ============ ===========
The accompanying notes to financial statements are an integral part of these statements. 5 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF CASH FLOWS
For the Three Months ended March 31, 1997 1996 (Unaudited) (Unaudited) ------------ ----------- Cash flows from operating activities: Net loss $ (648,464) $(169,044) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 36,811 10,044 Stock issued for services 586 33,876 Changes in operating assets and liabilities: Short-term deposit -- -- Accounts receivable (170,788) 443 Accrued revenue receivables (49,915) --- Inventory 14,526 (101,975) Prepaid expenses (102,950) (495) Other assets (72) (16,688) Accounts payable 27,802 138,184 Accrued expenses 11,148 35,799 Deferred revenue (17,800) -- ------------ ----------- Net cash used in operating activities (899,116) (69,856) ------------ ----------- Cash flows from investing activities: Proceeds from short-term investments 1,153,718 -- Purchase of equipment (55,209) (94,392) ------------ ----------- Net cash provided by (used in) investing activities 1,098,509 (94,392) ------------ ----------- Cash flows from financing activities: Payments on note payable and capital leases (8,555) (6,518) Proceeds from issuance of common stock 11,475 410,000 Payments on short-term notes payable -- (6,330) Payments on note payable - related party -- (41,814) Payments received on stock subscriptions receivable -- 20,000 ------------ ----------- Net cash provided by financing activities 2,920 375,338 ------------ ----------- Net increase in cash and cash equivalents 202,313 211,090 ------------ ----------- Cash and cash equivalents at beginning of period 1,645,163 25,241 ------------ ----------- Cash and cash equivalents at end of period $1,847,476 $ 236,331 ============ ===========
The accompanying notes to financial statements are an integral part of these statements. 6 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF CASH FLOWS (Continued)
For the Three Months Ended March 31, 1997 1996 (Unaudited) (Unaudited) ----------- ----------- Supplemental disclosure of cash flow information: Cash paid for Interest $620 $ 2,468 Income taxes -- -- Supplemental schedule of non-cash investing and financing activities: Stock issued for services $586 $33,876 Equipment acquired from related parties -- -- Capital lease for equipment -- $30,323
The accompanying notes to financial statements are an integral part of these statements. 7 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND MARCH 31, 1997 NOTE 1--BASIS OF PRESENTATION The accompanying unaudited interim financial statements have been prepared without audit pursuant to rules and regulations of the Securities and Exchange Commission and 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 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 Revenue from hardware and software sales is recognized upon shipment provided that the Company has no further material obligations. Revenue from maintenance fees, training courses and Internet access are recognized as the services are performed. License fees are recognized when the Company has no further material obligations. Revenue from Web site design and consulting is recognized on the percentage of completion method on an individual contract basis. Percentage complete is determined primarily based upon the ratio that labor costs incurred bear 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 margin, if any, reported for periods during which work on the project is ongoing may not accurately reflect the final results of the project, which can only be determined upon project completion. Provisions for any estimated losses on uncompleted contracts are made in the period in which such losses are determinable. Amounts earned but not billed are shown as accrued revenue receivables in the accompanying balance sheets. Amounts invoiced but not earned are shown as deferred revenue in the accompanying balance sheets. NOTE 3 - NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE Net loss per common and common equivalent share has been computed based upon the weighted average number of common shares and common share equivalents outstanding. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common stock and common stock equivalent shares issued by the Company at prices below the initial public offering price during the twelve month period prior to the offering (using the treasury stock method for common stock for common stock equivalents at an assumed offering price of $6.75 per unit) have been included in the calculation as if they were outstanding for all periods presented regardless of whether they were antidilutive. NOTE 4 - 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 had one major customer for the three months ended March 31, 1997, which accounted for 12% of net sales. The Company had one major customer for the three months ended March 31, 1996, which accounted for 23% of net sales. 8 NOTE 5 - NEW ACCOUNTING STANDARD In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", which supercedes Accounting Principles Board Opinion No. 15, "Earnings per Share". SFAS No. 128 is effective for annual and interim periods ending after December 15, 1997 and simplifies the computation of earnings per share by replacing the presentation of primary earnings per share with a presentation of basis earnings per share. SFAS No. 128 requires dual presentation of basis and diluted earnings per share by entities with complex capital structures. Basic earnings per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity. The Company does not believe that its loss per share calculations will be materially affected as a result of adopting SFAS No. 128. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company develops sophisticated websites that are targeted to three specific industry segments. During the first quarter of 1997, the Company formed three separate business units, Cable Access America (CAA), Healthcare, and the Business Resource Group (BRG), in order to better focus its efforts within each industry segment. CAA is a turnkey product and service package featuring the use of hybrid cable modem technology designed to put cable television operators in the Internet servicing provisioning business. This is an outgrowth of the Company's Community Access America products and services that have been offered to a variety of markets since the latter part of 1995. The Healthcare division features the MD Gateway website and is focused primarily on online medical education for healthcare professionals and accredited Continuing Medical Education (CME) programs for physicians. The BRG develops, markets, and supports sophisticated, interactive Web sites for customers' use on the Internet or Intranets. The BRG utilizes 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 and acts as a reseller of Edify Corporation's "Electronic Workforce" software that allows interactive, self service applications on the web. The Company generates revenues through the sale of design and 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 CAA program, training course fees, and monthly fees paid by customers for Internet access provided by the Company in the Denver market. The Company commenced sales in February 1995, and was in the development stage through December 31, 1995. RESULTS OF OPERATIONS 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/software sales, respectively.
For the Three Months Ended March 31, ------------------------------ 1997 1996 ---- ---- Net Sales: Service sales 78.0% 91.2% Hardware/software sales 22.0% 8.8% ------ ------ Total net sales 100.0% 100.0% Cost of sales: Cost of services (as percentage of service sales) 59.3% 58.0% Cost of hardware and software (as percentage of hardware and software sales) 84.8% 90.5% ------ ------ Cost of sales 64.9% 60.8% ------ ------ Gross Margin 35.1% 39.2% ------ ------ Operating expenses: Sales and marketing expenses 55.4% 23.7% Product development expenses 40.6% 24.9% General and administrative expenses 69.1% 49.1% Depreciation and amortization expense 7.1% 3.8% ------ ------ Total operating expenses 172.2% 101.5% Loss from operations (137.1%) (62.3%) Net Loss (125.6%) (63.3%)
10 THREE MONTHS ENDED MARCH 31, 1997 AND 1996 Net sales for the three months ended March 31, 1997 totaled $516,472, including $402,890 for service sales and $113,582 for hardware and software sales. This represents an increase of 94% above 1996 net sales of $266,849 which consisted of $243,336 for service sales and $23,513 for hardware and software sales. The Company had one major customer for the three months ended March 31, 1997, which accounted for 12% of net sales. The Company had one major customer for the three months ended March 31, 1996, which accounted for 23% of net sales. The increase in sales for the 1997 period, compared to 1996, was due to the expanded development of the Company's product and service offerings in the Cable Access America and healthcare areas, and to a substantial increase in marketing and sales activities in general. Cost of sales as a percentage of net sales was 64.9% for the 1997 period and 60.8% for the 1996 period. 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 periods when service sales are a greater percentage of total net sales. The increase in the cost of sales as a percentage of net sales in the three-month period of 1997 is due to the lower percentage of service sales in the 1997 period, compared to the 1996 period. Sales and marketing expenses were $285,868 for the 1997 period and $63,173 for the 1996 period. Sales and marketing expenses as a percentage of net sales increased from 23.7% in 1996 to 55.4% in 1997. The increase in dollars spent, as well as the increase as a percentage of net sales during the 1997 period, were due to the hiring of new sales and marketing personnel and associated expenditures. The Company also developed initial marketing materials, began lead generation activity and began to sell its CAA and CME products and services. In addition the Company entered into an agreement with Telemedical Systems Integration, Inc. (TMED) during the fourth quarter of 1996 to serve as the Company's primary sales group for its healthcare products including the recently introduced CME products. The Company incurred significant expenses during the three-month period ended March 31, 1997 related to initial training of and lead generation for this sales force. Product development expenses were $209,944 for the three months ended March 31, 1997, compared to $66,551 for the 1996 period. Product development expense as a percentage of net sales increased from 24.9% in 1996 to 40.6% in 1997. The increase in these expenses, as well as the increase as a percentage of net sales during the 1997 period, reflects the continued development of the Company's products and services. Product development expenses during the 1997 period included the completion of the initial development of the Company's CAA products and initial product offerings targeted at the CME segment of the healthcare market. Product development expenses during the 1996 period included enhancements to the initial CAA product and early development of the Company's Webquest process. Product development expenses are expected to continue to increase during the remainder of fiscal 1997 as the Company continues to develop the CAA and CME products and services and investigates the feasibility of other product offerings. General and administrative expenses were $356,902 for the three months ended March 31, 1997, compared to $131,132 for the 1996 period. General and administrative expenses as a percentage of net sales increased from 49.1% in 1996 to 69.1% in 1997. The dollar and percentage increases reflect the development of the Company's general and administrative infrastructure, including finance, accounting, business development and investor relations capabilities, as well as additional expenses related to being a public company. Depreciation and amortization expenses were $36,838 for the three months ended March 31, 1997, compared to $10,044 for the 1996 period. This increase reflects the increase in fixed assets and equipment to support higher levels of Web site and Internet access services, as well as to support the growth in the number of employees. Other income (expense) was $59,654 during the three-month period ended March 31, 1997, compared to ($2,695) for the 1996 period. Upon 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. The Company's investments consist of U.S. Treasury Bills and cash equivalents. Net losses were $648,464 in the three-month period ended March 31, 1997 compared to $169,044 for the 1996 period. This increase in loss in the 1997 period reflects expenses in the marketing and sales, product development, and general and administrative areas that have increased at a faster rate than net sales. This is due to the time lag associated with product development and market introduction as well as the long sales cycle for most of the Company's products and services. The Company expects to continue to experience increased operating expenses and capital investments during the remainder of fiscal 1997, as it continues to develop new product offerings and the infrastructure required to support its 11 anticipated growth. The Company believes that, initially, these expenses are expected to be greater than increases in net sales and, more likely than not, will result in substantial operating losses in the second and third quarters of fiscal 1997. The Company expects to report an operating loss for the full year ending December 31, 1997. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 1997, the Company had cash and cash equivalents of $1,847,476, short-term investments of $2,701,625 and working capital of $5,035,485. The Company has financed its operations and capital equipment expenditures through a combination of public and private sales of common stock, issuing common stock for services, lease financing, short-term loans and the utilization of trade payables. During 1996, the Company completed an initial public offering of its common stock 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 three months ended March 31, 1997, the Company purchased $55,209 of fixed assets. These purchases were primarily computer equipment, communications equipment, cable modems and software necessary to develop and demonstrate the recently introduced Cable Access America products. In anticipation of future growth, the Company expects to invest a minimum of $200,000 during the remainder of fiscal 1997 to purchase additional computer equipment, software and office equipment. Accounts receivable balances increased from $229,350 at December 31, 1996 to $400,138 at March 31, 1997, due to the increased sales level during the three month period and a concentration of billing towards the end of the quarter. Due to the Company's utilization of the percentage of completion method of revenue recognition for its Web services, an asset of $140,252, representing revenue earned and not billed, is shown as accrued revenue receivable at March 31, 1997. This amount has increased from $90,337 at December 31, 1996 due to increased revenue for the quarter. A liability for amounts invoiced but not earned of $30,869 is shown as deferred revenue at March 31, 1997. The Company's hardware and software inventory of $181,415 at March 31, 1997 decreased from $195,941 at December 31, 1996, and consists of software licenses and computer hardware purchased by the Company for resale. Prepaid expenses increased to $235,494 at March 31, 1997, from $132,544 at December 31, 1996, primarily due to amounts prepaid for insurance for the Company. The major portion of the remaining balance consists primarily of amounts paid under a marketing and sales agreement with an independent company. These amounts consist of advanced consulting fees, sales commission advances and travel advances that are expected to be earned through commissions on sales of the Company's CME products and services. Trade account payables at March 31, 1997, increased to $359,611 from $331,809 at December 31, 1996, due to the increased level of business activity for the quarter. The Company believes that its cash and cash equivalents and working capital are adequate to sustain operations for at least the next twelve months. If sufficient cashflow is not being generated at the end of this period, the Company may 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. LENGTH OF SALES CYCLE; POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS The development and implementation of interactive Web sites is often an enterprise-wide decision by prospective customers and may require the Company to engage in a lengthy sales cycle. The pursuit of sales leads typically involves an analysis of the prospective customer's needs, preparation of a written proposal, one or more presentations and contract negotiations. The Company often provides significant education to prospective customers regarding the use and benefits of Internet or Intranet technologies and products such as Edify's Electronic Workforce. Extensive Web site development or licensing of Electronic Workforce may also involve a substantial commitment of capital and the attendant delays frequently associated with approving large capital expenditures and reviewing new technologies that affect key operations. While the sales cycle varies from customer to customer, it typically has ranged from one to six months for Web site design and support, and from one to three months for Community Access America projects. The sales cycle may also be subject to a prospective customer's budgetary constraints and internal acceptance reviews, over which the Company has little or no control. Consequently, if sales forecasted from a specific customer for a particular quarter are not realized in that quarter, the Company is unlikely to be able to generate revenue from alternate sources in time to compensate for the shortfall. If a larger order is delayed or lost to a competitor, the Company's revenues for that quarter could be materially diminished. Moreover, 12 to the extent that significant sales occur earlier than expected, operating results for subsequent quarters may be adversely affected. Further, as a result of the Company's limited operating history, the Company does not have historical financial data for a sufficient number of periods on which to base planned operating expenses. Accordingly, the Company's expense levels are based in part on its expectations as to future revenues and to a large extent are fixed. The Company typically operates with little or no backlog and the sales cycles for its products and services may vary significantly. As a result, quarterly sales and operating results generally depend on the volume and timing of and ability to close customer contracts within the quarter, which are difficult to forecast. The Company may be unable to adjust spending on a timely manner to compensate for any unexpected revenue shortfalls. Accordingly, any significant shortfall of demand for the Company's products and services in relation to the Company's expectations would have an immediate adverse impact on the Company's business, operating results and financial condition. In addition, the Company plans to increase its operating expenses to fund product development and increase sales and marketing. To the extent that such expenses precede or are not subsequently followed by increased revenues, the Company's business, operating results and financial condition will be materially adversely affected. FORWARD LOOKING INFORMATION Information contained in this report, other than historical information, should be considered forward looking and reflects management's current view 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 product development and technology changes; competition and pricing pressures; length of sales cycle; variability of sales order flow; and management growth. 13 Part II.-- Other Information - ---------------------------- Items 1-5. Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K None 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: March 31, 1997 By /S/Thomas S. Plunkett --------------------- Vice President and Chief Financial Officer 15 March 31, 1997 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 March 31, 1997 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 March 31, 1997. 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 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ONLINE SYSTEMS SERVICES, INC AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 1,847,476 2,701,625 478,744 78,606 181,415 5,567,415 727,505 222,763 6,236,845 531,930 24,717 0 0 7,965,140 (2,284,942) 6,236,845 113,582 516,472 96,293 335,038 0 0 0 (648,464) 0 (648,464) 0 0 0 (648,464) (.20) (.20)
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