-----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, Tij+O7bH3WhhBZOYb7BHAkxgYqnoJhDFezB7kY+XDGK8YfnYEKX1QIAOIZZuTflL ZaNnajOr7I1lmJB3qpLlqg== 0000927356-97-000935.txt : 19980629 0000927356-97-000935.hdr.sgml : 19980629 ACCESSION NUMBER: 0000927356-97-000935 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970812 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: 97657500 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 2ND QUARTER 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 June 30, 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) (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 August 12, 1997, Registrant had 3,191,411 shares of common stock outstanding. ONLINE SYSTEM SERVICES, INC. INDEX ----- PAGE ---- PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS UNAUDITED BALANCE SHEETS AS OF JUNE 30, 1997 AND DECEMBER 31, 1996 3 UNAUDITED STATEMENTS OF OPERATIONS, THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996, RESPECTIVELY 4 UNAUDITED STATEMENTS OF STOCKHOLDERS' EQUITY, SIX MONTHS ENDED JUNE 30, 1997 5 UNAUDITED STATEMENTS OF CASH FLOWS, SIX MONTHS ENDED JUNE 30, 1997 6,7 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 8,9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-14 PART II. OTHER INFORMATION ITEM 1-3 & 5. NOT APPLICABLE 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15 SIGNATURES 16 2 ONLINE SYSTEM SERVICES, INC. BALANCE SHEETS JUNE 30, DECEMBER 31, 1997 1996 ------------- ------------- ASSETS Current Assets: Cash and cash equivalents $ 3,727,675 $ 1,645,163 Short-term investments --- 3,855,343 Accounts receivable, net 480,807 229,350 Accrued revenue receivables 211,212 90,337 Inventory 125,622 195,941 Prepaid expenses 305,361 132,544 Short-term deposit 61,015 61,015 ------------- ------------- Total current assets 4,911,692 6,209,693 ------------- ------------- Equipment, net 682,970 486,344 Other assets 164,671 164,616 ------------- ------------- TOTAL ASSETS $ 5,759,333 $ 6,860,653 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 464,467 $ 331,809 Accrued expenses 71,953 17,684 Accrued salaries and taxes payable 121,826 82,806 Current portion of note and capital leases payable 31,097 30,437 Deferred revenue 85,876 48,669 ------------- ------------- Total current liabilities 775,219 511,405 ------------- ------------- Note and capital leases payable 16,440 32,647 ------------- ------------- 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, 3,191,411 and 3,162,545 shares issued and outstanding, respectively 7,896,848 7,953,665 Stock subscriptions receivable --- (586) Accumulated deficit (2,929,174) (1,636,478) ------------- ------------- Total stockholders' equity 4,967,674 6,316,601 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 5,759,333 $ 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 the Three Months For the Six Months Ended Ended June 30, June 30, 1997 1996 1997 1996 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ---------- ---------- ------------ ---------- Net sales: Service sales $ 473,316 $ 192,845 $ 876,206 $ 436,181 Hardware and software sales 175,381 108,246 288,963 131,759 ---------- ---------- ------------ ---------- 648,697 301,091 1,165,169 567,940 Cost of sales: Cost of services 296,830 127,697 535,574 268,724 Cost of hardware and software 147,763 82,909 244,055 104,180 ---------- ---------- ------------ ---------- 444,593 210,606 779,629 372,904 ---------- ---------- ------------ ---------- Gross Margin 204,104 90,485 385,540 195,036 ---------- ---------- ------------ ---------- Operating expenses: Sales and marketing expenses 245,403 128,972 531,272 192,146 Product development expenses 229,557 103,011 439,501 169,562 General and administrative expenses 384,846 159,344 741,749 290,476 Depreciation and amortization 38,500 16,471 75,337 26,515 ---------- ---------- ------------ ---------- 898,306 407,798 1,787,859 678,699 ---------- ---------- ------------ ---------- Loss from operations (694,202) (317,313) (1,402,319) (483,663) Other income (expense): Interest income (expense) 49,969 27,057 109,623 24,363 ---------- ---------- ------------ ---------- Loss before provision for income taxes (644,233) (290,256) (1,292,696) (459,300) Provision for income taxes --- --- --- --- ---------- ---------- ------------ ---------- Net loss ($644,233) ($290,256) ($1,292,696) ($459,300) ========== ========== ============ ========== Net loss per common and common equivalent share (Note 3) ($0.20) ($0.10) ($0.41) ($0.17) ========== ========== ============ ========== Weighted average common and common equivalent shares outstanding (Note 3) 3,185,276 3,009,228 3,179,030 2,781,214 ========== ========== ============ ==========
The accompanying notes to financial statements are an integral part of these statements. 4 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Stock Stockholders' Common Stock 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 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 650,000 325,000 --- --- 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) 28,866 18,183 --- --- 18,183 Purchase of option to buy common stock (unaudited) (Note 6) (75,000) (75,000) Stock subscriptions receivable (unaudited) --- --- 586 --- 586 Net loss for the six months ended June 30, 1997 (unaudited) --- --- --- (1,292,696) (1,292,696) --------- ---------- ------------- ----------- ------------ Balances, June 30, 1997 (unaudited) 3,191,411 $7,896,848 $ --- ($2,929,174) $ 4,967,674 ========= ========== ============= =========== ============
The accompanying notes to financial statements are an integral part of these statements. 5 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1997 1996 (Unaudited) (Unaudited) ------------ ----------- Cash flows from operating activities: Net loss ($1,292,696) ($459,300) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 75,337 26,515 Stock issued for services 586 35,016 Changes in operating assets and liabilities: Accounts receivable (251,457) (119,214) Accrued revenue receivables (120,875) --- Inventory 70,319 (101,975) Prepaid expenses (172,817) (8,494) Interest receivable --- (23,001) Other assets (55) (1,101) Accounts payable 132,659 252,690 Accrued expenses 93,289 40,210 Deferred revenue 37,207 --- ------------ ----------- Net Cash Used in Operating Activities (1,428,503) (358,654) ------------ ----------- Cash flows from investing activities: Proceeds from short-term investments 3,855,343 --- Purchase of equipment 271,964 (134,550) ------------ ----------- Net cash provided by (used in) investing activities 3,583,379 (134,550) ------------ ----------- Cash flows from financing activities: Payments on note payable and capital leases (15,547) (15,003) Proceeds from issuance of common stock 18,183 8,948,751 Purchase of option to buy common stock (Note 6) (75,000) --- Payments on short-term notes payable --- (50,814) Payments received on stock --- 20,000 Subscriptions receivable stock offering costs --- (1,300,337) ------------ ----------- Net cash (used in) provided by financing activities (72,364) 7,602,597 ------------ ----------- Net increase in cash and cash equivalents 2,082,512 7,109,393 Cash and cash equivalents at beginning of period 1,645,163 25,241 ------------ ----------- Cash and cash equivalents at end of period $ 3,727,675 $ 7,134,634 ============ ===========
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 Six Months Ended June 30, 1997 1996 (Unaudited) (Unaudited) ----------- ---------- Supplemental Cash Flow Information: Cash paid for Interest --- $ 6,011 Income taxes --- --- Non-cash Investing and Financing Activities: Stock issued for services $ 586 $35,016 Capital lease for equipment --- 5,440 Note payable for fixed assets purchased --- 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 JUNE 30, 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 and 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 8 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND JUNE 30, 1997 NOTE 4 - CONCENTRATION OF CREDIT RISK (CONTINUED) 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 June 30, 1997, which accounted for 11% of net sales. The Company had two major customers for the three months ended June 30, 1996, which accounted for 23% and 13% of net sales, respectively. The Company had no customers representing sales of more than 10% during the six-months ended June 30, 1997. The Company had one customer for the six months ended June 30, 1996, which accounted for 12% of net sales. 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 basic earnings per share. SFAS No. 128 requires dual presentation of basic 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. NOTE 6 - PURCHASE OF OPTION TO BUY COMMON STOCK During the quarter ended June 30, 1997, the Company purchased for the price of $75,000 from a consultant to the Company, a stock option to buy 100,000 shares of the Company's common stock at $.50 per share. Upon purchase, the options were cancelled. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company develops sophisticated websites and interactive online services 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 two-way and hybrid cable modem technology designed to put cable television operators in the Internet servicing provisioning business utilizing their existing cable infrastructure. During the three-month period ended June 30, 1997, the Company made enhancements to this system to allow the use in wireless cable environments and began to market its products and services to this market in addition to continuing efforts to market to traditional cable operators. During the quarter ended June 30, 1997, the Company began to market its CAA products outside of the United States and made significant enhancements to the Community Access Partnership (CAP) product . The CAP program involves the licensing to cable and wireless cable customers of the Company's Community Access website template that allows the partner to develop a local content web business within its community. 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. During the three-month period ended June 30, 1997, the Company began the development of an interactive, online banking system utilizing Edify Corporation's software that will be offered on a service bureau basis to credit unions. During the first six months of 1997, the Company also continued its development of electronic commerce capabilities allowing customers to sell goods and services online including completing the financial transactions online. 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 and CAP programs, 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 For the Six Months Ended Ended June 30, June 30, -------------------- ------------------ 1997 1996 1997 1996 ------ ------ ------ ------ Net Sales: Service sales 73.0% 64.0% 75.2% 76.8% Hardware/software sales 27.0% 36.0% 24.8% 23.2% ------ ------ ------ ------ 100.0% 100.0% 100.0% 100.0% Cost of sales: Cost of services 62.7% 66.2% 61.1% 61.6% Cost of equipment 84.3% 76.6% 84.5% 79.1% 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For the Three Months For the Six Months Ended Ended June 30, June 30, -------------------- ------------------ 1997 1996 1997 1996 ------ ------ ------ ------ 68.5% 69.9% 66.9% 65.7% ------ ------ ------ ------ Gross Margin 31.5% 30.1% 33.1% 34.3% ------ ------ ------ ------ Operating expenses: Sales and marketing expenses 37.8% 42.8% 45.6% 33.8% Product development expenses 35.4% 34.2% 37.7% 29.9% General and administrative expenses 59.3% 52.9% 63.7% 51.1% Depreciation and amortization expense 6.0% 5.5% 6.5% 4.7% ------ ------ ------ ------ 138.5% 135.4% 153.5% 119.5% Loss from operations (107.0%) (105.3%) (120.4%) (85.2%) Net Loss (99.3%) (96.4%) (110.9%) (80.9%) Three Months and Six Months Ended June 30, 1997 and l996 (Unaudited) Net sales for the three months ended June 30, 1997 totaled $648,697, including $473,316 for service sales and $175,381 for hardware and software sales. This represents an increase of 115% above 1996 net sales of $301,091 which consisted of $192,845 for service sales and $108,246 for hardware and software sales. The Company had one major customer for the three months ended June 30, 1997, which accounted for 11% of net sales. The Company had two major customers for the three months ended June 30, 1996, which accounted for 23% and 13% of net sales, respectively. Net sales for the six months ended June 30, 1997 totaled $1,165,169, including $876,206 for service sales and $288,963 for hardware and software sales. This represents an increase of 105% above 1996 net sales of $567,940 which consisted of $436,181 for service sales and $131,759 for hardware and software sales. The Company had no customers representing sales of more than 10% during the six-months ended June 30, 1997. The Company had one customer for the six months ended June 30, 1996, which accounted for 12% of net sales. The increases in sales for the 1997 three and six-month periods, compared to 1996, were due to the expanded development of the Company's product and service offerings in the CAA, CAP, BRG, and healthcare areas, and to a substantial increase in marketing and sales activities in general. The sales increase includes website development revenue from three customers associated with electronic commerce and initial revenue from online banking development and sale of a CAP license. Cost of sales as a percentage of net sales was 68.5% for the three- month 1997 period and 66.9% for the six-month 1997 period and 69.9% and 65.7% for the comparable 1996 periods. 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 decrease in the cost of sales as a percentage of net sales in the three-month period of 1997 is due to the higher percentage of service sales in the 1997 period, compared to the 1996 period. The increase in the cost of sales as a percentage of net sales in the six-month period of 1997 is due to the lower percentage of service sales in the 1997 period, compared to the 1996 period. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Sales and marketing expenses were $245,403 for the three months ended June 30, 1997 and $128,972 for the three months ended June 30, 1996. Sales and marketing expenses as a percentage of net sales decreased from 42.8% in 1996 to 37.8% in 1997. Sales and marketing expenses were $531,272 for the six months ended June 30, 1997 and $192,146 for the six months ended June 30, 1996. Sales and marketing expenses as a percentage of net sales increased from 33.8% in 1996 to 45.6% in 1997. The increase in dollars spent, as well as the increase as a percentage of net sales during the 1997 six-month 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 early part of the six-month period ended June 30, 1997 related to initial training of and lead generation for this sales force. During the three-month period ended June 30, 1997, the Company incurred expenses associated with marketing and trade shows directed towards the wireless cable market and began to market its CAA and CAP products and services to markets outside of the United States. Product development expenses were $229,557 for the three months ended June 30, 1997, compared to $103,011 for the 1996 period. Product development expense as a percentage of net sales increased from 34.2% in 1996 to 35.4% in 1997. Product development expenses were $439,501 for the six months ended June 30, 1997, compared to $169,562 for the 1996 period. Product development expense as a percentage of net sales increased from 29.9% in 1996 to 37.7% in 1997. The increase in these expenses, as well as the increase as a percentage of net sales during the 1997 periods, reflect the continued development of the Company's products and services. Product development expenses during the 1997 periods included the completion of the initial development of the Company's CAA and CAP products, addition of wireless cable capabilities, and initial product offerings targeted at the CME segment of the healthcare market. Product development expenses during the 1996 periods 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, CAP, online banking and electronic commerce products and services and investigates the feasibility of other product offerings. General and administrative expenses were $384,846 for the three months ended June 30, 1997, compared to $159,344 for the 1996 period. General and administrative expenses as a percentage of net sales increased from 52.9% in 1996 to 59.3% in 1997. General and administrative expenses were $741,749 for the six months ended June 30, 1997, compared to $290,476 for the 1996 period. General and administrative expenses as a percentage of net sales increased from 51.1% in 1996 to 63.7% 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. In addition, during the latter part of the six-month period ended June 30, 1997, the Company incurred expenses and developed capabilities to enter into the international market for its CAA and CAP products and services. Depreciation and amortization expenses were $38,500 for the three months ended June 30, 1997, compared to $16,471 for the 1996 period. Depreciation and amortization expenses were $75,337 for the six months ended June 30, 1997, compared to $26,515 for the 1996 period. These increases reflect 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 was $49,969 during the three-month period ended June 30, 1997, compared to $27,057 for the 1996 period. Other income was $109,623 during the six-month period ended June 30, 1997, compared to $24,363 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, Corporate Bonds, and cash equivalents. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net losses were $644,233 in the three-month period ended June 30, 1997 compared to $290,256 for the 1996 period. Net losses were $1,292,696 in the six-month period ended June 30, 1997 compared to $459,300 for the 1996 period. These increases in losses in the 1997 periods reflect 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 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 third and fourth 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 June 30, 1997, the Company had cash and cash equivalents of $3,727,675 and working capital of $4,136,473. 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 quarter ended June 30, 1997, the Company purchased for the price of $75,000 from a consultant to the Company, a stock option to buy 100,000 shares of the Company's common stock at $.50 per share. Upon purchase, the options were cancelled. During the six months ended June 30, 1997, the Company purchased $271,964 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 along with hardware and software necessary to provide the online banking services on a service bureau basis. 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 $480,807 at June 30, 1997, due to the increased sales level during the six month period and a concentration of billing towards the end of the quarter ended June 30, 1997. Due to the Company's utilization of the percentage of completion method of revenue recognition for its Web services, an asset of $211,212, representing revenue earned and not billed, is shown as accrued revenue receivable at June 30, 1997. This amount has increased from $90,337 at December 31, 1996 due to increased revenue for the six month period and an increase in large web development projects that require several months to complete . A liability for amounts invoiced but not earned of $85,876 is shown as deferred revenue at June 30, 1997. The Company's hardware and software inventory of $125,622 at June 30, 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 $305,361 at June 30, 1997, from $132,544 at December 31, 1996, primarily due to amounts prepaid for insurance for the Company and amounts paid to a consultant to the company for services not yet rendered. 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 payable at June 30, 1997, increased to $464,467 from $331,809 at December 31, 1996, due to the increased level of business activity for the six month period. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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, or, if available, available on terms that will be acceptable to the Company. LENGTH OF SALES CYCLE; POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS The decision to purchase the Company's products and services 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 Cable 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, 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. 14 Part II.-- Other Information - - ---------------------------- Items 1-3 and 5. Not Applicable Item 4. Submission of matters to a vote of security holders. The annual meeting of shareholders of the Company was held on May 20, 1997 at the offices of the Company. The following persons were elected to serve as directors of the Company for the ensuing year and until their successors are duly elected and qualified: R. Steven Adams, Robert M. Geller, Paul H. Spieker, Robert J. Lewis, H. Robert Gill, Richard C. Jennewine and Charles P. Spickert. In addition, the proposal to increase from 700,000 to 1,100,000 shares the number of shares reserved for issuance pursuant to the Company's Stock Option Plan of 1995 was approved, with a total of 1,489,800 shares voted with respect to this matter, 1,446,575 shares of which voted for adoption of the resolution, 34,525 shares voted against its adoption and 8,700 shares abstained from voting on this matter. In addition, shareholders approved the appointment of Arthur Anderson LLP as independent accountants of the Company for the fiscal year ending December 31, 1997, 2,418,913 shares voted for adoption of this resolution, 1,100 shares voted against its adoption and 1,450 shares abstained from voting on the matter. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K None 15 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 12, 1997 By /s/ Thomas S. Plunkett ----------------------- Vice President and Chief Financial Officer 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS 6-MOS DEC-31-1997 DEC-31-1997 MAR-01-1997 JAN-01-1997 JUN-30-1997 JUN-30-1997 3,727,675 3,727,675 0 0 563,413 563,413 82,606 82,606 125,622 125,622 4,911,692 4,911,692 937,350 937,350 254,380 254,380 5,759,333 5,759,333 775,219 775,219 16,440 16,440 0 0 0 0 7,896,848 7,896,848 (2,929,174) (2,929,174) 5,759,333 5,759,333 175,381 288,963 648,697 1,165,169 444,593 779,629 898,306 1,787,859 0 0 0 0 (49,969) (109,623) (644,233) (1,292,696) 0 0 (644,233) (1,292,696) 0 0 0 0 0 0 (644,233) (1,292,696) ($.20) ($.41) ($.20) ($.41)
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