<PAGE>
FORM 10-QSB - Quarterly
Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of l934.
For the period ended June 30, 1997.
--------------
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ______________ to _______________.
Commission File Number 0-28462.
----------------
ONLINE SYSTEM SERVICES, INC.
- - ----------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1293864
- - ----------------------------------------------------------------
(State or other jurisdiction I.R.S. Employer
of incorporation or organization Identification No.)
1800 GLENARM PLACE, SUITE 800, DENVER, CO 80202
- - ------------------------------------------------
(Address of principal executive offices) (Zipcode)
(303)296-9200
- - -------------
(Registrant's telephone number, including area code)
Not Applicable
- - --------------
Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [_] NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 12, 1997, Registrant had 3,191,411 shares of common stock
outstanding.
<PAGE>
ONLINE SYSTEM SERVICES, INC.
INDEX
-----
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
UNAUDITED BALANCE SHEETS AS OF JUNE 30, 1997
AND DECEMBER 31, 1996 3
UNAUDITED STATEMENTS OF OPERATIONS, THREE MONTHS AND SIX
MONTHS ENDED JUNE 30, 1997 AND 1996, RESPECTIVELY 4
UNAUDITED STATEMENTS OF STOCKHOLDERS' EQUITY,
SIX MONTHS ENDED JUNE 30, 1997 5
UNAUDITED STATEMENTS OF CASH FLOWS, SIX MONTHS ENDED
JUNE 30, 1997 6,7
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 8,9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-14
PART II. OTHER INFORMATION
ITEM 1-3 & 5. NOT APPLICABLE 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
2
<PAGE>
ONLINE SYSTEM SERVICES, INC.
BALANCE SHEETS
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,727,675 $ 1,645,163
Short-term investments --- 3,855,343
Accounts receivable, net 480,807 229,350
Accrued revenue receivables 211,212 90,337
Inventory 125,622 195,941
Prepaid expenses 305,361 132,544
Short-term deposit 61,015 61,015
------------- -------------
Total current assets 4,911,692 6,209,693
------------- -------------
Equipment, net 682,970 486,344
Other assets 164,671 164,616
------------- -------------
TOTAL ASSETS $ 5,759,333 $ 6,860,653
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 464,467 $ 331,809
Accrued expenses 71,953 17,684
Accrued salaries and taxes payable 121,826 82,806
Current portion of note and capital
leases payable 31,097 30,437
Deferred revenue 85,876 48,669
------------- -------------
Total current liabilities 775,219 511,405
------------- -------------
Note and capital leases payable 16,440 32,647
------------- -------------
Stockholders' equity:
Preferred stock, no par value,
5,000,000 shares authorized, no
shares issued or outstanding --- ---
Common stock, no par value
10,000,000 shares authorized,
3,191,411 and 3,162,545 shares
issued and outstanding, respectively 7,896,848 7,953,665
Stock subscriptions receivable --- (586)
Accumulated deficit (2,929,174) (1,636,478)
------------- -------------
Total stockholders' equity 4,967,674 6,316,601
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 5,759,333 $ 6,860,653
============= =============
The accompanying notes to financial statements are an integral part of these
balance sheets.
3
<PAGE>
ONLINE SYSTEM SERVICES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended Ended
June 30, June 30,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Net sales:
Service sales $ 473,316 $ 192,845 $ 876,206 $ 436,181
Hardware and software sales 175,381 108,246 288,963 131,759
---------- ---------- ------------ ----------
648,697 301,091 1,165,169 567,940
Cost of sales:
Cost of services 296,830 127,697 535,574 268,724
Cost of hardware and software 147,763 82,909 244,055 104,180
---------- ---------- ------------ ----------
444,593 210,606 779,629 372,904
---------- ---------- ------------ ----------
Gross Margin 204,104 90,485 385,540 195,036
---------- ---------- ------------ ----------
Operating expenses:
Sales and marketing expenses 245,403 128,972 531,272 192,146
Product development expenses 229,557 103,011 439,501 169,562
General and administrative expenses 384,846 159,344 741,749 290,476
Depreciation and amortization 38,500 16,471 75,337 26,515
---------- ---------- ------------ ----------
898,306 407,798 1,787,859 678,699
---------- ---------- ------------ ----------
Loss from operations (694,202) (317,313) (1,402,319) (483,663)
Other income (expense):
Interest income (expense) 49,969 27,057 109,623 24,363
---------- ---------- ------------ ----------
Loss before provision for income taxes (644,233) (290,256) (1,292,696) (459,300)
Provision for income taxes --- --- --- ---
---------- ---------- ------------ ----------
Net loss ($644,233) ($290,256) ($1,292,696) ($459,300)
========== ========== ============ ==========
Net loss per common and common
equivalent share (Note 3) ($0.20) ($0.10) ($0.41) ($0.17)
========== ========== ============ ==========
Weighted average common and common
equivalent shares outstanding (Note 3) 3,185,276 3,009,228 3,179,030 2,781,214
========== ========== ============ ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
4
<PAGE>
ONLINE SYSTEM SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Stock Stockholders'
Common Stock Subscriptions Accumulated Equity
Shares Amount Receivable Deficit (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 --- --- (57,269) --- (57,269)
Common stock issued in private
placement for cash at $0.50 per share 650,000 325,000 --- --- 325,000
Net loss --- --- --- (482,239) (482,239)
Subchapter s corporation losses
allocated to individual shareholders --- (266,193) --- 266,193 ---
--------- ---------- ------------- ----------- ------------
Balances, December 31, 1995 1,625,000 272,864 (57,269) (216,046) (451)
Common stock issued in conjunction with
private placement 182,245 410,000 --- --- 410,000
Less offering costs --- (6,330) --- --- (6,330)
Common stock issued in conjunction with
initial public offering for cash at
$6.75 per unit 1,265,000 8,538,750 --- --- 8,538,750
Less offering costs --- (1,306,769) --- --- (1,306,769)
Exercise of stock options and warrants 90,300 45,150 --- --- 45,150
Stock subscriptions receivable --- --- 56,683 --- 56,683
Net loss --- --- --- (1,420,432) (1,420,432)
--------- ---------- ------------- ----------- ------------
Balances, December 31, 1996 3,162,545 7,953,665 (586) (1,636,478) 6,316,601
Exercise of stock options (unaudited) 28,866 18,183 --- --- 18,183
Purchase of option to buy common
stock (unaudited) (Note 6) (75,000) (75,000)
Stock subscriptions receivable
(unaudited) --- --- 586 --- 586
Net loss for the six months ended
June 30, 1997 (unaudited) --- --- --- (1,292,696) (1,292,696)
--------- ---------- ------------- ----------- ------------
Balances, June 30, 1997 (unaudited) 3,191,411 $7,896,848 $ --- ($2,929,174) $ 4,967,674
========= ========== ============= =========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
5
<PAGE>
ONLINE SYSTEM SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months
Ended
June 30,
1997 1996
(Unaudited) (Unaudited)
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,292,696) ($459,300)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 75,337 26,515
Stock issued for services 586 35,016
Changes in operating assets and liabilities:
Accounts receivable (251,457) (119,214)
Accrued revenue receivables (120,875) ---
Inventory 70,319 (101,975)
Prepaid expenses (172,817) (8,494)
Interest receivable --- (23,001)
Other assets (55) (1,101)
Accounts payable 132,659 252,690
Accrued expenses 93,289 40,210
Deferred revenue 37,207 ---
------------ -----------
Net Cash Used in Operating Activities (1,428,503) (358,654)
------------ -----------
Cash flows from investing activities:
Proceeds from short-term investments 3,855,343 ---
Purchase of equipment 271,964 (134,550)
------------ -----------
Net cash provided by (used in)
investing activities 3,583,379 (134,550)
------------ -----------
Cash flows from financing activities:
Payments on note payable and capital leases (15,547) (15,003)
Proceeds from issuance of common stock 18,183 8,948,751
Purchase of option to buy common stock (Note 6) (75,000) ---
Payments on short-term notes payable --- (50,814)
Payments received on stock --- 20,000
Subscriptions receivable stock offering costs --- (1,300,337)
------------ -----------
Net cash (used in) provided by
financing activities (72,364) 7,602,597
------------ -----------
Net increase in cash and cash equivalents 2,082,512 7,109,393
Cash and cash equivalents at beginning of period 1,645,163 25,241
------------ -----------
Cash and cash equivalents at end of period $ 3,727,675 $ 7,134,634
============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
6
<PAGE>
ONLINE SYSTEM SERVICES, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
For the Six Months
Ended
June 30,
1997 1996
(Unaudited) (Unaudited)
----------- ----------
Supplemental Cash Flow Information:
Cash paid for
Interest --- $ 6,011
Income taxes --- ---
Non-cash Investing and Financing Activities:
Stock issued for services $ 586 $35,016
Capital lease for equipment --- 5,440
Note payable for fixed assets purchased --- 30,323
The accompanying notes to financial statements are an integral part of these
statements.
7
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND JUNE 30, 1997
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited interim financial statements have been
prepared without audit pursuant to rules and regulations of the Securities and
Exchange Commission and reflect, in the opinion of management, all adjustments,
which are of a normal and recurring nature, necessary for a fair presentation of
the financial position and results of operations for the periods presented. The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions.
Such estimates and assumptions affect the reported amounts of assets and
liabilities as well as disclosure of contingent assets and liabilities at the
date of the accompanying financial statements, and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates. The results of operations for the interim periods are not
necessarily indicative of the results for the entire year.
NOTE 2 - REVENUE RECOGNITION
Revenue from hardware and software sales is recognized upon shipment
provided that the Company has no further material obligations. Revenue from
maintenance fees, training courses and Internet access are recognized as the
services are performed. License fees are recognized when the Company has no
further material obligations.
Revenue from Web site design and consulting is recognized on the
percentage of completion method on an individual contract basis. Percentage
complete is determined primarily based upon the ratio that labor costs incurred
bear to total estimated costs. The Company's use of the percentage of
completion method of revenue recognition requires estimates of the degree of
project completion. To the extent these estimates prove to be inaccurate, the
revenues and gross margin, if any, reported for periods during which work on the
project is ongoing may not accurately reflect the final results of the project,
which can only be determined upon project completion. Provisions for any
estimated losses on uncompleted contracts are made in the period in which such
losses are determinable.
Amounts earned but not billed are shown as accrued revenue receivables
in the accompanying balance sheets. Amounts invoiced but not earned are shown
as deferred revenue in the accompanying balance sheets.
NOTE 3 - NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
Net loss per common and common equivalent share has been computed
based upon the weighted average number of common shares and common share
equivalents outstanding. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, common stock and common stock equivalent shares
issued by the Company at prices below the initial public offering price during
the twelve month period prior to the offering (using the treasury stock method
for common stock and common stock equivalents at an assumed offering price of
$6.75 per unit) have been included in the calculation as if they were
outstanding for all periods presented regardless of whether they were
antidilutive.
NOTE 4 - CONCENTRATION OF CREDIT RISK
The Company sells computer hardware and software and related services
from its Denver offices to the surrounding states. The Company extends credit
to its customers.
Credit losses, if any, have been provided for in the financial
statements and are based on management's expectations. The Company's accounts
receivable are subject to potential concentrations of credit risk. The
8
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND JUNE 30, 1997
NOTE 4 - CONCENTRATION OF CREDIT RISK (CONTINUED)
Company does not believe that it is subject to any unusual risks or significant
risks in the normal course of it's business.
The Company had one major customer for the three months ended June 30,
1997, which accounted for 11% of net sales. The Company had two major customers
for the three months ended June 30, 1996, which accounted for 23% and 13% of net
sales, respectively. The Company had no customers representing sales of more
than 10% during the six-months ended June 30, 1997. The Company had one
customer for the six months ended June 30, 1996, which accounted for 12% of net
sales.
NOTE 5 - NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share", which supercedes Accounting Principles Board Opinion No. 15,
"Earnings per Share". SFAS No. 128 is effective for annual and interim periods
ending after December 15, 1997 and simplifies the computation of earnings per
share by replacing the presentation of primary earnings per share with a
presentation of basic earnings per share. SFAS No. 128 requires dual
presentation of basic and diluted earnings per share by entities with complex
capital structures. Basic earnings per share includes no dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution of securities that could share in the
earnings of an entity. The Company does not believe that its loss per share
calculations will be materially affected as a result of adopting SFAS No. 128.
NOTE 6 - PURCHASE OF OPTION TO BUY COMMON STOCK
During the quarter ended June 30, 1997, the Company purchased for the
price of $75,000 from a consultant to the Company, a stock option to buy 100,000
shares of the Company's common stock at $.50 per share. Upon purchase, the
options were cancelled.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company develops sophisticated websites and interactive online
services that are targeted to three specific industry segments. During the
first quarter of 1997, the Company formed three separate business units, Cable
Access America (CAA), Healthcare, and the Business Resource Group (BRG), in
order to better focus its efforts within each industry segment. CAA is a
turnkey product and service package featuring the use of two-way and hybrid
cable modem technology designed to put cable television operators in the
Internet servicing provisioning business utilizing their existing cable
infrastructure. During the three-month period ended June 30, 1997, the Company
made enhancements to this system to allow the use in wireless cable environments
and began to market its products and services to this market in addition to
continuing efforts to market to traditional cable operators. During the quarter
ended June 30, 1997, the Company began to market its CAA products outside of the
United States and made significant enhancements to the Community Access
Partnership (CAP) product . The CAP program involves the licensing to cable and
wireless cable customers of the Company's Community Access website template that
allows the partner to develop a local content web business within its community.
The Healthcare division features the MD Gateway website and is focused primarily
on online medical education for healthcare professionals and accredited
Continuing Medical Education (CME) programs for physicians. The BRG develops,
markets, and supports sophisticated, interactive Web sites for customers' use on
the Internet or Intranets. The BRG utilizes an interactive Web design process
called "WebQuest" to expedite the design of Web sites with customers both
locally and by use of remote computer access and acts as a reseller of Edify
Corporation's "Electronic Workforce" software that allows interactive, self
service applications on the web. During the three-month period ended June 30,
1997, the Company began the development of an interactive, online banking
system utilizing Edify Corporation's software that will be offered on a service
bureau basis to credit unions. During the first six months of 1997, the Company
also continued its development of electronic commerce capabilities allowing
customers to sell goods and services online including completing the financial
transactions online.
The Company generates revenues through the sale of design and
consulting services for Web site development, resale of software licenses, mark-
ups on computer hardware and software sold to customers, maintenance fees
charged to customers to maintain computer hardware and Web sites, license fees
based on a percentage of revenues from the CAA and CAP programs, training course
fees, and monthly fees paid by customers for Internet access provided by the
Company in the Denver market. The Company commenced sales in February 1995, and
was in the development stage through December 31, 1995.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the
percentage of net sales by items contained in the statements of operations. All
percentages are calculated as a percentage of total net sales, with the
exception of cost of services and cost of hardware and software which are
calculated as a percentage of service sales and hardware/software sales,
respectively.
For the Three Months For the Six Months
Ended Ended
June 30, June 30,
-------------------- ------------------
1997 1996 1997 1996
------ ------ ------ ------
Net Sales:
Service sales 73.0% 64.0% 75.2% 76.8%
Hardware/software sales 27.0% 36.0% 24.8% 23.2%
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
Cost of sales:
Cost of services 62.7% 66.2% 61.1% 61.6%
Cost of equipment 84.3% 76.6% 84.5% 79.1%
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
For the Three Months For the Six Months
Ended Ended
June 30, June 30,
-------------------- ------------------
1997 1996 1997 1996
------ ------ ------ ------
68.5% 69.9% 66.9% 65.7%
------ ------ ------ ------
Gross Margin 31.5% 30.1% 33.1% 34.3%
------ ------ ------ ------
Operating expenses:
Sales and marketing expenses 37.8% 42.8% 45.6% 33.8%
Product development expenses 35.4% 34.2% 37.7% 29.9%
General and administrative
expenses 59.3% 52.9% 63.7% 51.1%
Depreciation and amortization
expense 6.0% 5.5% 6.5% 4.7%
------ ------ ------ ------
138.5% 135.4% 153.5% 119.5%
Loss from operations (107.0%) (105.3%) (120.4%) (85.2%)
Net Loss (99.3%) (96.4%) (110.9%) (80.9%)
Three Months and Six Months Ended June 30, 1997 and l996 (Unaudited)
Net sales for the three months ended June 30, 1997 totaled $648,697,
including $473,316 for service sales and $175,381 for hardware and software
sales. This represents an increase of 115% above 1996 net sales of $301,091
which consisted of $192,845 for service sales and $108,246 for hardware and
software sales. The Company had one major customer for the three months ended
June 30, 1997, which accounted for 11% of net sales. The Company had two major
customers for the three months ended June 30, 1996, which accounted for 23% and
13% of net sales, respectively.
Net sales for the six months ended June 30, 1997 totaled $1,165,169,
including $876,206 for service sales and $288,963 for hardware and software
sales. This represents an increase of 105% above 1996 net sales of $567,940
which consisted of $436,181 for service sales and $131,759 for hardware and
software sales. The Company had no customers representing sales of more than 10%
during the six-months ended June 30, 1997. The Company had one customer for the
six months ended June 30, 1996, which accounted for 12% of net sales.
The increases in sales for the 1997 three and six-month periods,
compared to 1996, were due to the expanded development of the Company's product
and service offerings in the CAA, CAP, BRG, and healthcare areas, and to a
substantial increase in marketing and sales activities in general. The sales
increase includes website development revenue from three customers associated
with electronic commerce and initial revenue from online banking development and
sale of a CAP license.
Cost of sales as a percentage of net sales was 68.5% for the three-
month 1997 period and 66.9% for the six-month 1997 period and 69.9% and 65.7%
for the comparable 1996 periods. Cost of sales on hardware and software sales
are generally higher than on service sales. Therefore, the Company's overall
gross profit margin is higher during periods when service sales are a greater
percentage of total net sales. The decrease in the cost of sales as a
percentage of net sales in the three-month period of 1997 is due to the higher
percentage of service sales in the 1997 period, compared to the 1996 period. The
increase in the cost of sales as a percentage of net sales in the six-month
period of 1997 is due to the lower percentage of service sales in the 1997
period, compared to the 1996 period.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Sales and marketing expenses were $245,403 for the three months ended
June 30, 1997 and $128,972 for the three months ended June 30, 1996. Sales and
marketing expenses as a percentage of net sales decreased from 42.8% in 1996 to
37.8% in 1997. Sales and marketing expenses were $531,272 for the six months
ended June 30, 1997 and $192,146 for the six months ended June 30, 1996. Sales
and marketing expenses as a percentage of net sales increased from 33.8% in 1996
to 45.6% in 1997. The increase in dollars spent, as well as the increase as a
percentage of net sales during the 1997 six-month period, were due to the hiring
of new sales and marketing personnel and associated expenditures. The Company
also developed initial marketing materials, began lead generation activity and
began to sell its CAA and CME products and services. In addition the Company
entered into an agreement with Telemedical Systems Integration, Inc. (TMED)
during the fourth quarter of 1996 to serve as the Company's primary sales group
for its healthcare products, including the recently introduced CME products.
The Company incurred significant expenses during the early part of the six-month
period ended June 30, 1997 related to initial training of and lead generation
for this sales force. During the three-month period ended June 30, 1997, the
Company incurred expenses associated with marketing and trade shows directed
towards the wireless cable market and began to market its CAA and CAP products
and services to markets outside of the United States.
Product development expenses were $229,557 for the three months ended
June 30, 1997, compared to $103,011 for the 1996 period. Product development
expense as a percentage of net sales increased from 34.2% in 1996 to 35.4% in
1997. Product development expenses were $439,501 for the six months ended June
30, 1997, compared to $169,562 for the 1996 period. Product development expense
as a percentage of net sales increased from 29.9% in 1996 to 37.7% in 1997. The
increase in these expenses, as well as the increase as a percentage of net sales
during the 1997 periods, reflect the continued development of the Company's
products and services. Product development expenses during the 1997 periods
included the completion of the initial development of the Company's CAA and CAP
products, addition of wireless cable capabilities, and initial product offerings
targeted at the CME segment of the healthcare market. Product development
expenses during the 1996 periods included enhancements to the initial CAA
product and early development of the Company's Webquest process. Product
development expenses are expected to continue to increase during the remainder
of fiscal 1997 as the Company continues to develop the CAA, CAP, online banking
and electronic commerce products and services and investigates the feasibility
of other product offerings.
General and administrative expenses were $384,846 for the three months
ended June 30, 1997, compared to $159,344 for the 1996 period. General and
administrative expenses as a percentage of net sales increased from 52.9% in
1996 to 59.3% in 1997. General and administrative expenses were $741,749 for the
six months ended June 30, 1997, compared to $290,476 for the 1996 period.
General and administrative expenses as a percentage of net sales increased from
51.1% in 1996 to 63.7% in 1997. The dollar and percentage increases reflect the
development of the Company's general and administrative infrastructure,
including finance, accounting, business development and investor relations
capabilities, as well as additional expenses related to being a public company.
In addition, during the latter part of the six-month period ended June 30,
1997, the Company incurred expenses and developed capabilities to enter into the
international market for its CAA and CAP products and services.
Depreciation and amortization expenses were $38,500 for the three
months ended June 30, 1997, compared to $16,471 for the 1996 period.
Depreciation and amortization expenses were $75,337 for the six months ended
June 30, 1997, compared to $26,515 for the 1996 period. These increases reflect
the increase in fixed assets and equipment to support higher levels of Web site
and Internet access services, as well as to support the growth in the number of
employees.
Other income was $49,969 during the three-month period ended June 30,
1997, compared to $27,057 for the 1996 period. Other income was $109,623 during
the six-month period ended June 30, 1997, compared to $24,363 for the 1996
period. Upon completion of the Company's initial public offering in May 1996,
the Company paid a portion of its outstanding debt resulting in a reduction of
future interest expense and began earning interest income on the invested net
proceeds. The Company's investments consist of U.S. Treasury Bills, Corporate
Bonds, and cash equivalents.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Net losses were $644,233 in the three-month period ended June 30,
1997 compared to $290,256 for the 1996 period. Net losses were $1,292,696 in
the six-month period ended June 30, 1997 compared to $459,300 for the 1996
period. These increases in losses in the 1997 periods reflect expenses in the
marketing and sales, product development, and general and administrative areas
that have increased at a faster rate than net sales. This is due to the time
lag associated with product development and market introduction as well as the
long sales cycle for most of the Company's products and services. The Company
expects to continue to experience increased operating expenses and capital
investments during the remainder of fiscal 1997, as it continues to develop new
product offerings and the infrastructure required to support its anticipated
growth. The Company believes that, initially, these expenses are expected to be
greater than increases in net sales and, more likely than not, will result in
substantial operating losses in the third and fourth quarters of fiscal 1997.
The Company expects to report an operating loss for the full year ending
December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company had cash and cash equivalents of
$3,727,675 and working capital of $4,136,473. The Company has financed its
operations and capital equipment expenditures through a combination of public
and private sales of common stock, issuing common stock for services, lease
financing, short-term loans and the utilization of trade payables. During 1996,
the Company completed an initial public offering of its common stock which
resulted in net proceeds to the Company of $7,231,981 and the issuance of an
additional 1,265,000 shares of common stock. During the quarter ended June 30,
1997, the Company purchased for the price of $75,000 from a consultant to the
Company, a stock option to buy 100,000 shares of the Company's common stock at
$.50 per share. Upon purchase, the options were cancelled.
During the six months ended June 30, 1997, the Company purchased
$271,964 of fixed assets. These purchases were primarily computer equipment,
communications equipment, cable modems and software necessary to develop and
demonstrate the recently introduced Cable Access America products along with
hardware and software necessary to provide the online banking services on a
service bureau basis. In anticipation of future growth, the Company expects to
invest a minimum of $200,000 during the remainder of fiscal 1997 to purchase
additional computer equipment, software and office equipment.
Accounts receivable balances increased from $229,350 at December 31,
1996 to $480,807 at June 30, 1997, due to the increased sales level during the
six month period and a concentration of billing towards the end of the quarter
ended June 30, 1997. Due to the Company's utilization of the percentage of
completion method of revenue recognition for its Web services, an asset of
$211,212, representing revenue earned and not billed, is shown as accrued
revenue receivable at June 30, 1997. This amount has increased from $90,337 at
December 31, 1996 due to increased revenue for the six month period and an
increase in large web development projects that require several months to
complete . A liability for amounts invoiced but not earned of $85,876 is shown
as deferred revenue at June 30, 1997. The Company's hardware and software
inventory of $125,622 at June 30, 1997 decreased from $195,941 at December 31,
1996, and consists of software licenses and computer hardware purchased by the
Company for resale.
Prepaid expenses increased to $305,361 at June 30, 1997, from $132,544
at December 31, 1996, primarily due to amounts prepaid for insurance for the
Company and amounts paid to a consultant to the company for services not yet
rendered. The major portion of the remaining balance consists primarily of
amounts paid under a marketing and sales agreement with an independent company.
These amounts consist of advanced consulting fees, sales commission advances and
travel advances that are expected to be earned through commissions on sales of
the Company's CME products and services. Trade account payable at June 30,
1997, increased to $464,467 from $331,809 at December 31, 1996, due to the
increased level of business activity for the six month period.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company believes that its cash and cash equivalents and working
capital are adequate to sustain operations for at least the next twelve months.
If sufficient cashflow is not being generated at the end of this period, the
Company may be required to seek additional funds through equity, debt or other
external financing. There is no assurance that any additional capital
resources, which the Company may need, will be available if and when required,
or, if available, available on terms that will be acceptable to the Company.
LENGTH OF SALES CYCLE; POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The decision to purchase the Company's products and services is often
an enterprise-wide decision by prospective customers and may require the Company
to engage in a lengthy sales cycle. The pursuit of sales leads typically
involves an analysis of the prospective customer's needs, preparation of a
written proposal, one or more presentations and contract negotiations. The
Company often provides significant education to prospective customers regarding
the use and benefits of Internet or Intranet technologies and products such as
Edify's Electronic Workforce. Extensive Web site development or licensing of
Electronic Workforce may also involve a substantial commitment of capital and
the attendant delays frequently associated with approving large capital
expenditures and reviewing new technologies that affect key operations. While
the sales cycle varies from customer to customer, it typically has ranged from
one to six months for Web site design and support, and from one to three months
for Cable Access America projects. The sales cycle may also be subject to a
prospective customer's budgetary constraints and internal acceptance reviews,
over which the Company has little or no control. Consequently, if sales
forecasted from a specific customer for a particular quarter are not realized in
that quarter, the Company is unlikely to be able to generate revenue from
alternate sources in time to compensate for the shortfall. If a larger order is
delayed or lost to a competitor, the Company's revenues for that quarter could
be materially diminished. Moreover, to the extent that significant sales occur
earlier than expected, operating results for subsequent quarters may be
adversely affected.
Further, as a result of the Company's limited operating history, the
Company does not have historical financial data for a sufficient number of
periods on which to base planned operating expenses. Accordingly, the Company's
expense levels are based in part on its expectations as to future revenues and
to a large extent are fixed. The Company typically operates with little or no
backlog and the sales cycles for its products and services may vary
significantly. As a result, quarterly sales and operating results generally
depend on the volume and timing of and ability to close customer contracts
within the quarter, which are difficult to forecast. The Company may be unable
to adjust spending on a timely manner to compensate for any unexpected revenue
shortfalls. Accordingly, any significant shortfall of demand for the Company's
products and services in relation to the Company's expectations would have an
immediate adverse impact on the Company's business, operating results and
financial condition. In addition, the Company plans to increase its operating
expenses to fund product development and increase sales and marketing. To the
extent that such expenses precede or are not subsequently followed by increased
revenues, the Company's business, operating results and financial condition will
be materially adversely affected.
FORWARD LOOKING INFORMATION
Information contained in this report, other than historical
information, should be considered forward looking and reflects management's
current view of future events and financial performance that involve a number of
risks and uncertainties. The factors that could cause actual results to differ
materially include, but are not limited to, the following: general economic
product development and technology changes; competition and pricing pressures;
length of sales cycle; variability of sales order flow; and management growth.
14
<PAGE>
Part II.-- Other Information
- - ----------------------------
Items 1-3 and 5. Not Applicable
Item 4. Submission of matters to a vote of security holders.
The annual meeting of shareholders of the Company was held on May 20,
1997 at the offices of the Company. The following persons were elected to serve
as directors of the Company for the ensuing year and until their successors are
duly elected and qualified: R. Steven Adams, Robert M. Geller, Paul H. Spieker,
Robert J. Lewis, H. Robert Gill, Richard C. Jennewine and Charles P. Spickert.
In addition, the proposal to increase from 700,000 to 1,100,000 shares
the number of shares reserved for issuance pursuant to the Company's Stock
Option Plan of 1995 was approved, with a total of 1,489,800 shares voted with
respect to this matter, 1,446,575 shares of which voted for adoption of the
resolution, 34,525 shares voted against its adoption and 8,700 shares abstained
from voting on this matter. In addition, shareholders approved the appointment
of Arthur Anderson LLP as independent accountants of the Company for the fiscal
year ending December 31, 1997, 2,418,913 shares voted for adoption of this
resolution, 1,100 shares voted against its adoption and 1,450 shares abstained
from voting on the matter.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
15
<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ONLINE SYSTEM SERVICES, INC.
Date: August 12, 1997 By /s/ Thomas S. Plunkett
-----------------------
Vice President and
Chief Financial Officer
16
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<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> MAR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 3,727,675 3,727,675
<SECURITIES> 0 0
<RECEIVABLES> 563,413 563,413
<ALLOWANCES> 82,606 82,606
<INVENTORY> 125,622 125,622
<CURRENT-ASSETS> 4,911,692 4,911,692
<PP&E> 937,350 937,350
<DEPRECIATION> 254,380 254,380
<TOTAL-ASSETS> 5,759,333 5,759,333
<CURRENT-LIABILITIES> 775,219 775,219
<BONDS> 16,440 16,440
0 0
0 0
<COMMON> 7,896,848 7,896,848
<OTHER-SE> (2,929,174) (2,929,174)
<TOTAL-LIABILITY-AND-EQUITY> 5,759,333 5,759,333
<SALES> 175,381 288,963
<TOTAL-REVENUES> 648,697 1,165,169
<CGS> 444,593 779,629
<TOTAL-COSTS> 898,306 1,787,859
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (49,969) (109,623)
<INCOME-PRETAX> (644,233) (1,292,696)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (644,233) (1,292,696)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (644,233) (1,292,696)
<EPS-PRIMARY> ($.20) ($.41)
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