-----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, QiPqzHFrpJNYM0JuidO5odAH5G+G3WLyQSp3wvwDayUkctaSdh6f5eX08VqO3zpu VYwi1pK00oFtzOguYU+hSA== 0001045969-99-000526.txt : 19990716 0001045969-99-000526.hdr.sgml : 19990716 ACCESSION NUMBER: 0001045969-99-000526 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990630 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990715 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: 8-K SEC ACT: SEC FILE NUMBER: 333-71503 FILM NUMBER: 99664882 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 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (date of earliest event reported): June 30, 1999 ------------- ONLINE SYSTEM SERVICES, INC. ---------------------------- (Exact name of registrant as specified in its charter) Colorado -------- (State or other jurisdiction of incorporation) 0-28462 84-1293864 ------- ---------- (Commission File Number) (IRS Employer Identification No.) 1800 Glenarm Place, Suite 800, Denver, CO 80202 ------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 296-9200 -------------- N/A -------------------------------------- (Former name or former address, if changed since last report) Item 2. ACQUISITION OR DISPOSITION OF ASSETS. On June 30, 1999, Online System Services, Inc. ("Parent"), through its wholly-owned subsidiary, Durand Acquisition Corp. ("Sub"), completed its acquisition of all of the assets of Durand Communications, Inc. ("Company"), a California corporation. The transaction was effected by an Agreement and Plan of Merger dated as of March 19, 1998 (the "Agreement") incorporated by reference under Exhibit 2.1 of this Form 8-K. The Agreement was approved by the Boards of Directors and shareholders of Parent, Sub, and Company. Under the terms of the Agreement, each shareholder of Company who did not exercise dissenter's rights received 2.46 shares of common stock of the Parent ("Parent Common Stock") for each share of common stock, no par value per share, of the Company ("Company Common Stock"), issued and outstanding immediately prior to the Effective Time of the Agreement, other than shares of Company Common Stock owned, directly or indirectly, by the Company or any subsidiary of the Company or by Parent, Sub or any subsidiary of Parent. The shareholders of Company received a total of 955,649 (assuming no exercise of dissenter's rights) shares of Parent Common Stock under the terms of the Agreement. The shares issued under the terms of the Agreement were previously authorized but unissued shares of the Parent. At the time of the execution of the Agreement, there were no material relationships between the Parent and any shareholders of the Company. Pending the completion of the acquisition, one of the shareholders and officers of Company, Andre Durand, was elected by the Board of Directors of Parent as an officer of Parent. Item 7. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial Statements of Business Acquired. Auidited financial statements for the years ended December 31, 1997 and 1996 are being filed herewith. Audited financial statements of Durand Communications, Inc. for the year ended December 31, 1998 will be filed with the pro forma financial information as soon as practicable, but not later than September 10, 1999. (b) Pro Forma Financial Information. The required pro forma financial information relative to the acquisition is currently not available. The pro forma financial information will be filed as soon as practicable, but not later than September 10, 1999. (c) Exhibits: 2.1 Agreement and Plan of Merger dated March 19, 1998 among OSS, Durand Acquisition Corporation and Durand Communications, Inc. (1) - ----------------------------- (1) Filed with the Form 10-KSB Annual Report for the year ended December 31, 1997, Commission File No. 0-28462. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: July 14, 1999 ONLINE SYSTEM SERVICES, INC. By /s/ Lindley S. Branson -------------------------- Lindley S. Branson Its: Executive Vice-President/ General Counsel INDEX TO FINANCIAL STATEMENTS Durand Communications, Inc.
Page No. ------- Independent Auditors' Report F-2 Balance Sheets as of December 31, 1997 and 1996 F-4 Statements of Operations for the years ended December 31, 1997 and 1996 F-5 Statements of Changes in Stockholders' Deficit for the years ended December 31, 1997 and 1996 F-6 Statements of Cash Flows for the years ended December 31, 1997 and 1996 F-7 Notes to Financial Statements for the years ended December 31, 1997 and 1996 F-9
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2 Independent Auditors' Report The Board of Directors Durand Communications, Inc.: We have audited the accompanying balance sheets of Durand Communications, Inc. as of December 31, 1997 and 1996, and the related statements of operations, changes in stockholders' deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Durand Communications, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 1 to the financial statements, the Company has suffered recurring losses from operations and has working capital and stockholders' deficiencies which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG Peat Marwick LLP Los Angeles, California March 19, 1998 F-3 DURAND COMMUNICATIONS, INC. Balance Sheets December 31, 1997 and 1996
Assets 1997 1996 ----------- ------------ Current assets: Cash $ 86,137 25,698 Accounts receivable, net of allowance for doubtful accounts of $3,125 at December 31, 1996 -- 4,000 Other current assets 10,637 8,445 ----------- ------------ Total current assets 96,774 38,143 Property and equipment, net (note 2 and 4) 89,083 87,060 Intangible assets, net (note 3) 50,783 19,851 ----------- ------------ $ 236,640 145,054 =========== ============ Liabilities and Stockholders' Deficit Current liabilities: Current portion of convertible debentures (note 4) $ 727,218 200,000 Current portion of long-term debt and capital leases (note 4) 80,189 25,911 Accounts payable 423,521 254,998 Accrued expenses 189,110 49,651 Notes payable to related parties (note 5) 87,549 -- ----------- ------------ Total current liabilities 1,507,587 530,560 Convertible debentures, less current portion (note 4) 385,853 -- Long-term debt and capital leases, less current portion (note 4) 34,686 20,192 Other liabilities 23,035 -- ----------- ------------ Total liabilities 1,951,161 550,752 ----------- ------------ Stockholders' deficit (notes 4, 8, 9 and 10): Common stock, no par value. Authorized 25,000,000 shares; issued and outstanding 309,152 and 249,451 shares at December 31, 1997 and 1996, respectively 5,123,666 3,412,544 Treasury stock, 50 shares at December 31, 1997 and 1996 (5,000) (5,000) Accumulated deficit (6,833,187) (3,813,242) ----------- ------------ Total stockholders' deficit (1,714,521) (405,698) Commitments, contingencies and subsequent events (notes 7 and 12) ----------- ------------ $ 236,640 145,054 =========== ============ See accompanying notes to financial statements.
F-4 DURAND COMMUNICATIONS, INC. Statements of Operations Years ended December 31, 1997 and 1996
1997 1996 ------------- ------------ Revenues (note 1): License revenue $ 13,180 250,000 Product revenue 37,514 210,485 Service revenue 13,014 10,107 ------------- ------------ Total revenues 63,708 470,592 ------------- ------------ Costs and expenses: Costs of revenues 11,846 28,205 Research and development 1,590,274 501,609 Selling, general and administrative 1,077,207 1,564,040 ------------- ------------ Total costs and expenses 2,679,327 2,093,854 ------------- ------------ Loss from operations (2,615,619) (1,623,262) Gain on sale of investment (note 6) -- 200,000 Interest expense, including debt conversion costs (428,778) (23,765) Other income (expense), net 24,452 (14,149) ------------- ------------ Net loss $ (3,019,945) (1,461,176) ============= ============ Basic and diluted loss per share $ (11.04) (6.00) ============= ============ Weighted-average shares outstanding 273,587 243,671 ============= ============ See accompanying notes to financial statements.
F-5 DURAND COMMUNICATIONS, INC. Statements of Changes in Stockholders' Deficit Years ended December 31, 1997 and 1996
Total Common stock Treasury stock Accumulated stockholders' ------------------------------------------------- Shares Amount Shares Amount deficit deficit ------------------------------------------------------------------------------- Balance at December 31, 1995 234,329 2,015,138 50 (5,000) (2,352,066) (341,928) Sale of common stock 15,122 1,241,154 -- -- -- 1,241,154 Stock option compensation -- 156,252 -- -- -- 156,252 (note 10) Net loss -- -- -- -- (1,41,176) (1,461,176) ------------------------------------------------------------------------------- Balance at December 31, 1996 249,451 3,412,544 50 (5,000) (3,813,242) (405,698) Sale of common stock, net 44,272 883,765 -- -- -- 883,765 Conversion of debt to common stock 9,934 462,882 -- -- -- 462,882 Common stock issued as dividends 5,495 -- -- -- -- -- Warrants issued with convertible debt -- 106,185 -- -- -- 106,185 Options issued to settle compensation expense -- 18,600 -- -- -- 18,600 Capital contribution to settle compensation expense (note 8) -- 83,032 -- -- -- 83,032 Stock option compensation (note 10) -- 156,658 -- -- -- 156,658 Net loss -- -- -- -- (3,019,945) (3,019,945) ------------------------------------------------------------------------------- Balance at December 31, 1997 309,152 5,123,666 50 (5,000) (6,833,187) (1,714,521) ===============================================================================
See accompanying notes to financial statements F-6 DURAND COMMUNICATIONS, INC. Statements of Cash Flows Years ended December 31, 1997 and 1996
1997 1996 ------------- ------------ Cash flows from operating activities: Net loss $ (3,019,945) (1,461,176) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 73,054 73,488 Induced debt conversion costs 182,945 -- Interest expense related to warrants issued with convertible debt 57,779 -- Compensation costs settled with options 18,600 -- Compensation costs settled with warrants 83,032 -- Amortization of deferred compensation 156,658 156,252 Provision for doubtful accounts -- 3,125 Changes in assets and liabilities: Accounts receivable 4,000 (1,945) Other current assets (2,192) 3,212 Accounts payable and accrued expenses 290,710 (155,460) ------------- ----------- Net cash used in operating activities (2,155,359) (1,382,504) ------------- ----------- Cash flows used in investing activities: Purchase of intangible assets (54,213) (26,100) Purchase of property and equipment (13,958) (18,729) ------------- ----------- Net cash used in investing activities (68,171) (44,829) ------------- ----------- Cash flows from financing activities: Repayment of long-term debt and capital leases (29,129) (6,523) Repayment of convertible debentures (220,000) -- Proceeds from issuance of common stock 904,925 1,241,154 Proceeds from issuance of convertible debentures 1,480,624 200,000 Proceeds from issuance of long-term debt 147,549 18,400 ------------- ----------- Net cash provided by financing activities 2,283,969 1,453,031 ------------- ----------- Net increase in cash 60,439 25,698 Cash at beginning of year 25,698 -- ------------- ----------- Cash at end of year $ 86,137 25,698 ============= ===========
(Continued) F-7 DURAND COMMUNICATIONS, INC. Statements of Cash Flows, Continued
1997 1996 ---------- --------- Supplemental disclosure of cash flow information: Cash paid for: Interest $ 5,064 833 State income taxes 2,400 2,400 ========== ========= Supplemental schedule of noncash activities: Capital lease obligations incurred in purchasing equipment $ 37,901 14,852 Conversion of debt to equity 279,938 -- Accrued convertible debt discount costs to be settled with stock 19,147 -- Warrants issued with convertible debt 48,406 -- Accrued stock issue costs to be settled with stock $ 21,160 -- ========== =========
See accompanying notes to financial statements. F-8 DURAND COMMUNICATIONS, INC. Notes to Financial Statements December 31, 1997 and 1996 (1) Summary of Significant Accounting Policies Nature of Operations Durand Communications, Inc., the holding company, and Durand Communications Network, Inc., its wholly owned operating subsidiary, collectively referred to herein as Durand or the Company, were incorporated in the state of California in August 1993 and commenced operations in December 1993 for the purpose of marketing intranet and internet working tools, applications and services for use by the on-line community. On April 24, 1997, Durand Communications Network, Inc. was merged into Durand Communications, Inc. All significant intercompany transactions have been eliminated in consolidation up through the date of merger. The Company commenced marketing its initial product, MindWire NT Intranet toolkit program, in August 1995, and commenced marketing its newest product, Community Ware Internet services and tools program, in March 1997. The Company's target markets are businesses, associations, schools, educational organizations and social organizations which may benefit from using the Internet and "on-line community" to facilitate and promote communications, information sharing and commerce amongst various groups (each an on-line community). Going Concern The accompanying financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements, the Company had working capital and stockholders' deficiencies of $1,401,813 and $1,714,521 as of December 31, 1997, respectively, and incurred a net loss of $3,019,945 and $1,461,176 during the years ended December 31, 1997 and 1996, respectively. The Company has historically relied upon private placements of its stock and issuances of debt to generate funds to meet its operating needs and plans to continue pursuing financing in this manner during the next year. However, there are no assurances that such financing will be available when and as needed to satisfy current obligations. Revenue Recognition The Company recognizes revenue from product sales upon shipment to the customer. Service revenue primarily consists of subscriber fees from Community Ware, which are recognized ratably over the service period, and support fees, which are recognized when earned. The license revenues are recognized when earned, in accordance with the contractual provisions. The Company had one customer in South America which comprised approximately 53% of fiscal 1996 revenues. Intangible Assets Intangible assets consist of capitalized trademark expenses, organizational expenses and software license fees, which are amortized on a straight-line basis over their estimated useful lives as follows: Trademark 3 years Organizational costs 5 years Software license fees 1 to 5 years F-9 Property and Equipment Property and equipment are stated at cost. Equipment under capital lease is stated at the present value of the minimum lease payments. Depreciation and amortization of property and equipment is computed using the straight-line method over the estimated useful lives of the related assets as follows: Computers and office equipment 3 to 7 years Furniture and fixtures 7 years Property and equipment held under capital lease are amortized straight-line over the estimated useful life of the asset. Research and Development and Advertising Research and development and advertising costs are expensed as incurred. Computer Software Costs Pursuant to Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," the Company is to capitalize certain software development costs and production costs once technological feasibility has been achieved. Software development costs incurred prior to achieving technological feasibility are expensed as incurred. Technological feasibility of the Company's products is generally established at the beta phase. Costs incurred subsequent to achieving technological feasibility have historically been minor and, accordingly, have not been capitalized. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of On January 1, 1996, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121). This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted operating cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of SFAS No. 121 did not have a material impact on the financial statements of the Company. Stock Option Plan Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock- based awards on the date of F-10 grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income disclosures for employee stock option grants made in 1996 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. Reporting of Comprehensive Income In June 1997, the Financial Accounting Standards Board issued SFAS 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. This statement requires that an enterprise classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. This statement is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company will adopt SFAS No. 130 in 1998. Business Segments and Related Information The Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131), in June 1997. SFAS No. 131 establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires enterprises to report selected information about operating segments in interim financial reports issued to shareholders. Is also establishes standards for related disclosure about products and services, geographic areas and major customers. It replaces the "industry segment" concept of SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," with a "management approach" concept as the basis for identifying reportable segments. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997. The Company will adopt SFAS No. 131 in 1998. Loss Per Share On December 31, 1997, the Company retroactively adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128) which replaces the presentation of primary and fully diluted earnings (loss) per share with a presentation of basic and diluted earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted earnings (loss) per share is computed is computed similarly to fully diluted earnings (loss) per share pursuant to Accounting Principles Board (APB) Opinion No. 15. The following table presents contingently issuable shares, options and warrants to purchase shares of common stock that were outstanding during 1997 and 1996 which were not included in the computation of diluted loss per share because the impact would have been antidilutive:
1997 1996 ------------ ------------ Options 35,104 17,180 Warrants 28,671 7,050 ============ ============
Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of assets and liabilities at the balance sheet date and the reporting of revenues and expenses during the reporting periods to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. F-11 (2) Property and Equipment Property and equipment balances, recorded at cost, at December 31, 1997 and 1996 are summarized as follows: 1997 1996 -------------------- -------------------- Computers and office equipment $ 228,065 176,896 Furniture and fixtures 11,233 10,543 -------------------- -------------------- 239,298 187,439 Less accumulated depreciation and amortization (150,215) (100,379) -------------------- -------------------- $ 89,083 87,060 ==================== ====================
At December 31, 1997 and 1996, the amount of computer equipment under capital lease included in property and equipment was $62,203 and $24,302 , respectively. The related accumulated amortization of equipment under capital lease was $28,153 and $19,577 at December 31, 1997 and 1996, respectively. (3) Intangible Assets Intangible assets balances at December 31, 1997 and 1996 are summarized as follows: 1997 1996 -------------------- -------------------- Software licenses $ 65,613 40,000 Organizational costs 10,343 10,343 Trademark 1,874 1,874 -------------------- -------------------- 77,830 52,217 Less accumulated amortization (27,047) (32,366) -------------------- -------------------- $ 50,783 19,851 ==================== ====================
The Company records software licenses at the respective cost to acquire the license. Legal fees incurred during the incorporation of the Company and to acquire the MindWire NT trademark have been capitalized as organizational costs and trademark, respectively. In July 1997, the Company acquired all of the assets of Electric Minds, including the trademarks, application and systems content, for $54,213. The intangible assets acquired from Electric Minds are included in software licenses at December 31, 1997. (4) Convertible Debentures, Long-term Debt and Capital Lease Obligations Convertible debentures consist of the following:
December 31 --------------------------------------------- 1997 1996 -------------------- -------------------- 14% convertible debentures, payable on demand, interest payable monthly and convertible into common stock at holders' option at a price determined by the first closing of the Company's next private placement equity financing $ 225,000 --
F-12 9.5% to 12% convertible debentures, due at various dates from May 19, 1998 through July 11, 1999, accrued interest and principal payable at maturity and convertible into common stock at holder's option at a price determined by the first closing of the Company's next private placement equity financing 888,071 -- 12% convertible debentures, payable on demand, interest payable monthly and convertible into common stock at the holders' option at a price of $107 per share -- 200,000 -------------------- -------------------- 1,113,071 200,000 Less current portion 727,218 200,000 -------------------- -------------------- $ 385,853 -- ==================== ====================
Aggregate maturities of convertible debentures as of December 31, 1997 are $727,218 in 1998 and $385,853 in 1999. Long-term debt and capital lease obligations consist of the following:
December 31 --------------------------------------------- 1997 1996 -------------------- -------------------- Capital lease obligations, secured by equipment, interest rates ranging from 14% to 16.8%, interest and principal payable in monthly installments of $1,829 through September 2000 $ 44,718 15,029 10% notes payable, due on demand, accrued interest and principal paid at maturity -- 18,400 10% notes payable, due at various dates from March 18, 1998 through May 19, 1998, accrued interest and principal payable at maturity 60,000 -- 14.55% notes payable, secured by equipment, interest and principal payment of $350 payable monthly through December 2000 10,157 12,674 -------------------- -------------------- 114,875 46,103 Less current portion 80,189 25,911 -------------------- -------------------- $ 34,686 20,192 ==================== ====================
F-13 Aggregate maturities of long-term debt and capital lease obligations for each of the five years subsequent to December 31, 1997 are as follows:
Capital lease Long-term debt obligation Total -------------------- -------------------- ------------------- Year ending December 31: 1998 $ 23,133 62,909 86,042 1999 19,980 3,363 23,343 2000 11,370 3,885 15,255 -------------------- -------------------- ------------------- Total maturities 54,483 $ 70,157 124,640 ==================== =================== Less amounts representing interest 9,765 -------------------- Present value of minimum lease payments 44,718 Less current installments of obligations under capital leases 17,280 -------------------- Obligations under capital leases, excluding current installments $ 27,438 ====================
For tyears ended December 31, 1997 and 1996, interest expense relating to convertible notes and notes payable aggregated $41,177 and $18,168, respectively. During 1997, the Company issued $180,000 of 12% convertible debentures which were convertible into common stock of the Company at $85.60 per share or the Company's next private placement value. In December 1997, the conversion price was reduced to $20 per share as a condition of an agreement to raise equity financing from the holder. As a result, the Company recorded the fair value of the incremental additional shares issued upon conversion of $182,944, which is included in "interest expense" in the accompanying statement of operations for 1997. The $180,000 12% convertible debentures were converted into 9,000 shares of common stock in December 1997. Additionally, $100,000 of 12% convertible debentures were converted into 934 shares of common stock, net of related fees, in 1997. In 1997, the maturity dates of the remaining $100,000 12% convertible debentures outstanding at December 31, 1996 were extended to July 1998. Subsequent to December 31, 1997, $912,267 of 10% and 12% convertible debentures were converted into 39,664 shares of common stock. (5) Notes Payable to Related Parties In February 1997, the Company issued a $110,000 10% note payable to a company which is owned by certain shareholders of the Company. The note is payable upon demand and $64,395 was outstanding at December 31, 1997. In December 1997, the Company issued a $11,154 9.5% note payable due March 18, 1998 to a former employee of the Company under a severance agreement. Also in December 1997, the Company issued a $12,000 10% note payable due May 11, 1998 to CompuLearning Systems (d/b/a Electronic University Network), which the Company acquired in January 1998 (note 11). (6) Investment in Casino World Holdings At December 31, 1996, the Company owned 10% of the outstanding stock of Casino World Holdings (Casino World), a privately held company. The investment was assigned a zero value upon acquisition since Casino World was a relatively new entity with no substantial operations at the time and the product sold by the Company to obtain the investment in Casino World F-14 was in the beta stage and also had no independently determinable fair value. During March 1997, the Company sold half of its investment in Casino World for $200,000 and recognized the related gain on the sale of the investment. Casino World has first right of refusal to purchase the Company's remaining investment in Casino World for $1.5 million. (7) Operating Leases The Company has a noncancelable operating lease for its main office space through June 30, 1998 with a monthly payment of $2,880 or $17,280 through the end of the lease. All other operating leases are month-to-month arrangements. Rent expense amounted to $77,935 and $80,970 during the years ended December 31, 1997 and 1996, respectively. (8) Stockholders' Equity During the years ended December 31, 1997 and 1996, the Company sold 43,468 and 15,122 shares of common stock, respectively, through private placement offerings which generated proceeds of $904,925 and $1,241,154, respectively. The Company issued 804 shares of common stock as payment for stock issuance costs related to the 1997 private placements. There were no stock issuance costs incurred in 1996. On March 25, 1997, the Company issued 776 shares of common stock to a founder and former employee of the Company as part of a severance package. The shares were given to the employee from the shares owned by the president of the Company. As a result, $83,032 was recognized as a charge to earnings and a capital contribution from the president to the Company based upon the estimated market value of the stock on the date of issuance. The Company has an agreement with two directors, whereby their original stock purchase agreement contains certain anti-dilution provisions. Common stock is issued in the form of a stock dividend under these antidilution provisions. As a result, the Company issued 5,495 shares of common stock as dividends to the directors during the year ended December 31, 1997. The Company also has agreements with two shareholders, whereby their original stock purchase agreements contain price protection provisions. At December 31, 1997, the Company was required to distribute 13,062 additional shares to these shareholders under these price protection provisions, which were distributed in March 1998. The Company issued 2,000 shares of common stock in February 1998, at an estimated market price of $23 per share, as payment of costs of raising capital in 1997. The Company accrued the value of the shares to be issued at December 31, 1997 and allocated the fair value of the shares pro rata among the debt and equity raised. As a result, $21,160 was recorded as stock issuance costs, $19,147 as a discount of convertible debt and $5,693 as interest expense. (9) Warrants On December 4, 1996, the Company granted 7,050 warrants to purchase an equivalent number of shares of common stock in connection with the placement of $110,000 of 10% notes payable. The warrants were exercisable at $120 per share until December 4, 1997. The fair value of the warrants on the date of the grant was estimated to be $0 using the minimum value option-pricing model with the following assumptions: dividend yield of 0%; risk-free interest rate of 5.41%; and an expected life of one year. As of December 4, 1997, these warrants had not been exercised and expired. In June 1997, the Company granted 1,580 options and 3,271 warrants to purchase an equivalent number of shares of common stock in connection with the placement of $180,000 of 12% convertible debentures. The options are exercisable at $58.85 per share, 1,168 of the warrants are exercisable at $107 per share and 2,103 of the warrants are exercisable at $85.60 per share until June 19, 1999. The fair value of the options and warrants on the date of grant was estimated to be $0 using the minimum value option- pricing model with the following assumptions: dividend yield of 0%; risk- free interest rate of 6.04%; and an expected life of two years. On December 26, 1997, as part of an agreement to raise equity financing, the Company repriced the options and warrants to $25 per share, the then current market value, and issued an additional 5,500 warrants to purchase an equivalent number of shares of common stock exercisable at $25 per share. The debentures were converted into common stock in December 1997 and the related fair value of the options and warrants was recorded as stock issuance costs. The weighted-average fair value of the options and warrants on December 26, 1997 was estimated to be $3.40 per option/warrant using the Minimum Value option-pricing model with the following weighted-average assumptions: dividend yield of 0%; risk-free F-15 interest rate of 6.04%; and an expected life of 4.9 years. The fair value of the repriced options and warrants and additional 5,500 warrants granted of $35,424 was recorded as stock issuance costs in the accompanying financial statements. On August 12, 1997, the Company granted 1,500 warrants to a founder and former employee to purchase an equivalent number of shares of common stock in connection with a severance agreement. The warrants are exercisable at $15.00 per share until August 12, 2000. The fair value of the warrants on the date of grant was estimated to be $12.40 for each warrant using the minimum value option-pricing model with the following assumptions: dividend yield of 0%; risk-free interest rate of 5.90%; and an expected life of three years. As a result, the Company recognized $18,600 of compensation expense during the year ended December 31, 1997 related to these warrants. On September 8, 1997, the Company granted 4,000 warrants to purchase an equivalent number of shares of common stock in connection with the placement of $220,000 of 14% promissory notes payable. The warrants are exercisable at $16.25 per share until September 7, 2004. The fair value of the warrants on the date of grant was estimated to be $14.32 for each warrant using the minimum value option-pricing model with the following assumptions: dividend yield of 0%; risk-free interest rate of 6.08%; and an expected life of seven years. The debt was repaid in 1997 and the Company recognized $48,097 of interest expense related to the warrants during the year ended December 31, 1997. During December 1997, the Company granted 11,400 warrants to purchase an equivalent number of shares of common stock in connection with the placement of $285,000 of 9.5% convertible debentures. The warrants are exercisable at $25 per share until December 2002. The fair value of the warrants on the date of grant was estimated to be $6.40 for each warrant using the minimum value option-pricing model with the following assumptions: dividend yield of 0%; risk-free interest rate of 6%; and an expected life of five years. As a result, the Company recognized an additional $9,136 of related interest expense during the year ended December 31, 1997 and had an unamortized convertible debt discount of $48,406 at December 31, 1997. (10) Stock Options In August 1996, the Board of Directors adopted the 1996 Limited Stock Option Plan and the 1996 Stock Option Plan (the Plans) which reserved 8,200 and 9,800 shares of the Company's common stock, respectively, for issuance to directors, officers, employees and consultants as stock awards or as stock options. During 1997, 5,100 and 6,000 stock options were granted under the respective Plans, at an exercise price below the estimated market price of the Company's stock on date of grant. As a result, $45,050 of compensation expense was recognized for the year ended December 31, 1997 using the intrinsic value method. At December 31, 1997, unamortized compensation expense related to these option grants was $28,450. In addition to the Plans, the Company granted 12,000 options to members of the Board of Directors in September 1997 at an exercise price of $25 per share, the estimated fair value of the stock on the date of grant. The Company also issued 11,680 nonqualified stock options to a key employee under an agreement dated July 17, 1996, at an exercise price below the estimated market price of the Company's stock on date of grant. As a result, compensation expense of $111,608 and $156,252 was recognized during the years ended December 31, 1997 and 1996, respectively. Effective September 4, 1997, these options were repriced from $64 per share to $25 per share, the estimated fair value of the stock on the date of repricing. On December 5, 1997, the unvested portion of these options was canceled upon the employee's termination. The remaining 3,504 vested options were outstanding and exercisable at December 31, 1997. In 1997, the Company also granted 3,000 options as payment of stock issuance costs. The options are exercisable at $25 per share until December 2000. The fair value of the options on the date of grant was estimated to be $4.06 per option using the minimum value option-pricing model with the following assumptions: dividend yield of 0%; risk-free interest rate of 6%; and an expected life of three years. As a result, the Company recorded stock issuance costs during the year ended December 31, 1997. The weighted-average fair value of stock options granted during 1996 was $59.95 per share on the date of grant using the minimum value option- pricing model with the following weighted average assumptions: expected dividend yield of 0%, risk-free interest rate of 6.59% and an expected life of approximately 4.75 years. F-16 The weighted-average fair value of stock options granted during 1997 was $14.85 per share on the date of grant using the minimum value option- pricing model with the following weighted average assumptions: expected dividend yield of 0%, risk-free interest rate of 6.03% and an expected life of approximately 10 years. The Company applies APB Opinion No. 25 in accounting for stock options granted to employees and directors. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss would have been increased to the pro forma amounts indicated below: 1997 1996 -------------------- -------------------- Net loss - as reported $ (3,019,945) (1,461,176) Net loss - pro forma (3,231,594) (1,522,784) ==================== ====================
The following is a summary of stock option activity:
Weighted average Number of shares exercise price -------------------- -------------------- Balance at December 31, 1995 5,500 $ 17.27 Granted 11,680 64.00 ==================== Balance at December 31, 1996 17,180 49.04 Granted 26,100 22.52 Canceled (8,176) 64.00 -------------------- Balance at December 31, 1997 35,104 21.70 ==================== ====================
The following table summarizes information about shares under option at December 31, 1997:
Weighted-average remaining Weighted Weighted Range of exercise contractual average average prices Number outstanding life exercise price Number exercisable exercise price - ------------------ ------------------ ------------------ ----------------- ------------------ ------------------ $ 10.59 to 21.25 15,350 8.99 years $ 16.22 10,020 $ 14.39 25.00 to 40.00 19,754 7.01 years 25.95 19,754 25.95 ------------------ ------------------ 35,104 21.70 29,774 ================== ================= ================== ==================
(11) Income Taxes Income tax expense for the years ended December 31, 1997 and 1996 represents the California state minimum franchise tax of $2,400 and is included in selling, general and administrative expenses in the accompanying statements of operations. The Company has no items which give rise to deferred tax assets or liabilities other than potential future benefits from tax loss carryforwards. Management has determined that it is more likely than not that any potential benefit from these tax loss carryforwards will not be realized through anticipated profitable operations. Such potential future benefits have been fully reserved. F-17 As of December 31, 1997, the Company has approximately $5,515,000 of net operating loss carryforwards available for Federal and state income tax purposes, respectively, which expire in 1999 through 2012. The ultimate realization of the net operating loss carryforwards may be limited by Section 382 of the Internal Revenue Code in the event of a change of control. (12) Subsequent Events In January 1998, the Company acquired 100% of the outstanding stock of CompuLearning Systems (d/b/a Electronic University Network) in exchange for 20,253 shares of the Company's common stock valued at $25 per share, the estimated market price of the Company's stock on date of acquisition, or $506,325. The acquisition of Electronic University Network will be accounted for using the purchase method. Electronic University Network's technology will be utilized by the Company in upcoming product releases. On March 19, 1998, the Company signed an agreement to merge with Online Systems Services, Inc. (OSS), whereby OSS would acquire all of the outstanding common stock of the Company, subject to shareholder approval. OSS develops, markets and supports products and services that enable broadband communication companies to provide high speed access to their customers. F-18 -----END PRIVACY-ENHANCED MESSAGE-----