<PAGE>
FORM 10-QSB - Quarterly
Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of l934.
For the period ended June 30, 1996.
--------------
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from _________ to _________.
Commission File Number 0-28462.
-------
ONLINE SYSTEM SERVICES, INC.
- - ----------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1293864
- - ----------------------------------------------------------------
(State or other jurisdiction I.R.S. Employer
of incorporation or organization Identification No.)
1800 GLENARM PLACE, SUITE 800, DENVER, CO 80202
- - -----------------------------------------------------
(Address of principal executive offices) (Zipcode)
(303)296-9200
- - -------------
(Registrant's telephone number, including area code)
Not Applicable
- - --------------
Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[_] YES [X] NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 9, 1996, Registrant had 3,072,245 shares of common stock, No
Par Value, outstanding.
1
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ONLINE SYSTEM SERVICES, INC.
INDEX
-----
Page
----
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Balance Sheets as of June 30, 1996 (Unaudited)
and December 31, 1995. 3,4
Unaudited Statements of Operations, three months
and six months ended June 30, 1996 and 1995 5
Unaudited Statements of Stockholders' Equity,
six months ended June 30, 1996 6
Unaudited Statements of Cash Flows, three months
and six months ended June 30, 1996 and 1995 7,8
Notes to Financial Statements (unaudited) 9-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15-17
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
2
<PAGE>
PART I - FINANCIAL INFORMATION
- - ------------------------------
Item 1. Financial Statements
ONLINE SYSTEM SERVICES, INC.
BALANCE SHEETS
June 30, December 31,
1996 1995
------------ ------------
(unaudited)
ASSETS
- - ------
Current assets:
Cash and cash equivalents $ 7,134,634 $ 25,241
Accounts receivable, net (Note 1) 217,496 98,282
Prepaid software inventory (Note 11) 101,975 ---
Prepaid expense 13,493 5,000
Interest receivable 23,001 ---
------------ ------------
Total current assets 7,490,599 128,523
------------ ------------
Equipment, net (Note 2) 242,173 97,215
------------ ------------
Other assets
Deposits 2,057 956
Intangibles, net of accumulated
amortization of $317 and $233 (Note 1) 954 1,038
Total other assets 3,011 1,994
------------ ------------
Total assets $ 7,735,783 $ 227,732
============ ============
3
<PAGE>
ONLINE SYSTEM SERVICES, INC.
BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- - ----------------------------------------------
June 30, 1996 December 31, 1995
------------- -----------------
(Unaudited)
Current liabilities:
Accounts payable $ 327,680 $ 74,990
Accrued expenses 6,381 11,020
Accrued salaries and taxes payable 64,252 19,403
Short-term notes payable (Note 5) --- 50,814
Current portion capital lease & 33,547 17,017
note payable (Note 7)
Note payable-related party (Note 4) 12,707 12,707
------------- ----------------
Total current liabilities 444,567 185,951
------------- ----------------
Long-term liabilities:
Note and capital leases payable (Note 7) 47,537 42,232
------------- ----------------
Total long-term liabilities 47,537 42,232
------------- ----------------
Total liabilities 492,104 228,183
------------- ----------------
Commitments and contingencies (Note 3) --- ---
------------- ----------------
Stockholders' equity (deficit)
Common stock, no par value, 10,000,000
shares authorized, 3,072,045, and
1,625,000 shares issued and outstanding,
respectively 7,921,278 272,864
Stock subscriptions (Note 10) (2,253) (57,269)
Accumulated deficit (675,346) (216,046)
------------- ----------------
Total stockholders' equity (deficit) 7,243,679 (451)
------------- ----------------
Total liabilities and stockholders'
equity (deficit) $ 7,735,783 $ 227,732
============= ================
4
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ONLINE SYSTEM SERVICES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------------- ------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
Net sales:
Service sales 192,845 23,147 436,181 25,297
Equipment sales 108,246 2,036 131,759 51,315
------- ------ ------- ------
Total net sales 301,091 25,183 567,940 76,612
Cost of sales:
Cost of services 127,697 34,714 268,724 36,708
Cost of equipment 82,909 1,075 104,180 40,667
------- ------ ------- ------
Cost of sales 210,606 35,789 372,904 77,375
------- ------ ------- ------
Gross profit 90,485 (10,606) 195,036 (763)
------- ------ ------- ------
Operating expenses:
Sales and marketing expense 128,972 16,346 192,146 24,301
Product development expense 103,011 41,567 169,562 42,067
General and administrative expense 159,344 76,932 290,476 85,189
Depreciation and amortization 16,471 6,515 26,515 6,079
------- ------ ------- ------
Total operating expenses 407,798 140,873 678,699 157,636
------- ------- ------- -------
Income (loss) from operations (317,313) (151,479) (483,663) (158,399)
Interest income (expense) 27,057 --- 24,363 ---
------- -------- --------- --------
Income (loss) before provision for
income taxes (290,256) (151,479) (459,300) (158,399)
Provision for income taxes --- --- --- ---
-------- -------- -------- --------
Net income (loss) $(290,256) $(151,479) $(459,300) $(158,399)
========= ========= ========= =========
Net income (loss) per share $ (0.10) $ (0.05) $ (0.17) $ (0.06)
========= ========= ========= =========
Weighted average number of common
shares and equivalents outstanding 3,009,228 2,550,695 2,781,214 2,550,695
========= ========= ========= =========
</TABLE>
5
<PAGE>
ONLINE SYSTEM SERVICES, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- STOCK ACCUMULATED
SHARES AMOUNT SUBSCRIPTIONS DEFICIT
---------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 --- --- --- ---
Issuance of common stock to founder for
cash at an average price of $0.0002
per share 480,000 100 --- ---
Common stock to founders for services
rendered at $0.05 per share 125,000 6,250 --- ---
Common stock issued for services
rendered at $0.56 per share 370,000 207,707 --- ---
Stock subscriptions receivable (Note 10)
--- --- (57,269) ---
Issuance of common stock for cash at
$0.50 per share 650,000 325,000 --- ---
Net loss for the year ended December
31, 1995 --- --- --- (482,239)
Subchapter S corporation losses
allocated to individual shareholders --- (266,193) --- 266,193
---------- -------- -------- --------
Balance, December 31, 1995 1,625,000 272,864 (57,269) (216,046)
--------- ------- -------- --------
Issuance of common stock for cash at
$2.25 per share (unaudited) 182,245 410,000 --- ---
Less costs of issuance (unaudited) --- (6,330) --- ---
Issuance of common stock for cash at 1,265,000 8,538,751 --- ---
$6.75 per unit (unaudited)
Less costs of issuance (unaudited) --- (1,294,007) --- ---
Stock subscriptions receivable
(unaudited) (Note 10) --- --- 55,016 ---
Net loss for the six months ended June
30, 1996 (unaudited) --- --- --- (459,300)
---------- ----------- -------- --------
Balance, June 30, 1996 (unaudited) $3,072,245 $ 7,921,278 $ (2,253) $ (675,346)
========== =========== ======== ==========
</TABLE>
6
<PAGE>
ONLINE SYSTEM SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended Ended
June 30, June 30,
-------------------------- ------------------------
1996 1995 1996 1995
---------- --------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net profit (loss) $ (290,256) $(151,479) $ (459,300) $(158,399)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 16,471 6,028 26,515 6,079
Stock issued for services 1,140 35,323 35,016 41,573
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable (119,657) 516 (119,214) (559)
(Increase) in prepaid software licenses --- --- (101,975) ---
(Increase) in prepaid expense (7,999) --- (8,494) ---
(Increase) in interest receivable (23,001) --- (23,001) ---
(Increase) in deferred offering costs 16,538 --- --- ---
(Increase) in deposits (951) (50) (1,101) (50)
Increase (decrease) in accounts payable 114,505 49,077 252,690 56,675
Increase (decrease) in accrued expenses 4,411 10,684 40,210 10,684
Increase (decrease) in short-term notes
payable (9,000) --- (50,814) ---
---------- ---------- ---------------- ----------
Net cash (used) by operating activities (297,799) (49,901) (409,468) (43,997)
---------- --------- ---------- ---------
Cash flows from investing activities
Purchase of fixed assets (40,158) (35,657) (134,550) (38,699)
---------- --------- ---------- ---------
Net cash (used) by investing activities (40,158) (35,657) (134,550) (38,699)
---------- --------- ---------- ---------
Cash flows from financing activities
Payments on capital lease and notes
payable (8,484) --- (15,003) ---
Issuance of common stock 7,244,744 124,250 7,668,414 124,350
---------- --------- ---------- ---------
Net cash provided by financing
activities 7,236,260 124,250 7,653,411 124,350
---------- --------- ---------- ---------
Net increase in cash 6,898,303 38,692 7,109,393 41,654
</TABLE>
7
<PAGE>
ONLINE SYSTEM SERVICES, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------------- ------------------
1996 1995 1996 1995
------ ------ ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash at beginning of period 236,331 2,962 25,241 ---
----------- -------- ----------- --------
Cash at end of period $ 7,134,634 $ 41,654 $ 7,134,634 $ 41,654
=========== ======== =========== ========
Supplemental cash flow information
Cash paid for
Interest $ 3,543 $ --- $ 6,011 $ ---
Income taxes --- --- --- ---
Non cash financing activities
Stock issued for services $ 1,140 $ 35,323 $ 35,016 $ 41,573
Capital lease for equipment 5,440 --- 5,440 ---
Note payable for fixed assets
purchased --- --- 30,323 ---
</TABLE>
8
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND JUNE 30, 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company was incorporated on March 22, 1994 under the state laws of Colorado,
however, principal operations did not begin until 1995. The Company develops,
markets and supports World Wide Web ("Web") sites, on the Internet or Intranets
to enable companies to enhance revenues, reduce costs, and improve customer
service and communication. The Company differentiates itself by offering high
quality, highly functional, sophisticated Web sites, targeted at specific
industry segments or cross-industry business applications. The initial types of
cross-industry business applications targeted by Company include Web sites for
the online purchase of products or services, customer service applications and
human resource functions. The first industry segment targeted by the Company is
the health care industry, with an integrated network or "market place" of Web
sites called "MD Gateway". The Company also markets and supports "Community
Access America," a turnkey package of hardware, software, documentation, and
marketing and technical assistance that enables a local cable company, telephone
company, newspaper or other entity to provide Internet access and Web site
development to small non-urban communities.
The Company generates net sales through the sale of consulting services for Web
site development, mark-ups on computer hardware and software sold to customers,
maintenance fees charged to customers to maintain computer hardware and Web
sites, license fees based on a percentage of revenues from the Community Access
America program, training course fees, and monthly fees paid by customers for
Internet access provided by the Company in the Denver market.
Prior to December 31, 1995 planned principal operations had commenced, but no
significant revenues had been generated and the Company was considered a
development stage enterprise. Beginning January 1, 1996 the Company is no
longer in the development stage.
a. Accounting Method
The Company's financial statements are prepared using the accrual method of
accounting.
Equipment sales revenue is recognized when the equipment is delivered and the
Company has no further material obligations. Service sales revenue is
recognized when services are performed. Expenses are recognized when incurred.
b. Cash Equivalents
The Company considers all highly liquid investments with a maturity of twelve
months or less when purchased to be cash equivalents.
c. Accounts Receivable
Accounts receivable are shown net of the allowance for doubtful accounts. The
allowance was $5,173 and $30,272 at December 31, 1995 and June 30, 1996,
respectively.
d. Equipment
Equipment is recorded at cost. Major additions and improvements are
capitalized. The cost and related accumulated depreciation of equipment retired
or sold are removed from the accounts and any differences between the
undepreciated amount and the proceeds from the sale are recorded as gain or loss
on sale of equipment.
9
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND JUNE 30, 1996--(CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
e. Depreciation
Depreciation is computed using the straight line method over the estimated
useful lives of the assets of five years.
f. Intangibles
Intangibles are recorded at cost and are amortized using the straight-line
method over the estimated useful life of five years. Amortization expense for
the year ended December 31, 1995 and the six months ended June 30, 1996 was $233
and $84, respectively.
g. Concentrations of Credit
The Company sells computer equipment and related services from its Denver
offices to the surrounding states. The Company extends credit to its customers.
Credit losses, if any, have been provided for in the financial statements and
are based on management's expectations. The Company's accounts receivable are
subject to potential concentrations of credit risk. The Company does not
believe that it is subject to any unusual risks or significant risks in the
normal course of its business.
h. Income Taxes
The Company has operating loss carryforwards of $667,000 at June 30, 1996,
available to reduce future federal taxable income. Until September 26, 1995,
the Company operated as a Sub chapter S corporation whereby all tax benefits
were passed through to the individual shareholders. Accordingly, the losses
were offset to common stock until the Sub chapter S election was involuntarily
revoked when a corporation became a shareholder of the Company. The tax benefit
of the operating loss carryforwards at June 30, 1996 is offset by a valuation of
the same amount.
i. Unaudited Financial Statements
In the opinion of management, the accompanying unaudited statements of
operations, stockholders' equity (deficit) and cash flows for the three months
and six months ended June 30, 1995 and 1996 include all of the adjustments
necessary for a fair statement of results. All such adjustments are of a normal
recurring nature.
NOTE 2--EQUIPMENT
A portion of the equipment that was purchased during 1995 was acquired from
related parties. This equipment purchased was recorded at its original cost
plus accumulated depreciation that had been taken to the point of purchase which
totaled $60,393.
10
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND JUNE 30, 1996--(CONTINUED)
NOTE 2--EQUIPMENT (CONTINUED)
Equipment consists of the following:
December 31, June 30,
1995 1996
------------ -----------
(unaudited)
Capital lease equipment........... $ 60,500 $ 65,940
Computer equipment................ 79,464 175,866
Office equipment.................. 26,408 31,820
Software.......................... 11,939 69,558
-------- --------
178,311 343,184
Accumulated depreciation.......... (81,096) (101,011)
-------- ---------
Net Equipment..................... $ 97,215 $ 242,173
======== =========
Depreciation expense for the year ended December 31, 1995 and for the six months
ended June 30, 1996 was $20,703 and $19,915 respectively.
NOTE 3--COMMITMENTS AND CONTINGENCIES
The Company entered into five operating lease agreements for office furniture
during 1995. All of the leases expire in 1997. The monthly rental payments
total $1,488.
Total lease payments are as follows:
1996............................................... $ 17,856
1997............................................... 12,607
The total lease expense for the year ended December 31, 1995 and the six months
ended June 30, 1996 was $6,942 and $18,000, respectively.
The Company has entered into a month to month lease for office space commencing
July 1995 at $3,000 per month. It is anticipated that the monthly rent will
increase to $9,000 beginning October 1996.
On March 1, 1996, the Company entered into a non-exclusive value-added reseller
agreement with Edify Corporation (Edify), which will allow the Company to use
and sublicense the Edify Electronic Workforce software to the Company's
customers. The initial term will continue for fifteen months commencing March
1, 1996. A subsequent twelve month term may be extended by Edify, at its
discretion, provided the Company has met all obligations under the agreement.
The agreement requires the Company to purchase a solutions provider start-up
package for $100,000, which has been paid in full as of June 30, 1996.
The Company entered into a business relationship among Charlie Spickert, Medical
Education Collaborative (MEC) and the Company. The overall objective is to
become a leader in Internet training and Web services to the medical market.
Mr. Spickert and MEC will provide the knowledge and reputation to penetrate the
medical training and services market. The Company will provide the needed
resources and expertise in Internet services. Mr. Spickert will be paid 50,000
common stock options exercisable at $0.50 per share, that will expire after 5
years. The stock options will vest at 25,000 increments on a pro-rata basis.
The first increment will vest when over 400 hours have been devoted to this
business relationship. The remaining 25,000 shares will be vested on a pro-rata
basis over the first $20,000 earned in lieu of compensation due MEC.
11
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND JUNE 30, 1996--(CONTINUED)
NOTE 3--COMMITMENTS AND CONTINGENCIES (CONTINUED)
As part of the joint development and marketing arrangement with MEC and Mr.
Spickert, the Company has agreed to perform Web site development services as a
vendor to MEC and MEC will markup the project cost by 15% as payment for its
involvement.
On September 1, 1995, the Company entered into a consulting agreement with
Creative Business Strategies, Inc. (CBS) pursuant to which CBS was to assist the
Company in developing its business plan, advise the Company regarding business
opportunities and financings and promote the Company and its services. For
these services, CBS was to be paid a fee of $2,500 per month, was granted a
stock option to purchase 100,000 shares of the Company's common stock at $.50
per share, such option to vest over a period of eighteen months, and was to be
paid a transaction-based fee for business combinations or certain other
transactions completed by the Company which were initiated by CBS. The options
have not been exercised. Between September and December 1995, CBS purchased
114,000 shares of the Company's common stock at $.50 per share. Effective
February 1, 1996, the agreement with CBS was amended to provide for a monthly
fee of $4,000 for a period of 36 months and to eliminate any transaction-based
compensation.
NOTE 4--RELATED PARTY TRANSACTIONS
a. Note Payable Related Party
The Company has recorded a note payable to a former officer and shareholder of
the Company of $12,707 at December 31, 1995. The note is unsecured, noninterest
bearing and is due October 30, 1996. No interest has been imputed on the note
because it is not material to the financial statements.
b. Capital Lease Related Party
To provide working capital for the Company, shareholders of the Company formed a
partnership that purchased the equipment from the Company for cash and then
leased the equipment back through a capital lease (See Note 7).
c. Month to Month Lease
The Company's principal offices are located in a building managed by an
affiliate. An officer of the Company is related to the vice president of the
management company. The Company was in need of expanding its office space and
due to several vacant floors in the building, the management company agreed to
rent an additional floor to the Company and its current office space at a total
monthly rate of $3,000.
NOTE 5--SHORT-TERM NOTES PAYABLE
The Company negotiated two short-term notes of $24,000 and $32,814 for services
provided by a vendor and equipment purchased. The balance due on both notes as
of December 31, 1995 and June 30, 1996 was $50,814 and $-0-, respectively. The
payment terms require two payments of $19,407 through February 1996 and $3,000
per month from March through June 1996. The notes are non-interest bearing and
unsecured. No interest has been imputed on the notes because it is not material
to the financial statements.
12
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND JUNE 30, 1996--(CONTINUED)
NOTE 6--STOCK OPTIONS, WARRANTS AND RIGHTS (CONTINUED)
a. Stock options
-------------
During 1995, the Board of Directors approved a stock option plan for the
Company's employees, officers and consultants. The Company has made available
350,000 shares for the plan adopted March 17, 1995. The plan was amended
increasing the authorized shares to 600,000 on December 8, 1995 and to 700,000
on January 24, 1996. As of June 30, 1996 a total of 693,058 options were
outstanding under the plan, with option prices ranging from $0.50 to $6.50. The
plan shall be in effect for ten years from the adoption date. Options for the
purchase of an aggregate of 7,700 shares of common stock have been granted
outside of the plan to two directors one of whom is also an officer, at exercise
prices of $0.50 and $2.25 per share.
b. Warrants
--------
In connection with the acquisition of the equipment under the capital lease
described in Note 7, the Company issued warrants to purchase 25,000 shares of
common stock at $0.50 per share. The Company issued an additional 18,450
warrants in conjunction with its private placement, with an exercise price of
$2.25 per share. The warrants are granted at the fair market value of the common
stock at the time of issuance. Accordingly, no discount was recorded. The
warrants expire in the year 2000 and 2001, respectively. In May and June 1996 in
conjunction with the Company's initial public offering, the Company issued
1,265,000 warrants. Each two warrants entitle the holder to purchase one share
of common stock at a price of $9.00 per share during the three year period
commencing May 23, 1996, unless previously redeemed. In addition, the Company
granted to its Underwriter an option to purchase 110,000 units at a price of
$8.10 per unit. Every two units consisted of two shares of Common Stock and a
warrant to purchase one share of common stock for the price of $9.00 per share
that is exercisable from May 23, 1997 until May 23, 2001, unless previously
redeemed.
NOTE 7--NOTE AND CAPITAL LEASE PAYABLE
The Company entered into a capital lease for office equipment as follows.
December 31, 1995 June 30, 1996
----------------- -------------
(unaudited)
Capital lease payable in monthly
principal and interest payments of
$1,733, for thirty-six months
beginning January 15, 1996, effective
interest rate of 14.9%, secured by
office equipment $ 50,000 $ 42,955
Capital lease payable in monthly
principal and interest payments of
$471, for thirty-six months beginning
July 28, 1995, effective interest rate
of 35.8%, secured by a phone system 9,249 8,033
Note payable for purchase of fixed
assets, monthly principal payments of
$1,588 beginning March 1996 for twelve
months and then payment changes to
$625 for the remaining twenty-four
months, effective interest rate of
9.0% and unsecured --- 24,656
Capital lease payable --- 5,440
-------- --------
59,249 81,084
Less current portion (17,017) (33,547)
-------- --------
$ 42,232 $ 47,537
======== ========
13
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND JUNE 30, 1996--(CONTINUED)
NOTE 7--NOTE AND CAPITAL LEASE PAYABLE (CONTINUED)
The following is a schedule of future
minimum lease payments.
December 31, June 30,
1995 1996
(unaudited)
1996 $ 26,448 $ 35,079
1997 26,448 36,668
1998 23,622 26,605
-------- --------
Total minimum lease payments 76,518 98,352
Less amount representing interest (17,269) (17,268)
-------- --------
Present value of minimum lease payments $ 59,249 $ 81,084
======== ========
NOTE 8--ROYALTY AGREEMENT
An agreement was entered into by the Company with Creative Learning
International (CLI) for a 5% royalty on all participants in the Internet game,
"The Adventure Begins." The agreement includes revenues generated from all
public seminars, corporate training, special events and any licensing or
franchise agreements. A royalty of 3% will be paid to CLI for any other
products that use the design concept created for the Internet game.
This royalty agreement will be in effect as long as the training program is used
by the Company or by any other entity the program is licensed to by the Company.
NOTE 9--STOCK SUBSCRIPTIONS RECEIVABLE
The Company entered into two stock subscription agreements. The first agreement
stipulates that shares will be paid through services rendered to the Company.
The $2,253 of required services are still outstanding as of June 30, 1996 and
will be completed prior to September of 1996. The second agreement required the
payment of $20,000 cash on or before January 31, 1996. The payment was received
prior to the expiration date.
NOTE 10--MAJOR CUSTOMERS
The Company had one major customer during 1995 that accounted for 40% of the
Company's sales. The service agreement between the Company and this customer
terminated May 1996. The Company has one major customer for the six months of
1996, which accounted for 12% of the Company's sales during this period.
NOTE 11--PREPAID SOFTWARE LICENSES
In conjunction with the agreement signed with Edify, the Company has purchased
$101,975 of software licenses. $60,000 is required under the terms of the
contract and $41,975 is in anticipation of future orders. It is anticipated
that all software licenses inventory will be sold within a one year period
following June 30, 1996.
NOTE 12--INITIAL PUBLIC OFFERING
In May and June 1996, the Company completed an initial public offering of
1,265,000 Units at a price to public of $6.75 per Unit, before deduction of
commissions and offering expenses. Each Unit consisted of one share of common
stock and one warrant. Two warrants included in the Units entitle the holder to
purchase one share of common stock, at an exercise price of $9.00 per share
during the three year period commencing May 23, 1996, unless previously
redeemed.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Online System Services, Inc. was formed in March 1994, commenced sales in
February 1995 and was in the development stage through December 31, 1995. The
Company develops, markets and supports sophisticated, high-end Web sites for
customers' use on the Internet or Intranets. As a part of the anticipated
development of interactive, self service, Web applications for its customers,
the Company has a non-exclusive value added reseller agreement with Edify
Corporation to use and sublicense the Edify "Electronic Workforce" software.
The Company is developing an interactive Web design process called "WebQuest" to
expedite the design of Web sites with customers both locally and by use of
remote computer access. Also, the Company has developed a specialization in the
healthcare industry with the introduction of an integrated network or
"marketspace" of Web sites called "MD Gateway" In addition, the Company markets
and supports "Community Access America", a turnkey package of hardware,
software, documentation, marketing, and technical assistance that enables a
local cable company, telephone company, newspaper or other entity to provide
Internet access and Web site development to smaller, non-urban communities.
Results of Operations
The Company generates net sales through the sale of consulting services
for Web site development, resale of software licenses, mark-ups on computer
hardware and software sold to customers, maintenance fees charged to customers
to maintain computer hardware and Web sites, license fees based on a percentage
of revenues from the Community Access America program, training course fees, and
monthly fees paid by customers for Internet access provided by the Company in
the Denver market.
The following table sets forth for the periods indicated the percentage of net
sales by items contained in the statements of operations.
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1996
------------------ -----------------
(UNAUDITED) (UNAUDITED)
Net sales:
Service sales.................. 64.0% 91.9% 76.8% 33.0%
Equipment sales................ 36.0 8.1 23.2 67.0
------ ------ ----- ------
Total net sales.............. 100.0 100.0 100.0 100.0
Cost of sales:
Cost of services............... 66.2 150.0 61.6 145.1
Cost of equipment.............. 76.6 52.8 79.1 79.2
------ ------ ----- ------
Total cost of sales.......... 69.9 142.1 65.7 101.0
Gross profit..................... 30.1 (42.1) 34.3 (1.0)
------ ------ ----- ------
Operating expenses:
Marketing and sales expense.... 42.8 64.9 33.8 31.7
Product development expense.... 34.2 165.1 29.9 54.9
General and administrative
expense....................... 52.9 305.5 51.1 111.2
Depreciation and amortization
expense....................... 5.5 23.9 4.7 7.9
------ ------ ----- ------
Total operating expenses..... 135.4 559.4 119.5 205.8
Income (loss) from operations.... (105.4%) (601.5%) (85.2%) (206.8%)
====== ====== ===== ======
15
<PAGE>
Three Months and Six Months Ended June 30, 1996 and l995 (Unaudited)
The comparisons of the three and six-month periods for fiscal 1996 to the
similar periods in fiscal 1995 reflect the fact that the Company commenced
business operations in February 1995 and was in the early development stage of
its operations during fiscal 1995. The Company expects that expenses during the
next several months will increase at a faster rate than will net sales as the
Company develops the infrastructure required to service an expected higher level
of operations. It is therefore, more likely than not that the Company will
continue to incur operating losses in the third and fourth quarters of fiscal
1996. The Company expects to report an operating loss for the full year ending
December 31, 1996.
Net sales for the three months ended June 30, 1996 totaled $301,091, including
$192,845 for service sales and $108,246 for equipment sales. The equipment
sales included the sale of equipment to two customers totaling $68,351 and
$39,895, representing 22.7% and 13.3% respectively of net sales. Net sales for
the three months ended June 30, 1995 were predominantly from two initial
customers and totaled $25,183, including $23,147 for service sales and $2,036
for equipment sales.
Net sales for the six months ended June 30, 1996 totaled $567,940, including
$436,181 for service sales and $131,759 for equipment sales. One equipment
customer amounting to $68,351 represented 12% of net sales for this six month
period. The Company does not believe that business is substantially dependent
on any one customer. Net sales for the six months ended June 30, 1995, were
predominantly from two initial customers and totaled $76,612, including $25,297
for service sales and $51,315 for equipment sales.
The increase in net sales for the three and six-month periods in 1996 compared
to the similar periods in 1995 were due to the development of the Company's
current product and service offerings that were not available in the prior year
periods and to a substantial increase in marketing and sales activities in
general.
Cost of sales as a percentage of net sales was 69.9% for the three months ended
June 30, 1996 and 142.1% for three months ended June 30, 1995. Cost of sales as
a percentage of net sales was 65.7% for the six months ended June 30, 1996 and
101.0% for six months ended June 30, 1995. The Company's gross profit margin
on service sales has fluctuated and has been lower during periods when the
Company has hired additional service personnel and incurred other fixed costs in
anticipation of future growth. The decrease in the cost of sales as a
percentage of net sales in the 1996 periods are due to the higher level of sales
in the 1996 periods and the low level of sales during the 1995 periods when the
Company was in the early development stage.
Sales and marketing expenses were $128,972 and $16,346 for the three months
ended June 30, 1996 and 1995, respectively, and were $192,146 and $24,301 for
the six months ended June 30, 1996 and 1995, respectively. The increases during
the 1996 periods were due to the hiring of new sales and marketing personnel and
associated expenditures. The company also increased the promotion and
marketing of its MD Gateway and Community Access America products. Sales and
marketing expenses also increased during the three months ended June 30, 1996 as
the company commenced training for the sale of Edify Electronic Workforce
products. Because of the potentially long sales cycle for the sale of the
Company's products and services, sales and marketing expenses may increase at a
faster rate than net sales during the next six months resulting in an increased
percentage of net sales for these costs.
Product development expenses were $103,011 and $41,567 for the three months
ended June 30, 1996 and 1995 respectively, and were $169,562 and $40,667 for the
six months ended June 30, 1996 and 1995, respectively. This increase reflects
the continued development of the Company's products and services since
commencement of business in February 1995. Product development expenses during
the three and six month periods ended June 30, 1996 include enhancements to the
Community Access America products and continued development work on WebQuest and
MD Gateway. Product development expenses during the six month period of 1995
included the development of the Company's training course entitled "The Internet
Game" which is primarily being utilized as a marketing tool to enhance Web
development sales activities. Product development expenses are expected to
continue to increase significantly during the remainder of 1996 as the Company
develops the WebQuest and MD Gateway products.
General and administrative expenses were $159,344 and $76,932 for the three
months ended June 30, 1996 and 1995, respectively, and were $290,476 and $85,189
for the six months ended June 30, 1996 and 1995, respectively. This increase
reflects the continued development of the Company's infrastructure since
commencement of business in February 1995.
Depreciation and amortization expenses were $16,471 and $6,028 for the three
months ended June 30, 1996 and 1995, respectively, and were $26,515 and $6,079
for the six months ended June 30, 1996 and 1995, respectively. This increase
reflects the increase in capital
16
<PAGE>
equipment purchased to support higher levels of Web site and Internet Access
services as well as to support the growth in the number of employees.
Interest income (expense) was $27,057 during the three-month period ended June
30, 1996 and $24,363 during the six-month period ending June 30, 1996, and was
$0 for the same periods in 1995. On completion of the company's initial public
offering in May 1996, the company paid a portion of its outstanding debt
resulting in a reduction of future interest expense and began earning interest
income on the invested net proceeds.
Liquidity and Capital Resources
As of June 30, 1996 the Company had cash and cash equivalents of $7,134,634 and
net working capital of $7,046,032 due to the completion during May and June 1996
of an initial public offering including the exercise of the underwriters'
overallotment option which resulted in net proceeds to the Company of $7,244,744
and the issuance of an additional 1,265,000 shares of common stock. During the
six months ended June 30, 1996, the Company also completed a private placement
of common stock that resulted in net proceeds of $393,670.
During the six months ended June 30, 1996, the Company's investing activities
consisted of the purchase of $134,550 of fixed assets. These amounts are
primarily comprised of computer equipment, communications equipment and software
necessary to provide Internet access and training, to host Web sites and to
develop Web sites for customers. In anticipation of future growth, the Company
expects to invest in additional computer equipment, software and office
equipment during the remainder of 1996.
The Company's software license inventory of $101,495 as of June 1996 consisted
of Edify software licenses purchased by the company for resale and are now being
sold as part of its high end interactive Web services. The company expects to
sell these licenses to customers within the one year period following June 30,
1996.
Accounts receivable balances increased from $98,282 at December 31, 1995 to
$217,496 on June 30, 1996 due to the increased sales level during the quarter
ended June 30, 1996 and a concentration of sales towards the end of the three
month period. The Company has $23,001 of interest receivable on June 30, 1996
due to interest earned but not received on Treasury Bills outstanding.
Trade accounts payables as of June 30, 1996 increased to $327,680 from $74,940
as of December 31, 1996 due to the increased level of business activity and
expenses incurred in connection with the public offering.
During the six months ended June 30, 1996, the Company paid $50,814 of short-
term notes that were utilized to help finance the Company's operations before
the private placement and public offering proceeds were available.
The Company incurred an additional capital lease for expanded telephone
equipment of $5,440 during the six months ended June 30, 1996 and also incurred
a debt obligation of $30,323 in conjunction with the purchase of hardware and
software during March of 1996.
The Company believes that its cash and cash equivalents and working capital are
adequate to sustain operations for a minimum of the next twelve-month period.
If sufficient cash flow is not being generated at the end of this twelve-month
period, the Company will be required to seek additional funds through equity,
debt or other external financing. There is no assurance that any additional
capital resources, which the Company may need, will be available if and when
required, and on terms that will be acceptable to the Company.
Forward Looking Information
Information contained in this report, other than historical information, should
be considered forward looking and reflects management's current views of future
events and financial performance that involve a number of risks and
uncertainties. The factors that could cause actual results to differ materially
include, but are not limited to, the following: general economic conditions and
developments within the Internet and Intranet industries; product development
and technology changes; competition and pricing pressures; length of sales
cycle; variability of sales order flow; and management growth.
17
<PAGE>
PART II.-- OTHER INFORMATION
- - ----------------------------
ITEMS 1-4. NOT APPLICABLE
ITEM 5. OTHER INFORMATION
On May 30, 1996, the Company completed an initial public offering of 1,100,000
Units at a price to public of $6.75 per Unit, before deduction of commissions
and offering expenses. Each Unit consisted of one share of common stock and one
warrant. During the three year period commencing May 23, 1996, unless
previously redeemed, each two warrants entitle the holder to purchase one share
of common stock at a price of $9.00 per share.
On June 21, 1996, the Company issued an additional 165,000 Units at a price to
public of $6.75 per Unit, upon exercise of the overallotment option for the
initial public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three-months ended
June 30, 1996.
18
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ONLINE SYSTEM SERVICES, INC.
Date: August 13, 1996 By /S/ Robert M. Geller
--------------------------
Vice President
Chief Financial Officer
19
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 7,134,634
<SECURITIES> 0
<RECEIVABLES> 247,768
<ALLOWANCES> 30,272
<INVENTORY> 101,975
<CURRENT-ASSETS> 7,490,599
<PP&E> 343,184
<DEPRECIATION> 101,011
<TOTAL-ASSETS> 7,735,783
<CURRENT-LIABILITIES> 372,104
<BONDS> 47,537
0
0
<COMMON> 7,993,741
<OTHER-SE> (675,346)
<TOTAL-LIABILITY-AND-EQUITY> 7,735,783
<SALES> 567,940
<TOTAL-REVENUES> 567,940
<CGS> 372,904
<TOTAL-COSTS> 1,051,603
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,363
<INCOME-PRETAX> (459,300)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (459,300)
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