21
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT
PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
December 31, 1996 0-28462
ONLINE SYSTEM SERVICES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1293864
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1800 Glenarm Place, Denver, CO 80202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(303) 296-9200
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Units, consisting of one share of Common Stock, no par value and one Warrant
Common Stock, no par value
Warrants for the purchase of Common Stock, no par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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___
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [X_].
Registrant's revenues for fiscal year ended December 31, 1996: $1,445,042
Aggregate market value of voting stock held by non-affiliates of registrant
as of February 28, 1997: Approximately $8,925,313
Number of shares outstanding as of February 28, 1997: 3,177,995 shares of
Common Stock, no par value, and 1,265,000 common stock purchase warrants.
Documents incorporated by reference: Portions of the registrant's
definitive Proxy Statement, for the Annual Meeting of Shareholders to be held on
May 20, 1997, to be filed with the Commission, are incorporated by reference in
Part III of this Form 10-KSB.
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS.
General
Online System Services, Inc. (the "Company" or "OSS") develops, markets
and supports sophisticated, high-end World Wide Web ("Web") sites, on the
Internet or Intranets, to enable companies to enhance revenues, reduce costs,
and improve customer service and communication. A growing number of businesses,
associations and other organizations are establishing Web sites as a means to
communicate internally with employees and externally with customers, prospective
customers and other constituents. Many Web sites have been used initially only
for one-way communication such as marketing or advertising through online
product brochures. The Company differentiates itself by offering high quality,
highly functional, sophisticated Web sites that allow for interactive
communication and automated processing of information. Businesses can enhance
revenues by using Web sites to conduct online commerce, such as interactive
catalog sales. Businesses can also reduce costs by using Web-based technologies
to automate help desk and other service functions that have historically been
staffed with operators who require training and who may handle hundreds of calls
each day. Interactive, sophisticated Web sites for employee and customer service
functions can reduce staffing and training costs, and improve service by
providing faster response time and more complete and current information.
Businesses can also readily track usage of Web sites as a means to focus
marketing efforts and improve service.
The Company also develops and markets sophisticated Web sites that are
targeted to specific industry segments. The first industry segment targeted by
the Company is the healthcare industry, for which standard and custom Web sites
and an integrated network or "marketspace" called "MD Gateway" have been
developed. In addition, the Company 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
smaller non-urban communities.
Since commencing operations in February 1995, the Company has built its
expertise through the development of Web sites for companies, primarily in the
Denver, Colorado area. The price for each of these Web sites ranged from
approximately $1,500 to $150,000. The Company has sold five Community Access
America packages as of February 28, 1997, and has developed two Internet
training seminars used to establish business contacts for other OSS products and
services. In January 1997, OSS introduced new products for the continuing
medical education market at the Alliance for Continuing Medical Education
tradeshow and has recently introduced a new enhancement for the Community Access
America product which is specifically designed for the cable and wireless
television industry. The Company is also designing and developing WebQuest, an
interactive Web site design method that allows the Company to provide its
customers a more effective and collaborative design process.
The Internet and Intranet
The Internet is a global web of computer networks. Developed over 25
years ago, this "network of networks" allows any computer attached to the
Internet to talk to any other using Internet protocols. Individuals connect
directly to the Internet through Internet Service Providers ("ISPs"). The rapid
growth in popularity of the Internet is in large part due to the increasing
availability of user-friendly navigational and utility tools designed to enable
easier access to the Internet; continued penetration of computers and modems
into U.S. households; the growth of Internet applications and the awareness of
those applications; and the emergence of the World Wide Web.
The Web is the term commonly used to describe the network of services
and information available on the Internet. This technology uses Web browser
software that allows non-technical users to exploit the capabilities of the
Internet. The Web enables users to find, retrieve and link information on the
Internet with easy to use graphical interfaces. The term "Web site" is commonly
used to describe the computer screen layouts and the file server computer that
are accessible by users of the Web. A Web site typically has a collection of
"Web pages" which may contain text, graphics, pictures, sound, animation, video
or other multi-media content.
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The Intranet is a term used to describe the implementation of Internet
technologies within a corporation or business organization, rather than for
external connection to the global Internet. The Intranet infrastructure
similarly enables employees using personal computers and Web browser software to
access and interact with a broad range of information sources within their
company, independent of physical location and underlying computer design.
Web Site Development and Maintenance
The set up and operation of a Web site requires a computer file server,
software resident on that file server and dedicated telephone communication
access to the file server. The file server is given an Internet or Intranet
address for each of the Web sites located on that server. When an Internet or
Intranet user enters that address, they are then connected to that customer's
file server where the resident Web pages are located. Once connected, the user
can view and interact with the information and content of the customer's Web
pages. Most of the Company's customers elect to have the file server for their
Web site located at the Company's facilities. A customer may elect to purchase
their own file server and software, either directly or through the Company, or
use one of the Company's file servers. If a file server for a customer is
located at the Company's facilities, the Company will, as a part of its
maintenance services, correct problems and make periodic updates to the
Customer's Web pages. The Company generates net sales through the sale of design
and consulting services for Web site development, mark-ups on computer hardware
and software sold to customers and maintenance fees charged to customers to
maintain computer hardware and Web sites. The Company provides prospective
customers a quote which includes the applicable equipment, software and
communication access pricing, and the price for the Web site development and
maintenance services desired by the prospective customer. Criteria for pricing
these services include the number of Web pages, and their complexity, the amount
of custom programming to be done by the Company, an estimate of the time to be
incurred and competitive conditions in the customer's industry. As a marketing
strategy and way to enhance revenues, the Company intends to negotiate cost
savings arrangements with selected customers. Under these arrangements, the
Company would receive as part of its pricing a percentage of the customer's cost
savings derived from its Web site.
Web sites vary significantly in their complexity and interactivity. A
simple Web site may have only text in outline form. More complex sites may have
colored text, graphics, pictures, sound, animation, video or other multi-media
content. A limiting factor on the content for a site is that as sites get more
complex, significantly more data must be transmitted, making transmission speed
an issue. The speed at which a user can access a Web site will vary based on the
user's modem speed or type of connection to the Internet or Intranet. As the
availability of increased transmission speeds grows, more complex presentations
of information will become practical at Web sites. Web sites may also vary in
their level of interactivity with the user. Many Web sites are for inquiry only
while others allow the user to interact with, enter and process information. A
properly designed Web site shares many attributes of the telephone, namely,
widespread connectivity, widespread access to services, and a simple,
easy-to-use interface. However, because of the computer keyboard and screen, a
Web site has the added capabilities of communicating text, graphics, pictures,
animation, video or other multi-media content.
The Company designs and implements Web sites ranging from basic
inquiry-only sites to complex, interactive sites capable of providing online
commerce, database integration and manipulation, sophisticated graphics,
animation and other multi-media content. The Company also serves as a
value-added reseller of software capable of allowing the Internet or Intranet
user to use self-service applications such as the online purchase of products or
services, product warranty and support, employee benefit enrollments and other
applications.
The Company demonstrates to a potential client how a Web site can
increase sales by providing a cost effective way to market its products to
consumers; or decrease costs by providing a more efficient way of processing
information. The Company can offer such companies a pricing structure that
minimizes up front costs and allows the Company to share in a percentage of the
customers' increased revenues or cost savings. Internet and Intranet
technologies are well-suited for tracking the number of Web site transactions as
a means to determine added revenues and savings.
The Company has developed a structured process for the design of Web
sites. During the initial phase of a design, the Company's Web developers meet
with representatives of the business customer to discuss the current methods for
serving employees, suppliers, customers or other targeted constituents. The
Company designs sites and
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Web page layouts as a logical extension of the customer's current business
methods for serving targeted constituents. When appropriate, the Company uses
its specialized designers who are experienced in Web graphics, animation and
other multi-media content applications. Prices for low-end Web site designs,
without added software, currently range from $5,000 to $50,000, depending on the
complexity of the design and implementation of the site. The Company focuses on
high-end Web site development that uses leading edge software. Prices for
high-end Web sites range from $100,000 to $500,000 or more.
WebQuest. The Company is developing an interactive design process called
WebQuest to expedite the design of Web sites and to allow customer
representatives to participate in the design at the Company's facility and by
remote computer access. Using WebQuest, the Company's designers and customer
representatives work together on computerized sketches of each Web page. The
WebQuest concept allows large-screen viewing and simultaneous design and editing
of the Web site by local participants and up to 32 remote participants. At the
end of a design session using WebQuest, the customer's participants receive a
printed "storyboard," which shows the design and content of the Web pages. The
storyboard includes the concept sketches made by OSS' design artists using
WebQuest. The Company believes its WebQuest system significantly increases the
quality and efficiency of Web site development.
Value Added Resale of Leading Edge Web Site Software. The Company
incorporates leading edge software in its Web site development. In March 1996,
the Company entered into a non-exclusive value-added reseller agreement with
Edify, which allows the Company to use and sublicense to OSS customers the Edify
"Electronic Workforce" software. Electronic Workforce incorporates intelligent
software agents, which are independent software modules that allow a user on the
Web to interact with a company's existing databases and that allow interaction
with Web browsers, telephones, facsimiles, e-mail and alphanumeric pagers.
Electronic Workforce easily allows for the exchange of information from a
variety of sources including mainframes, client-server environments and
relational databases. Electronic Workforce currently runs with the IBM OS/2
operating system. Electronic Workforce operates on a stand alone file server,
using the IBM OS/2 operating system, that can easily be connected to other
hardware platforms and operating systems. Thus, the IBM OS/2 operating system is
not a significant limiting factor. According to Edify, use of Electronic
Workforce with the Windows NT operating system is currently under development by
Edify. Electronic Workforce includes a visual, object oriented environment that
enables rapid development of business applications. The initial types of
cross-industry business applications targeted by the Company for Web site
development using Edify's Electronic Workforce include the online purchase of
products or services, customer service applications and human resource
functions.
Edify Corporation is based in Santa Clara, California. Edify was
established in 1989 to develop, market and support software that enables
organizations to provide automated services accessed by consumers, employees and
business partners. When the Company designs and implements an Internet or
Intranet business solution using Edify's Electronic Workforce, the Company
obtains the software from Edify and pays Edify a license fee. The Company
sublicenses the Edify software to OSS customers for a sublicense fee determined
by the Company. The sublicense fee includes the Company's markup and may vary
depending on the size of the project and the number of software modules.
Customers who sublicense Edify software from the Company also are expected to
pay the Company fees for ongoing software maintenance and support services. The
sublicense agreement between the Company and its customers must contain required
terms that protect Edify's proprietary interests in the software. The Company is
required to pay Edify a quarterly maintenance and support fee based on a
percentage of the cumulative product fees paid to Edify. Edify provides software
updates and support to the Company, but Edify is not responsible to provide
updates or support directly to the Company's customers. Since the Company's
agreement with Edify is nonexclusive, Edify and other Edify resellers can
compete with the Company for Web site development projects.
The agreement with Edify required payment of a one time nonrefundable
fee of $100,000. The $100,000 one time fee includes the purchase of $60,000 of
Edify products to be resold to OSS customers. The agreement has an initial term
of 15 months which may be renewed for 12 months if agreed to by Edify. As of
February 28, 1997, the Company had purchased $165,210 of Edify products, which
includes the $60,000 balance of the one time fee and had sublicensed Edify
software to one OSS customer. The Company plans to use other software products
and solutions in the future to support its Web site design and development
services.
<PAGE>
Internet Access and Web Site Customers. In February 1997, the Company
had approximately 350 subscribers for Internet access in the Denver Metropolitan
area through the Company as their ISP. As of February 28, 1997, the Company had
designed Web sites for 80 customers that are maintained at its Denver facility.
Four of the Company's larger Web site customers include INVESCO Funds Group,
Inc., a national mutual fund company; Echostar Communications Corp., a direct
broadcast satellite company; Ciba-Geigy, Ltd., a multinational chemical,
pharmaceutical and agriculture company; and KCNC News4 Television, a CBS
station, in Denver, Colorado. The Web site for KCNC News4 Television uses
sophisticated features including video from the station's "City Cam" network and
real time weather maps.
Web Site Maintenance. If a customer chooses to locate its Web site on
one of the Company's computer file servers, the Company will maintain the file
server and make periodic updates to the customer's Web pages for a monthly fee.
The monthly fees currently range from $100 to $750 or more, depending on the
amount of storage used on the file server and the complexity of the Web page
updates.
Training. The Company currently offers two Internet training seminars at
the training facility located at its principal offices. The Internet Game is an
introductory four-hour hands-on training seminar that uses computers for the
participants and incorporates interactive learning techniques. This course is
designed to teach people about the Internet, how to connect to it, and how to
use basic e-mail and Web browsers. This course was designed by Creative Learning
International ("CLI") and the Company pays CLI a royalty of 5% of the revenues
derived from the fees for this course. The Business Person's Guide to the
Internet is a four-hour seminar that focuses on how the Internet is used to
conduct various business activities. The Company also provides custom corporate
Internet and Intranet training. The Company has also developed a custom version
of The Internet Game, called "The Medical Internet Game," especially for
physicians.
Healthcare Market
The Company has selected the healthcare market as a major business
focus, with an emphasis on Internet-based medical education and information. The
healthcare market is being driven by rapid growth; pressure to control costs;
industry consolidation and fundamental market structure changes; increased
complexity of medical knowledge and technology; and competitive pressure on
physicians and other healthcare professionals. The Company believes that
Internet-based products and services can assist clients to increase revenues,
control costs and improve the quality of healthcare.
The Company offers Internet-based products designed to help physicians
and other healthcare professionals obtain access to timely and mission-critical
education and information via the Internet. At a customer's Web site, physicians
may choose from a variety of educational opportunities, view content samples,
access course content, take an online test, and receive CME credit. The Company
expects to generate revenues in the healthcare market from providing Internet
services to CME providers and by the development of Web sites. In January 1997,
the Company introduced new products for the CME market at the Alliance for
Continuing Medical Education tradeshow. Internet products are directed to the
needs of communications companies, managed care organizations, pharmaceutical
firms, hospitals, physicians and other users and providers of medical education.
MD Gateway, introduced last year as a marketspace for medical
information and education, complements the Company's product strategy. The site
functions as a central clearing house for education and information about
conferences, associations, relevant sites and other useful content. This
marketspace integrates the professional and educational needs of physicians with
the unique interests of professional associations, multi-media publishers,
managed care organizations and pharmaceutical and medical device companies.
The Company has a joint development and marketing arrangement with
Charles Spickert and Medical Education Collaborative ("MEC"). MEC is a nonprofit
medical education firm founded by Mr. Spickert in 1988 and is a nationally
accredited provider of continuing medical education credits for physicians. Mr.
Spickert has worked in continuing medical education for over 15 years. The
Company has granted to Mr. Spickert options for the purchase of 50,000 shares of
Common Stock with an exercise price of $0.50 per share.
<PAGE>
MEC routinely receives grants from private industry, including grants
from medical device and pharmaceutical companies for medical education services
performed by MEC. MEC plans to use Web-based technologies for some of these
services. MEC may subcontract with the Company for Web site development services
that are to be performed under one or more grants. 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.
On November 11, 1996, the Company entered into an agreement with
Telemedical Systems Integration, Inc. ("TMED") to work with the Company to
design and market online-interactive medical information and educational
products and services to the health-care industry. The agreement is for a period
of three years, subject to earlier termination in certain events, and provides
that TMED will perform consulting services for the Company valued at up to
$225,000 ($80,000 of which had been advanced as of February 28, 1997) and will
be paid a commission on sales completed by TMED. TMED will serve as the
Company's primary sales group for its healthcare products, including the
recently introduced CME products. The Company has also agreed to grant TMED an
option to purchase up to 28,000 shares of the Company's common stock at a
purchase price of $3.57 per share.
Many online and Internet-based systems exist or are under development by
different companies to serve the needs of the healthcare industry. The Company
expects to differentiate its healthcare offerings by combining its ability to
develop highly functional, sophisticated Web sites that allow for interactive
communication and automated processing of information with the resources of
industry specialists, such as MEC.
Community Access America
The market for providing Internet access services has been growing
rapidly, with many competing ISPs in urban markets. The Company believes that
currently only a few of the ISPs operate in non-urban markets with populations
from 10,000 to 200,000 within a local calling area. If a person in that market
desires to purchase Internet access but there is no ISP in that person's local
calling area, that person generally would incur long distance charges when
obtaining Internet access unless access could be purchased on a competitive
basis from a long distance carrier such as AT&T Corp. ("AT&T"). The Company
believes there is currently an opportunity for providing ISP services in
non-urban markets, which will allow consumers in those markets to purchase
Internet access without incurring long distance charges. OSS believes there is
an additional opportunity in non-urban markets for ISPs to set up local Web
sites with content and advertising space sold to local businesses in those
markets.
The Company has developed an Internet Service Provider package called
"Community Access America" to offer a turnkey Internet "Point of Presence" to
local cable, telephone and newspaper companies in non-urban markets with
populations from 10,000 to 200,000. The Company has sold five Community Access
America packages as of February 28, 1997. The package is designed to add a new
layer of revenues for the local companies' existing subscriber base. Especially
developed for non-urban areas, Community Access America provides the local
community a link to the Internet and World Wide Web for local and international
information, entertainment and news. The turnkey package includes the hardware,
software, documentation, and marketing and technical assistance that an operator
requires to become an ISP and Web developer. The Company assists with initial
installation and setup of the system for a fixed fee, and sells or may lease the
required equipment to the ISP operator. The ISP solicits subscribers and pays
for Internet access in its local calling area under a contract between the ISP
and MCI, Sprint or other provider of Internet backbone services. The ISP's
customers use their computer modem to dial a local number to connect to the
ISP's equipment that has a digital access line serving as the link to the
Internet. The Company contracts with ISP operators to provide the turnkey
package, for a price which includes the Company's margin, and to provide
continued marketing and technical assistance in exchange for a service fee and a
share of the ISP's gross revenues.
The Company believes that the Community Access America program offers a
local ISP the benefit of a turnkey package that can be readily geared to
advertising by local businesses. The Community Access America program also
includes the Company's proprietary software for use with billing Internet
access. The Company is targeting local cable companies, telephone companies and
newspapers as prospective ISPs. These types of businesses already have an
existing base of consumer and advertising customers but often do not have
experience with the Internet or Web-based technologies. The Company's turnkey
package provides the necessary hardware, software, training and support required
<PAGE>
for providing quality Internet access services and local Web site development.
The Company believes that the end users of Internet access will have an interest
in the Community Access America program because it eliminates long distance toll
charges for Internet access, supports the local community and is a source for
local information and advertising.
The Company has recently introduced a new enhancement for the Community
Access America product under the name "Cable Access America" which is
specifically designed for the cable and wireless television industry. The
enhancement uses hybrid cable modems to deliver data at high speeds to customers
while using conventional telephone modems to send data from the customer to the
Internet. For cable operators, hybrid cable modems do not require costly system
upgrades in their existing plant to be performed in order to offer data
services. This enables cable operators to provide customers with high-speed data
transmission where it is most needed, from the Internet to the customer's
computer, while keeping costs down for the cable operator.
The initial capital investment for an ISP operator purchasing the
Community Access America package ranges from approximately $33,000 to $70,000 or
more, depending on the size of the equipment. The equipment is sized based on
the number of anticipated subscribers. The ISP operator determines the fees
payable by a subscriber. Those fees can range from approximately $10 per month
for a few hours of Internet access to several hundred dollars per month for high
speed access by a frequent user.
In addition to providing Internet access, Community Access America
provides the local ISP training and software to assist the ISP operator with the
design and implementation of Web sites for the local ISP area. The Company has
developed an interactive Web site available to all ISP operators participating
in Community Access America to provide them with continued assistance and
support.
Trademarks and Proprietary Protection
The Company has applied for federal registration of the trademarks
"Community Access America", "WebQuest" and "MD Gateway" and "The Virtual
Salesforce." The Company does not believe that its current products or services
are patentable. The Company plans to rely on a combination of copyright, trade
secret, trademark laws, and nondisclosure and other contractual provisions to
protect its proprietary rights. As a part of its confidentiality procedures, the
Company generally enters into with its officers and employees written
nondisclosure and nonsolicitation agreements which restrict the use and
disclosure of proprietary information and the solicitation of customers for the
purpose of selling competing products or services. The Company has not entered
into noncompetition agreements with its officers, directors or employees.
Because the policing of proprietary rights may be difficult and the ideas and
other aspects underlying the Company's products and services may not in all
cases be protectable under intellectual property laws, there can be no assurance
that the Company can prevent competitors from marketing the same or similar
products and services. In addition, competitors may independently develop
products and services that compete with the Company.
Competition
The market for Internet and Intranet products and services is highly
competitive and the Company expects that this competition will continue to
intensify in the future. The Company's current and prospective competitors
include many companies that have substantially greater financial, technical,
marketing, and other resources than the Company. Increased competition could
result in price reductions and increased spending on marketing and product
development. Any of these events could have a material adverse effect on the
Company's financial condition and operating results. There can be no assurance
that the Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, financial condition, and results of
operations.
There are many nationally known companies and regional and local
companies across the country that are involved in Internet and Intranet
applications, including the development and support of Web sites, and the number
of competitors is growing. Andersen Consulting LLP and Electronic Data Systems
Corporation are large custom software developers, integrators and resellers
whose services include a broad range of Internet and Intranet applications. In
addition, many of the Internet access providers also provide Web site
development services. The Company believes that in most urban markets there
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are growing numbers of software and consulting firms that provide a wide range
of Web site design and support services. Competitors in the Denver market
include Eagle River Interactive, Inc., Navidec, Inc., Rocky Mountain Internet
and SuperNet, Inc. The Company will also compete with the internal information
system departments of prospective customers who are choosing whether to
outsource design and support or retain or develop that function in-house.
In the market for Internet and Intranet business solutions that use
self-service applications such as Edify's Electronic Workforce, competitors
include systems integrators and potential customers' internal information system
departments. Since the Company's reseller agreement with Edify is nonexclusive,
the Company competes with Edify and other resellers of Edify products. In the
future, the Company expects competition from Netscape Communications
Corporation, Microsoft and others to increase. The Company also expects database
vendors such as Oracle Systems Corporation, Sybase, Inc. and Informix
Corporation to provide many of the capabilities needed in the development of the
Internet and Intranet self-service applications. Where appropriate, the Company
plans to serve as a value-added reseller of other software products that are
complementary or alternatives to the Edify products.
Many online and Internet-based services for the healthcare industry
exist or are under development by various organizations. Intense competition
could jeopardize the success of the Company's healthcare product offerings.
Individuals and businesses connect directly to the Internet through
Internet Service Providers, including MCI Telecommunications Corporation
("MCI"), AT&T, Sprint Corp. ("Sprint"), Microsoft, NETCOM On-Line Communications
Services, Inc. ("NETCOM"), Performance Systems International, Inc. ("PSINet"),
UUNET Technologies, Inc. ("UUNET"), Bolt Beranek & Newman Inc. ("BBN") and
others. There are also many local ISPs providing Internet access principally in
urban markets. These companies are competitors to OSS, which provides Internet
access services in the Denver Metropolitan area market. Internet access services
are growing nationwide as easy-to-use software packages make accessing the
Internet as easy as getting to the popular online services. To compete with
these direct Internet access providers, consumer online services including
America OnLine, Inc. ("AOL"), CompuServe, Inc. ("CompuServe"), and Prodigy
Services Co. ("Prodigy"), have Internet access gateways for their existing
subscribers. With these gateways, the online services effectively become large
Internet "on-ramps" bringing large numbers of subscribers onto the Internet.
In the Denver market, the Company competes with nationally known and
local ISPs for Internet access, including MCI, AT&T, Microsoft, NETCOM, PSINet,
UUNET, as well as Rocky Mountain Internet and SuperNet Inc. Ameritech has
partnered with Concentric Networks Corporation to sell, primarily to independent
telephone companies, Internet access in non-urban markets. Management believes
that the Community Access America pricing structure is currently more
advantageous to potential ISP's than the Ameritech program. The Company expects
that competition with its Community Access America program will grow as the
large urban markets for Internet access begin to mature and the large ISPs look
to open smaller markets. The Company is aware of at least one company which has
developed a program which competes with OSS's Cable Access America product.
Government Regulation
The Company's products and services pertaining to Web site content and
development are not currently subject to direct regulation by the Federal
Communications Commission or any other federal or state agency, other than
regulations applicable to businesses generally. Changes in the regulatory
environment relating to the Internet content or connectivity industries,
including regulatory changes that directly or indirectly affect
telecommunication costs or increase the likelihood or scope of competition from
regional telephone companies or others, could have a material adverse effect on
the Company's business. The Company cannot predict the impact, if any, that
future regulation or regulatory changes may have on its business.
Employees
At February 28, 1997, the Company employed 42 people, all of whom are
full time employees.
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The directors and executive officers of the Company are as follows:
Name Position
R. Steven Adams President, Chief Executive Officer and a Director
Thomas S. Plunkett Chief Financial Officer
Robert M. Geller Secretary and a Director
Paul H. Spieker Vice President-Technical Operations and a Director
D. Kent McBride Vice President-Learning and Performance
William Eager Vice President-Web Services
Vincent D.Bradshaw Vice President-Sales
Robert J. Lewis Director
H. Robert Gill Director
Richard C. Jennewine Director
........R. Steven Adams, founder of OSS, has served as President, Chief
Executive Officer and a director since the Company's incorporation in March
1994. From 1985 to 1994, Mr. Adams was President-Sheridan Hotel Management, a
full service hotel management company. Mr. Adams was the creator and founder of
HotelNet, which was an online information system for the hospitality industry.
Mr. Adams' experience includes software development, personal computer
manufacturing and management of online information systems.
........Thomas S. Plunkett, has served as Vice President-Chief Financial Officer
of the Company since October 1996. From 1995 to 1996 Mr. Plunkett was the Vice
President of Business Management at Maxtor Corporation, a manufacturer of disk
drives. From 1994 to 1995 Mr. Plunkett was the Vice President of Operations for
Hi-Tech Manufacturing, an electronic manufacturing services company. From 1992
to 1994 he was a Controller at Conner Peripherals, a manufacturer of disk
drives. From 1989 to 1992, Mr. Plunkett served as Vice President and C.F.O. of
Discovery Technologies, a manufacturer of high resolution medical image
transmission equipment. Prior to joining Discovery Technologies, Mr. Plunkett
held various senior operations and financial management positions with
Miniscribe Corporation from 1982 to 1989.
........Robert M. Geller, has been a director and corporate secretary of the
Company since May 1995. He also served as Vice President-Chief Financial Officer
of the Company on a one-half time basis from May 1995 to October 1996. Mr.
Geller currently provides services to the Company on a part time basis. From
1986 to the present, Mr. Geller has been President of The Growth Strategies
Group, a consulting company specializing in board and executive services for
emerging growth companies. Mr. Geller is a director of Integral Peripherals,
Inc., a privately held manufacturer of computer disk drives; Renaissance
Entertainment Corporation, a publicly held owner and operator of renaissance
fairs; and Armanino Foods of Distinction, Inc., a publicly held producer of
Italian foods.
........Paul H. Spieker, has been Vice President-Technical Operations of the
Company since February 1995. From 1992 to 1994 Mr. Spieker was President of
Business Regulatory Coalition-Colorado, a public affairs company responsible for
policy formulation and activities primarily dealing with regulatory matters
representing companies before the Colorado Public Utilities Commission. From
1991 to 1994, he was a private consultant primarily for businesses in voice and
data communications. From 1990 to 1991, Mr. Spieker was President of Developers
Cable Construction, a startup company providing contract construction services
for residential developers and local telephone and cable companies. From 1987 to
1990, Mr. Spieker was employed by Volt Information Sciences, Inc., a New York
based telecommunications company. Mr. Spieker was employed by U S WEST
Communications, Inc. and its predecessor from 1966 to 1987 and served in several
senior management capacities, including the head of the strategic business unit
which served large telephone customers in a seven state territory.
........D. Kent McBride, has been Vice President-Learning and Performance of the
Company since December 1995 and served as Vice President of Business Development
from May 1995 to December 1995. From May 1994 to May 1995, Mr. McBride was an
independent consultant and developed and delivered accelerated learning classes
for clients ranging from nuclear power plants to the U.S. Air Force and the
Colorado Department of Revenue. From January 1993 to May 1994, he was employed
by The Boulder Center of Accelerated Learning, a training firm based in Boulder,
Colorado. From October 1992 to January 1993, he was a software and training
consultant.
<PAGE>
Mr. McBride served as customer service manager for the Association of Brewers, a
publisher for the home and micro brewing industries, from May 1992 to October
1992. From March 1991 to May 1992, he was a consultant to industry for team
building and personal leadership.
........William Eager, has been Vice President-Web Services of the Company since
March 1995. From 1990 to 1995, Mr. Eager was an author publishing for Prentice
Hall Publishing and Que Corporation. During that time Mr. Eager wrote seven
books on the Internet and electronic communications. Mr. Eager is the author of
the book "Using the World Wide Web," published in 1994 by Que Corporation. From
1987 to 1990, he was Director-Corporate Communications for BASF Corporation, an
electronic media company. Mr. Eager provides his full time services to the
Company and without restriction from any publisher. If Mr. Eager elects to
author additional books, he would do so on his own time. The Company believes it
benefits from Mr. Eager's reputation as an author in the Internet and technology
application fields.
........Vincent D. Bradshaw, joined the Company as Director-Sales in June 1996
and was promoted to Vice President-Sales and made an officer of the Company in
September 1996. From May 1993 to May 1996, he was Director of Business
Development for Source One Management, Inc., a privately held Denver based
company in the business of providing technical operations management and
engineering services. From 1987 to 1996, Mr. Bradshaw was an independent, Denver
based marketing and business consultant, doing business as Foresight Business
Services. As a consultant, he provided marketing and business operations advice
to a number of private and public companies. From May 1981 to December 1986, Mr.
Bradshaw was employed by Mountain Bell and its parent company US West Inc. in
different sales positions leading to his being named Vice President-Federal
Services from 1985 to 1986. From August 1960 to April 1981, he held progressive
technical operations, engineering and sales/marketing positions with AT&T
Company in several eastern states. Mr. Bradshaw is currently a business advisor
with the Boulder Technology Incubator, a not-for-profit corporation that assists
fledgling inventors and firms in marketing their technologies.
........Robert J. Lewis, has been a director of the Company since February 1995.
Mr. Lewis retired in October 1995 after having spent 37 years in the cable
television industry as an owner and developer of cable systems and senior
executive with several cable television companies. From 1987 until his
retirement, Mr. Lewis was employed by TCI Telecommunications, Inc. ("TCI"), one
of the largest cable television companies in the United States. Mr. Lewis served
as a Senior Vice President of TCI from 1991 to 1993 and as a Senior Advisor to
TCI from 1993 until his retirement.
........H. Robert Gill, has been a director of the Company since August 1996.
From April 1996 to the present, Mr. Gill has been the President of The Topaz
Group, a consulting company offering board of director services to high
technology, emerging growth public and private corporations. From March 1995 to
March 1996, Mr. Gill was the Senior Vice President and President, Enhanced
Products Group for Frontier Corporation, a telecommunications company. From
January 1989 to March 1995 he was President, Chief Executive Officer and a
director or Confer-Tech International, Inc. Mr. Gill is a director of TOPRO,
Inc., a systems integration company offering equipment and services to a variety
of growth manufacturing industries, QualMark Corporation, a provider of
accelerated Life testing equipment and services, MOSAIX, Inc., a marketer of
inbound and outbound call center systems and services, and Spatial Technologies,
Inc., a developer and marketer of three dimensional modeling software for CAD
applications.
........Richard C. Jennewine, has been a director of the Company since November
1996. From September 1995 to the present, Mr. Jennewine has been
President-International Operations and Regional Manager-Western Operations for
Computer Aid, Inc. a leader in strategic outsourcing and information services
consulting. From December 1991 to February 1995, Mr. Jennewine served as the
Senior Vice President of the CONCORD Group, a privately held entrepreneurial
group of 40 significant international enterprises. From January 1994 to February
1995, he served as the President of the Concord Trading Corporation, a company
focusing on trading and business ventures in Asia, Russia, the Middle East and
South America. Prior to these positions, Mr. Jennewine spent 26 years with IBM
Corporation, including startup operations in mainland China. Mr. Jennewine is a
director of Easter Seals of Colorado and is a member of the Corporate Management
Committee of Computer Aid, Inc.
<PAGE>
........Mr. Geller currently provides services to the Company on a part-time
basis. All of the other officers of the Company are full time employees of the
Company. There are no family relationships among any of the directors or
executive officers of the Company.
Item 2. DESCRIPTION OF PROPERTY.
........The Company's principal offices are located in approximately 12,600
square feet of space in Denver, Colorado, leased for a period of three years
ending on September 30, 1999. The current base monthly rental is $13,657. The
spouse of R. Steven Adams, President, Chief Executive Officer and a director of
the Company, is an officer of the firm which manages the building where the
Company's principal offices are located.
Item 3. LEGAL PROCEEDINGS.
........Not Applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
........Not applicable.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The number of record holders of the Company's Common Stock ("Common
Stock") and Common Stock Purchase Warrants ("Warrants") on February 28, 1997 was
64 and 8, respectively. The Company estimates that the number of beneficial
owners of the Common Stock on February 28, 1997 exceeded 1,200. Prior to May 23,
1996 there was no public trading market for the Common Stock and Warrants. Since
May 23, 1996, the high and low sale prices for the Common Stock and the Warrants
as reported on the Nasdaq Small Cap Market are shown in the table below, based
on information provided by the Nasdaq Stock Market. These quotations represent
prices between dealers, and do not include retail markups, markdowns or
commissions, and may not represent actual transactions.
COMMON STOCK WARRANTS
------------------------- ----------------------
Quarter Ended High Low High Low
1996
June 30 11-1/4 5-5/8 3 7/8
September 30 6-1/4 3-1/8 1-1/2 1/2
December 31 5-1/8 3-1/4 7/8 3/8
The Company has never paid a cash dividend on its Common Stock. The
payment by the Company of dividends, if any, in the future rests within the
discretion of its Board of Directors and will depend, among other things, upon
the Company's earnings, capital requirements and financial condition.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
General
The Company develops, markets and supports sophisticated, high-end Web
sites for customers' use on the Internet or Intranets. The Company generates
revenues through the sale of design and consulting services for Web site
development, resale of software licenses, mark-ups on computer hardware and
software sold to customers, maintenance fees charged to customers to maintain
computer hardware and Web sites, license fees based on a percentage of revenues
from the Community Access America program, training course fees, and monthly
fees paid
<PAGE>
by customers for Internet access provided by the Company in the Denver market.
The Company commenced sales in February 1995, and was in the development stage
through December 31, 1995.
Results of Operations
The following table sets forth for the periods indicated the percentage
of net sales by items contained in the statements of operations. All percentages
are calculated as a percentage of total net sales, with the exception of cost of
services and cost of hardware and software which are calculated as a percentage
of service sales and hardware and software sales, respectively.
For the Twelve Months Ended
December 31
---------------------------
1996 1995
---- ----
Net Sales:
Service sales 77.9% 59.4%
Hardware and software sales 22.1% 40.6%
----- -----
Total net sales 100.0% 100.0%
Cost of sales:
Cost of services (as percentage of service sales) 63.7% 70.3%
Cost of hardware and software (as percentage of
hardware and software sales) 72.8% 83.4%
----- -----
Cost of sales 65.7% 75.6%
----- -----
Gross Margin 34.3% 24.4%
----- -----
Operating expenses:
Sales and marketing expenses 43.8% 21.2%
Product development expenses 32.0% 20.1%
General and administrative expenses 61.8% 98.7%
Depreciation and amortization expense 7.4% 5.3%
----- -----
Total operating expenses 145.0% 145.3%
Loss from operations (110.7%) (120.9%)
Net Loss (98.3%) (121.2%)
Twelve Months Ended December 31, 1996 and 1995
Net sales for the twelve months ended December 31, 1996 total
$1,445,042, including $1,125,617 for service sales and $319,425 for hardware and
software sales. This represents an increase of 263.3% above 1995 net sales of
$397,756, which consisted of $236,412 for service sales and $161,344 for
hardware and software sales. Net sales for the 1995 period were predominantly
from two initial customers. In 1966, one customer accounted for sales in excess
of 10% of net sales. The increase in sales for the 1996 period, compared to
1995, was due to the expanded development of the Company's product and service
offerings and to a substantial increase in marketing and sales activities in
general.
Cost of sales as a percentage of net sales was 65.7% for the 1996 period
and 75.6% for the 1995 period. 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. Cost of sales on hardware and software sales are
generally higher than on service sales. Therefore, the Company's overall gross
profit margin is higher during periods when service sales are a greater
percentage of total net sales. The decrease in the cost of sales as a percentage
of net sales in the twelve-month period of 1996 is due to the higher percentage
of service sales in the 1996 period, compared to the 1995 period, and the higher
relative fixed costs associated with providing initial services during 1995.
<PAGE>
Sales and marketing expenses were $633,025 for the 1996 period and
$84,444 for the 1995 period. Sales and marketing expenses as a percentage of net
sales increased from 21.2% in 1995 to 43.8% in 1996. The increase in dollars
spent, as well as the increase as a percentage of net sales during the 1996
period, 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 and services. Because of
the potentially long sales cycle for the Company's products and services, and
the recent introduction of new products and services in the healthcare and
Community Access America areas, sales and marketing expenses are expected to
increase at a faster rate than net sales during the next several quarters,
resulting in an increased percentage of net sales for these expenses.
Product development expenses were $462,108 for the twelve months ended
December 31, 1996, compared to $79,760 for the 1995 period. Product development
expense as a percentage of net sales increased from 20.1% in 1995 to 32.0% in
1996. The increase in these expenses, as well as the increase as a percentage of
net sales during the 1996 period, reflects the continued development of the
Company's products and services. Product development expenses during the 1996
period include enhancements to the Community Access America products with an
emphasis during the fourth quarter on a line of new offerings targeted at the
cable industry, continued development work on WebQuest, an interactive design
process intended to expedite the design of Web sites, and initial feasibility
studies on various broadbanned transmission products and services. During the
fourth quarter of fiscal 1996, the Company also developed a group of Web-based
products and services targeted to continuing medical education ("CME")
providers. Product development expenses during the 1995 period included the
development of the Company's training courses entitled "The Internet Game" and
"The Business Person's Guide to the Internet" which are primarily being utilized
as marketing tools to enhance Web development sales activity and the initial
development of the Community Access America products and services. Product
development expenses are expected to continue to increase during fiscal 1997 as
the Company continues to develop the Community Access America and CME products
and services and investigates the feasibility of other product offerings.
General and administrative expenses were $892,799 for the twelve months
ended December 31, 1996, compared to $392,600 for the 1995 period. General and
administrative expenses as a percentage of net sales decreased from 98.7% in
1995 to 61.8% in 1996. The dollar increase reflects the development of the
Company's general and administrative infrastructure, including finance,
accounting, business development and investor relation capabilities, as well as
additional expenses related to being a public company. The expenditures as a
percentage of net sales decreased during 1996 compared to 1995 as a portion of
the general and administrative infrastructure expenses represents fixed costs
that do not increase at the same rate as increases in net sales.
Depreciation and amortization expenses were $106,814 for the twelve
months ended December 31, 1996, compared to $20,936 for the 1995 period. This
increase reflects the increase in fixed assets and equipment to support higher
levels of Web site and Internet access services, as well as to support the
growth in the number of employees. During 1996, the Company enhanced its
training facility utilized to educate potential customers.
Other income (expense) was $179,192 during the twelve-month period
ended December 31, 1996, compared to ($1,479) for the 1995 period. Upon
completion of the Company's initial public offering in May 1996, the Company
paid a portion of its outstanding debt resulting in a reduction of future
interest expense and began earning interest income on the invested net proceeds.
The Company's investments consist of U.S. Treasury Bills and cash equivalents.
Net losses were $1,420,432 in the twelve-month period ended December
31, 1996 compared to $482,239 for the 1995 period. These losses reflect expenses
incurred to develop and identify the Company's initial products and services,
and to develop marketing and sales programs and operational and administrative
expenses incurred to support its business. The Company expects to continue to
experience increased operating expenses and capital investments during fiscal
1997, as it continues to develop new product offerings and the infrastructure
required to support its anticipated growth. The Company believes that,
initially, these expenses are expected to be greater than increases in net sales
and, more likely than not, will result in substantial operating losses in the
first, second and third quarters of fiscal 1997. The Company expects to report
an operating loss for the full year ending December 31, 1997.
<PAGE>
Liquidity and Capital Resources
As of December 31, 1996, the Company had cash and cash equivalents of
$1,645,163, short-term investments of $3,855,343 and working capital of
$5,698,288. The Company has financed its operations and capital equipment
expenditures through a combination of public and private sales of common stock,
issuing common stock for services, lease financing, short-term loans and the
utilization of trade payables. During 1996, the Company completed an initial
public offering of its common stock which resulted in net proceeds to the
Company of $7,231,981 and the issuance of an additional 1,265,000 shares of
common stock.
During the twelve months ended December 31, 1996, the Company purchased
$459,997 of fixed assets. These purchases were primarily 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 addition
to these amounts, during 1996, the Company entered into an operating lease in
order to make significant upgrades to its Web server, access server and Internet
communications capabilities. As part of the lease agreement, the Company must
maintain an interest-bearing deposit of $222,693, which will be released over
time as lease payments are made. In anticipation of future growth, the Company
expects to invest a minimum of $500,000 during fiscal 1997 to purchase
additional computer equipment, software and office equipment.
Accounts receivable balances increased from $98,282 at December 31, 1995
to $229,350 at December 31, 1996, due to the increased sales level during fiscal
1996. Due to the Company's utilization of the percentage of completion method
of revenue recognition for its Web services, an asset of $90,337, representing
revenue earned and not billed, is shown as accrued revenue receivable at
December 31, 1996. A liability for amounts invoiced but not earned of $48,669 is
shown as deferred revenue at December 31, 1996. The Company's hardware and
software inventory of $195,941 at December 31, 1996, consists of software
licenses purchased by the Company for resale.
Prepaid expenses increased to $132,544 at December 31, 1996, from $5,000
at December 31, 1995, primarily due to amounts paid under a marketing and sales
agreement with an independent company. These amounts consist of advanced
consulting fees, sales commission advances and travel advances that are expected
to be earned through commissions on sales of the Company's CME products and
services. Trade account payables at December 31, 1996, increased to $331,809
from $74,990 at December 31, 1995, due to the increased level of business
activity and associated expenses and acquisition of software and hardware
inventory, as well as equipment, which acquisitions occurred near the
end of the 1996 period.
The Company believes that its cash and cash equivalents and working
capital are adequate to sustain operations for at least the next twelve months.
If sufficient cashflow is not being generated at the end of this period, the
Company may be required to seek additional funds through equity, debt or other
external financing. There is no assurance that any additional capital resources,
which the Company may need, will be available if and when required, and on terms
that will be acceptable to the Company.
<PAGE>
Length of Sales Cycle; Potential Fluctuations in Quarterly Results
The development and implementation of interactive Web sites is often an
enterprise-wide decision by prospective customers and may require the Company to
engage in a lengthy sales cycle. The pursuit of sales leads typically involves
an analysis of the prospective customer's needs, preparation of a written
proposal, one or more presentations and contract negotiations. The Company often
provides significant education to prospective customers regarding the use and
benefits of Internet or Intranet technologies and products such as Edify's
Electronic Workforce. Extensive Web site development or licensing of Electronic
Workforce may also involve a substantial commitment of capital and the attendant
delays frequently associated with approving large capital expenditures and
reviewing new technologies that affect key operations. While the sales cycle
varies from customer to customer, it typically has ranged from one to six months
for Web site design and support, and from one to three months for Community
Access America projects. The sales cycle may also be subject to a prospective
customer's budgetary constraints and internal acceptance reviews, over which the
Company has little or no control. Consequently, if sales forecasted from a
specific customer for a particular quarter are not realized in that quarter, the
Company is unlikely to be able to generate revenue from alternate sources in
time to compensate for the shortfall. If a larger order is delayed or lost to a
competitor, the Company's revenues for that quarter could be materially
diminished. Moreover, to the extent that significant sales occur earlier than
expected, operating results for subsequent quarters may be adversely affected.
Further, as a result of the Company's limited operating history, the
Company does not have historical financial data for a sufficient number of
periods on which to base planned operating expenses. Accordingly, the Company's
expense levels are based in part on its expectations as to future revenues and
to a large extent are fixed. The Company typically operates with little or no
backlog and the sales cycles for its products and services may vary
significantly. As a result, quarterly sales and operating results generally
depend on the volume and timing of and ability to close customer contracts
within the quarter, which are difficult to forecast. The Company may be unable
to adjust spending on a timely manner to compensate for any unexpected revenue
shortfalls. Accordingly, any significant shortfall of demand for the Company's
products and services in relation to the Company's expectations would have an
immediate adverse impact on the Company's business, operating results and
financial condition. In addition, the Company plans to increase its operating
expenses to fund product development and increase sales and marketing. To the
extent that such expenses precede or are not subsequently followed by increased
revenues, the Company's business, operating results and financial condition will
be materially adversely affected.
Forward Looking Information
Information contained in this report, other than historical information,
should be considered forward looking and reflects management's current view of
future events and financial performance that involve a number of risks and
uncertainties. The factors that could cause actual results to differ materially
include, but are not limited to, the following: general economic product
development and technology changes; competition and pricing pressures; length of
sales cycle; variability of sales order flow; and management growth.
<PAGE>
Item 7. FINANCIAL STATEMENTS.
ONLINE SYSTEM SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants 17
Balance Sheets as of December 31, 1996 and 1995 19
Statements of Operations for the Years Ended December 31, 1996 and 1995 20
Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1996 and 1995 21
Statements of Cash Flows for the Years Ended December 31, 1996 and 1995 22
Notes to Financial Statements 24
<PAGE>
INDEPENDENT AUDITORS' REPORT
To Online System Services, Inc.:
Board of Directors
Online System Services, Inc.
Denver, Colorado
We have audited the accompanying balance sheet of Online System Services, Inc.
as of December 31, 1995, and the related statements of operations, stockholders'
equity (deficit) and cash flows for the year ended December 31, 1995. 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 audit.
We conducted our audit 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 audit provides 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 Online System Services, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Jones, Jensen & Company
Salt Lake City, Utah
February 9, 1996.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Online System Services, Inc.:
We have audited the accompanying balance sheet of ONLINE SYSTEM SERVICES, INC.
(a Colorado corporation) as of December 31, 1996, and the related statements of
operations, stockholders' equity (deficit) and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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 Online System Services, Inc. as
of December 31, 1996, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 28, 1997.
<PAGE>
ONLINE SYSTEM SERVICES, INC.
BALANCE SHEETS
December 31,
1996 1995
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $1,645,163 $ 25,241
Short-term investments 3,855,343 ---
Accounts receivable, net 229,350 98,282
Accrued revenue receivables 90,337 ---
Inventory 195,941 ---
Prepaid expenses 132,544 5,000
Short-term deposit 61,015 ---
----------- ----------
Total current assets 6,209,693 128,523
----------- ----------
Equipment, net (Notes 3 and 6) 486,344 97,215
Other assets 164,616 1,994
---------- ----------
$6,860,653 $227,732
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $331,809 $ 74,990
Accrued expenses 17,684 11,020
Accrued salaries and taxes payable 82,806 19,403
Short-term notes payable (Note 4) -- 50,814
Current portion of note and capital leases payable 30,437 17,017
(Notes 6 and 11)
Note payable-related party (Note 11) -- 12,707
Deferred revenue 48,669 --
---------- ---------
Total current liabilities 511,405 185,951
---------- ---------
Note and capital leases payable (Notes 6 and 11) 32,647 42,232
Commitments and Contingencies (Notes 7, 11 and 12)
Stockholders' equity (deficit):
Preferred stock, no par value, 5,000,000 shares
authorized, no shares issued or outstanding -- --
Common stock, no par value, 10,000,000 shares
authorized, 3,162,545 and 1,625,000 shares
issued and outstanding, respectively 7,953,665 272,864
Stock subscriptions receivable (Note 8) (586) (57,269)
Accumulated deficit (1,636,478) (216,046)
----------- ---------
Total stockholders' equity (deficit) 6,316,601 (451)
----------- ---------
$ 6,860,653 $ 227,732
=========== =========
The accompanying notes to financial statements are an integral part of these
balance sheets.
<PAGE>
<TABLE>
ONLINE SYSTEM SERVICES, INC.
STATEMENTS OF OPERATIONS
<CAPTION>
Year Ended
December 31,
-----------------------------
1996 1995
<S> <C> <C>
Net Sales:
Service sales $1,125,617 $236,412
Hardware and software sales 319,425 161,344
------------ ------------
1,445,042 397,756
Cost of sales:
Cost of services 717,409 166,224
Cost of hardware and software 232,511 134,552
------------ ------------
949,920 300,776
------------ ------------
Gross margin 495,122 96,980
Operating expenses:
Sales and marketing expenses 633,025 84,444
Product development expenses 462,108 79,760
General and administrative expenses 892,799 392,600
Depreciation and amortization 106,814 20,936
------------ ------------
2,094,746 577,740
------------ ------------
Loss from operations (1,599,624) (480,760)
Other income (expense):
Interest income (expense) 179,192 (1,635)
Other --- 156
------------ ------------
179,192 (1,479)
------------ ------------
Loss before provision for income taxes (1,420,432) (482,239)
Provision for income taxes --- ---
------------ ------------
Net loss $(1,420,432) $(482,239)
============ ============
Net loss per common and common equivalent share (Note $ (.52) $ (.19)
2)
============ ============
Weighted average common and common equivalent shares
outstanding (Note 2) 2,742,654 2,550,695
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE>
<TABLE>
ONLINE SYSTEM SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<CAPTION>
Stock Total
Common Stock Subscriptions Accumulated Stockholders'
Shares Amount Receivable Deficit Equity (Deficit)
------ ------ ------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1994 --- $ --- $ --- $ --- $ ---
Common stock issued to founder
for cash at an average
price of $0.0002 per share 480,000 100 --- --- 100
Common stock issued to founders
for services rendered at
$0.05 per share 125,000 6,250 --- --- 6,250
Common stock issued for services
rendered at $0.56 per share 370,000 207,707 --- --- 207,707
Stock subscriptions receivable
(Note 8) --- --- (57,269) --- (57,269)
Common stock issued in private
placement for cash at $0.50
per share 650,000 325,000 --- --- 325,000
Net loss --- --- --- (482,239) (482,239)
Subchapter S corporation losses
allocated to individual
shareholders --- (266,193) --- 266,193 ---
----------- ------------ ------------ ------------- --------------
Balances, December 31, 1995 1,625,000 272,864 (57,269) (216,046) (451)
Common stock issued in
conjunction with private
placement (Note 5) 182,245 410,000 --- --- 410,000
Less offering costs --- (6,330) --- --- (6,330)
Common stock issued in
conjunction with initial
public offering for cash at
$6.75 per unit (Note 5) 1,265,000 8,538,750 --- --- 8,538,750
Less offering costs --- (1,306,769) --- --- (1,306,769)
Exercise of stock options and
warrants (Note 5) 90,300 45,150 --- --- 45,150
Stock subscriptions receivable
(Note 8) --- --- 56,683 --- 56,683
Net loss --- --- --- (1,420,432) (1,420,432)
----------- ------------ ------------ ------------- --------------
Balances, December 31, 1996 3,162,545 $7,953,665 $ (586) $(1,636,478) $ 6,316,601
=========== ============ ============ ============= ==============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE>
<TABLE>
ONLINE SYSTEM SERVICES, INC.
STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended
December 31,
-------------- --------------
1996 1995
<S> <C> <C>
-------------- ------------
Cash flows from operating activities:
Net loss $(1,420,432) $(482,239)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 106,814 20,936
Stock issued for services 36,683 176,688
Changes in operating assets and liabilities:
Increase in short-term deposit (61,015) ---
Increase in accounts receivable (131,068) (98,282)
Increase in accrued revenue receivables (90,337) ---
Increase in inventory (195,941) ---
Increase in prepaid expenses (127,544) ---
Increase in other assets (162,622) (956)
Increase in accounts payable 256,819 74,990
Increase in accrued expenses 70,067 30,423
Increase in deferred revenue 48,669 ---
-------------- ------------
Net cash used in operating activities (1,669,907) (278,440)
-------------- ------------
Cash flows from investing activities:
Purchase of short-term investments (3,855,343) ---
Purchase of equipment (459,997) (92,760)
-------------- ------------
Net cash used in investing activities (4,315,340) (92,760)
-------------- ------------
Cash flows from financing activities:
Proceeds from refinancing equipment --- 45,000
Payments on note payable and capital leases (32,111) (4,473)
Proceeds from issuance of common stock 8,993,900 305,100
Proceeds from (payments on) short-term notes payable (50,814) 50,814
Payments on note payable - related party (12,707) ---
Payments received on stock subscriptions receivable 20,000 ---
Stock offering costs (1,313,099) ---
-------------- ------------
Net cash provided by financing activities 7,605,169 396,441
-------------- ------------
Net increase in cash and cash equivalents 1,619,922 25,241
Cash and cash equivalents at beginning of period 25,241 ---
Cash and cash equivalents at end of period -------------- ------------
$1,645,163 $25,241
============== ============
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE>
</TABLE>
ONLINE SYSTEM SERVICES, INC.
STATEMENTS OF CASH FLOWS (Continued)
Year Ended
December 31,
--------------------------
1996 1995
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid for
Interest $ 12,100 $ 1,635
Supplemental schedule of non-cash
investing and financing activities:
Stock issued for services 36,683 176,688
Equipment acquired from related parties --- 75,051
Capital lease for equipment 5,623 10,500
Note payable to related party for
fixed assets purchased --- 15,929
Note payable for fixed assets purchased 30,323 ---
Intangibles acquired from related parties --- 1,271
Prepaid lease payments --- 5,000
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
Online System Services, Inc. (the "Company") was incorporated on March
22, 1994, under the state laws of Colorado, and principal operations began in
1995. The Company develops, markets and supports World Wide Web ("Web") sites on
the Internet and on proprietary Intranets. The Company designs and implements
Web sites ranging from basic inquiry-only sites to complex, interactive sites
capable of providing online commerce, database integration and manipulation,
sophisticated graphics, animation and other multi-media content. The Company
also serves as a value-added reseller of software capable of allowing the
Internet or Intranet user to use self-service applications such as the online
purchase of products or services, product warranty and support, employee benefit
enrollments and other applications. 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 revenues through the sale of design and consulting
services for Web site development, computer hardware and software sold to
customers of its Web site development services, 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. The Company has incurred operating losses since
its inception, and is devoting significant resources to developing and marketing
its products and services. Although the Company's initial public offering raised
a significant amount of funding, which the Company believes will be sufficient
to fund such product development and marketing, commercial acceptance of the
Company's products and services must occur in the marketplace in sufficient
quantities to allow the Company to generate income sufficient to cover its
selling, marketing, development and administrative expenses. There can be no
assurance that such marketplace acceptance will occur.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue from hardware and software sales is recognized upon shipment
provided that the Company has no further material obligations. Revenue from
maintenance fees, training courses and Internet access are recognized as the
services are performed. License fees are recognized when the Company has no
further material obligations.
Revenue from Web site design and consulting is recognized on the
percentage of completion method on an individual contract basis. Percentage
complete is determined primarily based upon the ratio that labor costs incurred
bear to total estimated costs. The Company's use of the percentage of completion
method of revenue recognition requires estimates of the degree of project
completion. To the extent these estimates prove to be inaccurate, the revenues
and gross margin, if any, reported for periods during which work on the project
is ongoing may not accurately reflect the final results of the project, which
can only be determined upon project completion. Provisions for any estimated
losses on uncompleted contracts are made in the period in which such losses are
determinable.
Amounts earned but not billed are shown as accrued revenue receivables
in the accompanying balance sheets. Amounts invoiced but not earned are shown as
deferred revenue in the accompanying balance sheets.
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents
The Company considers all cash and cash equivalents to include highly
liquid investments with original maturities of 90 days or less that are readily
convertible into cash and are not subject to significant risk from fluctuations
in interest rates.
Short-Term Investments
Short-term investments consist of U.S. Government Treasury Bills. These
investments are classified as held-to-maturity securities and are measured at
amortized cost.
Accounts Receivable
Accounts receivable are shown net of allowance for doubtful accounts of
$64,851 and $5,173 at December 31, 1996 and 1995, respectively.
Equipment
Equipment is stated at cost and depreciation is provided using the
straight-line method over the estimated useful lives of the respective assets.
Maintenance and repairs are expensed as incurred and improvements are
capitalized.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or
market. Inventory consists of finished goods, comprised of software licenses
which the Company has purchased for the purpose of sublicensing the software to
its customers and hardware and software purchased for resale.
Concentration of Credit Risk
The Company has no significant off balance-sheet concentrations of
credit risk such as foreign exchange contracts, option contracts or other
foreign hedging arrangements. The Company maintains the majority of its cash
with financial institutions, in the form of demand deposits.
The Company performs ongoing evaluations of its customers' financial
condition and generally does not require collateral, except for billings in
advance of work performed. Its accounts receivable balances are primarily
domestic.
Income Taxes
The Company recognizes deferred income tax assets and liabilities for
the expected future income tax consequences, based on enacted tax laws, of
temporary differences between the financial reporting and tax bases of assets,
liabilities and carryforwards. Deferred tax assets are then reduced, if deemed
necessary, by a valuation allowance for the amount of any tax benefits which,
more likely than not, based on current circumstances, are not expected to be
realized (Note 10).
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes (Continued)
Until September 26, 1995, the Company operated as an S Corporation
whereby all tax benefits were passed through to the individual shareholders.
Upon termination of the S Corporation, all losses were allocated to the
individual shareholders.
Net Loss Per Common and Common Equivalent Share
Net loss per common and common equivalent share has been computed based
upon the weighted average number of common shares and common share equivalents
outstanding. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common stock and common stock equivalent shares issued by the
Company at prices below the initial public offering price during the twelve
month period prior to the offering (using the treasury stock method for common
stock equivalents and an assumed offering price of $6.75 per unit) have been
included in the calculation as if they were outstanding for all the periods
presented regardless of whether they were antidilutive.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates may affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Long-Lived Assets
Long-lived assets and certain identifiable intangibles to be held and
used by the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Any long-lived assets and certain identifiable intangibles to be
disposed of are reported at the lower of carrying amount or fair value less cost
to sell.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash
equivalents, short-term trade receivables and payables, short-term investments
and notes payable. As of December 31, 1996 and 1995, the carrying values of such
instruments approximated their fair value.
Reclassifications
Certain reclassifications to prior year financial statements have been
made to conform to the current year's presentation.
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(3) EQUIPMENT
Equipment consists of the following:
December 31, December 31,
1996 1995
---------- -----------
Computer equipment $450,743 $139,964
Office equipment 85,558 26,408
Software 83,387 11,939
Leasehold improvements 52,608 ---
---------- -----------
672,296 178,311
Less accumulated depreciation (185,952) (81,096)
---------- -----------
Net equipment $486,344 $ 97,215
========== ===========
The Company depreciates computer equipment, office equipment and
software over five years and leasehold improvements over the life of the lease.
Depreciation expense was $106,814 and $20,703 for the years ended
December 31, 1996 and 1995, respectively. Depreciation expense related to
equipment under capital leases was $17,583 and $8,591 for the years ended
December 31, 1996 and 1995, respectively.
(4) 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 outstanding
as of December 31, 1995, was $50,814 . The payment terms required two payments
of $19,407 through February 1996 and $3,000 per month from March through June
1996. The notes were non-interest bearing, unsecured and no interest was imputed
on the notes because it was not material to the financial statements. The notes
were repaid during 1996.
(5) STOCKHOLDERS' EQUITY (DEFICIT)
Initial Public Offering
In May 1996, the Company completed an initial public offering of its
common stock. The Company sold 1,265,000 units, each consisting of one share of
common stock and one common stock purchase warrant. The units sold at a price of
$6.75 per unit. Total proceeds from the initial public offering after deducting
offering costs of $1,306,769 were $7,231,981.
Private Placement
In March 1996, the Company completed a private placement of common
stock. The Company sold 41 units, each consisting of 4,445 shares of common
stock and 450 common stock purchase warrants. The units sold at a price of
$10,000 per unit. Total proceeds from the private placement, after deducting
offering costs of $6,330, were $403,670.
Preferred Stock
The Board of Directors is authorized to issue up to 5,000,000 shares of
Preferred Stock, in any one or more classes or series, to fix the dividend,
redemption, liquidation, retirement, conversion, voting and other preference
rights for such shares, and to issue options and warrants for the purchase of
such shares, on such terms and for such
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(5) STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
consideration as the Board may deem appropriate. As of December 31, 1996, no
shares of Preferred Stock are issued or outstanding.
Stock Option Plan
During 1995, the Company adopted the 1995 Stock Option Plan (the
"Plan"). The Company may grant options for up to 700,000 shares under the Plan.
The Company has options outstanding for 719,258 shares as of December 31, 1996.
The Company intends to increase the number of shares which may be granted under
the Plan to 1,100,000 at its annual shareholders meeting on May 20, 1997. Under
the Plan, the option exercise price equals the stock's fair market value on the
date of grant. The options vest over various terms with a maximum vesting period
of 42 months and expire after a maximum of ten years. The Company accounts for
the Plan under Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," under which no compensation cost has been
recognized.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation". SFAS 123 defines a fair value-based method of
accounting for employee stock options and similar equity instruments. However,
it also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed by APB
Opinion No. 25. Entities electing to remain with the accounting in APB Opinion
No. 25 must make pro forma disclosures of net income and earnings per share as
if the fair value-based method of accounting defined in SFAS 123 had been
applied. The Company has elected to make the pro forma disclosures in accordance
with SFAS 123 as set forth below.
The fair value of each option grant is estimated on the date of grant
using the Black Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: risk-free interest
rate of 5.9 and 5.7 percent, no expected dividend yields, expected lives of 2.7
and 1.9 years, and expected volatility of 75 percent (actual volatility of the
Company's common stock since the initial public offering.) Fair value
computations are highly sensitive to the volatility factor assumed; the greater
the volatility, the higher the computed fair value of options granted.
Had compensation cost for the Plan been determined consistent with SFAS
123, the Company's net loss and net loss per common and common equivalent share
would have been increased to the following pro forma amounts:
1996 1995
-------------- --------------
Net Loss: As Reported $(1,420,432) $(482,239)
Pro Forma (1,541,985) (495,286)
Net loss per common and
common equivalent share: As Reported $(0.52) $(0.19)
Pro Forma (0.56) (0.19)
Because the fair value method of accounting required by SFAS 123 has not
been applied to options granted prior to January 1, 1995, the resulting pro
forma compensation cost may not be representative of that to be expected in
future years.
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(5) STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
Stock Option Plan (Continued)
A summary of the status of the Plan at December 31, 1996 and 1995, and
changes during the years then ended is presented in the table and narrative
below:
<TABLE>
1996 1995
-------------------------- --------------------------
Weighted Avg. Weighted Avg.
Shares Exercise Price Shares Exercise Price
-------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 510,558 $0.50 - $ -
Granted 466,100 3.28 535,558 0.50
Exercised (85,300) (0.50) - -
Forfeited (172,100) 2.27 (25,000) 0.50
-------- --------- -------- -----------
Outstanding at end of year 719,258 $1.87 510,558 $0.50
======= ========
Exercisable at end of year 209,008 $0.76 133,058 $0.50
======= ========
Weighted average fair value of
options granted during year $1.59 $0.16
</TABLE>
Of the 719,258 options outstanding at December 31, 1996, 437,758 have exercise
prices between $0.50 and $1.25, with a weighted average exercise price of $0.59
and a weighted average remaining contractual life of 4.4 years, of which 201,508
of these options are exercisable and have a weighted average exercise price of
$.64. Of the 719,258 options outstanding at December 31, 1996, 281,500 have
exercise prices between $2.25 and $4.38, with a weighted average exercise price
of $3.87 and a weighted average remaining contractual life of 6.2 years, of
which 7,500 of these options are exercisable and have a weighted average
exercise price of $2.63.
Common Stock Options/Warrants
In September 1995, in conjunction with a consulting agreement entered
into by the Company with Creative Business Strategies ("CBS") (see Note 12), the
Company granted stock options under the Plan to purchase 100,000 shares of the
Company's common stock at an exercise price of $.50 per share, which vest
eighteen months after the date of the agreement and are exercisable for a period
of 5 years. As of December 31, 1996, none of these options are vested.
In December 1995, in conjunction with a business relationship entered
into among Charlie Spickert, Medical Education Collaborative ("MEC") and the
Company (see Note 12), the Company granted stock options under the Plan to
purchase 50,000 shares of the Company's common stock at an exercise price of
$.50 per share. The options vest over 48 months, which vesting may be
accelerated in certain events. As of December 31, 1996, none of these options
are vested.
During December 1995, in connection with the acquisition of the
equipment described in Note 11, the Company issued warrants to purchase 25,000
shares of the Company's common stock at an exercise price of $.50 per share,
which vested immediately and are exercisable for 5 years. On the date of
issuance, the Company determined the warrants had a nominal value. As of
December 31, 1996, 5,000 warrants have been exercised.
In connection with the Company's private placement of common stock in
March 1996, the Company issued warrants to purchase 18,450 shares of the
Company's common stock at an exercise price of $2.25 per share,
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(5) STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
which vested immediately and are exercisable for 5 years. On the date of
issuance, the Company determined the warrants had a nominal value. As of
December 31, 1996, none have been exercised.
In conjunction with the initial public offering in May 1996, the Company
issued 1,265,000 units (including 165,000 units under the over-allotment), each
unit consisting of one share of common stock and one common stock purchase
warrant. Two of such warrants entitle the unitholders to purchase one share of
common stock at a price of $9.00 during the three year period commencing May
1996. Commencing one year from the date of the initial public offering, the
Company will have the right, at its discretion, to call all of the warrants for
redemption on 45 days' prior written notice at a redemption price of $.05 per
warrant if: (i) the closing bid price of the Company's common stock exceeds the
exercise price of the warrants ($9.00) by at least 50% during a period of at
least 20 of the 30 trading days immediately preceding the notice of redemption;
(ii) the Company has in effect a current registration statement covering the
common stock issuable upon exercise of the warrants; and (iii) the expiration of
the 45-day notice period is within the term of the warrants. If the Company
elects to exercise it's redemption right, holders of warrants may either
exercise their warrants, or their warrants will be redeemed.
In conjunction with the initial public offering, the Company issued to
the underwriters an option to purchase 110,000 units (consisting of one share of
common stock and one warrant, of which two warrants purchase one share of common
stock at a price of $9.00) (the "Representative's Securities"). The
Representative's Securities are not exercisable for one year after the date of
the initial public offering. Thereafter, for a period of four years, the
Representative's Securities are exercisable at a price of $8.10 per unit. The
warrants included in the Representative's Securities are exercisable consistent
with those issued in the initial public offering.
(6) NOTE AND CAPITAL LEASES PAYABLE
Note and capital leases payable consist of the following:
December 31, December 31,
1996 1995
------- -------
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 $35,747 $50,000
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 6,485 9,249
Capital lease payable in monthly principal and interest
payments of $198 for thirty-six months beginning
April 26, 1996, effective interest rate at 19.7%,
secured by a phone system 4,293 ---
Note payable for purchase of equipment, monthly principal
payments of $1,588 beginning March 1996 for twelve
months after which payment changes to $625 for the
remaining twenty-four months, effective interest rate of
9.0%, unsecured 16,559 ---
--------- ---------
63,084 59,249
Less-current portion (30,437) (17,017)
--------- ---------
$32,647 $42,232
========= =========
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(6) NOTE AND CAPITAL LEASES PAYABLE (Continued)
Future minimum lease payments under capital leases as of December 31,
1996 are as follows:
1997 $28,355
1998 26,002
1999 594
---------
Total minimum lease payments 54,951
Lease amount representing interest (8,426)
---------
$46,525
=========
Annual maturities of the note payable as of December 31, 1996 are as
follows:
1997 $ 8,282
1998 7,041
1999 1,236
---------
$16,559
=========
(7) ROYALTY AGREEMENT
The Company entered into an agreement with Creative Learning
International ("CLI") for a 5% royalty on all participants in the Internet Game,
"The Adventure Begins." The agreement encompasses 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. Through December 31,
1996, the Company had paid CLI $353 in royalties.
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.
(8) STOCK SUBSCRIPTIONS RECEIVABLE
The Company entered into two stock subscription agreements. The first
agreement stipulates that shares will be paid through the fair market value of
services rendered to the Company. The $36,683 of required services was completed
as of December 31, 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.
(9) MAJOR CUSTOMERS
The Company's sales to customers in excess of 10% of net sales for the
years ended December 31, 1996 and 1995, are as follows:
1996 1995
---- ----
Customer A $149,175 $ ----
Customer B 55,485 157,421
The Company's accounts receivable balances from customers in excess of
10% of the accounts receivable and accrued revenue receivables balance for the
years ended December 31, 1996 and 1995, are as follows:
1996 1995
---- ----
Customer C $ 39,834 $ 8,584
Customer D 33,850 ----
Customer E 900 16,300
Customer F 579 10,500
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(10) INCOME TAXES
For income tax return purposes, the Company has approximately $1,433,002
of net operating loss carryforwards that expire at various dates through the
year 2011. The net operating loss for tax purposes differs from that for
financial reporting purposes due to differences in reporting certain
transactions for income tax and financial reporting purposes. The Tax Reform Act
of 1986 contains provisions which may limit the net operating loss carryforwards
available to be used in any given year if certain events occur, including
significant changes in ownership interests.
The Company has determined that deferred tax assets representing the net
operating loss carryforward, as of December 31, 1996 and 1995, respectively, did
not satisfy the realization criteria. Accordingly, a valuation allowance was
recorded against the entire deferred tax asset. No other significant deferred
tax assets or liabilities existed at December 31, 1996 or 1995.
The difference between the expected statutory rate and the effective
rate is a result of the increase in the valuation allowance.
(11) RELATED PARTY TRANSACTIONS
Note Payable-Related Party
The Company had recorded a note payable to a former officer and
shareholder of the Company of $12,707 at December 31, 1995. The note was
unsecured, noninterest bearing and no interest was imputed on the note because
it is not material to the financial statements. The note was repaid during 1996.
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 6). Amounts due
under capital leases to related parties was $35,747 and $50,000 at December 31,
1996 and 1995, respectively.
Office 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 $9,104, which increases to $13,657 in February 1997 as new space
is occupied.
(12) COMMITMENTS AND CONTINGENCIES
The Company has entered into certain operating lease agreements for
office furniture during 1996 and 1995 which have various expiration dates
through 1999. Minimum future annual lease payments as of December 31, 1996,
including amounts paid to related parties, are as follows:
1997 $352,079
1998 319,382
1999 196,004
---------
$867,465
========
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(12) COMMITMENTS AND CONTINGENCIES (Continued)
In conjunction with an operating lease entered into during 1996, the
Company made a security deposit of $222,693, which will be returned to the
Company during the lease term as payments are made. The security deposit is
included in short-term deposit and other assets in the accompanying balance
sheet.
The total lease expense for the years ended December 31, 1996 and 1995,
was $122,578 and $6,942, respectively.
The Company entered into a business relationship on December 7, 1995
among Charlie Spickert, MEC and the Company. 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. In addition to receiving a percentage of revenues from the results of
the joint efforts of the parties, Mr. Spickert was granted 50,000 common stock
options (see Note 5).
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.
In September 1995, the Company entered into a consulting agreement with
CBS pursuant to which CBS is 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 a month, was granted a stock option to purchase 100,000 shares of
the Company's common stock (see Note 5), 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. 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.
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Change in Accountants
(i) On October 7, 1996, the Company dismissed Jones, Jensen & Company as its
independent accountants effective October 7, 1996.
(ii) The reports of Jones, Jensen and Company, regarding the Company's
consolidated financial statements since the Company's inception on March
22, 1994 through December 31, 1995, contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles, except for a
an explanatory paragraph in Jones, Jensen and Company's report dated
February 9, 1996, concerning the Company's ability to continue as a
going concern.
(iii) The Company's board of directors approved the decision to change
independent accountants.
(iv) In connection with the Company's audits since its inception on March 22,
1994 through December 31, 1995 and through October 7, 1996, there have
been no disagreements with Jones, Jensen and Company on any matter of
accounting principles or practice, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of Jones, Jensen and Company would have caused them to make
reference thereto in their reports on the financial statements for such
years.
New Independent Accountants
(i) On October 7, 1996, the Company engaged Arthur Andersen LLP as its new
independent accountants for the fiscal year ended December 31, 1996.
(ii) Since its inception on March 22, 1994 and through October 7, 1996
the Company did not engage or consult with Arthur Andersen LLP regarding
the matters described in Regulation S-B, Item 304(a)(2).
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Reference is made to the pertinent information contained in the
Company's definitive proxy statement for its 1997 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission, which information is
incorporated herein.
Item 10. EXECUTIVE COMPENSATION.
Reference is made to the pertinent information contained in the
Company's definitive proxy statement for its 1997 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission, which information is
incorporated herein.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Reference is made to the pertinent information contained in the
Company's definitive proxy statement for its 1997 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission, which information is
incorporated herein.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made to the pertinent information contained in the
Company's definitive proxy statement for its 1997 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission, which information is
incorporated herein.
Since inception, the Company has issued the following shares of Common
Stock to certain current or former officers and directors:
<PAGE>
Number of Shares Number of Shares Number of
Recipient Issued to Founder(1) Issued for Services(2) Shares Purchased(3)
- - - --------- -------------------- ---------------------- -------------------
R. Steven Adams 480,000 -- 20,000
Robert M. Geller -- 100,000 55,000
Paul H. Spieker -- 50,000 100,000
Mitchell B. Campbell -- -- 160,000
D. Kent McBride -- 50,000 5,000
William Eager -- 50,000 10,000
Mark D. Rothschild -- 20,000 30,000
Robert J. Lewis -- -- 26,670
- - - -------------
(1) On January 1, 1995, the Company issued 480,000 shares of Common Stock
issued to Mr. Adams, as the founder and promoter of the Company, for a
nominal value ($100).
(2) In March and May 1995, the Company issued an aggregate of 270,000 shares
of Common Stock to the respective officers and directors identified in
the table for services valued at $0.10 per share, which was determined
by the Board of Directors to be the fair market value of the Common
Stock at the time of issuance.
(3) From June through December 1995, the officers and directors identified
in the table purchased an aggregate of 315,000 shares of Common Stock
for cash at a price of $0.50 per share, which was determined by the
Board of Directors to be the fair market value of the Common Stock at
the time of purchase. During fiscal 1996, 65,000 shares were purchased
at a price of $.50 per share pursuant to the exercise of stock options
and 26,670 shares were purchased at a price of $2.25 per share in a
private placement.
During 1995, the Company leased $50,000 of equipment (the "Equipment
Lease") from a partnership whose partners include Robert M. Geller, an officer
and director of the Company. The three year capital lease has an effective
annual interest rate of 14.9%. The Company granted Mr. Geller a five-year
warrant to purchase 5,000 shares of Common Stock at an exercise price of $0.50
per share in connection with the Equipment Lease.
In September 1995, the Company entered into a consulting agreement with
Creative Business Strategies, Inc. ("CBS"), a principal shareholder of the
Company at that time. During 1995, CBS was granted an option to purchase 100,000
shares of the Company's Common Stock at $0.50 per share and was paid $10,000 for
services. During 1995, CBS also purchased 114,000 shares of the Company's Common
Stock for $0.50 per share. The agreement with CBS was replaced with a new
agreement during the first quarter of 1996, under which CBS is to be paid $2,500
for services rendered in January 1996 and $4,000 per month for 36 months
commencing February 1, 1996. CBS is a partner of the lessor under the Equipment
Lease and was granted a five-year warrant to purchase 5,000 shares of Common
Stock at an exercise price of $0.50 per share in connection with the Equipment
Lease.
The Company's principal offices are located in a building managed by
Sheridan Management Company and owned by one of its affiliates. R. Steven Adams'
spouse is a vice president of Sheridan Management Company.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) For Financial Statements filed as a part of this Report, reference
is made to "Index to Financial Statements" on page F-1 of this Report.
For a list of Exhibits filed as a part of this Report, see Exhibit
Index on page 38 of this Report.
(b) The Company filed a report on Form 8-K dated October 7, 1996, reporting
a change in the Company's independent public accountants.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
....... ONLINE SYSTEM SERVICES, INC.
Date: March 28, 1997 ....... By /s/ R. Steven Adams
--------------------
....... R. Steven Adams, President and Chief
Executive
....... Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
/s/ R. Steven Adams ....... March 28, 1997
- - - ------------------------------------
R. Steven Adams,
(President, Chief Executive Officer and a Director)
/s/ Thomas Plunkett ....... March 28, 1997
- - - ------------------------------------
Thomas Plunkett
(Chief Financial Officer & Principal Accounting Officer)
/s/ Paul H. Spieker ....... March 28, 1997
- - - ------------------------------------
Paul H. Spieker
(Director)
/s/ Robert M. Geller ....... March 28, 1997
- - - ------------------------------------
Robert M. Geller
(Director)
/s/ Robert J. Lewis ....... March 28, 1997
- - - ------------------------------------
Robert J. Lewis
(Director)
/s/ H. Robert Gill ....... March 28, 1997
- - - ------------------------------------
H. Robert Gill
(Director)
/s/ Richard C. Jennewine..... March 28, 1997
- - - --------------------------------------------
Richard Jennewine
(Director)
<PAGE>
ONLINE SYSTEM SERVICES, INC.
INDEX TO EXHIBITS
FORM 10-KSB (For Fiscal Year Ended December 31, 1996)
(a) Listing of Exhibits:
3.1 Articles of Incorporation, as amended, of the Company(1)
3.2 Bylaws of the Company(1)
4.1 Specimen form of the Company's Common Stock certificate(2)
4.2 Form of Warrant Agreement dated May 23, 1996 between Corporate Stock
Transfer and the Company, 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 Nonstatutory Stock Option Agreement for options issued to Creative
Business Strategies, Inc.(2)
4.7 Form of Warrant issued in connection with Sale-Leaseback of
Equipment(1)
4.8 Form of Warrant issued to private investors(1)
4.11 Specimen of Warrant Certificate--See Exhibit A filed with Exhibit 4.2
10.1 Certified Solutions Provider Agreement dated March 1, 1996 between
Edify Corporation and the Company(1)
10.1(a) Exhibits E and F to the Certified Solutions Provider Agreement
between Edify Corporation and the Company and filed as Exhibit
10.1(2)
10.2 Joint Marketing and Development Arrangement among the Company, Charlie
Spickert and Medical Education Collaborative(2)
10.3 Consulting Agreement between the Company and Creative Business
Strategies, Inc.(2)
10.4 Equipment Lease Agreement dated December 15, 1995 between the Company
and OSS Equipment Leasing General Partnership(1)
10.5 Financial Advisory Agreement dated February 23, 1996 between the
Company and Cohig and Associates(1)
10.6 Purchase Agreement dated February 7, 1996 between the Company and
WEBAD, Inc.(2)
10.7 Forms of Community Access America Agreements
10.8 Form of Nondisclosure and Nonsolicitation Agreement between the Company
and its employees(2)
10.9 Office Lease for the Company's principal offices(2)
10.10 Agreement dated November 11, 1996, with Telemedical Systems
Integration, Inc.* 13 (The registrant intends to deliver to its
shareholders a copy of 1996 Annual Report on form 10-KSB (without
exhibits), in lieu of a separate Annual Report to Shareholders)
16 Letter on change in certifying accountant(5)
23.1 Consent of Arthur Anderson LLP*
23.2 Consent of Jones, Jensen & Company*
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 Amendment No. 2 to the Registration Statement on Form SB-2,
filed May 16,1996, Commission File No. 333-3282-D.
(4) Filed with Amendment No. 3 to the Registration Statement on Form SB-2,
filed May 22,1996, Commission File No. 333-3282-D.
(5) Filed with the Form 8-K Report, dated October 7, 1996, Commission File
No. 0-28462.
<PAGE>
Exhibit 10.10
COOPERATIVE MARKETING AND
SALES DEVELOPMENT AGREEMENT
THIS AGREEMENT is entered into as of 11/22/96 by and between Online System
Services, Inc., a Colorado corporation ("OSS") and Telemedical Systems
Integration, Inc. ("TMED") a Georgia corporation, and its affiliated company
known as HeathCom Resources, located at: 1008 Chateau Lane, Smyrna, GA 30082,
hereinafter referred to as ("TMED").
WHEREAS, OSS and TMED wish to establish a joint effort to design, market, sell
and produce/deliver online products and services to the healthcare market. The
target markets for these products/services include but are not limited to
pharmaceutical and medical device companies, medical associations, hospitals and
group medical practices ("Market"). The products/services envisioned are
internet and intranet solutions, online CME training, internet access, MD Media,
and other high value online products and services ("Services").
The parties agree that they are each duly qualified for and in the regular
business of providing such Services. The parties envision their relationship to
take the form of a strategic alliance to jointly develop, deliver and more
effectively sell the Services to the Market.
NOW, therefore, the parties agree as follows:
1. RESPONSIBILITES OF THE PARTIES
The parties will jointly:
o Determine the strategic direction of the alliance
o Determine product and services strategy
o Design detailed specifications of Services including benefits to the
customer and business case economics
o Develop packaging and marketing strategy
o Provide access to medical advisory committees for strategic input
OSS will:
o Develop marketing materials
o Provide lead generation support
o Develop all products and deliver all services
o Provide overall coordination of client services and technical support o
Perform billing, collections and accounting for all sales made by TMED o
Perform accounting for and disbursement of all expenses including fees,
commissions and
expenses due to TMED
TMED will:
o Provide lead generation support
o Establish and manage a nationwide sales force in cities mutually acceptable
to the parties (minimum of 6 salespersons)
o Recommend other potential strategic partners
o Offer professional services to clients or potential clients (as a
subcontractor) to OSS o Promote the alliance and OSS through speaking
engagements and other contacts o Facilitate introductions to medical
associations and other healthcare groups o Arrange introductions (as a
seller's broker) to potential CME content providers
<PAGE>
2. TERM: Services shall be performed pursuant to this Agreement for a three-year
period commencing as of the above date, unless terminated earlier in accordance
with paragraph 8. At the conclusion of this term, OSS will have the exclusive
option to extend this Agreement for up to two, additional one-year terms.
Additionally, TMED agrees that OSS has the option to extend TMED's consulting
days in additional 180 day blocks during the term of this agreement and its
extensions at the rate of $1,250 per day.
3. COMPENSATION: For services performed by TMED for OSS under this Agreement,
OSS shall pay to TMED:
For consulting services related to product and market development, and for
introductions to potential content providers:
$225,000 total payable in accordance with the provisions shown on
Schedule A.
For establishment, management and operation of a national sales force:
Commissions on all gross revenues from sales resulting from TMED's
efforts payable in accordance with Schedule B.
An advance against commissions ("Draw") of $25,000 payable upon signing
of this Agreement. Such Draw shall be considered a non-recourse loan
against future commissions earned and OSS shall deduct amounts advanced
prior to payment of any future earned commissions. In addition, OSS will
advance, on a similar basis, up to $12,500 per month during the first
three months of this Agreement to cover travel and other expenses of
TMED if TMED does not have sufficient commission income pursuant to this
Agreement to cover such expenses.
plus reimbursement for expenses as defined in paragraph 5 below.
4. PAYMENT METHOD: TMED shall invoice OSS at the end of each month in which work
is performed under this Agreement. Partial periods at the beginning or ending of
the term of this Agreement shall be invoiced on a pro-rata basis. OSS agrees to
remit payments within fifteen days of receipt of TMED's invoices, except that
earned commissions will be accrued pending receipt of payment for services
rendered from purchasing clients.
5. EXPENSES: Except as specified in Section 3 above, TMED shall seek no
reimbursement from OSS for its normal expenses which include its local office
expense, use of personal automobiles, travel by TMED's principals or sales reps
for sales calls and management of the sales force, and business overhead. TMED
shall utilize its own offices, equipment and computer systems, except for
limited use of OSSs facilities for mutually agreed upon tasks. OSS shall be
responsible for any additional expenditures that it may request TMED to incur in
connection with attending training courses, seminars, meetings and special
events requiring travel by TMED's principals or sales agents outside their
assigned territory, provided such expenses are incurred only with the prior
consent of an authorized officer of OSS and are properly documented and
accounted for.
6. DESIGNATION OF DUTIES: The performance of consulting and other services under
this Agreement shall be under the direction of OSS. TMED agrees to be reasonably
available to provide such services subject to other reasonable obligations of
TMED for non-related activities. TMED further agrees that for consulting
services OSS is acquiring the specific expertise of TMED's principals, Charles
Turcan, Diane Turcan and Sue Kwentus. TMED agrees that it will devote not less
than 180 person days of consulting services, with not less than 90 person days
to be provided during the first year of this Agreement. OSS expects the
direction of the national sales force to be personally overseen by Charles
Turcan. TMED agrees it will ensure the direct participation of these key
personnel and will substitute no other individuals for the these duties, except
with the prior written consent of OSS.
<PAGE>
7. REPORTS: TMED shall maintain continuous work records, time and expense logs
and other such documentation as may be required to substantiate its activities
on behalf of OSS. TMED's records shall be available for inspection by OSS upon
OSS's reasonable request. TMED shall submit a report at the end of each month
summarizing its activities on behalf of OSS.
8. TERMINATION: OSS may terminate this Agreement for cause at anytime upon
notice to TMED, such notification effective with delivery of the notice. Cause
is defined as breach of any portion of this Agreement or any conduct, action or
omission of action on the part of TMED, its employees or agents which has a
material adverse impact on either the reputation of OSS or its ability to market
its Services.
This Agreement may be terminated at the sole option of OSS, at any time after
three months from the date this Agreement is effective if TMED has not staffed
at least six qualified sales representatives in cities acceptable to OSS, and at
any time after six months from the date an initial product is defined by OSS and
training is delivered on that product to at least six TMED sales people if total
cumulative sales are less than $250,000, or after twelve months if total
cumulative sales are less than $1,000,000. For the purpose of this clause, sales
are defined as signed sales orders submitted to OSS by TMED.
Additionally, this Agreement may be terminated by either party upon occurrence
of any of the following:
The insolvency, bankruptcy, reorganization under the bankruptcy laws, or
assignment for the benefit of creditors of either party to the extent there
is a reasonable doubt that such party lacks the resources or ability to
properly perform its obligations herein.
At the end of any twelve month period beginning from the date this Agreement
is effective providing written notice by the terminating party of its
intention to terminate the Agreement is delivered to the other party not
less than 90 days prior to the end of the period.
OSS agrees that in the event of termination, it will continue to remit any
commissions due to TMED on sales secured prior to the effective date of the
termination, and TMED agrees that it will continue to service accounts
throughout the period up to the date of termination.
9. PATENTS AND COPYRIGHTS: TMED agrees that all work produced by TMED pursuant
to this Agreement shall be deemed "works for hire." All rights thereto,
including any patents or copyrights, shall be the sole and exclusive property of
OSS.
10. NON-DISCLOSURE AGREEMENT: TMED agrees to keep confidential and not disclose
to any third party any proprietary information of OSS without the prior express
written consent of OSS. TMED agrees that during the term of this Agreement and
thereafter, TMED will not directly or indirectly use the proprietary information
of OSS other than in the course of performing duties on behalf of OSS on a "need
to know" basis.
As used herein, the term "proprietary information" shall mean any and all
information of a confidential, proprietary or secret nature which is or may be
either applicable to, or related in any way to, the business (present or future)
of OSS, or the research and development or investigation of activities by OSS.
TMED agrees that no information or documents shall be published or otherwise
made public without the prior express written consent of OSS.
11. CLIENT LISTS: TMED agrees that it will fully identify all clients to which
OSS Services are proposed or sold and provide OSS with complete information
about the client, including but not limited to name, title, address, telephone,
fax and email numbers, and business applications being
<PAGE>
addressed. OSS will register such clients in its sales contact management system
and, to the best of its ability, take such actions as are necessary to avoid any
conflicts with the client. OSS, from time to time, may supply TMED with
prospective leads and lists of current or potential clients. Any list of OSS's
clients or customers, whether committed to writing or generally known by TMED,
as such list may exist from time to time, constitutes a valuable and unique
asset of OSS, and TMED hereby agrees that during and at all times after the term
of this Agreement, TMED will not disclose such lists or any part thereof, or the
name of any of OSS's customers to any person, firm, corporation, association or
other entity for any reason or purpose whatsoever without OSS's written consent.
12. RETURN OF DOCUMENTS: Upon termination of this Agreement (whether by
expiration, termination, or otherwise), TMED shall promptly supply to OSS, if
requested to do so, all notes, memoranda, writings, lists, files, reports,
customer lists, prospect lists, correspondence, indexes, machines and any other
tangible products or documents which TMED produced, developed for OSS, received
or otherwise had access to while engaged by OSS. Further, without the prior
written consent of OSS, TMED will not copy and/or take a copy of any such
products or documents in preparation for or upon termination of this engagement.
This clause shall not apply to any materials provided by OSS to TMED as part of
Schedule A, Payment 2.
13. SOLICITATION OF EMPLOYEES: Each party agrees that it will not recruit or
offer employment, either directly or indirectly, to any employee, except those
individuals who regularly and customarily perform free-lance services, who has
been engaged by other party during the term of this Agreement, and for one year
after the termination of such engagement, except with written consent.
14. CONFLICTS OF INTEREST: TMED acknowledges that OSS does not wish to acquire
or use any trade secrets or documents of others. TMED represents and warrants
that it will not disclose to OSS or use any such trade secrets or documents.
TMED represents and warrants that work to be performed under this Agreement will
not require it to violate any confidence of another, and TMED represents and
warrants that it has not entered into any agreement which imposes any obligation
which conflicts with its obligations herein.
15. WARRANTIES BY CONSULTANT: TMED shall not, directly or indirectly, use or
cause OSS to use, in any prohibited manner, any material which is subject to a
patent, trademark or copyright of another without appropriate authorization. In
the event that any work or consultation services performed for OSS by TMED
violates the rights of another, TMED shall indemnify and hold harmless OSS for
any such violation.
It is specifically understood that TMED shall use its best efforts and that
there are no guarantees or warranties concerning the product of those efforts,
except as provided herein. Where a date of completion is given by TMED, TMED
will use its best efforts to complete its services on or before the date given,
but will not be liable for loss or inconvenience caused by delay or failure to
complete the services required on said date.
16. LIMITATION OF LIABILITY: TMED warrants that the services performed by it
herein shall conform to accepted industry practices. However, since TMED has
limited control over the use or application of the work output, the liability of
TMED to OSS herein for damages, regardless of the form of action, shall not
exceed the total amount paid for services rendered under this contract. Except
as specified herein, neither party to this Agreement shall be liable to other
party for damages or losses of any kind, including special, incidental and
consequential damages, loss of anticipated profit, or unabsorbed direct costs or
overhead, or any other losses or claims whatever on account of or arising out of
its activities pursuant to this Agreement.
17. INDEPENDENT CONTRACTOR STATUS: Except for the express purpose of TMED
soliciting sales of OSS's Services, neither party hereto shall be deemed to be
the agent, partner, or representative of the other. Except for duly authorized
sales contracts, neither party shall have
<PAGE>
authority to make any agreement or incur any liability on behalf of the other
party, nor shall either party be liable for any acts, omissions to act,
contracts, commitments, promises or representations made by the other, except as
the parties may otherwise expressly agree in writing. TMED shall be totally
responsible for all taxes, fees, licenses, or other charges required by any
jurisdictions for any compensation to TMED, its officers, employees, agents,
vendors or subcontractors resulting from this Agreement.
18. TMED'S RIGHT TO ENGAGE IN OTHER NON-COMPETITIVE WORK: The parties agree that
OSS shall have no proprietary or other rights to the work or activities of TMED
not directly related to services performed for OSS. Thus, it is acknowledged
that TMED will continue other customary duties and endeavors which are unrelated
to the Services provided by OSS. However, TMED and OSS each agree that during
the course of this Agreement and for one years thereafter, they will not compete
directly or indirectly , with the other or represent or market products or
services of or own 5% or more of any company which competes with the other in
the United States in any business in which the other was engaged as of the
effective date of this Agreement. In addition, Charles Turcan, Diane Turcan and
Sue Kwentus, jointly and severally, agree that following the termination of this
Agreement, they will not, directly or indirectly, engage in, be associated with
or own any interest in any business involved in a business doing business in the
United States which is in competition with the business being conducted by OSS
at the time of the termination of this Agreement for a period of one year
following such termination or, if earlier, until they have provided for the
payment to OSS of an amount equal to any outstanding Draw or advance provided by
OSS.. Nothing in this paragraph 18 shall be construed as to deny either party or
individual signatory to this Agreement the right to pursue any business activity
in which it was engaged as of the date this Agreement was made, or any new
business activity subsequent to the date this Agreement was made which is wholly
separate from and independent of any activity covered by the terms of this
Agreement or any extension thereof.
19. NONEXCLUSIVE ARRANGEMENT: TMED understands that OSS has entered into
strategic business partnerships with various other companies, including but not
limited to, Microsoft Corporation, Edify Corporation, Echostar - The Dish
Network, Worldcom/Gridnet (LDDS), Sprint, Healthcare Communications Group, and
Medical Education Collaborative. It is the nature of these agreements that they
are nonexclusive and their rights and benefits are not transferable to other
parties. OSS anticipates it will continue its existing agreements and make
other, similar arrangements which enhance its service offerings and increase its
access to markets. TMED agrees that nothing in this Agreement shall be construed
as limiting OSS's right to enter into or execute such agreements with other
business partners.
20. ASSIGNMENT: Neither party may assign or otherwise transfer this Agreement or
any of its rights or obligations herein without the prior written consent to
such assignment or transfer by the other party.
21. OPTION FOR FIRST RIGHTS OF REFUSAL: The parties agree that successful
execution of this Agreement will result in the development of a substantial and
potentially lucrative business activity. It is also likely that during the term
of this Agreement or its optional extension, TMED may be approached by other
internet or intranet services providers, content developers, or similar entities
who are offering products, services or similar business arrangements. TMED
agrees that it will offer OSS exclusive right of first refusal to negotiate
jointly with TMED concerning any such arrangement, or alternatively to propose
equivalent arrangements with TMED or third parties. OSS agrees that it will
promptly respond and/or negotiate in good faith to any notice by TMED of the
receipt of all offers from a third party and that agreement will not be
unreasonably withheld.
22. RIGHT OF FIRST REFUSAL: The parties agree that it is the intent of
this Agreement to forge a long term strategic relationship between the parties.
As part of the compensation arrangements, OSS has made available to TMED an
opportunity to acquire substantial beneficial interest in OSS common Stock. If
during the term of this Agreement, or any extension thereof, TMED should
<PAGE>
determine to make a public offering or private placement of its stock, it will
notify OSS of such a determination and offer to OSS the exclusive first right of
refusal to acquire all or part of such offering or private placement at terms no
less favorable than those offered to any third party.
23. ARBITRATION: All claims or disputes arising out of this Agreement
or the breach thereof shall be decided by arbitration in accordance with the
appropriate rules of the American Arbitration Association, then obtaining unless
the parties mutually agree otherwise. Notice of demand for arbitration shall be
filed in writing with the other party to the Agreement and with the American
Arbitration Association and shall be made within a reasonable time after the
dispute has arisen. The arbitration hearing shall be held in Denver, Colorado.
The arbitration award shall be binding and enforceable in any court having
jurisdiction thereover. The cost of the arbitration proceedings, exclusive of
each party's own attorney's fees and out of pocket costs, shall be shared
equally by both parties.
24. SEPARABILITY: If any provision of this Agreement shall be held, declared or
pronounced void, voidable, invalid, unenforceable or inoperative for any reason
by any court of competent jurisdiction, or otherwise, all other provisions of
this Agreement shall remain in full force and effect and be enforced in
accordance with their terms.
25. GENERAL: This Agreement shall be construed and enforced in accordance with
the laws of Colorado. This Agreement shall be binding upon the parties, their
heirs, successors and assigns. This Agreement supersedes all prior agreements
and understandings relating to the subject matter hereof between the parties and
may be modified or amended only in writing signed by the party against whom such
amendment or modification is sought to be enforced.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
ONLINE SYSTEM SERVICES, INC. TELEMEDICAL SYSTEMS INTEGRATION, INC
BY: BY:
R. Steven Adams Charles F. Turcan
President and CEO Chief Executive Officer
1800 Glenarm, 8th Floor 1008 Chateau Lane
Denver, Colorado 80202 Smyrna, GA 30082
The undersigned agree to the provisions of paragraph 18 of the Agreement as they
relate to each of the undersigned.
Charles F. Turcan Dated: ________________, 1996
K. Sue Kwentus Dated: ________________, 1996
Diane Brown Turcan Dated: ________________, 1996
<PAGE>
SCHEDULE A
COMPENSATION TO TMED FOR CONSULTING SERVICES AND INTRODUCTIONS TO POTENTIAL
THIRD PARTY CONTENT SUPPLIERS OR STRATEGIC PARTNERS
TMED will be compensated for consulting services rendered via the following
three methods:
Payment 1: $80,000 in cash for consulting services paid in advance (at contract
signing). This payment will be an advance against performance of future services
and shall be paid by TMED through the performance of services, including sales
of OSS's Services as follows (any amount not so paid by TMED at the termination
of this Agreement shall be paid in cash by TMED upon any such termination).
For the $80,000 advance to be earned by TMED, TMED must provide a minimum of
64 days of consulting services and be credited with commission income ("Credited
Income") in addition to that earned pursuant to the terms of Schedule B of at
least $80,000, such Credited Income to be based on a 15% override to the
commission earned and paid in accordance with Schedule B. For example, on the
first $533,333 of sales of OSS's Services for which TMED is to be paid a
commission pursuant to Schedule B, TMED will be paid $73,333 (14.5% of $533,333
per Schedule B) and will be credited with $80,000 against payment of the advance
(15% of $533,333). The 64 days of consulting services must be performed and the
credited income must be based on revenues for firm contracts accepted by OSS by
December 31, 1997. In the event that the advance is not earned by December 31,
1997, or the termination date of this Agreement, if earlier, TMED shall be
obligated to pay OSS an amount equal to the difference between the Credited
Income as of December 31, 1997, or the termination date of this Agreement, if
earlier, and $80,000, plus an amount equal to $1,250 times the difference
between the number of consulting days actually provided during such period and
64; provided (i) that OSS shall have given TMED a reasonable opportunity to
provide at least 64 consulting days prior to December 31, 1997; and (ii) that
the maximum amount TMED shall be required to pay OSS pursuant to the foregoing
is $80,000. Any amount so owed to OSS by TMED may, so long as this Agreement
remains in effect, be paid by deducting such amount from future commission
payment to be made to TMED pursuant to Schedule B.
Once the $80,000 advance has been earned as indicated above, TMED shall be paid
in cash a commission in addition to the commission to paid pursuant to Schedule
B on the next $933,333 of revenues through December 31, 1997 relating to sales
of OSS's Services for which TMED is to be paid a commission pursuant to Schedule
B, as follows:
Revenues (through Maximum Additional
Rate 12/31/97) Commission
15% $0-133,333 $20,000
7.5% $133,334-933,333 $60,000
Payment 2: $45,000 credit for OSS web development services to create desired
online presence for TMED at OSS market development rates. Amounts not used in
this manner will be paid in cash at the rate of $1,250 per day as consulting
services are provided. Additional OSS costs above $45,000 approved by TMED will
be deducted from commission payments due.
Credited payments made pursuant to this paragraph shall be made before payments
pursuant to the Payment 3 paragraph below. Any portion of the $45,000 credited
amount not used shall be paid in cash after payment pursuant to the Payment 3
paragraph.
Payment 3: The parties agree that it is their intent that the remaining $100,000
shall be paid in 28,000 shares of Online System Services common stock. The
parties agree to develop mutually acceptable procedures for such payment that
are compliant with SEC, IRS and other applicable laws, to be specified in an
amendment to this Agreement on or before December 31, 1996.
<PAGE>
SCHEDULE B
COMMISSIONS AND INCENTIVES FOR SALES BY TMED OF OSS SERVICES
Commissions will be based on gross revenues of all sales completed by TMED.
Sales shall exclude ongoing access, hosting, and maintenance not prepaid and
minor changes to the contract of less than $1,000. Sales made by TMED will be
deemed valid only when the contract is signed and accepted by an authorized
officer of OSS. Commissions will be deemed earned upon acceptance of such
contracts by OSS, but will be paid upon receipt by OSS of payment from end-user
client and after deduction of any outstanding draw balances.
Rate ANNUAL SALES REVENUE MAXIMUM COMM.
14.5% $0-$1,000,000 = $145,000*
15.5% $1,000,001 $2,000,000 = 155,000
16.5% $2,000,001 $3,000,000 = 165,000
17.5% $3,000,001 $4,000,000 = 175,000
19.5% $4,000,001 $5,000,000 = 195,000
22.5% $5,000,000 = 225,000 per Million
plus, a one-time bonus of $50,000 for each $2,500,000 in gross sales in each
calendar year
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 28, 1997, included in this Form 10-KSB into the Online
System Services, Inc.'s previously filed Registration Statement No. 333-13983 on
Form S-8.
Arthur Andersen LLP
Denver, Colorado
March 28, 1997.
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Form 10KSB for Online System
Services, Inc., of our report dated February 9, 1996, relating to the Financial
Statements dated December 31, 1995 of Online System Services, Inc.
Jones, Jensen & Company
March 28, 1997.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
Exhibit 27
INFORMATION FROM ONLINE SYSTEM SERVICES, INC. FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001011901
<NAME> ONLINE SYSTEM SERVICES, INC.
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 1,645,163
<SECURITIES> 3,855,343
<RECEIVABLES> 294,201
<ALLOWANCES> 64,851
<INVENTORY> 195,941
<CURRENT-ASSETS> 6,209,693
<PP&E> 672,296
<DEPRECIATION> 185,952
<TOTAL-ASSETS> 6,860,653
<CURRENT-LIABILITIES> 511,405
<BONDS> 32,647
0
0
<COMMON> 7,953,665
<OTHER-SE> (1,637,064)
<TOTAL-LIABILITY-AND-EQUITY> 6,860,653
<SALES> 319,425
<TOTAL-REVENUES> 1,445,042
<CGS> 232,511
<TOTAL-COSTS> 949,920
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,420,432)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,420,432)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,420,432)
<EPS-PRIMARY> (.52)
<EPS-DILUTED> (.52)
</TABLE>
