-----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, LxntV9FN0E2P0rm6x4VCJbS8I+L35jwNX9tcB1NqYJEdTjRyZGlHJvGZ08C5vqec T06IscXm6UNglcG9rS4cQw== 0000927356-99-001347.txt : 19990816 0000927356-99-001347.hdr.sgml : 19990816 ACCESSION NUMBER: 0000927356-99-001347 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: SEC FILE NUMBER: 000-28462 FILM NUMBER: 99689008 BUSINESS ADDRESS: STREET 1: 1800 GLENARM PLACE STREET 2: STE 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 SECOND QUARTER 10-Q FOR ONLINE SYSTEM SERVICES 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, 1999. -------------- [ ] 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. (d/b/a Webb Interactive 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 700, 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 6, 1999, Registrant had 7,487,532 shares of common stock outstanding. ______________ * The Company is in the process of changing its name to Webb Interactive Services, Inc. 1 ONLINE SYSTEM SERVICES, INC. AND SUBSIDIARIES Index -----
Page ---------- Part I. Financial Information Item 1. Unaudited Financial Statements Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 3 Consolidated Statements of Operations for the three and six months ended June 30, 1999 and 1998 4 Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998 5-6 Notes to Consolidated Financial Statements 7-16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17-31 Part II. Other Information Item 1 and 3-5. Not Applicable 31 Item 2. Changes in Securities and Use of Proceeds 31 Item 6. Exhibits and Reports on Form 8-K 31-32 Signatures 33
____________________ This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and is subject to the safe harbors created by those sections. These forward-looking statements are subject to significant risks and uncertainties, including those identified in the section of this Form 10-QSB entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors That May Affect Future Operating Results," which may cause actual results to differ materially from those discussed in such forward-looking statements. The forward-looking statements within this Form 10- QSB are identified by words such as "believes," "anticipates," "expects," "intends," "may," "will" and other similar expressions. However, these words are not the exclusive means of identifying such statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances occurring subsequent to the filing of this Form 10-QSB with the Securities and Exchange Commission ("SEC"). Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect the Company's business. 2 PART I FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS ONLINE SYSTEM SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1999 1998 -------------- -------------- ASSETS Current assets: Cash and cash equivalents $ 3,934,761 $ 698,339 Accounts receivable, net of allowance for doubtful accounts of $27,507 and $18,000, respectively 42,586 124,912 Accounts receivable from related party 15,807 22,925 Note and accrued interest receivable - 896,787 Inventory, net - 55,126 Prepaid expenses 158,492 74,179 Deferred acquisition costs - 229,404 Short-term deposits 102,541 101,441 -------------- -------------- Total current assets 4,254,187 2,203,113 Property and equipment, net of accumulated depreciation of $1,013,813 and $741,552, respectively 2,411,661 1,178,628 Intangible assets, net of accumulated amortization of $23,675 and none, respectively 14,739,521 - Other assets 4,216 3,535 -------------- -------------- Total assets $ 21,409,585 $ 3,385,276 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Convertible notes payable $ 643,414 $ - Current portion of notes and capital leases payable 162,995 21,766 Accounts payable and accrued liabilities 1,876,027 873,901 Accrued salaries and payroll taxes payable 386,757 329,755 Customer deposits and deferred revenue 402,602 100,600 -------------- -------------- Total current liabilities 3,471,795 1,326,022 Capital leases payable 61,714 39,915 Stockholders' equity: Preferred stock, no par value, 5,000,000 shares authorized: 10% redeemable, convertible preferred stock, 10% cumulative return; 85,000 and 245,000 shares issued and outstanding, respectively, including dividends payable of $127,447 and $241,172, respectively 977,447 2,691,172 Series C redeemable, convertible preferred stock, 4% cumulative return; 2,500 and none issued and outstanding, respectively, including dividends payable of $12,223 and none, respectively 2,512,223 - Series A redeemable, convertible preferred stock, 5% cumulative return; none and 1,400 issued and outstanding, respectively, including dividends payable of none and $10,164, respectively - 1,410,164 Common stock, no par value, 20,000,000 shares authorized, 7,219,159 and 4,642,888 shares issued and outstanding, respectively 40,678,469 16,410,300 Warrants and options 4,328,479 2,281,832 Accumulated deficit (30,620,542) (20,774,129) -------------- -------------- Total stockholders' equity 17,876,076 2,019,339 -------------- -------------- Total liabilities and stockholders' equity $ 21,409,585 $ 3,385,276 ============== ==============
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. 3 ONLINE SYSTEM SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, ---------------------------------------- ------------------------------------------ 1999 1998 1999 1998 ----------------- ----------------- ------------------- ----------------- Net revenues $ 178,650 $ 267,648 $ 371,096 $ 907,147 Net revenues from related party 14,284 33,160 110,120 120,900 ----------------- ----------------- ------------------- ----------------- 192,934 300,808 481,216 1,028,047 ----------------- ----------------- ------------------- ----------------- Cost of revenues 334,099 213,734 468,626 725,800 Cost of revenues from related party 5,985 53,086 72,692 102,573 ----------------- ----------------- ------------------- ----------------- 340,084 266,820 541,318 828,373 ----------------- ----------------- ------------------- ----------------- Gross margin (147,150) 33,988 (60,102) 199,674 ----------------- ----------------- ------------------- ----------------- Operating expenses: Sales and marketing expenses 389,264 611,451 834,653 1,125,767 Product development expenses 655,257 131,202 1,254,097 353,570 General and administrative expenses 1,479,094 857,062 3,014,702 1,708,585 Depreciation and amortization 139,169 105,970 247,398 201,347 ----------------- ----------------- ------------------- ----------------- 2,662,784 1,705,685 5,350,850 3,389,269 ----------------- ----------------- ------------------- ----------------- Loss from operations (2,809,934) (1,671,697) (5,410,952) (3,189,595) Equity in loss of subsidiary (105,134) - (127,083) - Interest income, net 36,775 33,225 82,917 62,414 ----------------- ----------------- ------------------- ----------------- Net loss (2,878,293) (1,638,472) (5,455,118) (3,127,181) Preferred stock dividends (29,028) (80,585) (75,041) (142,984) Accretion of preferred stock to redemption value (157,691) (1,818,564) (3,157,691) (2,237,260) Accretion of preferred stock for guaranteed return in excess of redemption value - - (1,158,563) - ----------------- ----------------- ------------------- ----------------- Net loss available to common stockholders $(3,065,012) $(3,537,621) $(9,846,413) $(5,507,425) ================= ================= =================== ================= Loss per share, basic and diluted $(0.52) $(1.03) $(1.76) $(1.62) ================= ================= =================== ================= Weighted average shares outstanding 5,909,394 3,446,131 5,608,227 3,390,909 ================= ================= =================== =================
The accompanying notes to consolidated financial statements are an integral part of these statements 4 ONLINE SYSTEM SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Six Months Ended June 30, ---------------------------------------------- 1999 1998 ---------------------- ------------------- Cash flows from operating activities: Net loss $(5,455,118) $(3,127,181) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 535,574 201,347 Loss from investment in subsidiary 127,083 - Accrued interest income on advances to DCI (46,379) (10,441) Reduction in note receivable for services received from DCI 368,643 - Stock and stock options issued for services and to customers 333,143 26,179 Changes in operating assets and liabilities: Decrease in accounts receivable 83,079 146,354 Decrease (increase) in accounts receivable from related party 7,118 (22,925) Decrease in accrued revenue receivables - 80,278 Decrease in inventory 55,126 172,838 Decrease (increase) in prepaid expenses (61,358) 63,557 Decrease (increase) in short-term deposits and other assets (1,500) 14,080 Increase (decrease) in accounts payable and accrued liabilities 192,936 (382,918) Increase in accrued salaries and payroll taxes payable 18,251 12,150 Increase (decrease) in customer deposits and deferred revenue 284,310 (9,321) ------------------- ------------------- Net cash used in operating activities (3,559,092) (2,836,003) ------------------- ------------------- Cash flows from investing activities: Cash acquired in business combinations 32,484 - Purchase of property and equipment (1,353,223) (229,762) Capitalized software development costs - (196,291) Cash advances to DCI (593,649) (575,000) Payment of acquisition costs (27,468) (124,636) Investment in subsidiary (240,564) - ------------------- ------------------- Net cash used in investing activities (2,182,420) (1,125,689) ------------------- ------------------- Cash flows from financing activities: Payments on capital leases (16,435) (15,133) Proceeds from issuance of common stock and warrants 3,074,256 65,442 Proceeds from exercise of stock options and warrants 1,322,000 189,182 Proceeds from issuance of 10% Preferred Stock - 159,558 Proceeds from issuance of 5% Preferred Stock - 3,000,000 Proceeds from issuance of Series C Preferred Stock 5,000,000 - Stock offering costs (401,887) (348,014) ------------------- ------------------- Net cash provided by financing activities 8,977,934 3,051,035 ------------------- ------------------- Net increase (decrease) in cash and cash equivalents 3,236,422 (910,657) Cash and cash equivalents, beginning of period 698,339 3,680,282 ------------------- ------------------- Cash and cash equivalents, end of period $ 3,934,761 $ 2,769,625 =================== ===================
The accompanying notes to consolidated financial statements are an integral part of these statements. 5 ONLINE SYSTEM SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (UNAUDITED)
Six Months Ended June 30, ---------------------------------------------- 1999 1998 ------------------- -------------------- Supplemental disclosure of cash flow information: Cash paid for interest $ 8,920 $ 3,254 Supplemental schedule of non-cash investing and financing activities: Common stock and warrants issued in business combinations $11,636,285 $ - Accretion of preferred stock to redemption value 3,157,691 993,980 Accretion of preferred stock for guaranteed return in excess of redemption value 1,158,563 - Preferred stock dividends paid or to be paid in common stock 75,041 142,984 Preferred stock and dividends converted to common stock 5,686,707 - Capital leases for equipment 35,000 18,750
The accompanying notes to consolidated financial statements are an integral part of these statements. 6 ONLINE SYSTEM SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 AND DECEMBER 31, 1998 (UNAUDITIED) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements include the accounts of Online System Services, Inc. and its wholly owned Subsidiaries (collectively the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated 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. The interim financial statements should be read in connection with the financial statements included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1998 filed with the Securities and Exchange Commission. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Among other factors, the Company has incurred significant and recurring losses from operations, and such losses are expected to continue in the near future, which raises substantial doubt about the ability of the Company to continue as a going concern. Management's plans in regard to these matters are described in Management's Discussion and Analysis of Financial Condition and Results of Operations. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. As discussed in Note 3, on June 30, 1999, the Company consummated its purchase of Durand Communications, Inc. ("DCI"). The business purchased from DCI has never achieved profitability and the Company expects to incur net losses for the foreseeable future. The continued viability of the Company depends upon, in part, its ability to obtain additional profitable customer contracts and to obtain additional capital through debt or equity financing. The Company believes that its cash and cash equivalents and working capital as of June 30, 1999 will be adequate to sustain operations through October 1999. The Company estimates that it will need to raise approximately $14 million through equity, debt or other external financing to sustain operations for the remainder of 1999 and 2000. The Company's plan to fund its operations is to obtain equity financing through a combination of strategic partner investments, additional private placements of its securities, and may include a secondary public offering of its common stock. The Company is engaged in ongoing discussions with certain potential strategic partners, which if successful, could result in additional equity funding for the Company. Further, the Company believes that it would be possible to continue to raise additional working capital through the sale of securities similar to the transaction described in Note 8 and has initiated discussions with various potential private investors which could result in additional debt or equity investments. However, the Company has no commitments for any such funding and there can be no assurances that these discussions will be successful, or if successful, that the terms of any such fundings will be acceptable to the Company. If the Company is not successful in obtaining funding in appropriate amounts or at appropriate terms, management would consider significant reductions in activity and operations. NOTE 2 - REVENUE RECOGNITION Transaction fee revenues include e-banking service bureau fees, online subscription fees, and Internet access and e-commerce royalties. The Company recognizes revenues in the period the services are provided or earned by the Company. Net revenues are comprised of the following:
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 1999 1998 1999 1998 --------- --------- --------- ---------- Net Revenues: Transaction fees $142,097 $ 47,678 $248,426 $ 70,828 Services 50,837 43,142 115,281 127,564 Hardware and software - 209,988 117,509 829,655 -------- -------- -------- ---------- Total net revenues $192,934 $300,808 $481,216 $1,028,047 ======== ======== ======== ==========
7 NOTE 3 - ACQUSITION OF DURAND COMMUNICATIONS, INC. On June 30, 1999, Durand Acquisition Corporation ("DAC"), a wholly owned subsidiary of the Company, completed a merger with Durand Communications, Inc. ("DCI"), a developer and marketer of Internet "community" building tools, by exchanging 944,763 of the Company's common stock for all of the common stock of DCI at an exchange ratio of 2.46 shares of the Company's common stock for each share of DCI's common stock. In addition, outstanding DCI options and warrants to purchase common stock were converted at the same exchange factor into 233,700 options and warrants to purchase the Company's common stock. The acquisition of the assets and liabilities was recorded using the purchase method of accounting whereby the consideration paid of $13,573,674 was allocated based on the relative fair values of the assets and liabilities acquired with the excess consideration over the fair market value of tangible assets of $13,669,270 recorded as intangible assets. Total consideration for the merger is as follows: Value of common stock issued $ 9,211,439 Value of warrants and options issued 1,440,446 (a) Liabilities assumed 2,190,566 (b) Acquisition expenses 911,223 ----------------- Total purchase price $13,753,674 =================
The purchase price was allocated to the assets acquired based on their fair market values as follows: Cash and cash equivalents $ 23,739 Other current assets 23,708 Property and equipment, net 36,984 ----------------- Total tangible assets acquired 84,431 Developed technologies, goodwill and other intangibles 13,669,243 ----------------- Total assets acquired $13,753,674 =================
(a) 233,700 warrants and options issued, which were valued using the Black- Scholes option pricing model using the following assumptions: Exercise prices $4.30 to $20.33 Fair market value of common stock on measurement date $9.75 Option lives 1 to 9 years Volatility rate 104% Risk free rate of return 5.0% Dividend rate 0%
(b) The liabilities assumed by the Company included a $1,168,173 note payable and accrued interest from DCI to the Company which was forgiven at the consummation of the transaction. In connection with the merger, the Company issued a warrant to a placement agent to purchase 31,421 shares of the Company's common stock at an exercise price of $14.13. The warrant is exercisable for a period of five years. The Company recorded $348,058 in acquisition costs for the warrant, which was valued using the Black-Scholes option pricing model utilizing the following assumptions: Exercise price $14.13 Fair market value of common stock on grant date $14.13 Option life 5 Years Volatility rate 104% Risk free rate of return 5.0% Dividend rate 0%
8 The transaction with DCI resulted in approximately $13,669,000 of intangible assets (primarily developed technologies and goodwill). These intangible assets will be amortized over three years. The purchase price allocation is subject to adjustment based on the final determination of the fair value of the assets and liabilities assumed, which could take as long as one year from June 30, 1999. Because the DCI business, now operated by the Company, has never been profitable, and due to the other risks and uncertainties discussed herein, it is reasonably possible that an analysis of these long-lived assets in future periods could result in a conclusion that they are impaired, and the amount of the impairment could be substantial. NOTE 4 - INVESTMENT IN NETIGNITE On March 10, 1999, the Company acquired a controlling interest in a newly formed company, NetIgnite 2, LLC ("NetIgnite"). NetIgnite is a development stage company which the Company formed with a predecessor company by the name of NetIgnite, Inc. ("NI"), the sole shareholder and founder of which was Perry Evans, the founder and past President of MapQuest.com. The Company was, as a result of this transaction, entitled to 99.5% of NetIgnite's operating income and approximately 60% of any proceeds upon the sale of NetIgnite. NI was entitled to .5% of NetIgnite's operating income and approximately 40% of any proceeds upon the sale of NetIgnite. Mr. Evans entered into an Employment Agreement with the Company which has an initial term of two years, provides for a minimum annual salary of $190,000 and the granting of stock options to purchase 80,000 shares of common stock at an exercise price of $12.25, one-third of such option shares to vest annually during the next three years subject to Mr. Evans' continuous employment by the Company. Prior to June 2, 1999, the Company utilized the equity method of accounting for this subsidiary and recorded a loss from this investment totaling $105,134 and $127,083 for the three and six months ended June 30, 1999, respectively. On June 2, 1999, the Company acquired the assets and liabilities of NI in exchange for 71,429 shares of common stock valued at $984,399. The acquisition of these assets and liabilities was recorded using the purchase method of accounting whereby the consideration paid was allocated based on the relative fair values of the assets and liabilities acquired with the excess consideration of $893,952 being recorded as an intangible asset. The results of operations of NetIgnite are included in the Company's results from the date of the NI acquisition and all significant intercompany balances and transactions have been eliminated in consolidation. The transaction with NetIgnite resulted in approximately $894,000 of intangible assets (primarily developed technologies and goodwill). These intangible assets will be amortized over three years. The purchase price allocation is subject to adjustment based on the final determination of the fair value of the assets and liabilities assumed, which could take as long as one year from June 2, 1999. Because the NetIgnite business, now operated by the Company, has risks and uncertainties discussed herein, it is reasonably possible that an analysis of these long-lived assets in future periods could result in a conclusion that they are impaired, and the amount of the impairment could be substantial. NOTE 5 - GOODWILL Goodwill is being amortized on a straight-line basis over three years. Subsequent to acquisitions which result in goodwill, the Company continually evaluates whether later events and circumstances have occurred that indicate the remaining useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. When factors indicate that goodwill should be evaluated for possible impairment, the Company uses an estimate of the related business segment's undiscounted net income or cash flows, as appropriate, over the remaining life of the goodwill in measuring whether the goodwill is recoverable. NOTE 6 - INCOME TAXES As a result of net losses and the Company's inability to recognize a benefit for its deferred tax assets, the Company did not record a provision for income taxes in the three and six months ended June 30, 1999 and 1998. NOTE 7 - NET LOSS PER SHARE Net loss per share is calculated in accordance with SFAS No. 128, "Earnings Per Share" ("SFAS 128"), and Securities and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS 128 and SAB 98, basic net loss per share is computed by dividing net loss available to common shareholders 9 for the period by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of the potential common shares is dilutive. As a result of the Company's net losses, all potentially dilutive securities, as indicated in the table below, would be anti-dilutive and are excluded from the computation of diluted loss per share.
June 30, ------------------------------------ 1999 1998 ---------------- --------------- Stock options 1,948,569 1,288,217 Warrants and underwriter options 362,929 963,150 Convertible debt 32,147 - 10% Preferred Stock 97,715 307,101 Series C Preferred Stock 225,763 - 5% Preferred Stock - 308,606 ---------------- --------------- Total 2,667,123 2,867,074 ================ ===============
The number of shares excluded from the earning per share calculation because they are anti-dilutive, using the treasury stock method, were 1,296,407 and 1,161,560 for the three and six months ended June 30, 1999, respectively, and 1,709,068 and 1,794,407 for the three and six months ended June 30, 1998, respectively. NOTE 8 - SERIES C PREFERRED STOCK On January 11, 1999, the Company completed a private placement of preferred stock which resulted in gross proceeds of $3,000,000. The Company sold 3,000 shares of Series C cumulative, convertible, redeemable preferred stock (the "Series C Preferred Stock"). Net proceeds to the Company were $2,755,500 after deducting $244,500 in offering costs. In addition, the Company also issued a warrant which entitled the holder to purchase, at a price of $1,000 per share, up to 2,000 shares of the Company's Series C Preferred Stock. This warrant also granted the Company the right to require the holder to exercise such warrants. On June 18, 1999, the Company exercised this right and sold 2,000 shares of the Series C Preferred Stock for net proceeds of $1,860,000 after deducting $140,000 in offering costs. The Series C Preferred Stock entitles the holder to voting rights equal to the number of shares of common stock into which the shares of the Series C Preferred Stock are convertible. The Series C Preferred Stock specifies a 4% per annum cumulative, non-compounding dividend based on the stated value of $1,000 per share. The Company may redeem the Series C Preferred Stock at any time at a redemption price per share equal to $1,200 plus any accrued but unpaid dividends plus a warrant to purchase a number of shares equal to each Series C Preferred Stock holder's pro-rata allocation of 100,000 shares. Such warrant would have a term of three years from the date of issuance and a per share exercise price equal to the applicable Maximum Conversion Price (as defined) for the Series C Preferred Stock being redeemed. In addition, the Company may redeem the Series C Preferred Stock upon the receipt of a notice of conversion with respect to the Series C Preferred Stock for which the Conversion Price (as defined) is less than $5.40 per share for a per share price equal to the product of (i) the number of shares of common stock otherwise issuable upon conversion of such shares of Series C Preferred Stock on the date of conversion and (ii) the closing bid price of common stock on the date of conversion. Each share of Series C Preferred Stock is convertible, at the option of the holder, at any time after February 1, 1999, into the number of shares of common stock equal to $1,000 divided by the lesser of (i) 140% of the closing bid price of the common stock on the date of the issuance of the Series C Preferred Stock being converted (initially $20.65), or if less and if the conversion is occurring at least 120 days after the issuance of the Series C Preferred Stock being converted, 100% of the closing bid price of the Company's common stock on the trading day closest to the date that is 120 days after the Series C Preferred Stock that is being converted was issued or (ii) the average of the five lowest closing bid prices of common stock during the 44 consecutive trading days immediately preceding the conversion of the Series C Preferred Stock conversion date. In addition, the Company may require the conversion of the Series C Preferred Stock at any time during the 20 day period immediately following 20 consecutive trading days during which the closing bid price of common 10 stock is not less than 200% of the Maximum Conversion Price of the Series C Preferred Stock being converted. The Series C Preferred Stock must be converted on the date which is five years after the date on which the Series C Preferred Stock being converted was issued. The beneficial conversion feature (a "Guaranteed Return") of the Series C Preferred Stock is considered to be an additional preferred stock dividend. The computed value of the Guaranteed Return of $3,931,754 is initially recorded as a reduction of the Series C Preferred Stock and an increase to additional paid-in capital. The Guaranteed Return reduction to preferred stock was accreted, as additional dividends, by recording a charge to income available to common stockholders from the date of issuance to the earliest date of conversion. The Company will also record annual dividends of $40 per share as a reduction of income available to common stockholders, whether or not declared by the Board of Directors, which totaled $13,534 and $21,369 for the three and six months ended June 30, 1999, respectively. The Company has the option to pay the dividends either in cash or in common stock upon conversion. It is the Company's intention to pay the accrued dividends on the Series C Preferred Stock through the issuance of its common stock at the time the Series C Preferred Stock is converted. Consequently, the Company has recorded the dividends payable within the preferred stock balance in the accompanying balance sheets, which totaled $12,223 as of June 30, 1999. The difference between the stated redemption value of $1,000 per share and the recorded value on January 11, 1999, and June 18, 1999 (the date upon which the Series C Preferred Stock was issued) totaling $4,316,254 was accreted as a charge to income available to common stockholders on the date that the Series C is first convertible, which occurred in the first and second quarters of 1999, respectively, and is comprised of the following:
Closings --------------------------------------------------- June 18, 1999 January 11, 1999 ---------------------- ---------------------- Guaranteed Return $ 17,691 $3,914,063 Series C Preferred Stock offering costs 140,000 244,500 ---------------------- ---------------------- Total accretion recorded $157,691 $4,158,563 ====================== ======================
During February 1999, the investor converted 2,500 shares of the Series C Preferred Stock, including accrued dividends payable of $9,149, into 232,564 shares of the Company's common stock at a conversion price per share ranging from approximately $10.74 to $11.00 as summarized in the following table:
Number of Shares --------------------------------------------- Series C Common Stock Preferred Common Conversion Conversion Date Stock Stock Price per Share ---------------------- ------------------- ------------------- -------------------- February 10, 1999 1,500 140,157 $10.74 February 11,1999 500 46,724 10.74 February 26, 1999 500 45,683 11.00 ------------------- ------------------- Total 2,500 232,564 =================== ===================
During July 1999, the investor converted 1,700 shares of the Series C Preferred Stock into 140,311 shares of the Company's common stock (See Note 15). NOTE 9 - CONVERSION OF PREFERRED STOCK AND EXERCISE OF COMMON STOCK WARRANT On January 13, 1999, all 1,400 outstanding shares of the Series A Preferred Stock, including accrued dividends payable of $12,465, were converted into 247,366 shares of the Company's common stock at a conversion price per share of $5.71. 11 In connection with the issuance of the Series A Preferred Stock, the Company issued a warrant to the investor to purchase 140,000 shares of the Company's common stock for a purchase price of $5.71 per share. During January 1999, the investor exercised the warrant for a total purchase price of $799,400. During January and February 1999, 160,000 shares of the 10% Preferred Stock, including accrued dividends payable of $165,093, were converted into 177,106 shares of the Company's common stock at conversion prices ranging from $9.46 to $10.00 as summarized in the following table:
Number of Shares --------------------------------------------- 10% Common Stock Preferred Common Conversion Conversion Date Stock Stock Price per Share ---------------------- ------------------- ------------------- --------------------- January 5, 1999 10,000 11,590 $ 9.46 January 7, 1999 10,000 11,039 9.98 January 14, 1999 5,000 5,422 10.00 January 15, 1999 60,000 66,248 10.00 January 19, 1999 10,000 10,858 10.00 January 20, 1999 25,000 27,636 10.00 January 28, 1999 10,000 11,077 10.00 February 2, 1999 20,000 22,083 10.00 February 25, 1999 10,000 11,153 10.00 ------------------- ------------------- Total 160,000 177,106 =================== ===================
NOTE 10 - COMMON STOCK In February 1999, the Company entered into a six-month agreement with an individual to provide the Company consulting services in his capacity as the Company's Chief Operating Officer. Pursuant to the terms of the agreement, in addition to a monthly cash fee of $15,000, the consultant earned shares of the Company's common stock determined by dividing $15,000 by the fair market value of the common stock on the last trading day of the month. During the three and six months ended June 30, 1999, the Company issued 3,020 and 8,497 shares of common stock under this agreement, respectively, valued in the aggregate at $45,000 and $90,000, respectively. NOTE 11 - EXERCISE OF IPO COMMON STOCK WARRANTS In connection with the initial public offering ("IPO") in May 1996, the Company issued 1,265,000 units, each unit consisting of one share of common stock and one common stock purchase warrant and 110,000 similar warrants to the underwriter (collectively the "IPO Warrants"). Two IPO Warrants entitled the holders to purchase one share of common stock at a price of $9.00 per share or the holders had the option of using the "cashless" exercise provision whereby holders could apply a portion of their IPO Warrants to pay the exercise price for the balance of the IPO Warrants to be exercised. In May 1999, the Company received $3,056,871 in net proceeds, after deducting offering costs of $17,387 from the exercise of the IPO Warrants and issued 341,578 shares of common stock. In addition, the Company issued 131,614 shares of common stock as a result of holders of the IPO Warrants utilizing the cashless exercise provision of the Agreement. As of June 30, 1999, all of the IPO Warrants have been exercised or have expired. NOTE 12 - CUSTOMER ACQUSITION COSTS In June 1999, the Company granted warrants to two customers to purchase in the aggregate 11,667 shares of the Company's common stock at exercise prices ranging from $9.75 to $9.94 per share. The warrants may be exercised from the date of issuance and expire in June 2000. The Company recorded deferred customer acquisition costs of $73,368 for the value of these warrants, which was expensed during the three months ended June 30, 1999. The Company's policy with regard to customer acquisition costs is to capitalize costs to acquire customers if the contract contains guarantees of minimum revenue which supports the amount paid. Because the agreement does not contain minimum guaranteed revenue and due to the start-up nature of this service and other uncertainties regarding 12 this arrangement, the Company has expensed the amount during the 1999 period. The Company valued these options utilizing the Black-Scholes option pricing model using the following assumptions: Exercise prices $9.75 to $9.94 Fair market value of common stock on grant date $10.88 to $15.50 Option life 1 Year Volatility rate 104% Risk free rate of return 5.0% Dividend rate 0%
In March 1999, the Company issued a warrant to a Customer, valued at $64,470, which was expensed during the three months ended March 31, 1999. On June 15, 1999, this warrant was cancelled. NOTE 13 - RELATED PARTY TRANSACTIONS A director of the Company is also the general partner and chief executive officer for one of the Company's customers. The Company entered into a contract during August 1997, as amended, whereby the Company provides its products and services to the customer for several markets. The Company earns revenue from the sale of computer hardware and third party software, engineering fees, equipment installation fees, and royalties from subscriber Internet access and content fees. The Company recognized revenue from the customer totaling $14,284 and $33,160 for the three months ended June 30, 1999 and 1998, respectively, and $110,120 and $120,900 for the six months ended June 30, 1999 and 1998, respectively. Included in accounts receivable at June 30, 1999 are amounts due from the customer totaling $15,807. NOTE 14 - BUSINESS SEGMENT INFORMATION The Company supports products and services that simplify and support e- commerce transactions in local markets by providing an interactive framework of local commerce and community-based services comprised of publishing content management, community-building and communications. The Company has two reportable business segments: Local Directory/Enterprise and Financial Services. Each of these is a business segment, with its respective financial performance detailed herein. Local Directory/Enterprise consists of Internet application solutions which provide merchants options for reaching their target customers through simple tools that publicize their company, product and services offerings; buyers to quickly find rich information about merchants and their offerings; and buyers and sellers a more effective and efficient transaction. Financial Services consists of an online banking solution, marketed generally to financial institutions having less than $500 million in assets, using a service bureau approach to e-banking, which enables them to provide many of the capabilities and services available to the larger financial institutions without the cost associated with the development of institution specific systems. Corporate Activities consists of general corporate expenses, including capitalized costs that are not allocated to specific business segments. Assets of corporate activities include unallocated cash, receivables, prepaid expenses, note receivable, deferred acquisition costs, deposits and corporate use of property and equipment.
Net Revenues - ------------------------------------------------------------------------------------------------------------------ Three Months Ended Six Months Ended June 30, June 30, --------------------------------------- --------------------------------------- 1999 1998 1999 1998 ----------------- --------------- ----------------- --------------- Local directory/Enterprise $111,825 $266,759 $327,660 $ 937,418 Financial services 81,109 34,049 153,556 90,629 ----------------- ----------------- ----------------- ----------------- Total net revenues $192,934 $300,808 $481,216 $1,028,047 ================= ================= ================= =================
13
Net Loss - ------------------------------------------------------------------------------------------------------------------------ Three Months Ended Six Months Ended June 30, June 30, ---------------------------------------- ---------------------------------------- 1999 1998 1999 1998 ------------------ --------------- ------------------ --------------- Local directory/Enterprise $(1,470,460) $ (871,781) $(2,746,031) $(1,591,707) Financial services (20,282) (108,921) (127,927) (162,948) Corporate activities (1,387,551) (657,770) (2,581,160) (1,372,526) ----------------- ----------------- ----------------- ----------------- Net loss $(2,878,472) $(1,638,472) $(5,455,118) $(3,127,181) ================= ================= ================= =================
Assets ----------------------------------------------------------------------------------------- June 30, December 31, 1999 1998 ------------------- ------------------- Local directory/Enterprise $ 1,507,554 $ 696,219 Financial services 654,849 416,071 Corporate activities 19,247,182 2,272,986 ------------------- ------------------- Total $21,409,585 $3,385,276 =================== ===================
Property and Equipment ----------------------------------------------------------------------------------------- June 30, December 31, 1999 1998 ------------------- ------------------- Local directory and Enterprise $1,020,257 $ 82,929 Financial services 630,889 397,721 Corporate activities 306,669 263,989 ------------------- ------------------- Total $1,353,223 $ 229,762 =================== ===================
Depreciation and Amortization - ------------------------------------------------------------------------------------------------------------------------ Three Months Ended Six Months Ended June 30, June 30, --------------------------------------- --------------------------------------- 1999 1998 1999 1998 ----------------- ----------------- ----------------- ----------------- Local directory/Enterprise $ 49,780 $ 44,460 $ 94,371 $ 83,492 Financial services 35,247 35,247 70,494 70,458 Corporate activities 54,142 26,263 82,533 47,397 ----------------- ----------------- ----------------- ----------------- Total depreciation and amortization $139,169 $105,970 $247,398 $201,347 ================= ================= ================= =================
Property and Equipment Additions ----------------------------------------------------------------------------------------- Six Months Ended June 30, --------------------------------------------- 1999 1998 ------------------- ------------------- Local directory/Enterprise $1,131,626 $ 19,537 Financial services 297,281 652 Corporate activities 35,685 146,181 ------------------- ------------------- Total $1,464,592 $166,370 =================== ===================
14 NOTE 15 - SUBSEQUENT EVENTS During July 1999, the investor converted 1,700 shares of the Series C Preferred Stock, including accrued dividends payable of $13,084, into 140,311 shares of the Company's common stock at conversion prices ranging from $11.13 to $14.20 as summarized in the following table:
Number of Shares --------------------------------------------- Series C Common Stock Preferred Common Conversion Conversion Date Stock Stock Price per Share ---------------------- ------------------- ------------------- --------------------- July 6, 1999 1,000 90,843 $11.13 July 20, 1999 700 49,468 14.20 ------------------- ------------------- Total 1,700 140,311 =================== ===================
On July 15, 1999, a holder converted its unsecured convertible promissory note totaling $236,509, including accrued interest payable of $10,365, into 16,034 shares of the Company's common stock at $14.75 per share. In connection with the sale of the Company's Series A Preferred Stock in November 1998, the Company issued the placement agent a warrant to purchase 20,000 shares of the Company's common stock at $5.61 per share. On July 6, 1999, the placement agent exercised the warrant resulting in proceeds to the Company of $114,200. During July 1999, the Company sold two customer contracts, including related computer hardware, for approximately $270,000. The Company provided services and equipment under the terms of the original contracts enabling the customers to provide Internet access to its end users. Revenue recognized by the Company from these contracts totaled approximately $8,700 for the six months ended June 30, 1999. NOTE 16 - UNAUDITED QUARTERLY INFORMATION In the fourth quarter of 1998, the Company revised certain factors used in determining the amounts to be accreted related to issuances of its 10% and 5% Preferred Stock. These revisions and their impact on unaudited quarterly amounts previously reported in 1998 are presented below.
Three Months Ended Six Months Ended June 30, 1998 June 30, 1998 ----------------------------- ---------------------------- As Reported As Revised As Reported As Revised (Unaudited) (Unaudited) (Unaudited) (Unaudited) ------------- ------------ ------------- ----------- Net loss $(1,638,472) $(1,638,472) $(3,127,181) $(3,127,181) Preferred stock dividends 80,585 80,585 142,984 142,984 Accretion of preferred stock to Redemption value 848,646 1,818,564 (a) 993,980 2,237,260 (a) ------------- ------------ ------------- ----------- Net loss available to common Stockholders $(2,567,703) $(3,537,621) $(4,264,145) $(5,507,425) ============= ============ ============= =========== Loss per share, basic and diluted $ (0.75) $ (1.03) $ (1.26) $ (1.62) ============= ============ ============= =========== Weighted average shares outstanding 3,446,131 3,446,131 3,390,909 3,390,909 ============= ============ ============= ===========
15 (a) Increase in accretion of preferred stock to redemption value due to the revision of discounts applied to common stock and common stock warrants issued in connection with preferred stock private placements and the revision of the accretion period for the preferred stock. 16 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Online System Services, Inc. (d/b/a Webb Interactive Services, Inc.) (NASDAQ: WEBB) is developing a new generation of Internet applications that simplify and support e-commerce transactions in local markets. Our products provide an interactive framework of local commerce and community-based services comprised of publishing content management, community-building and communications. Branded CommunityWare/XML, our products generally are offered on a private-labeled, application service basis through high-volume distribution partners such as yellow page publishers, newspapers, city guides and search engines. To date, we have generated revenues through the sale of design and consulting services for Web site development and network engineering services, 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 our products and services, training course fees, and monthly fees paid by customers for Internet access which we have provided. We commenced sales in February 1995, and were in the development stage through December 31, 1995. We have incurred losses from operations since inception. At June 30, 1999, we had an accumulated deficit of $30,620,542. The reports of our independent public accountants for the years ended December 31, 1998 and 1997 contained a paragraph noting substantial doubt regarding our ability to continue as a going concern. Prior to the third quarter of 1997, our focus generally was on three markets: general Web site development, maintenance and hosting; rural or small market Internet service providers ("ISPs"); and healthcare information services and continuing medical education. Each of these activities involved, to varying degrees, the building of online communities and the development of tools and services to allow for the building of strategic and customized Web sites. As an outgrowth of these activities, since mid 1997, our business has evolved to the development of online communities and more recently, the development of Internet applications that simplify and support e-commerce transactions in local markets. Our application services are being developed to solve two of the largest problems in the local online market; the failure of merchants to have their web sites found by their target customers, and the inability of customers to find merchants, compare products and services, and ask questions, or conduct transactions such as making an appointment or requesting a bid. The opportunity to connect buyers and sellers in the rapidly emerging local online market is significant. The Kelsey Group estimates that the number of U.S. based local businesses that are active advertisers and that have a web presence will increase from 1.9 million in 1999 to 5.2 million in 2004. According to Forrester Research, local online sales are projected to grow from $680 million in 1998 to $6.1 billion in 2003. The local only advertising dollars spent in support of these web site activities are projected to grow from $135 million in 1998 to $1.7 billion in 2003. Our application solutions are intended to provide: . Local market merchants with advanced yet easy-to-use web site publishing tools, new ways to have their site found by their target customers, and services that turn web site visitors into leads, buyers, and repeat customers. . Consumers with unique abilities to easily comparison shop and interact online with merchants in support of e-commerce or in-store transactions. . Directory services and yellow page publishers who host local market merchant sites with enhanced services to attract a larger share of merchant web sites and command premium fees for site development and hosting. 17 In addition to targeting the local directory and e-commerce markets, we also offer online banking transaction processing and management services to local market focused credit unions and community banks. Over the next year, we intend to offer a suite of XML-enabled services to these financial institutions to enhance customer service and support and connect their loans and other financial services into the local e-commerce marketplace. We have over five years of experience in web site development and in developing and marketing community building tools supported by a full suite of content rich services. Customers have included Citicorp Diners Club, Invesco Funds Group, TCI International, Intermedia Partners and Bresnan Communications, Inc. During the first six months of 1999, we acquired privately held Durand Communications, Inc. and NetIgnite, Inc. See Notes 3 and 4 of Notes to Consolidated Financial Statements. We have contracted with Switchboard, Inc. as a key anchor distribution partner in the online local directories market and with CU Cooperative Systems, Inc. in the community banking arena. We believe these partners provide a critical mass of end users that will generate sustainable and recurring revenue for Webb and a strong foundation on which to build enhanced distribution relationships with other market leaders. As a result of these agreements, we expect our revenues to increase during the remainder of fiscal 1999 and beyond. Our strategy is to develop a competitive advantage and build a leadership position in local e-commerce by: . Delivering leading-edge technical solutions that provide first mover advantage and capitalize on our expertise in online community, communication and XML-based technologies; . Securing additional distribution partnerships that drive the deployment of our technologies to a critical mass of end-users; and . Providing innovative, value-added services to enhance buyer-seller interaction. Based on applicable current accounting standards, we recorded a non- operating expense of $4,158,563 during the first quarter of 1999 in connection with the private placement of $3,000,000 principal amount of our Series C preferred stock. We also recorded a similar non-operating expense of $157,691 during the second quarter of 1999 in connection with the exercise of our option to sell an additional $2,000,000 principal amount of our Series C preferred stock. While these charges do not affect our operating losses or working capital, they do result in an increase in our net loss available to common stockholders. Additionally, we recorded a non-cash charge for preferred stock dividends during the 1999 three and six-month period totaling $29,028 and $75,041, respectively. Results of Operations In the fourth quarter of 1998, we revised certain factors used in determining the amounts to be accreted related to the issuance of our 10% and 5% Preferred Stock. These revisions and their impact on unaudited quarterly amounts previously reported in 1998 are presented below.
Three Months Ended Six Months Ended June 30, 1998 June 30, 1998 ----------------------------- ----------------------------- As Reported As Revised As Reported As Revised (Unaudited) (Unaudited) (Unaudited) (Unaudited) -------------- -------------- --------------- ------------- Net loss $(1,638,472) $(1,638,472) $(3,127,181) $(3,127,181) Preferred stock dividends 80,585 80,585 142,984 142,984 Accretion of preferred stock to redemption value 848,646 1,818,564 (a) 993,980 2,237,260 (a) ------------- ------------- -------------- ------------ Net loss available to common Stockholders $(2,567,703) $(3,537,621) $(4,264,145) $(5,507,425) ============= ============= ============== ============
18 Loss per share, basic and diluted $ (0.75) $ (1.03) $ (1.26) $ (1.62) =========== =========== =========== =========== Weighted average shares outstanding 3,446,131 3,446,131 3,390,909 3,390,909 =========== =========== =========== ===========
(a) Increase in accretion of preferred stock to redemption value due to the revision of discounts applied to common stock and common stock warrants issued in connection with preferred stock private placements and the revision of the accretion period for the preferred stock. The following table sets forth for the periods indicated the percentage of net revenues by items contained in the Statements of Operations. All percentages are calculated as a percentage of total net revenues, with the exception of cost of revenues which are calculated based on the respective net revenue amounts.
Three Months Ended Six Months Ended June 30, June 30, ------------------------------------------------ 1999 1998 1999 1998 ----------- ----------- ----------- --------- Net revenues: Transaction fees 73.7% 15.9% 51.6% 6.9% Services 26.3% 14.3% 24.0% 12.4% Hardware and software - 69.8% 24.4% 80.7% ---------- --------- ---------- --------- Total net revenues 100.0% 100.0% 100.0% 100.0% ---------- --------- ---------- --------- Cost of revenues: Cost of transaction fees 193.9% 59.9% 143.6% 147.1% (as percentage of transaction fee revenues) Cost of services 127.0% 70.4% 78.5% 33.9% (as percentage of service revenues) Cost of hardware and software - 99.0% 80.1% 82.1% (as percentage of hardware and software revenues) ---------- --------- ---------- --------- Total cost of revenues 176.3% 88.7% 112.5% 80.6% ---------- --------- ---------- --------- Gross Margin (76.3)% 11.3% (12.5)% 19.4% ---------- --------- ---------- --------- Operating expenses: Sales and marketing expenses 201.8% 203.3% 173.4% 109.5% Product development expenses 339.6% 43.6% 260.6% 34.4% General and administrative expenses 766.6% 284.9% 626.5% 166.2% Depreciation and amortization expenses 72.1% 35.2% 51.4% 19.6% ---------- --------- ---------- --------- Total operating expenses 1380.1% 567.0% 1111.9% 329.7% ---------- --------- ---------- --------- Loss from operations (1456.4)% (555.7)% (1124.4)% (310.3)% ---------- --------- ---------- --------- Net Loss (1491.9)% (544.7)% (1133.6)% (304.2)% Preferred stock dividends (15.0)% (26.8)% (15.6)% (13.9)% Accretion of preferred stock to redemption value (81.7)% (604.5)% (656.2)% (217.6)% Accretion of guaranteed return in excess of redemption value - - (240.8)% - ---------- --------- ---------- --------- Net loss available to common stockholders (1588.6)% (1176.0)% (2046.2)% (535.7)% ========== ========= ========== =========
19 Three and Six Months Ended June 30, 1999 and 1998. Components of net revenues and cost of revenues are as follows:
Three Months Ended Six Months Ended June 30, June 30, ---------------------------------------- ------------------------------------------- 1999 1998 1999 1998 ----------------- ----------------- ------------------- ------------------ Net revenues: Transaction fees $ 142,097 $ 47,678 $248,426 $ 70,828 Services 50,837 43,142 115,281 127,564 Hardware and software - 209,988 117,509 829,655 ----------------- ----------------- ------------------- ------------------ Total net revenues 192,934 300,808 481,216 1,028,047 ----------------- ----------------- ------------------- ------------------ Cost of revenues Cost of transaction fees 275,505 28,552 356,719 104,154 Cost of services 64,579 30,367 90,444 43,284 Cost of hardware and software - 207,901 94,155 680,935 ----------------- ----------------- ------------------- ------------------ Total cost of revenues 340,084 266,820 541,318 828,373 ----------------- ----------------- ------------------- ------------------ Gross margin $(147,150) $ 33,988 $(60,102) $ 199,674 ================= ================= =================== ==================
Revenues from transaction fees include e-banking service bureau fees, online subscription fees, and Internet access and e-commerce royalties. Our net revenues from transaction fees were $142,097 and $248,426 for the three and six month periods ended June 30, 1999, respectively, which represent increases of 198.0% and 250.7%, respectively, when compared with the similar 1998 periods. The increases are primarily due to increases in the number of subscribers using our financial services product; the implementation of our Re/Max Main Street product during the second quarter of 1998 and the steady growth of subscribers through the second quarter of 1999, which represents a more than 200% increase from 1998. Revenues from services include professional services for programming, network engineering fees, equipment installation and Internet connectivity fees. Our net revenues from services were $50,837 and $115,281 for the three and six month periods ended June 30, 1999, respectively, which represent increases of 17.8% for the three-month period and a decrease of 9.6% for the six-month period when compared with the similar 1998 periods. The increase in the 1999 three- month period was primarily due to design and integration fees earned in the second quarter. The decrease in the 1999 six-month period was primarily due to fewer fees charged for professional programming services related to customization of our e-banking product for an existing customer, a reduction in revenue from Internet connectivity services, and fewer programming services to an e-banking customer, which was partially off-set by an increase in design and integration fees and amortized software license fees from 1999 contracts. Revenues from hardware and software include the resale of computer hardware and third party software to customers generally in connection with implementing our CommunityWare products and services. During the fourth quarter of 1998, we changed our pricing structure whereby we supply any required equipment and the products and services and the customer is not required to pay any significant fees upon the delivery of such items. As a result, we did not resell any hardware or software during the three months ended June 30, 1999 compared to $209,988 in revenues for the similar 1998 period. Our net revenues from the resale of hardware and software were $117,509 for the six months ended June 30, 1999 compared to $829,655 for the similar 1998 period. During the six-month period, we sold equipment to customers with whom we have existing contracts to provide equipment. We anticipate that revenue from hardware and equipment revenues will continue to be at minimal levels in future periods. We had four customers representing 77% of revenues for the June 30, 1999 three-month period and four customers representing 82% of net revenues for the similar 1998 period. We had four customers representing 83% of revenues for June 30, 1999 six-month period and three customers representing 74% of revenues for the similar 1998 period. During the first quarter of 1999, Intermedia Partners, a related party (See Note 13 of Notes to Consolidated Financial Statements), announced that it intended to sell several of its cable systems in its Tennessee 20 market and elsewhere to TCI and Charter Communications, Inc.. We currently provide services to Intermedia in three Tennessee markets and have generated revenues from the sale of computer hardware, network engineering services, and royalties from Internet access revenue to their customers. Intermedia accounted for approximately 7% and 23% of our revenue for the three and six months ended June 30, 1999, respectively, primarily due to equipment sales which were not anticipated to continue during the balance of 1999, and approximately 12% and 2% of total revenue for the years ended December 31, 1998 and 1997, respectively. As a result of these factors and further consolidation of Intermedia's cable operations and the announcement by Charter Communications that its affiliate High Speed Access Corp will be the Internet access provider for these Tennessee markets beginning in mid to late 1999, we expect to receive substantially less revenue from Intermedia during the remainder of 1999 and in future periods. Provisions of the contracts may remain in effect whereby we may receive revenue from Internet content fees; however, to date, revenue from this source has been insignificant. In addition, during July 1999, we sold two customer contracts, including related computer hardware, for approximately $270,000. We provided services and equipment under the terms of the original contracts with these customers to provide Internet access to their end users. We recognized approximately $8,700 of revenue from these contracts during the second quarter of 1999. Cost of revenues as a percentage of net revenues was 176.3% for the three months ended June 30, 1999 compared to 88.7% for the similar 1998 period. Cost of revenues as a percentage of net revenues was 112.5% for the six months ended June 30, 1999 compared to 80.6% for the similar 1998 period. Transaction fee revenues - Cost of transaction fee revenues consist of customer revenue sharing costs, expenses associated with operating our network operating center, including Internet connection charges and depreciation expense, employee costs associated with assisting our customers in delivering our services to end users, third party content software license fees, and third party transaction fees. Cost of transaction fee revenues were $275,505 and $356,719 for the three and six months ended June 30, 1999, respectively, or 193.9% and 143.6% of net transaction fee revenues, as compared to $28,552 and $104,154, or 59.9% and 147.1% of net transaction fee revenues in the similar 1998 periods. The absolute dollar increase in the 1999 periods was primarily attributable to operating our network operating center, which we began during the second quarter of 1999, as well as costs associated with delivering Internet access and content to the customers of our cable operator distribution partners. We constructed the network operating center to accommodate our current customer base, our contract backlog and our forecast of future growth. Consequently, during the 1999 six-month period, the cost to operate the network operating center out paced our current revenues resulting in a negative gross margin. While we expect the operating costs of the network operating center to increase in future periods, we also expect our revenue base to grow sufficiently to reflect a positive gross margin in future periods. Service revenues - Cost of service revenues consist of compensation costs and consulting fees associated with performing programming, installation and integration services for our customers. Cost of service revenues were $64,579 and $90,444 for the three and six months ended June 30, 1999, respectively, or 127.0% and 78.5% of net service revenues, as compared to $30,367 and $43,284, or 70.4% and 33.9% of net service revenues in the similar 1998 periods. The increase in costs and corresponding decrease in gross margin during the 1999 periods was due to the fact that we incurred approximately $41,000 more costs than revenues. Hardware and software revenues - Cost of hardware and software revenues consist of computer and third party software purchased for resale to cable operators. Due to the change in our pricing model, we did not re-sell any computer or software products during the second quarter of 1999. Cost of hardware and software revenue was 80.1% of net revenues for the 1999 six-month period compared to 82.1% of net revenues for the similar 1998 period. Cost of hardware and software revenues as a percentage of net revenues decreased slightly during the 1999 period because during the 1998 period we sold equipment to existing customers at somewhat lower margins. Sales and marketing expenses consist primarily of salaries, advertising, trade show expenses, and costs of marketing materials. Sales and marketing expenses were $389,264 for the three months ended June 30, 1999, or 201.8% of net revenues as compared to $611,451, or 203.3% of net revenues for the similar 1998 period. For the 21 six months ended June 30, 1999, sales and marketing expenses were $834,653, or 173.4% of net revenues as compared to $1,125,767, or 109.5% of net revenues for the similar 1998 period. The decrease in absolute dollars in the 1999 periods was primarily attributable to (i) a net decrease of seven employees; (ii) the phase out of our international marketing efforts; and (iii) a decrease in direct advertising dollars as a result of our focus on distribution partners rather than the consumer directly. We expect sales and marketing expenses to increase on an absolute dollar basis in future periods but decrease as a percentage of net revenues as our revenues increase from current levels as we continue to market our products and services. Product development expenses consist primarily of employee compensation and programming fees relating to the development and enhancement of the features and functionality of our online CommunityWare software. Product development expenses were $655,257 for the three months ended June 30, 1999, or 339.6% of net revenues as compared to $131,202, or 43.6% of net revenues for the similar 1998 period. For the six months ended June 30, 1999, product development expenses were $1,254,097, or 260.6% of net revenues as compared to $353,570, or 34.4% of net revenues for the similar 1998 period. During 1999, all product development costs have been expensed as incurred. We capitalized $127,618 and $196,290 of development costs during the 1998 three and six-month periods, respectively. The increase in absolute dollars in the 1999 periods was due primarily to the an increase in technology personnel from 12 to 30 to support the continued development of our CommunityWare products, including deployment of our core publishing software and integration of the XML technologies into our software. We believe that significant investments in product development are critical to attaining out strategic objectives and, as a result, we expect product development expenses to increase in future periods. General and administrative expenses consist primarily of compensation, consulting expenses, fees for professional services, and the non-cash expense of warrants issued to customers. General and administrative expenses were $1,479,094 for the three months ended June 30, 1999, or 766.6% of net revenues as compared to $857,062, or 284.9% of net revenues for the similar 1998 period. For the six months ended June 30, 1999, general and administrative expenses were $3,014,702, or 626.5% of net revenues as compared to $1,708,585, or 166.2% of net revenues for the similar 1998 period. The increase in absolute dollars in the 1999 periods was primarily attributable to the following: (i) an increase in non-cash charges for common stock and common stock warrants issued for services or for customer acquisition costs which totaled $220,000 and $408,000 in the three and six-month periods, respectively; (ii) an increase in employee compensation; (iii) an increase in legal fees related to security filings and general corporate matters; and (iv) an increase in investor relation expenses. We expect general and administrative expenses to increase on an absolute dollar basis in future periods but decrease as a percentage of net revenues as our revenues increase from current levels. We also expect to incur non-cash charges in the third quarter as a result of the issuance of a warrant to purchase our common stock to a customer. The amount of such charges could exceed approximately $1 million. We expect that such charges may continue as we continue to build distributor relationships. Depreciation and amortization was $139,169 for the three months ended June 30, 1999, compared to $105,970 for the similar 1998 period. Depreciation and amortization was $247,398 for the six months ended June 30, 1999, compared to $201,347 for the similar 1998 period. We recorded more depreciation expense as a result of an increase in fixed assets primarily from construction of our network operating center and the purchase of third party application server platform software for delivering XML-based components with our software. We also began amortizing the intangible assets we acquired in the NetIgnite merger and recorded $23,675 of amortization expense in the 1999 three-month period. As a result of the NetIgnite and DCI mergers, we expect to record approximately $2,500,000 of amortization expense during the remainder of 1999 and approximately $5,000,000 of such expenses in 2000 and 2001 and approximately $2,500,000 of such expenses in 2002. Loss from investment in subsidiary is our share of the net losses from NetIgnite. NetIgnite was engaged primarily in product development activities. Interest income was $36,775 for the three months ended June 30, 1999, compared to $33,225 for the similar 1998 period. Interest income was $82,917 for the six months ended June 30, 1999, compared to $62,414 for the similar 1998 period. We earn interest by investing surplus cash in highly liquid investment funds or AAA rated commercial paper. During the 1999 period, we recorded $22,050 of interest income from our note receivable from DCI. 22 Net losses allocable to common stockholders were $3,065,012 for the three-month period ended June 30, 1999 compared to $3,537,621 for the similar 1998 period. We recorded non-operating expenses for preferred stock dividends and accretion of preferred stock to redemption value during the 1999 three-month period of $29,028 and $157,691, respectively, and $80,585 and $1,181,564 in the similar 1998 period. Net losses allocable to common stockholders were $9,846,413 for the six-month period ended June 30, 1999 compared to $5,507,425 for the similar 1998 period. We recorded non-operating expenses for preferred stock dividends and accretion of preferred stock to redemption value during the 1999 six-month period of $75,041 and $4,316,254, respectively, and $142,984 and $2,237,260 in the similar 1998 period. Additionally, the increase in losses reflect expenses in sales and marketing, product development, and general and administrative areas that have increased at a faster rate than net revenue. This is due to the time lag associated with product development and market introduction as well as the long sales cycle for most of our products and services. We expect to continue to experience increased operating expenses and capital investments during 1999, as we continue to develop new product offerings and the infrastructure required to support our anticipated growth. We expect to report operating and net losses for 1999 and for one or more years thereafter. Liquidity and Capital Resources As of June 30, 1999, we had cash and cash equivalents of $3,934,761 and working capital of $782,392. We financed our operations and capital expenditures and other investing activities primarily through private sales of preferred stock and the exercise of common stock warrants resulting in net proceeds of $4,615,500 and $3,856,271, respectively. (See Notes 8, 9 and 11 of Notes to Consolidated Financial Statements for information regarding these sales of securities). We used $3,559,092 in cash to fund our operations for the six months ended June 30, 1999, compared to $2,836,003 for the similar 1998 period. The increase in net cash used resulted primarily from an increase in our net operating losses and payment of 1998 accounts payable and accrued liabilities and accrued compensation in the first quarter of 1999. These items were offset by cash we received from customers that represents future revenue and by non-cash expenses for stock and stock options we issued for services. We used $2,182,420 in cash for capital expenditures and other investing activities for the six months ended June 30, 1999, compared to $1,125,689 for the similar 1998 period. The increase between periods is primarily a result of property and equipment we purchased in connection with establishing our computer operating center and our continuing development of the e-banking system for CU Cooperative as well as our cash investment in NetIgnite (See Note 4 of Notes to Consolidated Financial Statements). We received $8,977,934 in cash from financing activities for the six months ended June 30, 1999, compared to $3,051,035 for the similar 1998 period. During January 1999, we sold 3,000 shares of Series C Preferred Stock with a stated value of $1,000 per share, which resulted in net proceeds of $2,755,500. In connection with that transaction, we also exercised our right and called a warrant that required the investor to purchase 2,000 additional shares of the Series C Preferred Stock, resulting in net proceeds of $1,860,000. During May, 1999, we received net proceeds of $3,056,871 from the exercise of our warrants issued in connection with our public offering in 1996. In addition, during January 1999, an investor exercised a warrant to purchase common stock we issued in connection with the Series A Preferred Stock, which resulted in proceeds of $799,400. We also received $522,600 in cash during the 1999 six-month period from the issuance of our common stock as a result of the exercise of options and warrants. We believe that our cash and cash equivalents and working capital at June 30, 1999 will be adequate to sustain our operations through at least October 1999. In order to continue to finance our operations, we are pursing several funding possibilities. These funding activities are intended to raise the approximately $10 million of net proceeds we estimate will be required to sustain operations for the next twelve months. First, we are pursuing various potential strategic relationships which, if consummated, could result in one or more significant investments by strategic partners. We have also initiated discussions with various potential private investors which could result in additional debt or equity investments. There can be no assurance that we will be successful in obtaining any additional equity or debt capital or that if such capital is available, that it will be available on acceptable terms. If we are unable to 23 obtain the capital required to sustain our operations, we will be required to reduce or terminate certain of our operations which could have a material adverse affect on our operating results and financial condition. In its reports accompanying the audited financial statements for the years ended December 31, 1998 and 1997, our auditors, Arthur Andersen LLP, expressed substantial doubt about our ability to continue as a going concern. Year 2000 The Year 2000 issue involves the potential for system and processing failures of date-related data resulting from computer-controlled systems using two digits rather than four to define the applicable year. For example, computer programs that contain time-sensitive software may recognize a date using two digits of "00" as the year 1900 rather than the year 2000. This could result in system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar ordinary business activities. We have reviewed our internal software and hardware systems and believe they will function properly with respect to dates in the year 2000 and thereafter. We expect to incur no significant costs in the future for Year 2000 problems. Nonetheless, there can be no assurance in this regard until such systems are operational in the Year 2000. We are in the process of contacting all of our significant suppliers to determine the extent to which our systems are vulnerable to those third parties' failure to make their own systems Year 2000 compliant. As of the date of this report, we have substantially completed this review and believe our significant suppliers and vendors are Year 2000 compliant and that should any of them prove not to be Year 2000 compliant, we could find a replacement vendor or supplier which is Year 2000 compliant without significant delay or expense. While our review has not identified any Year 2000 problems that will have a material effect on our business, due to the general uncertainty inherent in the Year 2000 problem, resulting from the uncertainty of the Year 2000 readiness of third-party suppliers and vendors and of our customers, we are unable to determine at this time that the consequences of Year 2000 failures will not have a material impact on our results of operations, liquidity or financial condition. Of our product offerings, the one that may be most impacted by Year 2000 problems or peoples' concern about potential Year 2000 problems, is our Financial Services product offering. We have recently entered into an agreement with CU Cooperative Systems, Inc., a national cooperative association representing over 500 credit unions. The services to be provided to the members of the Cooperative are scheduled for introduction during the second half of 1999. Our Financial Services products are Year 2000 compliant, however, concerns about Year 2000 problems may cause individual cooperatives or their members to be reluctant to offer or to engage in e-banking transactions prior to the end of 1999. While we have not anticipated any significant income from the use of this system prior to 2000, a delay in the implementation of the system by the Cooperative's members could result in a decrease in anticipated revenues for the product offering in 2000, particularly during the first six months of the year. Factors That May Affect Future Results Factors that may affect our future results include, but are not limited to, the following items as well as the information in "Item 1 - Financial Statements - Note 1 to the Consolidated Financial Statements" and "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations." Our limited operating history could affect our business. We were founded in March 1994, commenced sales in February 1995, and were in the development stage through December 31, 1995. Accordingly, we have a limited operating history upon which you may evaluate us. Our business is subject to the risks, expenses and difficulties frequently encountered by companies with a limited operating history including: . Limited ability to respond to competitive developments, . Exaggerated effect of unfavorable changes in general economic and market conditions, . Ability to attract qualified personnel, and . Ability to develop and introduce new product and service offerings. There is no assurance we will be successful in addressing these risks. If we are unable to successfully address these risks our business could be significantly affected. 24 We have accumulated losses since inception and we anticipate that we will continue to accumulate losses for the foreseeable future. We have incurred net losses since inception totaling $30,620,542 through June 30, 1999. In addition, we expect to incur additional substantial operating and net losses in 1999 and for one or more years thereafter. We expect to incur these additional losses because: . We currently intend to increase our capital expenditures and operating expenses to expand the functionality and performance of our products and services, . We recorded goodwill and other intangible assets in connection with the DCI and NetIgnite acquisitions which we will amortize over their estimated useful lives of approximately three years. We have allocated approximately $14.7 million to goodwill and other intangible assets in connection with these acquisitions. Net losses since inception include approximately $10.2 million of non-cash expenses related to the issuance of preferred stock and warrants in financing transactions and warrants issued to three customers. The current competitive business environment may result in our issuance of similar securities in future financing transactions or to other companies as an inducement for them to enter into a business relationship with us. While these transactions represent non-cash charges, to the extent that we enter into similar transaction in the future, they will increase our expenses and may increase our net loss. If we are unable to raise additional working capital funds, we may not be able to sustain our operations. We believe that our present cash and cash equivalents, working capital and commitments for additional equity investments will be adequate to sustain our current level of operations only through October 1999. If we cannot raise additional funds when needed, we may be required to curtail or scale back our operations. These actions could have a material adverse effect on our business, financial condition, or results of operations. We estimate that we will need to raise through equity, debt or other external financing at least $10 million to sustain operations for the next 12 months. There is no assurance that we will be able to raise additional funds in amounts required or upon acceptable terms. In addition, we may discover that we have underestimated our working capital needs, and we may need to obtain additional funds to sustain our operations. In its report accompanying the audited financial statements for the years ended December 31, 1998 and 1997, our auditor, Arthur Andersen LLP, expressed substantial doubt about our ability to continue as a going concern. See "Item 2 - Management's Discussion of Financial Condition and Results of Operations - Liquidity and Capital Resources." We may never become or remain profitable. Our ability to become profitable depends on the ability of our products and services to generate revenues. The success of our revenue model will depend upon many factors including: . The success of our distribution partners in marketing their products and services, and . The extent to which consumers and businesses use our products and conduct e-commerce transactions and advertising utilizing our products. Because of the new and evolving nature of the Internet, we cannot predict whether our revenue model will prove to be viable, whether demand for our products and services will materialize at the prices we expect to be charged, or whether current or future pricing levels will be sustainable. Our business depends on the growth of the Internet. Our business plan assumes that the Internet will develop into a significant source of communication and communication interactivity. However, the Internet market is new and rapidly evolving and there is no assurance that the Internet will develop in this manner. If the Internet does not develop in this manner, our business, operating results and financial condition would be materially adversely effected. Numerous factors could prevent or inhibit the development of the Internet in this manner, including: . The failure of the Internet's infrastructure to support Internet usage or electronic commerce, . The failure of businesses developing and promoting Internet commerce to adequately secure the confidential information, such as credit card numbers, needed to carry out Internet commerce, and . Regulation of Internet activity Use of many of our products and services will be dependent on distribution partners. Because we have elected to partner with other companies for the distribution of many of our products and services, many users of our products and services are expected to subscribe through our distribution partners. As a result, our distribution partners, and not us, will substantially control the customer relationship with these users. If the business of the companies with whom we partner is adversely affected in any manner, our business, operating results and 25 financial condition could be materially adversely effected. We may be unable to develop desirable products. Our products are subject to rapid obsolescence and our future success will depend upon our ability to develop new products and services that meet changing customer and marketplace requirements. There is no assurance that we will be able to successfully: . Identify new product and service opportunities, or . Develop and introduce new products and services to market in a timely manner. If we are unable to accomplish these items, our business, operating results and financial condition could be materially adversely affected. Our products and services may not be successful. Even if we are able to successfully identify, develop, and introduce new products and services there is no assurance that a market for these products and services will materialize to the size and extent that we anticipate. If a market does not materialize as we anticipate, our business, operating results, and financial condition could be materially adversely affected. The following factors could affect the success of our products and services: . The failure of our business plan to accurately predict the rate at which the market for Internet products and services will grow, . The failure of our business plan to accurately predict the types of products and services the future Internet marketplace will demand, . Our limited experience in marketing our products and services, . The failure of our business plan to accurately predict our future participation in the Internet marketplace, . The failure of our business plan to accurately predict the estimated sales cycle, price, and acceptance of our products and services, . The development by others of products and services that renders our products and services noncompetitive or obsolete, or . Our failure to keep pace with the rapidly changing technology, evolving industry standards, and frequent new product and service introductions that characterize the Internet marketplace. The intense competition that is prevalent in the Internet market could have a material adverse effect on our business. Our current and prospective competitors include many companies whose financial, technical, marketing and other resources are substantially greater than ours. There is no assurance that we will have the financial resources, technical expertise, or marketing, sales and support capabilities to compete successfully. The presence of these competitors in the Internet marketplace could have a material adverse effect on our business, operating results, or financial condition by causing us to: . Reduce the average selling price of our products and services, or . Increase our spending on marketing, sales, and product development. There is no assurance that we would be able to offset the effects of any such price reductions or increases in spending through an increase in the number of our customers, higher sales from premium services, cost reductions or otherwise. Further, our financial condition may put us at a competitive disadvantage relative to our competitors. If we fail to, or cannot, meet competitive challenges, our business, operating results and financial condition could be materially adversely affected. 26 A limited number of our customers generate a significant portion of our revenues. We had four customers representing 77% of revenues for the June 30, 1999 three-month period and four customers representing 82% of net revenues for the similar 1998 period. We had four customers representing 83% of revenues for June 30, 1999 six-month period and three customers representing 74% of revenues for the similar 1998 period. There is no assurance that we will be able to attract or retain major customers. The loss of, or reduction in demand for products or related services from major customers could have a material adverse effect on our business, operating results, cashflows, and financial condition. See "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." The sales cycle for our products and services is lengthy and unpredictable. While our sales cycle varies from customer to customer, it typically has ranged from one to six months for projects. Our pursuit of sales leads typically involves an analysis of our prospective customer's needs, preparation of a written proposal, one or more presentations and contract negotiations. We often provide significant education to prospective customers regarding the use and benefits of our Internet technologies and products. Our sales cycle may also be affected by a prospective customer's budgetary constraints and internal acceptance reviews, over which we have little or no control. We may be unable to adjust our spending to account for potential fluctuations in our quarterly results. As a result of our limited operating history and the recent increased focus on our products and services, we do not have historical financial data for a sufficient number of periods on which to base planned operating expenses. Therefore, our expense levels are based in part on our expectations as to future sales and to a large extent are fixed. We typically operate with little backlog and the sales cycles for our products and services may vary significantly. As a result, our quarterly sales and operating results generally depend on the volume and timing of and the ability to close customer contracts within the quarter, which are difficult to forecast. We may be unable to adjust spending in a timely manner to compensate for any unexpected sales shortfalls. If we were unable to so adjust, any significant shortfall of demand for our products and services in relation to our expectations would have an immediate adverse effect on our business, operating results and financial condition. Further, we currently intend to increase our capital expenditures and operating expenses to fund product development and increase sales and marketing efforts. To the extent that such expenses precede or are not subsequently followed by increased sales, our business, operating results and financial condition will be materially adversely affected. We may be unable to retain our key executives and research and development personnel. We are highly dependent on the technical and management skills of our key employees, including in particular R. Steven Adams, our founder and Chief Executive Officer and Perry Evans, our President and founder of NetIgnite Inc. The loss of either Mr. Adams' or Mr. Evans' services could have a material adverse effect on our business and operating results. We do not maintain key person insurance for either Mr. Adams or Mr. Evans or any other member of management. Our future success also depends in part on our ability to identify, hire and retain additional personnel, including key product development, sales, marketing, financial and executive personnel. Competition for such personnel is intense and there is no assurance that we can identify or hire additional qualified personnel. Executives and research and development personnel who leave us may compete against us in the future. We generally enter into written nondisclosure and nonsolicitation agreements with our officers and employees which restrict the use and disclosure of proprietary information and the solicitation of customers for the purpose of selling competing products or services. However, we generally do not require our employees to enter into non-competition agreements. Thus, if any of these officers or key employees left, they could compete with us, so long as they did not solicit our customers. Any such competition could have a material adverse effect on our business. We may be unable to manage our expected growth. If we are able to implement our growth strategy, we will experience significant growth in the number of our employees, the scope of our operating and financial systems, and the geographic area of our operations. There is no assurance that we will be able to implement in whole or in part our growth strategy or that our management or other resources will be able to successfully manage any future growth in our business. Any failure to do so could have a material adverse effect on our operating results and financial condition. We may be unable to protect our intellectual property rights. Intellectual property rights are important to our success and our competitive position. There is no assurance that the steps we take to protect our intellectual 27 property rights will be adequate to prevent the imitation or unauthorized use of our intellectual property rights. Policing unauthorized use of proprietary systems and products is difficult and, while we are unable to determine the extent to which piracy of our software exists, we expect software piracy to be a persistent problem. In addition, the laws of some foreign countries do not protect software to the same extent as do the laws of the United States. Even if the steps we take to protect our proprietary rights prove to be adequate, our competitors may develop products or technologies that are both non-infringing and substantially equivalent or superior to our products or technologies. Computer viruses and similar disruptive problems could have a material adverse effect on our business. Our software and equipment may be vulnerable to computer viruses or similar disruptive problems caused by our customers or other Internet users. Our business, financial condition or operating results could be materially adversely effected by: . Losses caused by the presence of a computer virus that causes us or third parties with whom we do business to interrupt, delay or cease service to our customers, . Losses caused by the misappropriation of secured or confidential information by a third party who, in spite of our security measures, obtains illegal access to this information, . Costs associated with efforts to protect against and remedy security breaches, or . Lost potential revenue caused by the refusal of consumers to use our products and services due to concerns about the security of transactions and commerce that they conduct on the Internet. Future government regulation could materially adversely effect our business. There are currently few laws or regulations directly applicable to access to, communications on, or commerce on the Internet. Therefore, we are not currently subject to direct regulation of our business operations by any government agency, other than regulations applicable to businesses generally. Due to the increasing popularity and use of the Internet, however, federal, state, local, and foreign governmental organizations are currently considering a number of legislative and regulatory proposals related to the Internet. The adoption of any of these laws or regulations may decrease the growth in the use of the Internet, which could, in turn: . Decrease the demand for our products and services, . Increase our cost of doing business, or . Otherwise have a material adverse effect on our business, results of operations and financial condition. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, copyright, trademark, trade secret, obscenity, libel and personal privacy is uncertain and developing. Our business, results of operations and financial condition could be materially adversely effected by the application or interpretation of these existing laws to the Internet. Our systems may not be year 2000 compliant. We have reviewed our internal software and hardware systems. Based on this review, we believe that our internal software and hardware systems will function properly with respect to dates in the year 2000 and thereafter. We expect to incur no significant costs in the future for Year 2000 problems. Nonetheless, there is no assurance in this regard until our internal software and hardware systems are operational in the year 2000. The failure to correct material Year 2000 problems by our suppliers and vendors could result in an interruption in, or a failure of, certain of our normal business activities or operations. Due to the general uncertainty inherent in the Year 2000 problem, resulting from the uncertainty of the Year 2000 readiness of third-party suppliers and vendors and of our customers, we are unable to determine at this time that the consequences of Year 2000 failures will not have a material impact on our results of operations, liquidity or financial condition. See "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Compliance Disclosure." Our articles of incorporation and bylaws may discourage lawsuits and other claims against our directors. Our articles of incorporation provide, as permitted by Colorado law, that our directors shall have no personal liability for certain breaches of their fiduciary duties to us. In addition, our bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by Colorado law. These provisions may 28 reduce the likelihood of derivative litigation against directors and may discourage shareholders from bringing a lawsuit against directors for a breach of their duty. The price of our common stock has been highly volatile due to factors that will continue to effect the price of our stock. Our common stock traded as high as $19.38 per share and as low as $9.13 between January 1, 1999 and August 6, 1999. Historically, the over-the-counter markets for securities such as our common stock have experienced extreme price and volume fluctuations. Some of the factors leading to this volatility include: . Price and volume fluctuations in the stock market at large that do not relate to our operating performance, . Fluctuations in our quarterly operating results, . Announcements of product releases by us or our competitors, . Announcements of acquisitions and/or partnerships by us or our competitors, and . Increases in outstanding shares of common stock upon exercise or conversion of derivative securities. (See "We have issued numerous options, warrants and convertible securities to acquire our common stock that could have a dilutive effect on our shareholders.") The trading volume of our common stock may diminish significantly if our common stock is prohibited from being traded on the Nasdaq SmallCap Market. Although our shares are currently traded on The Nasdaq SmallCap Market, there is no assurance that we will remain eligible to be included on Nasdaq. If our common stock was no longer eligible for quotation on Nasdaq, it could become subject to rules adopted by the Securities and Exchange Commission regulating broker-dealer practices in connection with transactions in "penny stocks." If our common stock became subject to the penny stock rules, many brokers may be unwilling to engage in transactions in our common stock because of the added regulation, thereby making it more difficult for purchasers of our common stock to dispose of their shares. We have issued numerous options, warrants, and convertible securities to acquire our common stock that could have a dilutive effect on our shareholders. We have issued numerous options, warrants, and convertible securities to acquire our common stock. During the terms of these outstanding options, warrants, and convertible securities, the holders of these securities will have the opportunity to profit from an increase in the market price of our common stock with resulting dilution to the holders of shares who purchased shares for a price higher than the respective exercise or conversion price. The existence of such stock options, warrants and convertible securities may adversely affect the terms on which we can obtain additional financing, and you should expect the holders of such options or warrants to exercise or convert those securities at a time when we, in all likelihood, would be able to obtain additional capital by offering securities on terms more favorable to us than those provided by the exercise or conversion of such options or warrants. As of August 6, 1999, we have issued the following warrants and options to acquire shares of our common stock: . Options and warrants to purchase 1,919,228 shares of common stock upon exercise of such options and warrants, exercisable at prices ranging from $0.50 to $18.25 per share, with a weighted average exercise price of approximately $9.08 per share. . Options issued to EBI Securities Corporation, the representative of the underwriters involved in our initial public offering (the "Representative's Option"), to purchase 106,700 shares of common stock upon exercise of the Representative's Option at a purchase price of $8.10 per share. . Warrants issued in connection with the issuance of the 10% Preferred Stock to purchase 53,500 shares of common stock upon exercise of such warrants, exercisable at $15.00 per share. . Warrants issued in connection with the issuance of the 5% Preferred Stock to purchase 100,000 shares of common stock upon exercise of such warrants, exercisable at $16.33 per share. . Warrants issued to customers to purchase 81,829 shares of common stock upon exercise of such warrants, exercisable at $8.77 to $9.94 . Warrants issued to purchase 223,700 shares of our common stock at prices ranging from $4.30 to $20.33 assumed in connection with the acquisition of DCI. 29 In addition to these warrants and options, we have reserved an indeterminate number of shares of common stock for issuance upon conversion of outstanding shares of our 10% and Series C Preferred Stock. Based on the market value for the common stock as of August 6, 1999, the then outstanding 10% Preferred Stock and Series C Preferred Stock were convertible into approximately 113,108 shares and 78,853 shares, respectfully, of common stock. The number of shares of common stock issuable upon conversion of the 10% Preferred Stock and the Series C Preferred Stock could increase significantly if the market value for our common stock decreases in the future. Further, there could be issuances of additional similar securities in connection with our need to raise additional working capital. Future sales of our common stock in the public market could adversely affect the price of our common stock. Sales of substantial amounts of common stock in the public market that is not currently freely tradable, or even the potential for such sales, could have an adverse affect on the market price for shares of our common stock and could impair the ability of purchasers of our common stock to recoup their investment or make a profit. As of August 6, 1999, these shares consist of: . Approximately 630,000 shares owned by our officers, directors and holders of 10% of our outstanding common stock ("Affiliate Shares"). . 944,763 shares issued in connection with the DCI acquisition. Unless the Affiliate Shares are further registered under the securities laws, they may not be resold except in compliance with Rule 144 promulgated by the SEC, or some other exemption from registration. Rule 144 does not prohibit the sale of these shares but does place conditions on their resale which must be complied with before they can be resold. The shares of the common stock to be issued to the shareholders of DCI in connection with the DCI acquisition are expected to be registered pursuant to the Securities Act of 1993 by September 30, 1999. Future sales of our common stock in the public market could limit our ability to raise capital. Sales of substantial amounts of common stock in the public market pursuant to Rule 144, upon exercise or conversion of derivative securities or otherwise, or even the potential for such sales, could affect our ability to raise capital through the sale of equity securities. (See "We have issued numerous options, warrants, and convertible securities to acquire our common stock that could have a dilutive effect on our shareholders" and "Future sales of our common stock in the public market could adversely affect the price of our common stock.") Provisions in our articles of incorporation allow us to issue shares of stock that could make a third party acquisition of us difficult. Our Articles of Incorporation authorize our Board of Directors to issue up to 20,000,000 shares of common stock and 5,000,000 shares of preferred stock in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by our shareholders. Preferred stock authorized by the Board of Directors may include voting rights, preferences as to dividends and liquidation, conversion and redemptive rights and sinking fund provisions. If the Board of Directors authorizes the issuance of preferred stock in the future, this authorization could affect the rights of the holders of common stock, thereby reducing the value of the common stock, and could make it more difficult for a third party to acquire us, even if a majority of the holders of our common stock approved of an acquisition. Our expected issuance of our warrants to a customer will require us to record a non-cash expense which will, in turn, increase our net loss available to shareholders. Based on current accounting standards, we expect to record a non-cash expense which may exceed $1 million for the quarter ending September 30, 1999 as a result of our expected issuance of 150,000 shares to a customer. In addition, the agreement with the customer contemplates the issuance of a second warrant, subject to certain conditions, to purchase 150,000 shares of common stock which, if issued, could result in the increase of similar charges in the future. 30 We do not anticipate paying dividends on our common stock for the foreseeable future. We have never paid dividends on our common stock and do not intend to pay any dividends on our common stock in the foreseeable future. Any decision by us to pay dividends on our common stock will depend upon our profitability at the time, cash available therefor, and other factors. We anticipate that we will devote profits, if any, to our future operations. PART II OTHER INFORMATION Items 1 and 3-5. Not Applicable Item 2. Changes in Securities and Use of Proceeds On January 11, 1999, we sold 3,000 shares of Series C Cumulative Convertible Preferred Stock, $1,000 stated value, to one investor for $3 million. In connection with this investment, the investor granted us the option to require the inventor to purchase an additional 2,000 shares of such Preferred Stock. We exercised this option on June 18, 1999. EBI Securities, Inc. (formally Cohig & Associates, Inc.) served as the placement agent for the offering and received a commission equal to 7% of the gross proceeds of the offering. See Note 8 of the Notes to Consolidated Financial Statements for a description of the terms of the Preferred Stock. The securities were not registered under the Securities Act of 1933, as amended, based upon the exemption provided in Section 4(2) of such act and Regulation D promulgated thereunder. The securities were "restricted" securities as defined in Rule 144 promulgated by the Securities and Exchange Commission and were acquired for investment purposes. The certificates representing such securities contained restrictive legends. The securities are subject to demand registration rights. Item 6. Exhibits and Reports on Form 8-K (a) Listing of Exhibits: 2.1 Agreement and Plan of Merger dated March 19, 1998 among OSS, Durand Acquisition Corporation and Durand Communications, Inc. (3) 3.1 Articles of Incorporation, as amended, of OSS (5) 3.2 Bylaws of OSS (1) 4.1 Specimen form of OSS' Common Stock certificate (2) 4.2 Form of Warrant Agreement dated May 23, 1996 between Corporate Stock Transfer and OSS, including form of Warrant (2) 4.3 Stock Option Plan of 1995 (1) 4.4 Form of Incentive Stock Option Agreement for Stock Option Plan of 1995 (1) 4.5 Form of Nonstatutory Stock Option Agreement for Stock Option Plan of 1995 (1) 4.6 Form of Warrant issued in connection with Sale-Leaseback of Equipment (1) 4.7 Form of Warrant issued in 1996 to private investors (1) 4.8 Specimen of Warrant Certificate--See Exhibit A filed with Exhibit 4.2 4.9 Form of Warrant Agreement issued in 1997 and 1998 to private investors (3) 4.10 Form of Warrant Agreement issued in connection with issuance of Series A Preferred Stock (4) 4.11 Form of Warrant Agreement issued in connection with issuance of Series C Preferred Stock--See Exhibit B filed with Exhibit 10.8 10.1 Equipment Lease Agreement dated December 15, 1995 between OSS and OSS Equipment Leasing General Partnership (1) 10.2 Form of Nondisclosure and Nonsolicitation Agreement between OSS and its employees (2) 31 10.3 Office Lease for OSS' principal offices (2) 10.4 Long-Term Equipment Sale and Software License Agreement dated October 7, 1997 between OSS and FiberTel TCI2 S.A. (3) 10.5 Agreement dated October 7, 1997 between OSS and Medical Education Collaborative, Inc. (3) 10.6 Form of Change of Control Agreement between OSS and certain employees (7) 10.7 Securities Purchase Agreement and Exhibits thereto dated January 11, 1999 between OSS and Archer Investors, LLC (6) 10.8 Operating and Member Control Agreement dated March 10, 1999, among NetIgnite2, LLC, OSS and NetIgnite, Inc., Buy-Sell Agreement dated March 10, 1999, among NetIgnite2, LLC, OSS and NetIgnite, Inc. and Employment Agreement dated March 10, 1999, among OSS, NetIgnite2, LLC and Perry Evans (7) 10.8a Agreement and Plan of Merger between Online System Services, Inc. and NetIgnite, Inc. dated June 1, 1999* 10.9 Electronic Banking Service Contract dated May 28, 1997 between OSS and Rockwell Federal Credit Union (7) 10.10 Online Banking Service Agreement dated February 10, 1999 between OSS and CU Cooperative Systems, Inc. (7) 10.11 Internet/Business Site Development & Host Agreement dated November 12, 1997 between OSS and ReMax International, Inc. (7) 10.12 Long-Term Equipment Sale and Software License Agreement dated February 16, 1998 between OSS and Boulder Ridge Cable TV Inc. dba Starstream Communications (7) 10.13 Agreement for the Provision of Internet Services, Equipment, and Software Licenses dated November 26, 1997 between OSS and American Telecasting, Inc. (7) 10.14 Equipment Sale and Software License Agreement dated August 4, 1997, as amended May 26, 1998, between OSS and Intermedia Partners Southeast (7) 10.15 Agreement and Plan of Merger between Online System Services, Inc., DCI Acquisition Corp. and Durand Communications Inc. (8) 27 Financial Data Schedule* - ----------------------------- * Filed herewith. (1) Filed with the initial Registration Statement on Form SB-2, filed April 5, 1996, Commission File No. 333-3282-D. (2) Filed with Amendment No. 1 to the Registration Statement on Form SB-2, filed May 3,1996, Commission File No. 333-3282-D. (3) Filed with the Form 10-KSB Annual Report for the year ended December 31, 1997, Commission File No. 0-28462. (4) Filed with the Registration Statement on Form S-3, filed December 22, 1998, Commission File No. 333-69477. (5) Filed with the Registration Statement on Form S-3, filed January 29, 1999, Commission File No. 333-71503. (6) Filed with the Form 8-K Current Report dated January 11, 1999, as amended, Commission File No. 0-28462. (7) Filed with the Form 10-KSB Annual Report for the year ended December 31, 1998, Commission File No. 0-28462. (8) Filed with the Form 8-K Current Report dated June 30, 1999, Commission File No. 0-28462. (b) Reports on Form 8- The Company was not required to file a report on Form 8-K during the quarter ended June 30, 1998. 32 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, 1999 By /s/ William R. Cullen --------------------- Chief Financial Officer /s/ Stuart J. Lucko ------------------- Controller 33 EX-10.8.A 2 ARTICLES OF MERGER-ONLINE SYSTEM & NETIGNITE INC. EXHIBIT 10.8a AGREEMENT AND PLAN OF MERGER This AGREEMENT AND PLAN OF MERGER (the "Agreement") is entered into as of ___________, 1999, by an among NetIgnite, Inc., a Colorado corporation (the "Merged Corporation"), Perry Evans, the sole shareholder of the Merged Corporation (the "Sole Shareholder"), and Online System Services, Inc., a Colorado corporation (the "Surviving Corporation"). (The Merged and Surviving Corporations may be collectively referred to as "Constituent Corporations"). RECITALS The Board of Directors of the Surviving Corporation and the Board of Directors and the Sole Shareholder of the Merged Corporation, deeming it advisable for the mutual benefit of the Constituent Corporations and their respective shareholders that the Surviving Corporation acquire the Merged Corporation under the terms and conditions hereinafter set forth (the "Merger"), have approved this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements contained in this Agreement, the parties agree as follows: ARTICLE I Effective Date of the Merger The Effective Date of the Merger and of this agreement shall be the close of business on June 2, 1999 (the "Effective Date"). Upon the Effective Date of the Merger, the separate existences of the Constituent Corporations shall cease and the Constituent Corporations shall be merged into the Surviving Corporation, Online System Services, Inc., a Colorado corporation. ARTICLE II Articles of Incorporation The Articles of Incorporation of the Surviving Corporation shall be the Articles of Incorporation of the Surviving Corporation as the same shall be in effect on the Effective Date of the Merger. ARTICLE III Bylaws; Registered Office The Bylaws of the Surviving Corporation as of the Effective Date of the Merger shall be the Bylaws of the Surviving Corporation after the Merger. The registered office of the Surviving Corporation after the Merger shall be at 1800 Glenarm Place, Suite 700, Denver, Colorado 80202. 2 ARTICLE IV Directors and Officers The directors of the Surviving Corporation in office as of the date hereof shall remain the directors of the Surviving Corporation at and after the Effective Date of the Merger until their respective successors shall have been duly elected and qualified. Subject to the authority of the Board of Directors as provided by law and the Bylaws of the Surviving Corporation, the officers of the Surviving Corporation at the Effective Date of Merger shall remain the officers of the Surviving Corporation. The directors of the Merged Corporation and the officers of the Merged Corporation holding office on the Effective Date shall be deemed to have resigned effective as of the Effective Date. ARTICLE V Conversion of Shares in the Merger The manner of carrying the Merger into effect, and the manner and basis of converting the shares of the Constituent Corporations into shares of the Surviving Corporation are as follows: 5.01. Surviving Corporation's Common Stock. No shares of the Surviving Corporation's stock issued at the Effective Date shall be converted as a result of the Merger, but all such shares shall remain issued shares of the Surviving Corporation. 5.02. Merged Corporation's Common Stock. At the Effective Date each issued and outstanding share of the Merged Corporation's stock shall be automatically converted into 71,429 fully paid and nonassessable shares of Common Stock of the Surviving Corporation (the "Merger Shares"). ARTICLE VI Representations and Warranties 6.01 Representations and Warranties of the Merged Corporation. (a) Organization, Standing and Corporate Power. The Merged Corporation is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and has the requisite corporate power and authority to carry on its business as now being conducted. The Merged Corporation is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed (individually or in the aggregate) would not have a material adverse effect with respect to the Surviving Corporation. (b) Authority; Noncontravention. The Merged Corporation has all requisite corporate power and authority to enter into this Agreement and to consummate the 3 transactions contemplated by this Agreement. The execution and delivery of this Agreement by the Merged Corporation and the consummation by the Merged Corporation of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of the Merged Corporation and no other corporate action on the part of the Merged Corporation is necessary to authorize the execution and delivery of this Agreement or the consummation by the Merged Corporation of the transactions contemplated hereby. This Agreement has been duly executed and delivered by and constitutes a valid and binding obligation of the Merged Corporation, enforceable against the Merged Corporation in accordance with its terms. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions hereof will not (a) conflict with or result in any breach of any provision of the articles of incorporation or bylaws of the Merged Corporation, or (b) conflict with, or result in any breach or violation of, or constitute a default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration under (i) any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise or license applicable to the Merged Corporation or its properties or assets or (ii) any judgment, order, decree, statute, law, ordinance, rule, regulation or arbitration award applicable to the Merged Corporation or its properties or assets, or (c) result in the creation of any lien upon any of the properties or assets of the Merged Corporation. No consent, approval, order or authorization of, or registration, declaration or filing with, or notice to, any governmental entity is required by or with respect to the Merged Corporation or in connection with the execution and delivery of this Agreement by the Merged Corporation or the consummation by the Merged Corporation, as the case may be, of any of the transactions contemplated by this Agreement, except for (i) the filing with the SEC of such reports under the Securities Act of 1933, as amended (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act") as may be required in connection with this Agreement and the transactions contemplated hereby, (ii) the filing of the Articles of Merger with the Secretary of State of the State of Colorado and appropriate documents with the relevant authorities of other states in which the Company is qualified to do business, and (iii) such other consents, approvals, orders, authorizations, registrations, declarations, filings or notices as may be required under the "takeover" or "blue sky" laws of various states. (c) NetIgnite 2, LLC . The Merged Corporation has good, clear and marketable title to __ Units of NetIgnite 2, LLC (the "LLC"), free and clear of all liens. The Merged Corporation has not transferred or otherwise disposed of any interest in the LLC that it received upon the formation and organization of the LLC. 4 (d) Absence of Liabilities and Obligations. The Merged Corporation does not have any liabilities or obligations of any nature (whether known or unknown, accrued, absolute, contingent or otherwise). (e) Capitalization. Perry Evans is the sole shareholder of the Merged Corporation. There are no options, warrants, or any other rights obligating the Merged Corporation to issue, deliver or sell additional shares of capital stock or other equity securities of the Merged Corporation. 5 6.02 Representations and Warranties of the Surviving Corporation. (a) Organization, Standing and Corporate Power. The Surviving Corporation is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and has the requisite corporate power and authority to carry on its business as now being conducted. The Surviving Corporation is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed (individually or in the aggregate) would not have a material adverse effect with respect to the Merged Corporation. 6 (b) Authority; Noncontravention. The Surviving Corporation has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement by the Surviving Corporation and the consummation by the Surviving Corporation of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of the Surviving Corporation and no other corporate action on the part of the Surviving Corporation is necessary to authorize the execution and delivery of this Agreement or the consummation by the Surviving Corporation of the transactions contemplated hereby. This Agreement has been duly executed and delivered by and constitutes a valid and binding obligation of the Surviving Corporation, enforceable against it in accordance with its terms. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions hereof will not (a) conflict with or result in any breach of any provision of the articles of incorporation or bylaws of the Surviving Corporation, or (b) conflict with, or result in any breach or violation of, or constitute a default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration under (i) any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise or license applicable to the Surviving Corporation or its properties or assets or (ii) any judgment, order, decree, statute, law, ordinance, rule, regulation or arbitration award applicable to the Surviving Corporation or its properties or assets, or (c) result in the creation of any lien upon any of the properties or assets of the Surviving Corporation, other than, in the case of clauses (b) and (c), any such conflicts, breaches, violations, defaults, rights, losses or liens that individually or in the aggregate could not have a material adverse effect with respect to the Merged Corporation or could not prevent, hinder or materially delay the ability of the Merged Corporation to consummate the transactions contemplated by this Agreement. No consent, approval, order or authorization of, or registration, declaration or filing with, or notice to, any governmental entity is required by or with respect to the Surviving Corporation or in connection with the execution and delivery of this Agreement by the Surviving Corporation or the consummation by the Surviving Corporation, as the case may be, of any of the transactions contemplated by this Agreement, except for (i) the filing with the SEC of such reports under the Securities Act of 1933, as amended (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act") as may be required in connection with this Agreement and the transactions contemplated hereby, (ii) the filing of the Articles of Merger with the Secretaries of State of the State of Colorado and appropriate documents with the relevant authorities of other states in which the Company is qualified to do business, and (iii) such other consents, approvals, orders, authorizations, registrations, declarations, filings or notices as may be required under the "takeover" or "blue sky" laws of various states. 7 6.03 Representations and Warranties of the Sole Shareholder. The Sole Shareholder is the sole shareholder of the Merged Corporation. The Sole Shareholder has been given full access to information regarding the Surviving Corporation (including the opportunity to meet with the officers of the Surviving Corporation and to review all the documents that the Sole Shareholder may have requested) and has utilized such access to his satisfaction for the purpose of obtaining information necessary to make an informed investment decision. The Sole Shareholder has sufficient knowledge and experience in financial and business matters that the Sole Shareholder is capable of evaluating the merits and risks of receiving the Merger Shares. The Sole Shareholder understands that the receipt of the Shares is a speculative investment and involves a high degree of economic risk. The Merger Shares are being acquired for the Sole Shareholder's own account and for investment without the intention of reselling or redistributing the same, that no agreement has been made with others regarding the Merger Shares and that the Sole Shareholder's financial condition is such that it is not likely that it will be necessary to dispose of any of such Merger Shares in the foreseeable future. There are no options, warrants, or any other rights obligating the Merged Corporation to issue, deliver or sell additional shares of capital stock or other equity securities of the Merged Corporation. The Sole Shareholder is a resident of the State of Colorado. ARTICLE VII Effect of the Merger At the Effective Date of the Merger, the Surviving Corporation shall succeed to and shall possess and enjoy all the rights, privileges, immunities, powers and franchises, both of a public and private nature, of the Constituent Corporations, and all property, real, personal, and mixed, including patents, trademarks, tradenames, and all debts due to either of the Constituent Corporations on whatever account, for stock subscriptions as well as for all other things in action or all other rights belonging to either of said corporations; and all said property, rights, privileges, immunities, powers and franchises, and all and every other interest shall be thereafter the property of the Surviving Corporation as effectively as they were of the respective Constituent Corporations, and the title of any real estate vested by deed or otherwise in either of said Constituent Corporations shall not revert or be in any way impaired by reason of the Merger; provided, however, that all rights of creditors and all liens upon any property of either of said Constituent Corporations shall be preserved unimpaired, limited in lien to the property affected by such liens prior to the Effective Date of the Merger, and all debts, liabilities, and duties of said Constituent Corporations, respectively, shall thenceforth attach to the Surviving Corporation and may be enforced against it to the same extent as if said debts, liabilities, and duties had been incurred or contracted in the first instance by the Surviving Corporation. 8 ARTICLE VIII Accounting Matters The assets and liabilities of the Constituent Corporations as of the Effective Date of the Merger shall be taken up on the books of the Surviving Corporation at the amounts at which they were carried at that time on the books of the respective Constituent Corporations. The surplus of the Surviving Corporation after the Merger, including any surplus arising in the Merger, shall be available to be used for any lawful purposes for which surplus may be used. Accounting procedures and depreciation schedules and procedures of any Constituent Corporation may be converted to those procedures and schedules selected by the Surviving Corporation. ARTICLE IX Filing of Plan of Merger Upon adoption and approval of the Plan of Merger by the Board of Directors of the Surviving Corporation and the Board of Directors and Shareholders of the Merged Corporation, Articles of Merger shall be executed and delivered to the Secretary of State of the State of Colorado for filing as provided by the Colorado Business Corporation Act. The Constituent Corporations shall also cause to be performed all necessary acts within the State of Colorado and elsewhere to effectuate the Merger. ARTICLE X Registration of Parent Stock Within sixty (60) days after the Effective Date, the Surviving Corporation shall prepare and file a registration statement, covering the Merger Shares issued to the Sole Shareholder in accordance with Section 5.02 of this Agreement with the Securities and Exchange Commission (the "SEC") and use its best efforts to cause the Registration Statement to be declared effective under the Securities Act of 1933, as amended (the "Securities Act"), as promptly as practicable after its filing. The Registration Statement shall be on form SB-2, Form S-1, Form S-3 or such other form as is appropriate in order to register such Merger Shares with the SEC pursuant to section 5 of the Securities Act. The Surviving Corporation shall use its best efforts to cause the Registration Statement to be declared effective by the SEC as soon as possible following the filing thereof and shall use its best efforts to maintain the Registration Statement continually effective under the Securities Act for a period of two (2) years after the date on which the Registration Statement is declared effective by the SEC. Notwithstanding the Registration Statement, if in connection with a public offering of the Surviving Corporation's stock, the Surviving Corporation, an underwriter, the National Association of Dealers, Inc., or the Nasdaq Stock Market requests certain holders of the Surviving Corporation's outstanding stock to lock-up certain of the Surviving Corporation's stock or any portion thereof, the Sole Shareholder agrees that beginning on the date of the closing of such public offering and continuing for a period of six (6) months thereafter, the Sole Shareholder shall not, without consent of the requesting party, offer, sell, contract to sell, pledge, hypothecate, or otherwise dispose of any shares of the Surviving Corporation's stock. ARTICLE XI General Provisions 9 The respective representations and warranties of each of the parties to this Agreement shall not be deemed to be waived or otherwise affected by any investigation made by the other parties to this Agreement. The representations of the Merged Corporation and the Surviving Corporation contained in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Merger. Neither party may assign this Agreement or delegate the rights and responsibilities hereunder without the other party's prior written consent. No amendment to this Agreement or waiver of the rights or obligations of either party shall be effective unless in writing signed by the parties. This Agreement is governed by the laws of the State of Colorado without regard to conflicts of laws principles. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. This Agreement contains the entire agreement and understanding of the parties concerning the subject matter of this Agreement. This Agreement may be signed by facsimile and in counterparts. Executed as of the date first written above. ONLINE SYSTEM SERVICES, INC. By /s/ R. Steven Adams ------------------------------- R. Steven Adams, President and Chief Executive Officer NETIGNITE, INC. By /s/ Perry Evans ------------------------------- Perry Evans, President SOLE SHAREHOLDER (as to Section 6.03 only) /s/ Perry Evans --------------------------------- Perry Evans 10 JOINT WRITTEN ACTION BY THE SOLE DIRECTOR AND THE SOLE SHAREHOLDER OF NETIGNITE, INC. The undersigned, being the sole shareholder and the sole director of NetIgnite, Inc., a Colorado corporation ("Corporation"), acting pursuant to Colorado Statutes Sections 7-107-104 and 7-108-202, hereby adopt the following resolutions effective _________, 1999. RESOLVED, that the Plan of Merger dated ____________, 1999, which is attached hereto and hereby incorporated herein, for the merger of NetIgnite, Inc., with and into Online System Services, Inc., be, and it hereby is approved and adopted. FURTHER RESOLVED, that the President of the Corporation be, and hereby is, authorized and directed to execute Articles of Merger and to cause such Articles of Merger to be filed in the Colorado Secretary of State. FURTHER RESOLVED, that the officers of the Corporation be, and they hereby are, authorized and directed to execute such documents and to take such other actions as they, acting singly or jointly, deem necessary or desirable to effectuate the foregoing resolutions and the Plan of Merger approved in the foregoing resolutions. Executed as of the date first written above. /s/ Perry Evans --------------------------------- Perry Evans Sole Shareholder and Sole Director 11 EX-27 3 FINANCIAL DATA SCHEDULE
5 3-MOS 6-MOS DEC-31-1999 DEC-31-1999 APR-01-1999 JAN-01-1999 JUN-30-1999 JUN-30-1999 3,934,761 3,934,761 0 0 85,900 85,900 27,507 27,507 0 0 261,033 261,033 3,617,395 3,617,395 1,205,734 1,205,734 21,409,585 21,409,585 3,471,795 3,471,795 61,714 61,714 0 0 3,489,670 3,489,670 45,006,948 45,006,948 (30,620,542) (30,620,542) 21,409,585 21,409,585 192,934 481,216 192,934 481,216 340,084 541,318 0 0 2,662,784 5,350,850 0 0 0 0 (2,878,293) (5,455,118) 0 0 0 0 0 0 0 0 (186,719) (4,391,295) (3,065,012) (9,846,413) (0.52) (1.76) (0.52) (1.76)
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