-----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, Kia0JkV/7E2V9P0bE3Vitury0RdeiEDJS8Aud1H/w/tWQhBToXLnYowA4goy0uY5 1k8Lk10+km0OF1F/mX6FZA== 0000927356-96-000767.txt : 19980629 0000927356-96-000767.hdr.sgml : 19980629 ACCESSION NUMBER: 0000927356-96-000767 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 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: 96613704 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 June 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. [_] YES [X] NO APPLICABLE ONLY TO CORPORATE ISSUERS: As of August 9, 1996, Registrant had 3,072,245 shares of common stock, No Par Value, outstanding. 1 ONLINE SYSTEM SERVICES, INC. INDEX ----- Page ---- PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS Balance Sheets as of June 30, 1996 (Unaudited) and December 31, 1995. 3,4 Unaudited Statements of Operations, three months and six months ended June 30, 1996 and 1995 5 Unaudited Statements of Stockholders' Equity, six months ended June 30, 1996 6 Unaudited Statements of Cash Flows, three months and six months ended June 30, 1996 and 1995 7,8 Notes to Financial Statements (unaudited) 9-14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15-17 PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18 SIGNATURES 19 2 PART I - FINANCIAL INFORMATION - - ------------------------------ Item 1. Financial Statements ONLINE SYSTEM SERVICES, INC. BALANCE SHEETS June 30, December 31, 1996 1995 ------------ ------------ (unaudited) ASSETS - - ------ Current assets: Cash and cash equivalents $ 7,134,634 $ 25,241 Accounts receivable, net (Note 1) 217,496 98,282 Prepaid software inventory (Note 11) 101,975 --- Prepaid expense 13,493 5,000 Interest receivable 23,001 --- ------------ ------------ Total current assets 7,490,599 128,523 ------------ ------------ Equipment, net (Note 2) 242,173 97,215 ------------ ------------ Other assets Deposits 2,057 956 Intangibles, net of accumulated amortization of $317 and $233 (Note 1) 954 1,038 Total other assets 3,011 1,994 ------------ ------------ Total assets $ 7,735,783 $ 227,732 ============ ============ 3 ONLINE SYSTEM SERVICES, INC. BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) - - ---------------------------------------------- June 30, 1996 December 31, 1995 ------------- ----------------- (Unaudited) Current liabilities: Accounts payable $ 327,680 $ 74,990 Accrued expenses 6,381 11,020 Accrued salaries and taxes payable 64,252 19,403 Short-term notes payable (Note 5) --- 50,814 Current portion capital lease & 33,547 17,017 note payable (Note 7) Note payable-related party (Note 4) 12,707 12,707 ------------- ---------------- Total current liabilities 444,567 185,951 ------------- ---------------- Long-term liabilities: Note and capital leases payable (Note 7) 47,537 42,232 ------------- ---------------- Total long-term liabilities 47,537 42,232 ------------- ---------------- Total liabilities 492,104 228,183 ------------- ---------------- Commitments and contingencies (Note 3) --- --- ------------- ---------------- Stockholders' equity (deficit) Common stock, no par value, 10,000,000 shares authorized, 3,072,045, and 1,625,000 shares issued and outstanding, respectively 7,921,278 272,864 Stock subscriptions (Note 10) (2,253) (57,269) Accumulated deficit (675,346) (216,046) ------------- ---------------- Total stockholders' equity (deficit) 7,243,679 (451) ------------- ---------------- Total liabilities and stockholders' equity (deficit) $ 7,735,783 $ 227,732 ============= ================ 4 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, -------------------- ------------------ 1996 1995 1996 1995 ---- ---- ---- ---- (UNAUDITED) (UNAUDITED) Net sales: Service sales 192,845 23,147 436,181 25,297 Equipment sales 108,246 2,036 131,759 51,315 ------- ------ ------- ------ Total net sales 301,091 25,183 567,940 76,612 Cost of sales: Cost of services 127,697 34,714 268,724 36,708 Cost of equipment 82,909 1,075 104,180 40,667 ------- ------ ------- ------ Cost of sales 210,606 35,789 372,904 77,375 ------- ------ ------- ------ Gross profit 90,485 (10,606) 195,036 (763) ------- ------ ------- ------ Operating expenses: Sales and marketing expense 128,972 16,346 192,146 24,301 Product development expense 103,011 41,567 169,562 42,067 General and administrative expense 159,344 76,932 290,476 85,189 Depreciation and amortization 16,471 6,515 26,515 6,079 ------- ------ ------- ------ Total operating expenses 407,798 140,873 678,699 157,636 ------- ------- ------- ------- Income (loss) from operations (317,313) (151,479) (483,663) (158,399) Interest income (expense) 27,057 --- 24,363 --- ------- -------- --------- -------- Income (loss) before provision for income taxes (290,256) (151,479) (459,300) (158,399) Provision for income taxes --- --- --- --- -------- -------- -------- -------- Net income (loss) $(290,256) $(151,479) $(459,300) $(158,399) ========= ========= ========= ========= Net income (loss) per share $ (0.10) $ (0.05) $ (0.17) $ (0.06) ========= ========= ========= ========= Weighted average number of common shares and equivalents outstanding 3,009,228 2,550,695 2,781,214 2,550,695 ========= ========= ========= =========
5 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
COMMON STOCK ----------------------- STOCK ACCUMULATED SHARES AMOUNT SUBSCRIPTIONS DEFICIT ---------- ----------- ------------- ------------ Balance, 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 to founders 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 (Note 10) --- --- (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 1,265,000 8,538,751 --- --- $6.75 per unit (unaudited) Less costs of issuance (unaudited) --- (1,294,007) --- --- Stock subscriptions receivable (unaudited) (Note 10) --- --- 55,016 --- Net loss for the six months ended June 30, 1996 (unaudited) --- --- --- (459,300) ---------- ----------- -------- -------- Balance, June 30, 1996 (unaudited) $3,072,245 $ 7,921,278 $ (2,253) $ (675,346) ========== =========== ======== ==========
6 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF CASH FLOWS
For the Three Months For the Six Months Ended Ended June 30, June 30, -------------------------- ------------------------ 1996 1995 1996 1995 ---------- --------- ---------- ---------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities Net profit (loss) $ (290,256) $(151,479) $ (459,300) $(158,399) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 16,471 6,028 26,515 6,079 Stock issued for services 1,140 35,323 35,016 41,573 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (119,657) 516 (119,214) (559) (Increase) in prepaid software licenses --- --- (101,975) --- (Increase) in prepaid expense (7,999) --- (8,494) --- (Increase) in interest receivable (23,001) --- (23,001) --- (Increase) in deferred offering costs 16,538 --- --- --- (Increase) in deposits (951) (50) (1,101) (50) Increase (decrease) in accounts payable 114,505 49,077 252,690 56,675 Increase (decrease) in accrued expenses 4,411 10,684 40,210 10,684 Increase (decrease) in short-term notes payable (9,000) --- (50,814) --- ---------- ---------- ---------------- ---------- Net cash (used) by operating activities (297,799) (49,901) (409,468) (43,997) ---------- --------- ---------- --------- Cash flows from investing activities Purchase of fixed assets (40,158) (35,657) (134,550) (38,699) ---------- --------- ---------- --------- Net cash (used) by investing activities (40,158) (35,657) (134,550) (38,699) ---------- --------- ---------- --------- Cash flows from financing activities Payments on capital lease and notes payable (8,484) --- (15,003) --- Issuance of common stock 7,244,744 124,250 7,668,414 124,350 ---------- --------- ---------- --------- Net cash provided by financing activities 7,236,260 124,250 7,653,411 124,350 ---------- --------- ---------- --------- Net increase in cash 6,898,303 38,692 7,109,393 41,654
7 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, -------------------- ------------------ 1996 1995 1996 1995 ------ ------ ------ ------ (UNAUDITED) (UNAUDITED) Cash at beginning of period 236,331 2,962 25,241 --- ----------- -------- ----------- -------- Cash at end of period $ 7,134,634 $ 41,654 $ 7,134,634 $ 41,654 =========== ======== =========== ======== Supplemental cash flow information Cash paid for Interest $ 3,543 $ --- $ 6,011 $ --- Income taxes --- --- --- --- Non cash financing activities Stock issued for services $ 1,140 $ 35,323 $ 35,016 $ 41,573 Capital lease for equipment 5,440 --- 5,440 --- Note payable for fixed assets purchased --- --- 30,323 ---
8 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND JUNE 30, 1996 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company was incorporated on March 22, 1994 under the state laws of Colorado, however, principal operations did not begin until 1995. The Company develops, markets and supports World Wide Web ("Web") sites, on the Internet or Intranets to enable companies to enhance revenues, reduce costs, and improve customer service and communication. The Company differentiates itself by offering high quality, highly functional, sophisticated Web sites, targeted at specific industry segments or cross-industry business applications. The initial types of cross-industry business applications targeted by Company include Web sites for the online purchase of products or services, customer service applications and human resource functions. The first industry segment targeted by the Company is the health care industry, with an integrated network or "market place" of Web sites called "MD Gateway". The Company also markets and supports "Community Access America," a turnkey package of hardware, software, documentation, and 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 small non-urban communities. The Company generates net sales through the sale of consulting services for Web site development, 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. Prior to December 31, 1995 planned principal operations had commenced, but no significant revenues had been generated and the Company was considered a development stage enterprise. Beginning January 1, 1996 the Company is no longer in the development stage. a. Accounting Method The Company's financial statements are prepared using the accrual method of accounting. Equipment sales revenue is recognized when the equipment is delivered and the Company has no further material obligations. Service sales revenue is recognized when services are performed. Expenses are recognized when incurred. b. Cash Equivalents The Company considers all highly liquid investments with a maturity of twelve months or less when purchased to be cash equivalents. c. Accounts Receivable Accounts receivable are shown net of the allowance for doubtful accounts. The allowance was $5,173 and $30,272 at December 31, 1995 and June 30, 1996, respectively. d. Equipment Equipment is recorded at cost. Major additions and improvements are capitalized. The cost and related accumulated depreciation of equipment retired or sold are removed from the accounts and any differences between the undepreciated amount and the proceeds from the sale are recorded as gain or loss on sale of equipment. 9 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND JUNE 30, 1996--(CONTINUED) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) e. Depreciation Depreciation is computed using the straight line method over the estimated useful lives of the assets of five years. f. Intangibles Intangibles are recorded at cost and are amortized using the straight-line method over the estimated useful life of five years. Amortization expense for the year ended December 31, 1995 and the six months ended June 30, 1996 was $233 and $84, respectively. g. Concentrations of Credit The Company sells computer equipment 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 its business. h. Income Taxes The Company has operating loss carryforwards of $667,000 at June 30, 1996, available to reduce future federal taxable income. Until September 26, 1995, the Company operated as a Sub chapter S corporation whereby all tax benefits were passed through to the individual shareholders. Accordingly, the losses were offset to common stock until the Sub chapter S election was involuntarily revoked when a corporation became a shareholder of the Company. The tax benefit of the operating loss carryforwards at June 30, 1996 is offset by a valuation of the same amount. i. Unaudited Financial Statements In the opinion of management, the accompanying unaudited statements of operations, stockholders' equity (deficit) and cash flows for the three months and six months ended June 30, 1995 and 1996 include all of the adjustments necessary for a fair statement of results. All such adjustments are of a normal recurring nature. NOTE 2--EQUIPMENT A portion of the equipment that was purchased during 1995 was acquired from related parties. This equipment purchased was recorded at its original cost plus accumulated depreciation that had been taken to the point of purchase which totaled $60,393. 10 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND JUNE 30, 1996--(CONTINUED) NOTE 2--EQUIPMENT (CONTINUED) Equipment consists of the following: December 31, June 30, 1995 1996 ------------ ----------- (unaudited) Capital lease equipment........... $ 60,500 $ 65,940 Computer equipment................ 79,464 175,866 Office equipment.................. 26,408 31,820 Software.......................... 11,939 69,558 -------- -------- 178,311 343,184 Accumulated depreciation.......... (81,096) (101,011) -------- --------- Net Equipment..................... $ 97,215 $ 242,173 ======== ========= Depreciation expense for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $20,703 and $19,915 respectively. NOTE 3--COMMITMENTS AND CONTINGENCIES The Company entered into five operating lease agreements for office furniture during 1995. All of the leases expire in 1997. The monthly rental payments total $1,488. Total lease payments are as follows: 1996............................................... $ 17,856 1997............................................... 12,607 The total lease expense for the year ended December 31, 1995 and the six months ended June 30, 1996 was $6,942 and $18,000, respectively. The Company has entered into a month to month lease for office space commencing July 1995 at $3,000 per month. It is anticipated that the monthly rent will increase to $9,000 beginning October 1996. On March 1, 1996, the Company entered into a non-exclusive value-added reseller agreement with Edify Corporation (Edify), which will allow the Company to use and sublicense the Edify Electronic Workforce software to the Company's customers. The initial term will continue for fifteen months commencing March 1, 1996. A subsequent twelve month term may be extended by Edify, at its discretion, provided the Company has met all obligations under the agreement. The agreement requires the Company to purchase a solutions provider start-up package for $100,000, which has been paid in full as of June 30, 1996. The Company entered into a business relationship among Charlie Spickert, Medical Education Collaborative (MEC) and the Company. The overall objective is to become a leader in Internet training and Web services to the medical market. Mr. Spickert and MEC will provide the knowledge and reputation to penetrate the medical training and services market. The Company will provide the needed resources and expertise in Internet services. Mr. Spickert will be paid 50,000 common stock options exercisable at $0.50 per share, that will expire after 5 years. The stock options will vest at 25,000 increments on a pro-rata basis. The first increment will vest when over 400 hours have been devoted to this business relationship. The remaining 25,000 shares will be vested on a pro-rata basis over the first $20,000 earned in lieu of compensation due MEC. 11 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND JUNE 30, 1996--(CONTINUED) NOTE 3--COMMITMENTS AND CONTINGENCIES (CONTINUED) As part of the joint development and marketing arrangement with MEC and Mr. Spickert, the Company has agreed to perform Web site development services as a vendor to MEC and MEC will markup the project cost by 15% as payment for its involvement. On September 1, 1995, the Company entered into a consulting agreement with Creative Business Strategies, Inc. (CBS) pursuant to which CBS was to assist the Company in developing its business plan, advise the Company regarding business opportunities and financings and promote the Company and its services. For these services, CBS was to be paid a fee of $2,500 per month, was granted a stock option to purchase 100,000 shares of the Company's common stock at $.50 per share, such option to vest over a period of eighteen months, and was to be paid a transaction-based fee for business combinations or certain other transactions completed by the Company which were initiated by CBS. The options have not been exercised. Between September and December 1995, CBS purchased 114,000 shares of the Company's common stock at $.50 per share. Effective February 1, 1996, the agreement with CBS was amended to provide for a monthly fee of $4,000 for a period of 36 months and to eliminate any transaction-based compensation. NOTE 4--RELATED PARTY TRANSACTIONS a. Note Payable Related Party The Company has recorded a note payable to a former officer and shareholder of the Company of $12,707 at December 31, 1995. The note is unsecured, noninterest bearing and is due October 30, 1996. No interest has been imputed on the note because it is not material to the financial statements. b. Capital Lease Related Party To provide working capital for the Company, shareholders of the Company formed a partnership that purchased the equipment from the Company for cash and then leased the equipment back through a capital lease (See Note 7). c. Month to Month Lease The Company's principal offices are located in a building managed by an affiliate. An officer of the Company is related to the vice president of the management company. The Company was in need of expanding its office space and due to several vacant floors in the building, the management company agreed to rent an additional floor to the Company and its current office space at a total monthly rate of $3,000. NOTE 5--SHORT-TERM NOTES PAYABLE The Company negotiated two short-term notes of $24,000 and $32,814 for services provided by a vendor and equipment purchased. The balance due on both notes as of December 31, 1995 and June 30, 1996 was $50,814 and $-0-, respectively. The payment terms require two payments of $19,407 through February 1996 and $3,000 per month from March through June 1996. The notes are non-interest bearing and unsecured. No interest has been imputed on the notes because it is not material to the financial statements. 12 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND JUNE 30, 1996--(CONTINUED) NOTE 6--STOCK OPTIONS, WARRANTS AND RIGHTS (CONTINUED) a. Stock options ------------- During 1995, the Board of Directors approved a stock option plan for the Company's employees, officers and consultants. The Company has made available 350,000 shares for the plan adopted March 17, 1995. The plan was amended increasing the authorized shares to 600,000 on December 8, 1995 and to 700,000 on January 24, 1996. As of June 30, 1996 a total of 693,058 options were outstanding under the plan, with option prices ranging from $0.50 to $6.50. The plan shall be in effect for ten years from the adoption date. Options for the purchase of an aggregate of 7,700 shares of common stock have been granted outside of the plan to two directors one of whom is also an officer, at exercise prices of $0.50 and $2.25 per share. b. Warrants -------- In connection with the acquisition of the equipment under the capital lease described in Note 7, the Company issued warrants to purchase 25,000 shares of common stock at $0.50 per share. The Company issued an additional 18,450 warrants in conjunction with its private placement, with an exercise price of $2.25 per share. The warrants are granted at the fair market value of the common stock at the time of issuance. Accordingly, no discount was recorded. The warrants expire in the year 2000 and 2001, respectively. In May and June 1996 in conjunction with the Company's initial public offering, the Company issued 1,265,000 warrants. Each two warrants entitle the holder to purchase one share of common stock at a price of $9.00 per share during the three year period commencing May 23, 1996, unless previously redeemed. In addition, the Company granted to its Underwriter an option to purchase 110,000 units at a price of $8.10 per unit. Every two units consisted of two shares of Common Stock and a warrant to purchase one share of common stock for the price of $9.00 per share that is exercisable from May 23, 1997 until May 23, 2001, unless previously redeemed. NOTE 7--NOTE AND CAPITAL LEASE PAYABLE The Company entered into a capital lease for office equipment as follows. December 31, 1995 June 30, 1996 ----------------- ------------- (unaudited) Capital lease payable in monthly principal and interest payments of $1,733, for thirty-six months beginning January 15, 1996, effective interest rate of 14.9%, secured by office equipment $ 50,000 $ 42,955 Capital lease payable in monthly principal and interest payments of $471, for thirty-six months beginning July 28, 1995, effective interest rate of 35.8%, secured by a phone system 9,249 8,033 Note payable for purchase of fixed assets, monthly principal payments of $1,588 beginning March 1996 for twelve months and then payment changes to $625 for the remaining twenty-four months, effective interest rate of 9.0% and unsecured --- 24,656 Capital lease payable --- 5,440 -------- -------- 59,249 81,084 Less current portion (17,017) (33,547) -------- -------- $ 42,232 $ 47,537 ======== ======== 13 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND JUNE 30, 1996--(CONTINUED) NOTE 7--NOTE AND CAPITAL LEASE PAYABLE (CONTINUED) The following is a schedule of future minimum lease payments. December 31, June 30, 1995 1996 (unaudited) 1996 $ 26,448 $ 35,079 1997 26,448 36,668 1998 23,622 26,605 -------- -------- Total minimum lease payments 76,518 98,352 Less amount representing interest (17,269) (17,268) -------- -------- Present value of minimum lease payments $ 59,249 $ 81,084 ======== ======== NOTE 8--ROYALTY AGREEMENT An agreement was entered into by the Company with Creative Learning International (CLI) for a 5% royalty on all participants in the Internet game, "The Adventure Begins." The agreement includes revenues generated from all public seminars, corporate training, special events and any licensing or franchise agreements. A royalty of 3% will be paid to CLI for any other products that use the design concept created for the Internet game. This royalty agreement will be in effect as long as the training program is used by the Company or by any other entity the program is licensed to by the Company. NOTE 9--STOCK SUBSCRIPTIONS RECEIVABLE The Company entered into two stock subscription agreements. The first agreement stipulates that shares will be paid through services rendered to the Company. The $2,253 of required services are still outstanding as of June 30, 1996 and will be completed prior to September of 1996. The second agreement required the payment of $20,000 cash on or before January 31, 1996. The payment was received prior to the expiration date. NOTE 10--MAJOR CUSTOMERS The Company had one major customer during 1995 that accounted for 40% of the Company's sales. The service agreement between the Company and this customer terminated May 1996. The Company has one major customer for the six months of 1996, which accounted for 12% of the Company's sales during this period. NOTE 11--PREPAID SOFTWARE LICENSES In conjunction with the agreement signed with Edify, the Company has purchased $101,975 of software licenses. $60,000 is required under the terms of the contract and $41,975 is in anticipation of future orders. It is anticipated that all software licenses inventory will be sold within a one year period following June 30, 1996. NOTE 12--INITIAL PUBLIC OFFERING In May and June 1996, the Company completed an initial public offering of 1,265,000 Units at a price to 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. 14 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. FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 30, 1996 JUNE 30, 1996 ------------------ ----------------- (UNAUDITED) (UNAUDITED) Net sales: Service sales.................. 64.0% 91.9% 76.8% 33.0% Equipment sales................ 36.0 8.1 23.2 67.0 ------ ------ ----- ------ Total net sales.............. 100.0 100.0 100.0 100.0 Cost of sales: Cost of services............... 66.2 150.0 61.6 145.1 Cost of equipment.............. 76.6 52.8 79.1 79.2 ------ ------ ----- ------ Total cost of sales.......... 69.9 142.1 65.7 101.0 Gross profit..................... 30.1 (42.1) 34.3 (1.0) ------ ------ ----- ------ Operating expenses: Marketing and sales expense.... 42.8 64.9 33.8 31.7 Product development expense.... 34.2 165.1 29.9 54.9 General and administrative expense....................... 52.9 305.5 51.1 111.2 Depreciation and amortization expense....................... 5.5 23.9 4.7 7.9 ------ ------ ----- ------ Total operating expenses..... 135.4 559.4 119.5 205.8 Income (loss) from operations.... (105.4%) (601.5%) (85.2%) (206.8%) ====== ====== ===== ====== 15 Three Months and Six Months Ended June 30, 1996 and l995 (Unaudited) The comparisons of the three and six-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. The Company expects that expenses during the next several months will increase at a faster rate than will 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 third and fourth quarters of fiscal 1996. The Company expects to report an operating loss for the full year ending December 31, 1996. Net sales for the three months ended June 30, 1996 totaled $301,091, including $192,845 for service sales and $108,246 for equipment sales. The equipment sales included the sale of equipment to two customers totaling $68,351 and $39,895, representing 22.7% and 13.3% respectively of net sales. Net sales for the three months ended June 30, 1995 were predominantly from two initial customers and totaled $25,183, including $23,147 for service sales and $2,036 for equipment sales. Net sales for the six months ended June 30, 1996 totaled $567,940, including $436,181 for service sales and $131,759 for equipment sales. One equipment customer amounting to $68,351 represented 12% of net sales for this six month period. The Company does not believe that business is substantially dependent on any one customer. Net sales for the six months ended June 30, 1995, were predominantly from two initial customers and totaled $76,612, including $25,297 for service sales and $51,315 for equipment sales. The increase in net sales for the three and six-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 69.9% for the three months ended June 30, 1996 and 142.1% for three months ended June 30, 1995. Cost of sales as a percentage of net sales was 65.7% for the six months ended June 30, 1996 and 101.0% for six months ended June 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. The decrease in the cost of sales as a percentage of net sales in the 1996 periods are due to the higher level of sales in the 1996 periods and the low level of sales during the 1995 periods when the Company was in the early development stage. Sales and marketing expenses were $128,972 and $16,346 for the three months ended June 30, 1996 and 1995, respectively, and were $192,146 and $24,301 for the six months ended June 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 June 30, 1996 as the company commenced training 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 may increase at a faster rate than net sales during the next six months resulting in an increased percentage of net sales for these costs. Product development expenses were $103,011 and $41,567 for the three months ended June 30, 1996 and 1995 respectively, and were $169,562 and $40,667 for the six months ended June 30, 1996 and 1995, respectively. This increase reflects the continued development of the Company's products and services since commencement of business in February 1995. Product development expenses during the three and six month periods ended June 30, 1996 include enhancements to the Community Access America products and continued development work on WebQuest and MD Gateway. Product development expenses during the six month period of 1995 included the development of the Company's training course entitled "The Internet Game" which is primarily being utilized as a marketing tool to enhance Web development sales activities. Product development expenses are expected to continue to increase significantly during the remainder of 1996 as the Company develops the WebQuest and MD Gateway products. General and administrative expenses were $159,344 and $76,932 for the three months ended June 30, 1996 and 1995, respectively, and were $290,476 and $85,189 for the six months ended June 30, 1996 and 1995, respectively. This increase reflects the continued development of the Company's infrastructure since commencement of business in February 1995. Depreciation and amortization expenses were $16,471 and $6,028 for the three months ended June 30, 1996 and 1995, respectively, and were $26,515 and $6,079 for the six months ended June 30, 1996 and 1995, respectively. This increase reflects the increase in capital 16 equipment purchased to support higher levels of Web site and Internet Access services as well as to support the growth in the number of employees. Interest income (expense) was $27,057 during the three-month period ended June 30, 1996 and $24,363 during the six-month period ending June 30, 1996, and was $0 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. Liquidity and Capital Resources As of June 30, 1996 the Company had cash and cash equivalents of $7,134,634 and net working capital of $7,046,032 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 $7,244,744 and the issuance of an additional 1,265,000 shares of common stock. During the six months ended June 30, 1996, the Company also completed a private placement of common stock that resulted in net proceeds of $393,670. During the six months ended June 30, 1996, the Company's investing activities consisted of the purchase of $134,550 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 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 software license inventory of $101,495 as of June 1996 consisted of Edify software licenses purchased by the company for resale and are now being sold as part of its high end interactive Web services. The company expects to sell these licenses to customers within the one year period following June 30, 1996. Accounts receivable balances increased from $98,282 at December 31, 1995 to $217,496 on June 30, 1996 due to the increased sales level during the quarter ended June 30, 1996 and a concentration of sales towards the end of the three month period. The Company has $23,001 of interest receivable on June 30, 1996 due to interest earned but not received on Treasury Bills outstanding. Trade accounts payables as of June 30, 1996 increased to $327,680 from $74,940 as of December 31, 1996 due to the increased level of business activity and expenses incurred in connection with the public offering. During the six months ended June 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. The Company incurred an additional capital lease for expanded telephone equipment of $5,440 during the six months ended June 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. 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 growth. 17 PART II.-- OTHER INFORMATION - - ---------------------------- ITEMS 1-4. NOT APPLICABLE ITEM 5. OTHER INFORMATION On May 30, 1996, the Company completed an initial public offering of 1,100,000 Units at a price to 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. During the three year period commencing May 23, 1996, unless previously redeemed, each two warrants entitle the holder to purchase one share of common stock at a price of $9.00 per share. On June 21, 1996, the Company issued an additional 165,000 Units at a price to public of $6.75 per Unit, upon exercise of the overallotment option for the initial public offering. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (b) Reports on Form 8-K No reports on Form 8-K were filed during the three-months ended June 30, 1996. 18 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: August 13, 1996 By /S/ Robert M. Geller -------------------------- Vice President Chief Financial Officer 19 EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1995 JAN-01-1996 JUN-30-1996 7,134,634 0 247,768 30,272 101,975 7,490,599 343,184 101,011 7,735,783 372,104 47,537 0 0 7,993,741 (675,346) 7,735,783 567,940 567,940 372,904 1,051,603 0 0 24,363 (459,300) 0 0 0 0 0 (459,300) (0.17) (0.17)
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