<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, 1999.
--------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ___________________ to ______________________.
Commission File Number 0-28462.
----------------
ONLINE SYSTEM SERVICES, INC. (d/b/a Webb Interactive Services, Inc.*)
- ---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1293864
- ----------------------------------------------------------------
(State or other jurisdiction I.R.S. Employer
of incorporation or organization Identification No.)
1800 GLENARM PLACE, SUITE 700, DENVER, CO 80202
- --------------------------------------------------
(Address of principal executive offices) (Zipcode)
(303) 296-9200
- --------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------
Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ X ] YES [ ] NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 6, 1999, Registrant had 7,487,532 shares of common stock
outstanding.
______________
* The Company is in the process of changing its name to Webb Interactive
Services, Inc.
1
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ONLINE SYSTEM SERVICES, INC. AND SUBSIDIARIES
Index
-----
<TABLE>
<CAPTION>
Page
----------
<C> <S> <C>
Part I. Financial Information
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations for the three and six months ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998 5-6
Notes to Consolidated Financial Statements 7-16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17-31
Part II. Other Information
Item 1 and 3-5. Not Applicable 31
Item 2. Changes in Securities and Use of Proceeds 31
Item 6. Exhibits and Reports on Form 8-K 31-32
Signatures 33
</TABLE>
____________________
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended, and is subject to the safe harbors created
by those sections. These forward-looking statements are subject to significant
risks and uncertainties, including those identified in the section of this Form
10-QSB entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Factors That May Affect Future Operating Results,"
which may cause actual results to differ materially from those discussed in such
forward-looking statements. The forward-looking statements within this Form 10-
QSB are identified by words such as "believes," "anticipates," "expects,"
"intends," "may," "will" and other similar expressions. However, these words
are not the exclusive means of identifying such statements. In addition, any
statements which refer to expectations, projections or other characterizations
of future events or circumstances are forward-looking statements. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances occurring subsequent to the filing of this Form 10-QSB with the
Securities and Exchange Commission ("SEC"). Readers are urged to carefully
review and consider the various disclosures made by the Company in this report
and in the Company's other reports filed with the SEC that attempt to advise
interested parties of the risks and factors that may affect the Company's
business.
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
ONLINE SYSTEM SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,934,761 $ 698,339
Accounts receivable, net of allowance for doubtful accounts of $27,507 and
$18,000, respectively 42,586 124,912
Accounts receivable from related party 15,807 22,925
Note and accrued interest receivable - 896,787
Inventory, net - 55,126
Prepaid expenses 158,492 74,179
Deferred acquisition costs - 229,404
Short-term deposits 102,541 101,441
-------------- --------------
Total current assets 4,254,187 2,203,113
Property and equipment, net of accumulated depreciation
of $1,013,813 and $741,552, respectively 2,411,661 1,178,628
Intangible assets, net of accumulated amortization of $23,675 and none, respectively 14,739,521 -
Other assets 4,216 3,535
-------------- --------------
Total assets $ 21,409,585 $ 3,385,276
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Convertible notes payable $ 643,414 $ -
Current portion of notes and capital leases payable 162,995 21,766
Accounts payable and accrued liabilities 1,876,027 873,901
Accrued salaries and payroll taxes payable 386,757 329,755
Customer deposits and deferred revenue 402,602 100,600
-------------- --------------
Total current liabilities 3,471,795 1,326,022
Capital leases payable 61,714 39,915
Stockholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized:
10% redeemable, convertible preferred stock, 10% cumulative return; 85,000 and
245,000 shares issued and outstanding, respectively,
including dividends payable of $127,447 and $241,172, respectively 977,447 2,691,172
Series C redeemable, convertible preferred stock, 4% cumulative
return; 2,500 and none issued and outstanding, respectively,
including dividends payable of $12,223 and none, respectively 2,512,223 -
Series A redeemable, convertible preferred stock, 5% cumulative
return; none and 1,400 issued and outstanding, respectively,
including dividends payable of none and $10,164, respectively - 1,410,164
Common stock, no par value, 20,000,000 shares authorized,
7,219,159 and 4,642,888 shares issued and outstanding, respectively 40,678,469 16,410,300
Warrants and options 4,328,479 2,281,832
Accumulated deficit (30,620,542) (20,774,129)
-------------- --------------
Total stockholders' equity 17,876,076 2,019,339
-------------- --------------
Total liabilities and stockholders' equity $ 21,409,585 $ 3,385,276
============== ==============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
3
<PAGE>
ONLINE SYSTEM SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------- ------------------------------------------
1999 1998 1999 1998
----------------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Net revenues $ 178,650 $ 267,648 $ 371,096 $ 907,147
Net revenues from related party 14,284 33,160 110,120 120,900
----------------- ----------------- ------------------- -----------------
192,934 300,808 481,216 1,028,047
----------------- ----------------- ------------------- -----------------
Cost of revenues 334,099 213,734 468,626 725,800
Cost of revenues from related party 5,985 53,086 72,692 102,573
----------------- ----------------- ------------------- -----------------
340,084 266,820 541,318 828,373
----------------- ----------------- ------------------- -----------------
Gross margin (147,150) 33,988 (60,102) 199,674
----------------- ----------------- ------------------- -----------------
Operating expenses:
Sales and marketing expenses 389,264 611,451 834,653 1,125,767
Product development expenses 655,257 131,202 1,254,097 353,570
General and administrative expenses 1,479,094 857,062 3,014,702 1,708,585
Depreciation and amortization 139,169 105,970 247,398 201,347
----------------- ----------------- ------------------- -----------------
2,662,784 1,705,685 5,350,850 3,389,269
----------------- ----------------- ------------------- -----------------
Loss from operations (2,809,934) (1,671,697) (5,410,952) (3,189,595)
Equity in loss of subsidiary (105,134) - (127,083) -
Interest income, net 36,775 33,225 82,917 62,414
----------------- ----------------- ------------------- -----------------
Net loss (2,878,293) (1,638,472) (5,455,118) (3,127,181)
Preferred stock dividends (29,028) (80,585) (75,041) (142,984)
Accretion of preferred stock to
redemption value (157,691) (1,818,564) (3,157,691) (2,237,260)
Accretion of preferred stock for
guaranteed return in excess of
redemption value - - (1,158,563) -
----------------- ----------------- ------------------- -----------------
Net loss available to common
stockholders $(3,065,012) $(3,537,621) $(9,846,413) $(5,507,425)
================= ================= =================== =================
Loss per share, basic and diluted $(0.52) $(1.03) $(1.76) $(1.62)
================= ================= =================== =================
Weighted average shares outstanding 5,909,394 3,446,131 5,608,227 3,390,909
================= ================= =================== =================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements
4
<PAGE>
ONLINE SYSTEM SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------------------
1999 1998
---------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(5,455,118) $(3,127,181)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 535,574 201,347
Loss from investment in subsidiary 127,083 -
Accrued interest income on advances to DCI (46,379) (10,441)
Reduction in note receivable for services received from DCI 368,643 -
Stock and stock options issued for services and to customers 333,143 26,179
Changes in operating assets and liabilities:
Decrease in accounts receivable 83,079 146,354
Decrease (increase) in accounts receivable from related party 7,118 (22,925)
Decrease in accrued revenue receivables - 80,278
Decrease in inventory 55,126 172,838
Decrease (increase) in prepaid expenses (61,358) 63,557
Decrease (increase) in short-term deposits and other assets (1,500) 14,080
Increase (decrease) in accounts payable and accrued liabilities 192,936 (382,918)
Increase in accrued salaries and payroll taxes payable 18,251 12,150
Increase (decrease) in customer deposits and deferred revenue 284,310 (9,321)
------------------- -------------------
Net cash used in operating activities (3,559,092) (2,836,003)
------------------- -------------------
Cash flows from investing activities:
Cash acquired in business combinations 32,484 -
Purchase of property and equipment (1,353,223) (229,762)
Capitalized software development costs - (196,291)
Cash advances to DCI (593,649) (575,000)
Payment of acquisition costs (27,468) (124,636)
Investment in subsidiary (240,564) -
------------------- -------------------
Net cash used in investing activities (2,182,420) (1,125,689)
------------------- -------------------
Cash flows from financing activities:
Payments on capital leases (16,435) (15,133)
Proceeds from issuance of common stock and warrants 3,074,256 65,442
Proceeds from exercise of stock options and warrants 1,322,000 189,182
Proceeds from issuance of 10% Preferred Stock - 159,558
Proceeds from issuance of 5% Preferred Stock - 3,000,000
Proceeds from issuance of Series C Preferred Stock 5,000,000 -
Stock offering costs (401,887) (348,014)
------------------- -------------------
Net cash provided by financing activities 8,977,934 3,051,035
------------------- -------------------
Net increase (decrease) in cash and cash equivalents 3,236,422 (910,657)
Cash and cash equivalents, beginning of period 698,339 3,680,282
------------------- -------------------
Cash and cash equivalents, end of period $ 3,934,761 $ 2,769,625
=================== ===================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
<PAGE>
ONLINE SYSTEM SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------------------
1999 1998
------------------- --------------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $ 8,920 $ 3,254
Supplemental schedule of non-cash investing and financing activities:
Common stock and warrants issued in business combinations $11,636,285 $ -
Accretion of preferred stock to redemption value 3,157,691 993,980
Accretion of preferred stock for guaranteed return in excess of
redemption value 1,158,563 -
Preferred stock dividends paid or to be paid in common stock 75,041 142,984
Preferred stock and dividends converted to common stock 5,686,707 -
Capital leases for equipment 35,000 18,750
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
6
<PAGE>
ONLINE SYSTEM SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND DECEMBER 31, 1998
(UNAUDITIED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
include the accounts of Online System Services, Inc. and its wholly owned
Subsidiaries (collectively the "Company"). All significant intercompany balances
and transactions have been eliminated in consolidation. The consolidated
financial statements have been prepared without audit pursuant to rules and
regulations of the Securities and Exchange Commission and reflect, in the
opinion of management, all adjustments, which are of a normal and recurring
nature, necessary for a fair presentation of the financial position and results
of operations for the periods presented. The preparation of financial statements
in accordance with generally accepted accounting principles requires management
to make estimates and assumptions. Such estimates and assumptions affect the
reported amounts of assets and liabilities as well as disclosure of contingent
assets and liabilities at the date of the accompanying financial statements, and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates. The results of operations for the
interim periods are not necessarily indicative of the results for the entire
year. The interim financial statements should be read in connection with the
financial statements included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1998 filed with the Securities and Exchange
Commission.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Among other
factors, the Company has incurred significant and recurring losses from
operations, and such losses are expected to continue in the near future, which
raises substantial doubt about the ability of the Company to continue as a going
concern. Management's plans in regard to these matters are described in
Management's Discussion and Analysis of Financial Condition and Results of
Operations. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
As discussed in Note 3, on June 30, 1999, the Company consummated its
purchase of Durand Communications, Inc. ("DCI"). The business purchased from DCI
has never achieved profitability and the Company expects to incur net losses for
the foreseeable future.
The continued viability of the Company depends upon, in part, its ability
to obtain additional profitable customer contracts and to obtain additional
capital through debt or equity financing. The Company believes that its cash and
cash equivalents and working capital as of June 30, 1999 will be adequate to
sustain operations through October 1999. The Company estimates that it will need
to raise approximately $14 million through equity, debt or other external
financing to sustain operations for the remainder of 1999 and 2000. The
Company's plan to fund its operations is to obtain equity financing through a
combination of strategic partner investments, additional private placements of
its securities, and may include a secondary public offering of its common stock.
The Company is engaged in ongoing discussions with certain potential strategic
partners, which if successful, could result in additional equity funding for the
Company. Further, the Company believes that it would be possible to continue to
raise additional working capital through the sale of securities similar to the
transaction described in Note 8 and has initiated discussions with various
potential private investors which could result in additional debt or equity
investments. However, the Company has no commitments for any such funding and
there can be no assurances that these discussions will be successful, or if
successful, that the terms of any such fundings will be acceptable to the
Company. If the Company is not successful in obtaining funding in appropriate
amounts or at appropriate terms, management would consider significant
reductions in activity and operations.
NOTE 2 - REVENUE RECOGNITION
Transaction fee revenues include e-banking service bureau fees, online
subscription fees, and Internet access and e-commerce royalties. The Company
recognizes revenues in the period the services are provided or earned by the
Company. Net revenues are comprised of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net Revenues:
Transaction fees $142,097 $ 47,678 $248,426 $ 70,828
Services 50,837 43,142 115,281 127,564
Hardware and software - 209,988 117,509 829,655
-------- -------- -------- ----------
Total net revenues $192,934 $300,808 $481,216 $1,028,047
======== ======== ======== ==========
</TABLE>
7
<PAGE>
NOTE 3 - ACQUSITION OF DURAND COMMUNICATIONS, INC.
On June 30, 1999, Durand Acquisition Corporation ("DAC"), a wholly owned
subsidiary of the Company, completed a merger with Durand Communications, Inc.
("DCI"), a developer and marketer of Internet "community" building tools, by
exchanging 944,763 of the Company's common stock for all of the common stock of
DCI at an exchange ratio of 2.46 shares of the Company's common stock for each
share of DCI's common stock. In addition, outstanding DCI options and warrants
to purchase common stock were converted at the same exchange factor into 233,700
options and warrants to purchase the Company's common stock. The acquisition of
the assets and liabilities was recorded using the purchase method of accounting
whereby the consideration paid of $13,573,674 was allocated based on the
relative fair values of the assets and liabilities acquired with the excess
consideration over the fair market value of tangible assets of $13,669,270
recorded as intangible assets.
Total consideration for the merger is as follows:
<TABLE>
<S> <C>
Value of common stock issued $ 9,211,439
Value of warrants and options issued 1,440,446 (a)
Liabilities assumed 2,190,566 (b)
Acquisition expenses 911,223
-----------------
Total purchase price $13,753,674
=================
</TABLE>
The purchase price was allocated to the assets acquired based on their fair
market values as follows:
<TABLE>
<S> <C>
Cash and cash equivalents $ 23,739
Other current assets 23,708
Property and equipment, net 36,984
-----------------
Total tangible assets acquired 84,431
Developed technologies, goodwill and other intangibles 13,669,243
-----------------
Total assets acquired $13,753,674
=================
</TABLE>
(a) 233,700 warrants and options issued, which were valued using the Black-
Scholes option pricing model using the following assumptions:
<TABLE>
<S> <C>
Exercise prices $4.30 to $20.33
Fair market value of common stock on measurement date $9.75
Option lives 1 to 9 years
Volatility rate 104%
Risk free rate of return 5.0%
Dividend rate 0%
</TABLE>
(b) The liabilities assumed by the Company included a $1,168,173 note payable
and accrued interest from DCI to the Company which was forgiven at the
consummation of the transaction.
In connection with the merger, the Company issued a warrant to a placement
agent to purchase 31,421 shares of the Company's common stock at an exercise
price of $14.13. The warrant is exercisable for a period of five years. The
Company recorded $348,058 in acquisition costs for the warrant, which was valued
using the Black-Scholes option pricing model utilizing the following
assumptions:
<TABLE>
<S> <C>
Exercise price $14.13
Fair market value of common stock on grant date $14.13
Option life 5 Years
Volatility rate 104%
Risk free rate of return 5.0%
Dividend rate 0%
</TABLE>
8
<PAGE>
The transaction with DCI resulted in approximately $13,669,000 of
intangible assets (primarily developed technologies and goodwill). These
intangible assets will be amortized over three years. The purchase price
allocation is subject to adjustment based on the final determination of the fair
value of the assets and liabilities assumed, which could take as long as one
year from June 30, 1999. Because the DCI business, now operated by the Company,
has never been profitable, and due to the other risks and uncertainties
discussed herein, it is reasonably possible that an analysis of these long-lived
assets in future periods could result in a conclusion that they are impaired,
and the amount of the impairment could be substantial.
NOTE 4 - INVESTMENT IN NETIGNITE
On March 10, 1999, the Company acquired a controlling interest in a newly
formed company, NetIgnite 2, LLC ("NetIgnite"). NetIgnite is a development
stage company which the Company formed with a predecessor company by the name of
NetIgnite, Inc. ("NI"), the sole shareholder and founder of which was Perry
Evans, the founder and past President of MapQuest.com. The Company was, as a
result of this transaction, entitled to 99.5% of NetIgnite's operating income
and approximately 60% of any proceeds upon the sale of NetIgnite. NI was
entitled to .5% of NetIgnite's operating income and approximately 40% of any
proceeds upon the sale of NetIgnite. Mr. Evans entered into an Employment
Agreement with the Company which has an initial term of two years, provides for
a minimum annual salary of $190,000 and the granting of stock options to
purchase 80,000 shares of common stock at an exercise price of $12.25, one-third
of such option shares to vest annually during the next three years subject to
Mr. Evans' continuous employment by the Company.
Prior to June 2, 1999, the Company utilized the equity method of accounting
for this subsidiary and recorded a loss from this investment totaling $105,134
and $127,083 for the three and six months ended June 30, 1999, respectively.
On June 2, 1999, the Company acquired the assets and liabilities of NI in
exchange for 71,429 shares of common stock valued at $984,399. The acquisition
of these assets and liabilities was recorded using the purchase method of
accounting whereby the consideration paid was allocated based on the relative
fair values of the assets and liabilities acquired with the excess consideration
of $893,952 being recorded as an intangible asset.
The results of operations of NetIgnite are included in the Company's
results from the date of the NI acquisition and all significant intercompany
balances and transactions have been eliminated in consolidation.
The transaction with NetIgnite resulted in approximately $894,000 of
intangible assets (primarily developed technologies and goodwill). These
intangible assets will be amortized over three years. The purchase price
allocation is subject to adjustment based on the final determination of the
fair value of the assets and liabilities assumed, which could take as long as
one year from June 2, 1999. Because the NetIgnite business, now operated by the
Company, has risks and uncertainties discussed herein, it is reasonably possible
that an analysis of these long-lived assets in future periods could result in a
conclusion that they are impaired, and the amount of the impairment could be
substantial.
NOTE 5 - GOODWILL
Goodwill is being amortized on a straight-line basis over three years.
Subsequent to acquisitions which result in goodwill, the Company continually
evaluates whether later events and circumstances have occurred that indicate the
remaining useful life of goodwill may warrant revision or that the remaining
balance of goodwill may not be recoverable. When factors indicate that goodwill
should be evaluated for possible impairment, the Company uses an estimate of
the related business segment's undiscounted net income or cash flows, as
appropriate, over the remaining life of the goodwill in measuring whether the
goodwill is recoverable.
NOTE 6 - INCOME TAXES
As a result of net losses and the Company's inability to recognize a
benefit for its deferred tax assets, the Company did not record a provision for
income taxes in the three and six months ended June 30, 1999 and 1998.
NOTE 7 - NET LOSS PER SHARE
Net loss per share is calculated in accordance with SFAS No. 128, "Earnings
Per Share" ("SFAS 128"), and Securities and Exchange Commission Staff Accounting
Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS 128 and SAB 98, basic
net loss per share is computed by dividing net loss available to common
shareholders
9
<PAGE>
for the period by the weighted average number of common shares outstanding for
the period. Diluted net loss per share is computed by dividing the net loss for
the period by the weighted average number of common and potential common shares
outstanding during the period if the effect of the potential common shares is
dilutive. As a result of the Company's net losses, all potentially dilutive
securities, as indicated in the table below, would be anti-dilutive and are
excluded from the computation of diluted loss per share.
<TABLE>
<CAPTION>
June 30,
------------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
Stock options 1,948,569 1,288,217
Warrants and underwriter options 362,929 963,150
Convertible debt 32,147 -
10% Preferred Stock 97,715 307,101
Series C Preferred Stock 225,763 -
5% Preferred Stock - 308,606
---------------- ---------------
Total 2,667,123 2,867,074
================ ===============
</TABLE>
The number of shares excluded from the earning per share calculation
because they are anti-dilutive, using the treasury stock method, were 1,296,407
and 1,161,560 for the three and six months ended June 30, 1999, respectively,
and 1,709,068 and 1,794,407 for the three and six months ended June 30, 1998,
respectively.
NOTE 8 - SERIES C PREFERRED STOCK
On January 11, 1999, the Company completed a private placement of preferred
stock which resulted in gross proceeds of $3,000,000. The Company sold 3,000
shares of Series C cumulative, convertible, redeemable preferred stock (the
"Series C Preferred Stock"). Net proceeds to the Company were $2,755,500 after
deducting $244,500 in offering costs.
In addition, the Company also issued a warrant which entitled the holder to
purchase, at a price of $1,000 per share, up to 2,000 shares of the Company's
Series C Preferred Stock. This warrant also granted the Company the right to
require the holder to exercise such warrants. On June 18, 1999, the Company
exercised this right and sold 2,000 shares of the Series C Preferred Stock for
net proceeds of $1,860,000 after deducting $140,000 in offering costs.
The Series C Preferred Stock entitles the holder to voting rights equal to
the number of shares of common stock into which the shares of the Series C
Preferred Stock are convertible. The Series C Preferred Stock specifies a 4%
per annum cumulative, non-compounding dividend based on the stated value of
$1,000 per share. The Company may redeem the Series C Preferred Stock at any
time at a redemption price per share equal to $1,200 plus any accrued but unpaid
dividends plus a warrant to purchase a number of shares equal to each Series C
Preferred Stock holder's pro-rata allocation of 100,000 shares. Such warrant
would have a term of three years from the date of issuance and a per share
exercise price equal to the applicable Maximum Conversion Price (as defined) for
the Series C Preferred Stock being redeemed. In addition, the Company may
redeem the Series C Preferred Stock upon the receipt of a notice of conversion
with respect to the Series C Preferred Stock for which the Conversion Price (as
defined) is less than $5.40 per share for a per share price equal to the product
of (i) the number of shares of common stock otherwise issuable upon conversion
of such shares of Series C Preferred Stock on the date of conversion and (ii)
the closing bid price of common stock on the date of conversion. Each share of
Series C Preferred Stock is convertible, at the option of the holder, at any
time after February 1, 1999, into the number of shares of common stock equal to
$1,000 divided by the lesser of (i) 140% of the closing bid price of the common
stock on the date of the issuance of the Series C Preferred Stock being
converted (initially $20.65), or if less and if the conversion is occurring at
least 120 days after the issuance of the Series C Preferred Stock being
converted, 100% of the closing bid price of the Company's common stock on the
trading day closest to the date that is 120 days after the Series C Preferred
Stock that is being converted was issued or (ii) the average of the five lowest
closing bid prices of common stock during the 44 consecutive trading days
immediately preceding the conversion of the Series C Preferred Stock conversion
date.
In addition, the Company may require the conversion of the Series C
Preferred Stock at any time during the 20 day period immediately following 20
consecutive trading days during which the closing bid price of common
10
<PAGE>
stock is not less than 200% of the Maximum Conversion Price of the Series C
Preferred Stock being converted. The Series C Preferred Stock must be converted
on the date which is five years after the date on which the Series C Preferred
Stock being converted was issued.
The beneficial conversion feature (a "Guaranteed Return") of the Series C
Preferred Stock is considered to be an additional preferred stock dividend. The
computed value of the Guaranteed Return of $3,931,754 is initially recorded as a
reduction of the Series C Preferred Stock and an increase to additional paid-in
capital. The Guaranteed Return reduction to preferred stock was accreted, as
additional dividends, by recording a charge to income available to common
stockholders from the date of issuance to the earliest date of conversion. The
Company will also record annual dividends of $40 per share as a reduction of
income available to common stockholders, whether or not declared by the Board of
Directors, which totaled $13,534 and $21,369 for the three and six months ended
June 30, 1999, respectively. The Company has the option to pay the dividends
either in cash or in common stock upon conversion. It is the Company's
intention to pay the accrued dividends on the Series C Preferred Stock through
the issuance of its common stock at the time the Series C Preferred Stock is
converted. Consequently, the Company has recorded the dividends payable within
the preferred stock balance in the accompanying balance sheets, which totaled
$12,223 as of June 30, 1999.
The difference between the stated redemption value of $1,000 per share and
the recorded value on January 11, 1999, and June 18, 1999 (the date upon which
the Series C Preferred Stock was issued) totaling $4,316,254 was accreted as a
charge to income available to common stockholders on the date that the Series C
is first convertible, which occurred in the first and second quarters of 1999,
respectively, and is comprised of the following:
<TABLE>
<CAPTION>
Closings
---------------------------------------------------
June 18, 1999 January 11, 1999
---------------------- ----------------------
<S> <C> <C>
Guaranteed Return $ 17,691 $3,914,063
Series C Preferred Stock offering costs 140,000 244,500
---------------------- ----------------------
Total accretion recorded $157,691 $4,158,563
====================== ======================
</TABLE>
During February 1999, the investor converted 2,500 shares of the Series C
Preferred Stock, including accrued dividends payable of $9,149, into 232,564
shares of the Company's common stock at a conversion price per share ranging
from approximately $10.74 to $11.00 as summarized in the following table:
<TABLE>
<CAPTION>
Number of Shares
---------------------------------------------
Series C Common Stock
Preferred Common Conversion
Conversion Date Stock Stock Price per Share
---------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C>
February 10, 1999 1,500 140,157 $10.74
February 11,1999 500 46,724 10.74
February 26, 1999 500 45,683 11.00
------------------- -------------------
Total 2,500 232,564
=================== ===================
</TABLE>
During July 1999, the investor converted 1,700 shares of the Series C
Preferred Stock into 140,311 shares of the Company's common stock (See Note 15).
NOTE 9 - CONVERSION OF PREFERRED STOCK AND EXERCISE OF COMMON STOCK
WARRANT
On January 13, 1999, all 1,400 outstanding shares of the Series A Preferred
Stock, including accrued dividends payable of $12,465, were converted into
247,366 shares of the Company's common stock at a conversion price per share of
$5.71.
11
<PAGE>
In connection with the issuance of the Series A Preferred Stock, the
Company issued a warrant to the investor to purchase 140,000 shares of the
Company's common stock for a purchase price of $5.71 per share. During January
1999, the investor exercised the warrant for a total purchase price of $799,400.
During January and February 1999, 160,000 shares of the 10% Preferred
Stock, including accrued dividends payable of $165,093, were converted into
177,106 shares of the Company's common stock at conversion prices ranging from
$9.46 to $10.00 as summarized in the following table:
<TABLE>
<CAPTION>
Number of Shares
---------------------------------------------
10% Common Stock
Preferred Common Conversion
Conversion Date Stock Stock Price per Share
---------------------- ------------------- ------------------- ---------------------
<S> <C> <C> <C>
January 5, 1999 10,000 11,590 $ 9.46
January 7, 1999 10,000 11,039 9.98
January 14, 1999 5,000 5,422 10.00
January 15, 1999 60,000 66,248 10.00
January 19, 1999 10,000 10,858 10.00
January 20, 1999 25,000 27,636 10.00
January 28, 1999 10,000 11,077 10.00
February 2, 1999 20,000 22,083 10.00
February 25, 1999 10,000 11,153 10.00
------------------- -------------------
Total 160,000 177,106
=================== ===================
</TABLE>
NOTE 10 - COMMON STOCK
In February 1999, the Company entered into a six-month agreement with an
individual to provide the Company consulting services in his capacity as the
Company's Chief Operating Officer. Pursuant to the terms of the agreement, in
addition to a monthly cash fee of $15,000, the consultant earned shares of the
Company's common stock determined by dividing $15,000 by the fair market value
of the common stock on the last trading day of the month. During the three and
six months ended June 30, 1999, the Company issued 3,020 and 8,497 shares of
common stock under this agreement, respectively, valued in the aggregate at
$45,000 and $90,000, respectively.
NOTE 11 - EXERCISE OF IPO COMMON STOCK WARRANTS
In connection with the initial public offering ("IPO") in May 1996, the
Company issued 1,265,000 units, each unit consisting of one share of common
stock and one common stock purchase warrant and 110,000 similar warrants to the
underwriter (collectively the "IPO Warrants"). Two IPO Warrants entitled the
holders to purchase one share of common stock at a price of $9.00 per share or
the holders had the option of using the "cashless" exercise provision whereby
holders could apply a portion of their IPO Warrants to pay the exercise price
for the balance of the IPO Warrants to be exercised.
In May 1999, the Company received $3,056,871 in net proceeds, after
deducting offering costs of $17,387 from the exercise of the IPO Warrants and
issued 341,578 shares of common stock. In addition, the Company issued 131,614
shares of common stock as a result of holders of the IPO Warrants utilizing the
cashless exercise provision of the Agreement. As of June 30, 1999, all of the
IPO Warrants have been exercised or have expired.
NOTE 12 - CUSTOMER ACQUSITION COSTS
In June 1999, the Company granted warrants to two customers to purchase in
the aggregate 11,667 shares of the Company's common stock at exercise prices
ranging from $9.75 to $9.94 per share. The warrants may be exercised from the
date of issuance and expire in June 2000. The Company recorded deferred
customer acquisition costs of $73,368 for the value of these warrants, which was
expensed during the three months ended June 30, 1999. The Company's policy with
regard to customer acquisition costs is to capitalize costs to acquire customers
if the contract contains guarantees of minimum revenue which supports the amount
paid. Because the agreement does not contain minimum guaranteed revenue and due
to the start-up nature of this service and other uncertainties regarding
12
<PAGE>
this arrangement, the Company has expensed the amount during the 1999 period.
The Company valued these options utilizing the Black-Scholes option pricing
model using the following assumptions:
<TABLE>
<S> <C>
Exercise prices $9.75 to $9.94
Fair market value of common stock on grant date $10.88 to $15.50
Option life 1 Year
Volatility rate 104%
Risk free rate of return 5.0%
Dividend rate 0%
</TABLE>
In March 1999, the Company issued a warrant to a Customer, valued at
$64,470, which was expensed during the three months ended March 31, 1999. On
June 15, 1999, this warrant was cancelled.
NOTE 13 - RELATED PARTY TRANSACTIONS
A director of the Company is also the general partner and chief executive
officer for one of the Company's customers. The Company entered into a contract
during August 1997, as amended, whereby the Company provides its products and
services to the customer for several markets. The Company earns revenue from
the sale of computer hardware and third party software, engineering fees,
equipment installation fees, and royalties from subscriber Internet access and
content fees. The Company recognized revenue from the customer totaling $14,284
and $33,160 for the three months ended June 30, 1999 and 1998, respectively, and
$110,120 and $120,900 for the six months ended June 30, 1999 and 1998,
respectively. Included in accounts receivable at June 30, 1999 are amounts due
from the customer totaling $15,807.
NOTE 14 - BUSINESS SEGMENT INFORMATION
The Company supports products and services that simplify and support e-
commerce transactions in local markets by providing an interactive framework of
local commerce and community-based services comprised of publishing content
management, community-building and communications.
The Company has two reportable business segments: Local
Directory/Enterprise and Financial Services. Each of these is a business
segment, with its respective financial performance detailed herein.
Local Directory/Enterprise consists of Internet application solutions which
provide merchants options for reaching their target customers through simple
tools that publicize their company, product and services offerings; buyers to
quickly find rich information about merchants and their offerings; and buyers
and sellers a more effective and efficient transaction.
Financial Services consists of an online banking solution, marketed
generally to financial institutions having less than $500 million in assets,
using a service bureau approach to e-banking, which enables them to provide many
of the capabilities and services available to the larger financial institutions
without the cost associated with the development of institution specific
systems.
Corporate Activities consists of general corporate expenses, including
capitalized costs that are not allocated to specific business segments. Assets
of corporate activities include unallocated cash, receivables, prepaid expenses,
note receivable, deferred acquisition costs, deposits and corporate use of
property and equipment.
<TABLE>
<CAPTION>
Net Revenues
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------- ---------------------------------------
1999 1998 1999 1998
----------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Local directory/Enterprise $111,825 $266,759 $327,660 $ 937,418
Financial services 81,109 34,049 153,556 90,629
----------------- ----------------- ----------------- -----------------
Total net revenues $192,934 $300,808 $481,216 $1,028,047
================= ================= ================= =================
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Net Loss
- ------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------- ----------------------------------------
1999 1998 1999 1998
------------------ --------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Local directory/Enterprise $(1,470,460) $ (871,781) $(2,746,031) $(1,591,707)
Financial services (20,282) (108,921) (127,927) (162,948)
Corporate activities (1,387,551) (657,770) (2,581,160) (1,372,526)
----------------- ----------------- ----------------- -----------------
Net loss $(2,878,472) $(1,638,472) $(5,455,118) $(3,127,181)
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
Assets
-----------------------------------------------------------------------------------------
June 30, December 31,
1999 1998
------------------- -------------------
<S> <C> <C>
Local directory/Enterprise $ 1,507,554 $ 696,219
Financial services 654,849 416,071
Corporate activities 19,247,182 2,272,986
------------------- -------------------
Total $21,409,585 $3,385,276
=================== ===================
</TABLE>
<TABLE>
<CAPTION>
Property and Equipment
-----------------------------------------------------------------------------------------
June 30, December 31,
1999 1998
------------------- -------------------
<S> <C> <C>
Local directory and Enterprise $1,020,257 $ 82,929
Financial services 630,889 397,721
Corporate activities 306,669 263,989
------------------- -------------------
Total $1,353,223 $ 229,762
=================== ===================
</TABLE>
<TABLE>
<CAPTION>
Depreciation and Amortization
- ------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------- ---------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Local directory/Enterprise $ 49,780 $ 44,460 $ 94,371 $ 83,492
Financial services 35,247 35,247 70,494 70,458
Corporate activities 54,142 26,263 82,533 47,397
----------------- ----------------- ----------------- -----------------
Total depreciation and amortization $139,169 $105,970 $247,398 $201,347
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
Property and Equipment Additions
-----------------------------------------------------------------------------------------
Six Months Ended
June 30,
---------------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
Local directory/Enterprise $1,131,626 $ 19,537
Financial services 297,281 652
Corporate activities 35,685 146,181
------------------- -------------------
Total $1,464,592 $166,370
=================== ===================
</TABLE>
14
<PAGE>
NOTE 15 - SUBSEQUENT EVENTS
During July 1999, the investor converted 1,700 shares of the Series C
Preferred Stock, including accrued dividends payable of $13,084, into 140,311
shares of the Company's common stock at conversion prices ranging from $11.13 to
$14.20 as summarized in the following table:
<TABLE>
<CAPTION>
Number of Shares
---------------------------------------------
Series C Common Stock
Preferred Common Conversion
Conversion Date Stock Stock Price per Share
---------------------- ------------------- ------------------- ---------------------
<S> <C> <C> <C>
July 6, 1999 1,000 90,843 $11.13
July 20, 1999 700 49,468 14.20
------------------- -------------------
Total 1,700 140,311
=================== ===================
</TABLE>
On July 15, 1999, a holder converted its unsecured convertible promissory
note totaling $236,509, including accrued interest payable of $10,365, into
16,034 shares of the Company's common stock at $14.75 per share.
In connection with the sale of the Company's Series A Preferred Stock in
November 1998, the Company issued the placement agent a warrant to purchase
20,000 shares of the Company's common stock at $5.61 per share. On July 6,
1999, the placement agent exercised the warrant resulting in proceeds to the
Company of $114,200.
During July 1999, the Company sold two customer contracts, including
related computer hardware, for approximately $270,000. The Company provided
services and equipment under the terms of the original contracts enabling the
customers to provide Internet access to its end users. Revenue recognized by the
Company from these contracts totaled approximately $8,700 for the six months
ended June 30, 1999.
NOTE 16 - UNAUDITED QUARTERLY INFORMATION
In the fourth quarter of 1998, the Company revised certain factors used in
determining the amounts to be accreted related to issuances of its 10% and 5%
Preferred Stock. These revisions and their impact on unaudited quarterly amounts
previously reported in 1998 are presented below.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
----------------------------- ----------------------------
As Reported As Revised As Reported As Revised
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Net loss $(1,638,472) $(1,638,472) $(3,127,181) $(3,127,181)
Preferred stock dividends 80,585 80,585 142,984 142,984
Accretion of preferred stock to
Redemption value 848,646 1,818,564 (a) 993,980 2,237,260 (a)
------------- ------------ ------------- -----------
Net loss available to common
Stockholders $(2,567,703) $(3,537,621) $(4,264,145) $(5,507,425)
============= ============ ============= ===========
Loss per share, basic and diluted $ (0.75) $ (1.03) $ (1.26) $ (1.62)
============= ============ ============= ===========
Weighted average shares outstanding 3,446,131 3,446,131 3,390,909 3,390,909
============= ============ ============= ===========
</TABLE>
15
<PAGE>
(a) Increase in accretion of preferred stock to redemption value due to the
revision of discounts applied to common stock and common stock warrants
issued in connection with preferred stock private placements and the
revision of the accretion period for the preferred stock.
16
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Online System Services, Inc. (d/b/a Webb Interactive Services, Inc.)
(NASDAQ: WEBB) is developing a new generation of Internet applications that
simplify and support e-commerce transactions in local markets. Our products
provide an interactive framework of local commerce and community-based services
comprised of publishing content management, community-building and
communications. Branded CommunityWare/XML, our products generally are offered
on a private-labeled, application service basis through high-volume distribution
partners such as yellow page publishers, newspapers, city guides and search
engines.
To date, we have generated revenues through the sale of design and
consulting services for Web site development and network engineering services,
resale of software licenses, mark-ups on computer hardware and software sold to
customers, maintenance fees charged to customers to maintain computer hardware
and Web sites, license fees based on a percentage of revenues from our products
and services, training course fees, and monthly fees paid by customers for
Internet access which we have provided. We commenced sales in February 1995,
and were in the development stage through December 31, 1995. We have incurred
losses from operations since inception. At June 30, 1999, we had an accumulated
deficit of $30,620,542. The reports of our independent public accountants for
the years ended December 31, 1998 and 1997 contained a paragraph noting
substantial doubt regarding our ability to continue as a going concern.
Prior to the third quarter of 1997, our focus generally was on three
markets: general Web site development, maintenance and hosting; rural or small
market Internet service providers ("ISPs"); and healthcare information services
and continuing medical education. Each of these activities involved, to varying
degrees, the building of online communities and the development of tools and
services to allow for the building of strategic and customized Web sites. As an
outgrowth of these activities, since mid 1997, our business has evolved to the
development of online communities and more recently, the development of Internet
applications that simplify and support e-commerce transactions in local markets.
Our application services are being developed to solve two of the largest
problems in the local online market; the failure of merchants to have their web
sites found by their target customers, and the inability of customers to find
merchants, compare products and services, and ask questions, or conduct
transactions such as making an appointment or requesting a bid.
The opportunity to connect buyers and sellers in the rapidly emerging
local online market is significant. The Kelsey Group estimates that the number
of U.S. based local businesses that are active advertisers and that have a web
presence will increase from 1.9 million in 1999 to 5.2 million in 2004.
According to Forrester Research, local online sales are projected to grow from
$680 million in 1998 to $6.1 billion in 2003. The local only advertising dollars
spent in support of these web site activities are projected to grow from $135
million in 1998 to $1.7 billion in 2003.
Our application solutions are intended to provide:
. Local market merchants with advanced yet easy-to-use web site publishing
tools, new ways to have their site found by their target customers, and
services that turn web site visitors into leads, buyers, and repeat
customers.
. Consumers with unique abilities to easily comparison shop and interact
online with merchants in support of e-commerce or in-store transactions.
. Directory services and yellow page publishers who host local market
merchant sites with enhanced services to attract a larger share of
merchant web sites and command premium fees for site development and
hosting.
17
<PAGE>
In addition to targeting the local directory and e-commerce markets, we
also offer online banking transaction processing and management services to
local market focused credit unions and community banks. Over the next year, we
intend to offer a suite of XML-enabled services to these financial institutions
to enhance customer service and support and connect their loans and other
financial services into the local e-commerce marketplace.
We have over five years of experience in web site development and in
developing and marketing community building tools supported by a full suite of
content rich services. Customers have included Citicorp Diners Club, Invesco
Funds Group, TCI International, Intermedia Partners and Bresnan Communications,
Inc.
During the first six months of 1999, we acquired privately held Durand
Communications, Inc. and NetIgnite, Inc. See Notes 3 and 4 of Notes to
Consolidated Financial Statements.
We have contracted with Switchboard, Inc. as a key anchor distribution
partner in the online local directories market and with CU Cooperative Systems,
Inc. in the community banking arena. We believe these partners provide a
critical mass of end users that will generate sustainable and recurring revenue
for Webb and a strong foundation on which to build enhanced distribution
relationships with other market leaders. As a result of these agreements, we
expect our revenues to increase during the remainder of fiscal 1999 and beyond.
Our strategy is to develop a competitive advantage and build a leadership
position in local e-commerce by:
. Delivering leading-edge technical solutions that provide first mover
advantage and capitalize on our expertise in online community,
communication and XML-based technologies;
. Securing additional distribution partnerships that drive the deployment
of our technologies to a critical mass of end-users; and
. Providing innovative, value-added services to enhance buyer-seller
interaction.
Based on applicable current accounting standards, we recorded a non-
operating expense of $4,158,563 during the first quarter of 1999 in connection
with the private placement of $3,000,000 principal amount of our Series C
preferred stock. We also recorded a similar non-operating expense of $157,691
during the second quarter of 1999 in connection with the exercise of our option
to sell an additional $2,000,000 principal amount of our Series C preferred
stock. While these charges do not affect our operating losses or working
capital, they do result in an increase in our net loss available to common
stockholders. Additionally, we recorded a non-cash charge for preferred stock
dividends during the 1999 three and six-month period totaling $29,028 and
$75,041, respectively.
Results of Operations
In the fourth quarter of 1998, we revised certain factors used in
determining the amounts to be accreted related to the issuance of our 10% and 5%
Preferred Stock. These revisions and their impact on unaudited quarterly amounts
previously reported in 1998 are presented below.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
----------------------------- -----------------------------
As Reported As Revised As Reported As Revised
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Net loss $(1,638,472) $(1,638,472) $(3,127,181) $(3,127,181)
Preferred stock dividends 80,585 80,585 142,984 142,984
Accretion of preferred stock to
redemption value 848,646 1,818,564 (a) 993,980 2,237,260 (a)
------------- ------------- -------------- ------------
Net loss available to common
Stockholders $(2,567,703) $(3,537,621) $(4,264,145) $(5,507,425)
============= ============= ============== ============
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C>
Loss per share, basic and diluted $ (0.75) $ (1.03) $ (1.26) $ (1.62)
=========== =========== =========== ===========
Weighted average shares outstanding 3,446,131 3,446,131 3,390,909 3,390,909
=========== =========== =========== ===========
</TABLE>
(a) Increase in accretion of preferred stock to redemption value due to
the revision of discounts applied to common stock and common stock
warrants issued in connection with preferred stock private placements
and the revision of the accretion period for the preferred stock.
The following table sets forth for the periods indicated the
percentage of net revenues by items contained in the Statements of
Operations. All percentages are calculated as a percentage of total net
revenues, with the exception of cost of revenues which are calculated
based on the respective net revenue amounts.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------
1999 1998 1999 1998
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues:
Transaction fees 73.7% 15.9% 51.6% 6.9%
Services 26.3% 14.3% 24.0% 12.4%
Hardware and software - 69.8% 24.4% 80.7%
---------- --------- ---------- ---------
Total net revenues 100.0% 100.0% 100.0% 100.0%
---------- --------- ---------- ---------
Cost of revenues:
Cost of transaction fees 193.9% 59.9% 143.6% 147.1%
(as percentage of transaction fee revenues)
Cost of services 127.0% 70.4% 78.5% 33.9%
(as percentage of service revenues)
Cost of hardware and software - 99.0% 80.1% 82.1%
(as percentage of hardware and software revenues)
---------- --------- ---------- ---------
Total cost of revenues 176.3% 88.7% 112.5% 80.6%
---------- --------- ---------- ---------
Gross Margin (76.3)% 11.3% (12.5)% 19.4%
---------- --------- ---------- ---------
Operating expenses:
Sales and marketing expenses 201.8% 203.3% 173.4% 109.5%
Product development expenses 339.6% 43.6% 260.6% 34.4%
General and administrative expenses 766.6% 284.9% 626.5% 166.2%
Depreciation and amortization expenses 72.1% 35.2% 51.4% 19.6%
---------- --------- ---------- ---------
Total operating expenses 1380.1% 567.0% 1111.9% 329.7%
---------- --------- ---------- ---------
Loss from operations (1456.4)% (555.7)% (1124.4)% (310.3)%
---------- --------- ---------- ---------
Net Loss (1491.9)% (544.7)% (1133.6)% (304.2)%
Preferred stock dividends (15.0)% (26.8)% (15.6)% (13.9)%
Accretion of preferred stock to redemption value (81.7)% (604.5)% (656.2)% (217.6)%
Accretion of guaranteed return in excess of
redemption value - - (240.8)% -
---------- --------- ---------- ---------
Net loss available to common stockholders (1588.6)% (1176.0)% (2046.2)% (535.7)%
========== ========= ========== =========
</TABLE>
19
<PAGE>
Three and Six Months Ended June 30, 1999 and 1998.
Components of net revenues and cost of revenues are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------- -------------------------------------------
1999 1998 1999 1998
----------------- ----------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Net revenues:
Transaction fees $ 142,097 $ 47,678 $248,426 $ 70,828
Services 50,837 43,142 115,281 127,564
Hardware and software - 209,988 117,509 829,655
----------------- ----------------- ------------------- ------------------
Total net revenues 192,934 300,808 481,216 1,028,047
----------------- ----------------- ------------------- ------------------
Cost of revenues
Cost of transaction fees 275,505 28,552 356,719 104,154
Cost of services 64,579 30,367 90,444 43,284
Cost of hardware and software - 207,901 94,155 680,935
----------------- ----------------- ------------------- ------------------
Total cost of revenues 340,084 266,820 541,318 828,373
----------------- ----------------- ------------------- ------------------
Gross margin $(147,150) $ 33,988 $(60,102) $ 199,674
================= ================= =================== ==================
</TABLE>
Revenues from transaction fees include e-banking service bureau fees,
online subscription fees, and Internet access and e-commerce royalties. Our net
revenues from transaction fees were $142,097 and $248,426 for the three and six
month periods ended June 30, 1999, respectively, which represent increases of
198.0% and 250.7%, respectively, when compared with the similar 1998 periods.
The increases are primarily due to increases in the number of subscribers using
our financial services product; the implementation of our Re/Max Main Street
product during the second quarter of 1998 and the steady growth of subscribers
through the second quarter of 1999, which represents a more than 200% increase
from 1998.
Revenues from services include professional services for programming,
network engineering fees, equipment installation and Internet connectivity fees.
Our net revenues from services were $50,837 and $115,281 for the three and six
month periods ended June 30, 1999, respectively, which represent increases of
17.8% for the three-month period and a decrease of 9.6% for the six-month period
when compared with the similar 1998 periods. The increase in the 1999 three-
month period was primarily due to design and integration fees earned in the
second quarter. The decrease in the 1999 six-month period was primarily due to
fewer fees charged for professional programming services related to
customization of our e-banking product for an existing customer, a reduction
in revenue from Internet connectivity services, and fewer programming services
to an e-banking customer, which was partially off-set by an increase in design
and integration fees and amortized software license fees from 1999 contracts.
Revenues from hardware and software include the resale of computer hardware
and third party software to customers generally in connection with implementing
our CommunityWare products and services. During the fourth quarter of 1998, we
changed our pricing structure whereby we supply any required equipment and the
products and services and the customer is not required to pay any significant
fees upon the delivery of such items. As a result, we did not resell any
hardware or software during the three months ended June 30, 1999 compared to
$209,988 in revenues for the similar 1998 period. Our net revenues from the
resale of hardware and software were $117,509 for the six months ended June 30,
1999 compared to $829,655 for the similar 1998 period. During the six-month
period, we sold equipment to customers with whom we have existing contracts to
provide equipment. We anticipate that revenue from hardware and equipment
revenues will continue to be at minimal levels in future periods.
We had four customers representing 77% of revenues for the June 30, 1999
three-month period and four customers representing 82% of net revenues for the
similar 1998 period. We had four customers representing 83% of revenues for
June 30, 1999 six-month period and three customers representing 74% of revenues
for the similar 1998 period. During the first quarter of 1999, Intermedia
Partners, a related party (See Note 13 of Notes to Consolidated Financial
Statements), announced that it intended to sell several of its cable systems in
its Tennessee
20
<PAGE>
market and elsewhere to TCI and Charter Communications, Inc.. We currently
provide services to Intermedia in three Tennessee markets and have generated
revenues from the sale of computer hardware, network engineering services, and
royalties from Internet access revenue to their customers. Intermedia accounted
for approximately 7% and 23% of our revenue for the three and six months ended
June 30, 1999, respectively, primarily due to equipment sales which were not
anticipated to continue during the balance of 1999, and approximately 12% and 2%
of total revenue for the years ended December 31, 1998 and 1997, respectively.
As a result of these factors and further consolidation of Intermedia's cable
operations and the announcement by Charter Communications that its affiliate
High Speed Access Corp will be the Internet access provider for these Tennessee
markets beginning in mid to late 1999, we expect to receive substantially less
revenue from Intermedia during the remainder of 1999 and in future periods.
Provisions of the contracts may remain in effect whereby we may receive revenue
from Internet content fees; however, to date, revenue from this source has been
insignificant.
In addition, during July 1999, we sold two customer contracts, including
related computer hardware, for approximately $270,000. We provided services and
equipment under the terms of the original contracts with these customers to
provide Internet access to their end users. We recognized approximately $8,700
of revenue from these contracts during the second quarter of 1999.
Cost of revenues as a percentage of net revenues was 176.3% for the three
months ended June 30, 1999 compared to 88.7% for the similar 1998 period. Cost
of revenues as a percentage of net revenues was 112.5% for the six months ended
June 30, 1999 compared to 80.6% for the similar 1998 period.
Transaction fee revenues - Cost of transaction fee revenues consist of
customer revenue sharing costs, expenses associated with operating our network
operating center, including Internet connection charges and depreciation
expense, employee costs associated with assisting our customers in delivering
our services to end users, third party content software license fees, and third
party transaction fees. Cost of transaction fee revenues were $275,505 and
$356,719 for the three and six months ended June 30, 1999, respectively, or
193.9% and 143.6% of net transaction fee revenues, as compared to $28,552 and
$104,154, or 59.9% and 147.1% of net transaction fee revenues in the similar
1998 periods. The absolute dollar increase in the 1999 periods was primarily
attributable to operating our network operating center, which we began during
the second quarter of 1999, as well as costs associated with delivering Internet
access and content to the customers of our cable operator distribution partners.
We constructed the network operating center to accommodate our current customer
base, our contract backlog and our forecast of future growth. Consequently,
during the 1999 six-month period, the cost to operate the network operating
center out paced our current revenues resulting in a negative gross margin.
While we expect the operating costs of the network operating center to increase
in future periods, we also expect our revenue base to grow sufficiently to
reflect a positive gross margin in future periods.
Service revenues - Cost of service revenues consist of compensation costs
and consulting fees associated with performing programming, installation and
integration services for our customers. Cost of service revenues were $64,579
and $90,444 for the three and six months ended June 30, 1999, respectively, or
127.0% and 78.5% of net service revenues, as compared to $30,367 and $43,284, or
70.4% and 33.9% of net service revenues in the similar 1998 periods. The
increase in costs and corresponding decrease in gross margin during the 1999
periods was due to the fact that we incurred approximately $41,000 more costs
than revenues.
Hardware and software revenues - Cost of hardware and software revenues
consist of computer and third party software purchased for resale to cable
operators. Due to the change in our pricing model, we did not re-sell any
computer or software products during the second quarter of 1999. Cost of
hardware and software revenue was 80.1% of net revenues for the 1999 six-month
period compared to 82.1% of net revenues for the similar 1998 period. Cost of
hardware and software revenues as a percentage of net revenues decreased
slightly during the 1999 period because during the 1998 period we sold equipment
to existing customers at somewhat lower margins.
Sales and marketing expenses consist primarily of salaries, advertising,
trade show expenses, and costs of marketing materials. Sales and marketing
expenses were $389,264 for the three months ended June 30, 1999, or 201.8% of
net revenues as compared to $611,451, or 203.3% of net revenues for the similar
1998 period. For the
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six months ended June 30, 1999, sales and marketing expenses were $834,653, or
173.4% of net revenues as compared to $1,125,767, or 109.5% of net revenues for
the similar 1998 period. The decrease in absolute dollars in the 1999 periods
was primarily attributable to (i) a net decrease of seven employees; (ii) the
phase out of our international marketing efforts; and (iii) a decrease in direct
advertising dollars as a result of our focus on distribution partners rather
than the consumer directly. We expect sales and marketing expenses to increase
on an absolute dollar basis in future periods but decrease as a percentage of
net revenues as our revenues increase from current levels as we continue to
market our products and services.
Product development expenses consist primarily of employee compensation and
programming fees relating to the development and enhancement of the features and
functionality of our online CommunityWare software. Product development
expenses were $655,257 for the three months ended June 30, 1999, or 339.6% of
net revenues as compared to $131,202, or 43.6% of net revenues for the similar
1998 period. For the six months ended June 30, 1999, product development
expenses were $1,254,097, or 260.6% of net revenues as compared to $353,570, or
34.4% of net revenues for the similar 1998 period. During 1999, all product
development costs have been expensed as incurred. We capitalized $127,618 and
$196,290 of development costs during the 1998 three and six-month periods,
respectively. The increase in absolute dollars in the 1999 periods was due
primarily to the an increase in technology personnel from 12 to 30 to support
the continued development of our CommunityWare products, including deployment of
our core publishing software and integration of the XML technologies into our
software. We believe that significant investments in product development are
critical to attaining out strategic objectives and, as a result, we expect
product development expenses to increase in future periods.
General and administrative expenses consist primarily of compensation,
consulting expenses, fees for professional services, and the non-cash expense of
warrants issued to customers. General and administrative expenses were
$1,479,094 for the three months ended June 30, 1999, or 766.6% of net revenues
as compared to $857,062, or 284.9% of net revenues for the similar 1998 period.
For the six months ended June 30, 1999, general and administrative expenses were
$3,014,702, or 626.5% of net revenues as compared to $1,708,585, or 166.2% of
net revenues for the similar 1998 period. The increase in absolute dollars in
the 1999 periods was primarily attributable to the following: (i) an increase in
non-cash charges for common stock and common stock warrants issued for services
or for customer acquisition costs which totaled $220,000 and $408,000 in the
three and six-month periods, respectively; (ii) an increase in employee
compensation; (iii) an increase in legal fees related to security filings and
general corporate matters; and (iv) an increase in investor relation expenses.
We expect general and administrative expenses to increase on an absolute dollar
basis in future periods but decrease as a percentage of net revenues as our
revenues increase from current levels. We also expect to incur non-cash charges
in the third quarter as a result of the issuance of a warrant to purchase our
common stock to a customer. The amount of such charges could exceed
approximately $1 million. We expect that such charges may continue as we
continue to build distributor relationships.
Depreciation and amortization was $139,169 for the three months ended
June 30, 1999, compared to $105,970 for the similar 1998 period. Depreciation
and amortization was $247,398 for the six months ended June 30, 1999, compared
to $201,347 for the similar 1998 period. We recorded more depreciation expense
as a result of an increase in fixed assets primarily from construction of our
network operating center and the purchase of third party application server
platform software for delivering XML-based components with our software. We
also began amortizing the intangible assets we acquired in the NetIgnite merger
and recorded $23,675 of amortization expense in the 1999 three-month period. As
a result of the NetIgnite and DCI mergers, we expect to record approximately
$2,500,000 of amortization expense during the remainder of 1999 and
approximately $5,000,000 of such expenses in 2000 and 2001 and approximately
$2,500,000 of such expenses in 2002.
Loss from investment in subsidiary is our share of the net losses from
NetIgnite. NetIgnite was engaged primarily in product development activities.
Interest income was $36,775 for the three months ended June 30, 1999,
compared to $33,225 for the similar 1998 period. Interest income was $82,917 for
the six months ended June 30, 1999, compared to $62,414 for the similar 1998
period. We earn interest by investing surplus cash in highly liquid investment
funds or AAA rated commercial paper. During the 1999 period, we recorded
$22,050 of interest income from our note receivable from DCI.
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Net losses allocable to common stockholders were $3,065,012 for the
three-month period ended June 30, 1999 compared to $3,537,621 for the similar
1998 period. We recorded non-operating expenses for preferred stock dividends
and accretion of preferred stock to redemption value during the 1999 three-month
period of $29,028 and $157,691, respectively, and $80,585 and $1,181,564 in the
similar 1998 period. Net losses allocable to common stockholders were
$9,846,413 for the six-month period ended June 30, 1999 compared to $5,507,425
for the similar 1998 period. We recorded non-operating expenses for preferred
stock dividends and accretion of preferred stock to redemption value during the
1999 six-month period of $75,041 and $4,316,254, respectively, and $142,984 and
$2,237,260 in the similar 1998 period. Additionally, the increase in losses
reflect expenses in sales and marketing, product development, and general and
administrative areas that have increased at a faster rate than net revenue.
This is due to the time lag associated with product development and market
introduction as well as the long sales cycle for most of our products and
services. We expect to continue to experience increased operating expenses and
capital investments during 1999, as we continue to develop new product offerings
and the infrastructure required to support our anticipated growth. We expect
to report operating and net losses for 1999 and for one or more years
thereafter.
Liquidity and Capital Resources
As of June 30, 1999, we had cash and cash equivalents of $3,934,761
and working capital of $782,392. We financed our operations and capital
expenditures and other investing activities primarily through private sales of
preferred stock and the exercise of common stock warrants resulting in net
proceeds of $4,615,500 and $3,856,271, respectively. (See Notes 8, 9 and 11 of
Notes to Consolidated Financial Statements for information regarding these sales
of securities).
We used $3,559,092 in cash to fund our operations for the six months ended
June 30, 1999, compared to $2,836,003 for the similar 1998 period. The increase
in net cash used resulted primarily from an increase in our net operating losses
and payment of 1998 accounts payable and accrued liabilities and accrued
compensation in the first quarter of 1999. These items were offset by cash we
received from customers that represents future revenue and by non-cash expenses
for stock and stock options we issued for services.
We used $2,182,420 in cash for capital expenditures and other investing
activities for the six months ended June 30, 1999, compared to $1,125,689 for
the similar 1998 period. The increase between periods is primarily a result of
property and equipment we purchased in connection with establishing our computer
operating center and our continuing development of the e-banking system for CU
Cooperative as well as our cash investment in NetIgnite (See Note 4 of Notes to
Consolidated Financial Statements).
We received $8,977,934 in cash from financing activities for the six months
ended June 30, 1999, compared to $3,051,035 for the similar 1998 period. During
January 1999, we sold 3,000 shares of Series C Preferred Stock with a stated
value of $1,000 per share, which resulted in net proceeds of $2,755,500. In
connection with that transaction, we also exercised our right and called a
warrant that required the investor to purchase 2,000 additional shares of the
Series C Preferred Stock, resulting in net proceeds of $1,860,000. During May,
1999, we received net proceeds of $3,056,871 from the exercise of our warrants
issued in connection with our public offering in 1996. In addition, during
January 1999, an investor exercised a warrant to purchase common stock we issued
in connection with the Series A Preferred Stock, which resulted in proceeds of
$799,400. We also received $522,600 in cash during the 1999 six-month period
from the issuance of our common stock as a result of the exercise of options and
warrants.
We believe that our cash and cash equivalents and working capital at June
30, 1999 will be adequate to sustain our operations through at least October
1999. In order to continue to finance our operations, we are pursing several
funding possibilities. These funding activities are intended to raise the
approximately $10 million of net proceeds we estimate will be required to
sustain operations for the next twelve months. First, we are pursuing various
potential strategic relationships which, if consummated, could result in one or
more significant investments by strategic partners. We have also initiated
discussions with various potential private investors which could result in
additional debt or equity investments. There can be no assurance that we will be
successful in obtaining any additional equity or debt capital or that if such
capital is available, that it will be available on acceptable terms. If we are
unable to
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obtain the capital required to sustain our operations, we will be required to
reduce or terminate certain of our operations which could have a material
adverse affect on our operating results and financial condition. In its reports
accompanying the audited financial statements for the years ended December 31,
1998 and 1997, our auditors, Arthur Andersen LLP, expressed substantial doubt
about our ability to continue as a going concern.
Year 2000
The Year 2000 issue involves the potential for system and processing
failures of date-related data resulting from computer-controlled systems using
two digits rather than four to define the applicable year. For example,
computer programs that contain time-sensitive software may recognize a date
using two digits of "00" as the year 1900 rather than the year 2000. This could
result in system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar ordinary business activities.
We have reviewed our internal software and hardware systems and believe
they will function properly with respect to dates in the year 2000 and
thereafter. We expect to incur no significant costs in the future for Year 2000
problems. Nonetheless, there can be no assurance in this regard until such
systems are operational in the Year 2000. We are in the process of contacting
all of our significant suppliers to determine the extent to which our systems
are vulnerable to those third parties' failure to make their own systems Year
2000 compliant. As of the date of this report, we have substantially completed
this review and believe our significant suppliers and vendors are Year 2000
compliant and that should any of them prove not to be Year 2000 compliant, we
could find a replacement vendor or supplier which is Year 2000 compliant without
significant delay or expense. While our review has not identified any Year 2000
problems that will have a material effect on our business, due to the general
uncertainty inherent in the Year 2000 problem, resulting from the uncertainty of
the Year 2000 readiness of third-party suppliers and vendors and of our
customers, we are unable to determine at this time that the consequences of Year
2000 failures will not have a material impact on our results of operations,
liquidity or financial condition.
Of our product offerings, the one that may be most impacted by Year 2000
problems or peoples' concern about potential Year 2000 problems, is our
Financial Services product offering. We have recently entered into an agreement
with CU Cooperative Systems, Inc., a national cooperative association
representing over 500 credit unions. The services to be provided to the members
of the Cooperative are scheduled for introduction during the second half of
1999. Our Financial Services products are Year 2000 compliant, however,
concerns about Year 2000 problems may cause individual cooperatives or their
members to be reluctant to offer or to engage in e-banking transactions prior to
the end of 1999. While we have not anticipated any significant income from the
use of this system prior to 2000, a delay in the implementation of the system by
the Cooperative's members could result in a decrease in anticipated revenues for
the product offering in 2000, particularly during the first six months of the
year.
Factors That May Affect Future Results
Factors that may affect our future results include, but are not limited to,
the following items as well as the information in "Item 1 - Financial
Statements - Note 1 to the Consolidated Financial Statements" and "Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our limited operating history could affect our business. We were founded in
March 1994, commenced sales in February 1995, and were in the development stage
through December 31, 1995. Accordingly, we have a limited operating history upon
which you may evaluate us. Our business is subject to the risks, expenses and
difficulties frequently encountered by companies with a limited operating
history including:
. Limited ability to respond to competitive developments,
. Exaggerated effect of unfavorable changes in general economic and market
conditions,
. Ability to attract qualified personnel, and
. Ability to develop and introduce new product and service offerings.
There is no assurance we will be successful in addressing these risks. If we
are unable to successfully address these risks our business could be
significantly affected.
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We have accumulated losses since inception and we anticipate that we will
continue to accumulate losses for the foreseeable future. We have incurred net
losses since inception totaling $30,620,542 through June 30, 1999. In addition,
we expect to incur additional substantial operating and net losses in 1999 and
for one or more years thereafter. We expect to incur these additional losses
because:
. We currently intend to increase our capital expenditures and operating
expenses to expand the functionality and performance of our products
and services,
. We recorded goodwill and other intangible assets in connection with the
DCI and NetIgnite acquisitions which we will amortize over their
estimated useful lives of approximately three years. We have allocated
approximately $14.7 million to goodwill and other intangible assets in
connection with these acquisitions.
Net losses since inception include approximately $10.2 million of non-cash
expenses related to the issuance of preferred stock and warrants in financing
transactions and warrants issued to three customers. The current competitive
business environment may result in our issuance of similar securities in future
financing transactions or to other companies as an inducement for them to enter
into a business relationship with us. While these transactions represent
non-cash charges, to the extent that we enter into similar transaction in the
future, they will increase our expenses and may increase our net loss.
If we are unable to raise additional working capital funds, we may not
be able to sustain our operations. We believe that our present cash and cash
equivalents, working capital and commitments for additional equity investments
will be adequate to sustain our current level of operations only through October
1999. If we cannot raise additional funds when needed, we may be required to
curtail or scale back our operations. These actions could have a material
adverse effect on our business, financial condition, or results of operations.
We estimate that we will need to raise through equity, debt or other external
financing at least $10 million to sustain operations for the next 12 months.
There is no assurance that we will be able to raise additional funds in amounts
required or upon acceptable terms. In addition, we may discover that we have
underestimated our working capital needs, and we may need to obtain additional
funds to sustain our operations. In its report accompanying the audited
financial statements for the years ended December 31, 1998 and 1997, our
auditor, Arthur Andersen LLP, expressed substantial doubt about our ability to
continue as a going concern. See "Item 2 - Management's Discussion of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
We may never become or remain profitable. Our ability to become profitable
depends on the ability of our products and services to generate revenues. The
success of our revenue model will depend upon many factors including:
. The success of our distribution partners in marketing their products and
services, and
. The extent to which consumers and businesses use our products and
conduct e-commerce transactions and advertising utilizing our products.
Because of the new and evolving nature of the Internet, we cannot predict
whether our revenue model will prove to be viable, whether demand for our
products and services will materialize at the prices we expect to be charged, or
whether current or future pricing levels will be sustainable.
Our business depends on the growth of the Internet. Our business plan
assumes that the Internet will develop into a significant source of
communication and communication interactivity. However, the Internet market is
new and rapidly evolving and there is no assurance that the Internet will
develop in this manner. If the Internet does not develop in this manner, our
business, operating results and financial condition would be materially
adversely effected. Numerous factors could prevent or inhibit the development
of the Internet in this manner, including:
. The failure of the Internet's infrastructure to support Internet usage
or electronic commerce,
. The failure of businesses developing and promoting Internet commerce to
adequately secure the confidential information, such as credit card
numbers, needed to carry out Internet commerce, and
. Regulation of Internet activity
Use of many of our products and services will be dependent on distribution
partners. Because we have elected to partner with other companies for the
distribution of many of our products and services, many users of our products
and services are expected to subscribe through our distribution partners. As a
result, our distribution partners, and not us, will substantially control the
customer relationship with these users. If the business of the companies
with whom we partner is adversely affected in any manner, our business,
operating results and
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financial condition could be materially adversely effected.
We may be unable to develop desirable products. Our products are
subject to rapid obsolescence and our future success will depend upon our
ability to develop new products and services that meet changing customer and
marketplace requirements. There is no assurance that we will be able to
successfully:
. Identify new product and service opportunities, or
. Develop and introduce new products and services to market in a timely
manner.
If we are unable to accomplish these items, our business, operating results
and financial condition could be materially adversely affected.
Our products and services may not be successful. Even if we are able to
successfully identify, develop, and introduce new products and services there is
no assurance that a market for these products and services will materialize to
the size and extent that we anticipate. If a market does not materialize as we
anticipate, our business, operating results, and financial condition could be
materially adversely affected. The following factors could affect the success of
our products and services:
. The failure of our business plan to accurately predict the rate at which
the market for Internet products and services will grow,
. The failure of our business plan to accurately predict the types of
products and services the future Internet marketplace will demand,
. Our limited experience in marketing our products and services,
. The failure of our business plan to accurately predict our future
participation in the Internet marketplace,
. The failure of our business plan to accurately predict the estimated
sales cycle, price, and acceptance of our products and services,
. The development by others of products and services that renders our
products and services noncompetitive or obsolete, or
. Our failure to keep pace with the rapidly changing technology, evolving
industry standards, and frequent new product and service introductions
that characterize the Internet marketplace.
The intense competition that is prevalent in the Internet market could
have a material adverse effect on our business. Our current and prospective
competitors include many companies whose financial, technical, marketing and
other resources are substantially greater than ours. There is no assurance that
we will have the financial resources, technical expertise, or marketing, sales
and support capabilities to compete successfully. The presence of these
competitors in the Internet marketplace could have a material adverse effect on
our business, operating results, or financial condition by causing us to:
. Reduce the average selling price of our products and services, or
. Increase our spending on marketing, sales, and product development.
There is no assurance that we would be able to offset the effects of any
such price reductions or increases in spending through an increase in the number
of our customers, higher sales from premium services, cost reductions or
otherwise. Further, our financial condition may put us at a competitive
disadvantage relative to our competitors. If we fail to, or cannot, meet
competitive challenges, our business, operating results and financial condition
could be materially adversely affected.
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A limited number of our customers generate a significant portion of our
revenues. We had four customers representing 77% of revenues for the June 30,
1999 three-month period and four customers representing 82% of net revenues for
the similar 1998 period. We had four customers representing 83% of revenues for
June 30, 1999 six-month period and three customers representing 74% of revenues
for the similar 1998 period. There is no assurance that we will be able to
attract or retain major customers. The loss of, or reduction in demand for
products or related services from major customers could have a material adverse
effect on our business, operating results, cashflows, and financial condition.
See "Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations."
The sales cycle for our products and services is lengthy and unpredictable.
While our sales cycle varies from customer to customer, it typically has ranged
from one to six months for projects. Our pursuit of sales leads typically
involves an analysis of our prospective customer's needs, preparation of a
written proposal, one or more presentations and contract negotiations. We often
provide significant education to prospective customers regarding the use and
benefits of our Internet technologies and products. Our sales cycle may also be
affected by a prospective customer's budgetary constraints and internal
acceptance reviews, over which we have little or no control.
We may be unable to adjust our spending to account for potential
fluctuations in our quarterly results. As a result of our limited operating
history and the recent increased focus on our products and services, we do not
have historical financial data for a sufficient number of periods on which to
base planned operating expenses. Therefore, our expense levels are based in
part on our expectations as to future sales and to a large extent are fixed. We
typically operate with little backlog and the sales cycles for our products and
services may vary significantly. As a result, our quarterly sales and operating
results generally depend on the volume and timing of and the ability to close
customer contracts within the quarter, which are difficult to forecast. We may
be unable to adjust spending in a timely manner to compensate for any unexpected
sales shortfalls. If we were unable to so adjust, any significant shortfall of
demand for our products and services in relation to our expectations would have
an immediate adverse effect on our business, operating results and financial
condition. Further, we currently intend to increase our capital expenditures
and operating expenses to fund product development and increase sales and
marketing efforts. To the extent that such expenses precede or are not
subsequently followed by increased sales, our business, operating results and
financial condition will be materially adversely affected.
We may be unable to retain our key executives and research and development
personnel. We are highly dependent on the technical and management skills of our
key employees, including in particular R. Steven Adams, our founder and Chief
Executive Officer and Perry Evans, our President and founder of NetIgnite Inc.
The loss of either Mr. Adams' or Mr. Evans' services could have a material
adverse effect on our business and operating results. We do not maintain key
person insurance for either Mr. Adams or Mr. Evans or any other member of
management.
Our future success also depends in part on our ability to identify, hire
and retain additional personnel, including key product development, sales,
marketing, financial and executive personnel. Competition for such personnel is
intense and there is no assurance that we can identify or hire additional
qualified personnel.
Executives and research and development personnel who leave us may compete
against us in the future. We generally enter into written nondisclosure and
nonsolicitation agreements with our officers and employees which restrict the
use and disclosure of proprietary information and the solicitation of customers
for the purpose of selling competing products or services. However, we generally
do not require our employees to enter into non-competition agreements. Thus, if
any of these officers or key employees left, they could compete with us, so long
as they did not solicit our customers. Any such competition could have a
material adverse effect on our business.
We may be unable to manage our expected growth. If we are able to implement
our growth strategy, we will experience significant growth in the number of our
employees, the scope of our operating and financial systems, and the geographic
area of our operations. There is no assurance that we will be able to implement
in whole or in part our growth strategy or that our management or other
resources will be able to successfully manage any future growth in our business.
Any failure to do so could have a material adverse effect on our operating
results and financial condition.
We may be unable to protect our intellectual property rights. Intellectual
property rights are important to our success and our competitive position. There
is no assurance that the steps we take to protect our intellectual
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property rights will be adequate to prevent the imitation or unauthorized use of
our intellectual property rights. Policing unauthorized use of proprietary
systems and products is difficult and, while we are unable to determine the
extent to which piracy of our software exists, we expect software piracy to be a
persistent problem. In addition, the laws of some foreign countries do not
protect software to the same extent as do the laws of the United States. Even if
the steps we take to protect our proprietary rights prove to be adequate, our
competitors may develop products or technologies that are both non-infringing
and substantially equivalent or superior to our products or technologies.
Computer viruses and similar disruptive problems could have a material
adverse effect on our business. Our software and equipment may be vulnerable to
computer viruses or similar disruptive problems caused by our customers or other
Internet users. Our business, financial condition or operating results could be
materially adversely effected by:
. Losses caused by the presence of a computer virus that causes us or
third parties with whom we do business to interrupt, delay or cease
service to our customers,
. Losses caused by the misappropriation of secured or confidential
information by a third party who, in spite of our security measures,
obtains illegal access to this information,
. Costs associated with efforts to protect against and remedy security
breaches, or
. Lost potential revenue caused by the refusal of consumers to use our
products and services due to concerns about the security of transactions
and commerce that they conduct on the Internet.
Future government regulation could materially adversely effect our
business. There are currently few laws or regulations directly applicable to
access to, communications on, or commerce on the Internet. Therefore, we are not
currently subject to direct regulation of our business operations by any
government agency, other than regulations applicable to businesses generally.
Due to the increasing popularity and use of the Internet, however, federal,
state, local, and foreign governmental organizations are currently considering a
number of legislative and regulatory proposals related to the Internet. The
adoption of any of these laws or regulations may decrease the growth in the use
of the Internet, which could, in turn:
. Decrease the demand for our products and services,
. Increase our cost of doing business, or
. Otherwise have a material adverse effect on our business, results of
operations and financial condition.
Moreover, the applicability to the Internet of existing laws governing
issues such as property ownership, copyright, trademark, trade secret,
obscenity, libel and personal privacy is uncertain and developing. Our
business, results of operations and financial condition could be materially
adversely effected by the application or interpretation of these existing laws
to the Internet.
Our systems may not be year 2000 compliant. We have reviewed our internal
software and hardware systems. Based on this review, we believe that our
internal software and hardware systems will function properly with respect to
dates in the year 2000 and thereafter. We expect to incur no significant costs
in the future for Year 2000 problems. Nonetheless, there is no assurance in this
regard until our internal software and hardware systems are operational in the
year 2000.
The failure to correct material Year 2000 problems by our suppliers and
vendors could result in an interruption in, or a failure of, certain of our
normal business activities or operations. Due to the general uncertainty
inherent in the Year 2000 problem, resulting from the uncertainty of the Year
2000 readiness of third-party suppliers and vendors and of our customers, we are
unable to determine at this time that the consequences of Year 2000 failures
will not have a material impact on our results of operations, liquidity or
financial condition. See "Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Compliance Disclosure."
Our articles of incorporation and bylaws may discourage lawsuits and other
claims against our directors. Our articles of incorporation provide, as
permitted by Colorado law, that our directors shall have no personal liability
for certain breaches of their fiduciary duties to us. In addition, our bylaws
provide for mandatory indemnification of directors and officers to the fullest
extent permitted by Colorado law. These provisions may
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reduce the likelihood of derivative litigation against directors and may
discourage shareholders from bringing a lawsuit against directors for a breach
of their duty.
The price of our common stock has been highly volatile due to factors that
will continue to effect the price of our stock. Our common stock traded as high
as $19.38 per share and as low as $9.13 between January 1, 1999 and August 6,
1999. Historically, the over-the-counter markets for securities such as our
common stock have experienced extreme price and volume fluctuations. Some of
the factors leading to this volatility include:
. Price and volume fluctuations in the stock market at large that do not
relate to our operating performance,
. Fluctuations in our quarterly operating results,
. Announcements of product releases by us or our competitors,
. Announcements of acquisitions and/or partnerships by us or our
competitors, and
. Increases in outstanding shares of common stock upon exercise or
conversion of derivative securities. (See "We have issued numerous
options, warrants and convertible securities to acquire our common
stock that could have a dilutive effect on our shareholders.")
The trading volume of our common stock may diminish significantly if our
common stock is prohibited from being traded on the Nasdaq SmallCap Market.
Although our shares are currently traded on The Nasdaq SmallCap Market, there is
no assurance that we will remain eligible to be included on Nasdaq. If our
common stock was no longer eligible for quotation on Nasdaq, it could become
subject to rules adopted by the Securities and Exchange Commission regulating
broker-dealer practices in connection with transactions in "penny stocks." If
our common stock became subject to the penny stock rules, many brokers may be
unwilling to engage in transactions in our common stock because of the added
regulation, thereby making it more difficult for purchasers of our common stock
to dispose of their shares.
We have issued numerous options, warrants, and convertible securities to
acquire our common stock that could have a dilutive effect on our shareholders.
We have issued numerous options, warrants, and convertible securities to acquire
our common stock. During the terms of these outstanding options, warrants, and
convertible securities, the holders of these securities will have the
opportunity to profit from an increase in the market price of our common stock
with resulting dilution to the holders of shares who purchased shares for a
price higher than the respective exercise or conversion price. The existence of
such stock options, warrants and convertible securities may adversely affect the
terms on which we can obtain additional financing, and you should expect the
holders of such options or warrants to exercise or convert those securities at a
time when we, in all likelihood, would be able to obtain additional capital by
offering securities on terms more favorable to us than those provided by the
exercise or conversion of such options or warrants.
As of August 6, 1999, we have issued the following warrants and options to
acquire shares of our common stock:
. Options and warrants to purchase 1,919,228 shares of common stock upon
exercise of such options and warrants, exercisable at prices ranging
from $0.50 to $18.25 per share, with a weighted average exercise price
of approximately $9.08 per share.
. Options issued to EBI Securities Corporation, the representative of
the underwriters involved in our initial public offering (the
"Representative's Option"), to purchase 106,700 shares of common stock
upon exercise of the Representative's Option at a purchase price of
$8.10 per share.
. Warrants issued in connection with the issuance of the 10% Preferred
Stock to purchase 53,500 shares of common stock upon exercise of such
warrants, exercisable at $15.00 per share.
. Warrants issued in connection with the issuance of the 5% Preferred
Stock to purchase 100,000 shares of common stock upon exercise of such
warrants, exercisable at $16.33 per share.
. Warrants issued to customers to purchase 81,829 shares of common stock
upon exercise of such warrants, exercisable at $8.77 to $9.94
. Warrants issued to purchase 223,700 shares of our common stock at
prices ranging from $4.30 to $20.33 assumed in connection with the
acquisition of DCI.
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In addition to these warrants and options, we have reserved an
indeterminate number of shares of common stock for issuance upon conversion of
outstanding shares of our 10% and Series C Preferred Stock.
Based on the market value for the common stock as of August 6, 1999, the
then outstanding 10% Preferred Stock and Series C Preferred Stock were
convertible into approximately 113,108 shares and 78,853 shares, respectfully,
of common stock. The number of shares of common stock issuable upon conversion
of the 10% Preferred Stock and the Series C Preferred Stock could increase
significantly if the market value for our common stock decreases in the future.
Further, there could be issuances of additional similar securities in connection
with our need to raise additional working capital.
Future sales of our common stock in the public market could adversely
affect the price of our common stock. Sales of substantial amounts of common
stock in the public market that is not currently freely tradable, or even the
potential for such sales, could have an adverse affect on the market price for
shares of our common stock and could impair the ability of purchasers of our
common stock to recoup their investment or make a profit. As of August 6, 1999,
these shares consist of:
. Approximately 630,000 shares owned by our officers, directors and
holders of 10% of our outstanding common stock ("Affiliate Shares").
. 944,763 shares issued in connection with the DCI acquisition.
Unless the Affiliate Shares are further registered under the securities
laws, they may not be resold except in compliance with Rule 144 promulgated by
the SEC, or some other exemption from registration. Rule 144 does not prohibit
the sale of these shares but does place conditions on their resale which must be
complied with before they can be resold. The shares of the common stock to be
issued to the shareholders of DCI in connection with the DCI acquisition are
expected to be registered pursuant to the Securities Act of 1993 by September
30, 1999.
Future sales of our common stock in the public market could limit our
ability to raise capital. Sales of substantial amounts of common stock in the
public market pursuant to Rule 144, upon exercise or conversion of derivative
securities or otherwise, or even the potential for such sales, could affect our
ability to raise capital through the sale of equity securities. (See "We have
issued numerous options, warrants, and convertible securities to acquire our
common stock that could have a dilutive effect on our shareholders" and "Future
sales of our common stock in the public market could adversely affect the price
of our common stock.")
Provisions in our articles of incorporation allow us to issue shares of
stock that could make a third party acquisition of us difficult. Our Articles
of Incorporation authorize our Board of Directors to issue up to 20,000,000
shares of common stock and 5,000,000 shares of preferred stock in one or more
series, the terms of which may be determined at the time of issuance by the
Board of Directors, without further action by our shareholders. Preferred stock
authorized by the Board of Directors may include voting rights, preferences as
to dividends and liquidation, conversion and redemptive rights and sinking fund
provisions. If the Board of Directors authorizes the issuance of preferred
stock in the future, this authorization could affect the rights of the holders
of common stock, thereby reducing the value of the common stock, and could make
it more difficult for a third party to acquire us, even if a majority of the
holders of our common stock approved of an acquisition.
Our expected issuance of our warrants to a customer will require us to
record a non-cash expense which will, in turn, increase our net loss available
to shareholders. Based on current accounting standards, we expect to record a
non-cash expense which may exceed $1 million for the quarter ending September
30, 1999 as a result of our expected issuance of 150,000 shares to a customer.
In addition, the agreement with the customer contemplates the issuance of a
second warrant, subject to certain conditions, to purchase 150,000 shares of
common stock which, if issued, could result in the increase of similar charges
in the future.
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We do not anticipate paying dividends on our common stock for the
foreseeable future. We have never paid dividends on our common stock and do not
intend to pay any dividends on our common stock in the foreseeable future. Any
decision by us to pay dividends on our common stock will depend upon our
profitability at the time, cash available therefor, and other factors. We
anticipate that we will devote profits, if any, to our future operations.
PART II
OTHER INFORMATION
Items 1 and 3-5. Not Applicable
Item 2. Changes in Securities and Use of Proceeds
On January 11, 1999, we sold 3,000 shares of Series C Cumulative
Convertible Preferred Stock, $1,000 stated value, to one investor for $3
million. In connection with this investment, the investor granted us the option
to require the inventor to purchase an additional 2,000 shares of such Preferred
Stock. We exercised this option on June 18, 1999. EBI Securities, Inc. (formally
Cohig & Associates, Inc.) served as the placement agent for the offering and
received a commission equal to 7% of the gross proceeds of the offering. See
Note 8 of the Notes to Consolidated Financial Statements for a description of
the terms of the Preferred Stock. The securities were not registered under the
Securities Act of 1933, as amended, based upon the exemption provided in Section
4(2) of such act and Regulation D promulgated thereunder. The securities were
"restricted" securities as defined in Rule 144 promulgated by the Securities and
Exchange Commission and were acquired for investment purposes. The certificates
representing such securities contained restrictive legends. The securities are
subject to demand registration rights.
Item 6. Exhibits and Reports on Form 8-K
(a) Listing of Exhibits:
2.1 Agreement and Plan of Merger dated March 19, 1998 among OSS, Durand
Acquisition Corporation and Durand Communications, Inc. (3)
3.1 Articles of Incorporation, as amended, of OSS (5)
3.2 Bylaws of OSS (1)
4.1 Specimen form of OSS' Common Stock certificate (2)
4.2 Form of Warrant Agreement dated May 23, 1996 between Corporate Stock
Transfer and OSS, including form of Warrant (2)
4.3 Stock Option Plan of 1995 (1)
4.4 Form of Incentive Stock Option Agreement for Stock Option Plan of 1995
(1)
4.5 Form of Nonstatutory Stock Option Agreement for Stock Option Plan of
1995 (1)
4.6 Form of Warrant issued in connection with Sale-Leaseback of Equipment
(1)
4.7 Form of Warrant issued in 1996 to private investors (1)
4.8 Specimen of Warrant Certificate--See Exhibit A filed with Exhibit 4.2
4.9 Form of Warrant Agreement issued in 1997 and 1998 to private investors
(3)
4.10 Form of Warrant Agreement issued in connection with issuance of Series
A Preferred Stock (4)
4.11 Form of Warrant Agreement issued in connection with issuance of Series
C Preferred Stock--See Exhibit B filed with Exhibit 10.8
10.1 Equipment Lease Agreement dated December 15, 1995 between OSS and OSS
Equipment Leasing General Partnership (1)
10.2 Form of Nondisclosure and Nonsolicitation Agreement between OSS and
its employees (2)
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10.3 Office Lease for OSS' principal offices (2)
10.4 Long-Term Equipment Sale and Software License Agreement dated October
7, 1997 between OSS and FiberTel TCI2 S.A. (3)
10.5 Agreement dated October 7, 1997 between OSS and Medical Education
Collaborative, Inc. (3)
10.6 Form of Change of Control Agreement between OSS and certain employees
(7)
10.7 Securities Purchase Agreement and Exhibits thereto dated January 11,
1999 between OSS and Archer Investors, LLC (6)
10.8 Operating and Member Control Agreement dated March 10, 1999, among
NetIgnite2, LLC, OSS and NetIgnite, Inc., Buy-Sell Agreement dated
March 10, 1999, among NetIgnite2, LLC, OSS and NetIgnite, Inc. and
Employment Agreement dated March 10, 1999, among OSS, NetIgnite2, LLC
and Perry Evans (7)
10.8a Agreement and Plan of Merger between Online System Services, Inc.
and NetIgnite, Inc. dated June 1, 1999*
10.9 Electronic Banking Service Contract dated May 28, 1997 between OSS
and Rockwell Federal Credit Union (7)
10.10 Online Banking Service Agreement dated February 10, 1999 between OSS
and CU Cooperative Systems, Inc. (7)
10.11 Internet/Business Site Development & Host Agreement dated November
12, 1997 between OSS and ReMax International, Inc. (7)
10.12 Long-Term Equipment Sale and Software License Agreement dated
February 16, 1998 between OSS and Boulder Ridge Cable TV Inc. dba
Starstream Communications (7)
10.13 Agreement for the Provision of Internet Services, Equipment, and
Software Licenses dated November 26, 1997 between OSS and American
Telecasting, Inc. (7)
10.14 Equipment Sale and Software License Agreement dated August 4, 1997,
as amended May 26, 1998, between OSS and Intermedia Partners
Southeast (7)
10.15 Agreement and Plan of Merger between Online System Services, Inc.,
DCI Acquisition Corp. and Durand Communications Inc. (8)
27 Financial Data Schedule*
- -----------------------------
* Filed herewith.
(1) Filed with the initial Registration Statement on Form SB-2, filed April 5,
1996, Commission File No. 333-3282-D.
(2) Filed with Amendment No. 1 to the Registration Statement on Form SB-2,
filed May 3,1996, Commission File No. 333-3282-D.
(3) Filed with the Form 10-KSB Annual Report for the year ended December 31,
1997, Commission File No. 0-28462.
(4) Filed with the Registration Statement on Form S-3, filed December 22, 1998,
Commission File No. 333-69477.
(5) Filed with the Registration Statement on Form S-3, filed January 29, 1999,
Commission File No. 333-71503.
(6) Filed with the Form 8-K Current Report dated January 11, 1999, as amended,
Commission File No. 0-28462.
(7) Filed with the Form 10-KSB Annual Report for the year ended December 31,
1998, Commission File No. 0-28462.
(8) Filed with the Form 8-K Current Report dated June 30, 1999, Commission File
No. 0-28462.
(b) Reports on Form 8- The Company was not required to file a report on
Form 8-K during the quarter ended June 30, 1998.
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Signatures
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ONLINE SYSTEM SERVICES, INC.
Date: August 13, 1999 By /s/ William R. Cullen
---------------------
Chief Financial Officer
/s/ Stuart J. Lucko
-------------------
Controller
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EXHIBIT 10.8a
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (the "Agreement") is entered into as of
___________, 1999, by an among NetIgnite, Inc., a Colorado corporation (the
"Merged Corporation"), Perry Evans, the sole shareholder of the Merged
Corporation (the "Sole Shareholder"), and Online System Services, Inc., a
Colorado corporation (the "Surviving Corporation"). (The Merged and Surviving
Corporations may be collectively referred to as "Constituent Corporations").
RECITALS
The Board of Directors of the Surviving Corporation and the Board of
Directors and the Sole Shareholder of the Merged Corporation, deeming it
advisable for the mutual benefit of the Constituent Corporations and their
respective shareholders that the Surviving Corporation acquire the Merged
Corporation under the terms and conditions hereinafter set forth (the "Merger"),
have approved this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:
ARTICLE I
Effective Date of the Merger
The Effective Date of the Merger and of this agreement shall be the close
of business on June 2, 1999 (the "Effective Date"). Upon the Effective Date of
the Merger, the separate existences of the Constituent Corporations shall cease
and the Constituent Corporations shall be merged into the Surviving Corporation,
Online System Services, Inc., a Colorado corporation.
ARTICLE II
Articles of Incorporation
The Articles of Incorporation of the Surviving Corporation shall be the
Articles of Incorporation of the Surviving Corporation as the same shall be in
effect on the Effective Date of the Merger.
ARTICLE III
Bylaws; Registered Office
The Bylaws of the Surviving Corporation as of the Effective Date of the
Merger shall be the Bylaws of the Surviving Corporation after the Merger. The
registered office of the Surviving Corporation after the Merger shall be at 1800
Glenarm Place, Suite 700, Denver, Colorado 80202.
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ARTICLE IV
Directors and Officers
The directors of the Surviving Corporation in office as of the date
hereof shall remain the directors of the Surviving Corporation at and after the
Effective Date of the Merger until their respective successors shall have been
duly elected and qualified. Subject to the authority of the Board of Directors
as provided by law and the Bylaws of the Surviving Corporation, the officers of
the Surviving Corporation at the Effective Date of Merger shall remain the
officers of the Surviving Corporation. The directors of the Merged Corporation
and the officers of the Merged Corporation holding office on the Effective Date
shall be deemed to have resigned effective as of the Effective Date.
ARTICLE V
Conversion of Shares in the Merger
The manner of carrying the Merger into effect, and the manner and basis
of converting the shares of the Constituent Corporations into shares of the
Surviving Corporation are as follows:
5.01. Surviving Corporation's Common Stock. No shares of the Surviving
Corporation's stock issued at the Effective Date shall be converted as a
result of the Merger, but all such shares shall remain issued shares of
the Surviving Corporation.
5.02. Merged Corporation's Common Stock. At the Effective Date each issued and
outstanding share of the Merged Corporation's stock shall be
automatically converted into 71,429 fully paid and nonassessable shares
of Common Stock of the Surviving Corporation (the "Merger Shares").
ARTICLE VI
Representations and Warranties
6.01 Representations and Warranties of the Merged Corporation.
(a) Organization, Standing and Corporate Power. The Merged Corporation is
duly organized, validly existing and in good standing under the laws
of the jurisdiction in which it is incorporated and has the requisite
corporate power and authority to carry on its business as now being
conducted. The Merged Corporation is duly qualified or licensed to do
business and is in good standing in each jurisdiction in which the
nature of its business or the ownership or leasing of its properties
makes such qualification or licensing necessary, other than in such
jurisdictions where the failure to be so qualified or licensed
(individually or in the aggregate) would not have a material adverse
effect with respect to the Surviving Corporation.
(b) Authority; Noncontravention. The Merged Corporation has all requisite
corporate power and authority to enter into this Agreement and to
consummate the
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transactions contemplated by this Agreement. The execution and
delivery of this Agreement by the Merged Corporation and the
consummation by the Merged Corporation of the transactions
contemplated by this Agreement have been duly authorized by all
necessary corporate action on the part of the Merged Corporation and
no other corporate action on the part of the Merged Corporation is
necessary to authorize the execution and delivery of this Agreement
or the consummation by the Merged Corporation of the transactions
contemplated hereby. This Agreement has been duly executed and
delivered by and constitutes a valid and binding obligation of the
Merged Corporation, enforceable against the Merged Corporation in
accordance with its terms. The execution and delivery of this
Agreement does not, and the consummation of the transactions
contemplated by this Agreement and compliance with the provisions
hereof will not (a) conflict with or result in any breach of any
provision of the articles of incorporation or bylaws of the Merged
Corporation, or (b) conflict with, or result in any breach or
violation of, or constitute a default under (with or without notice
or lapse of time, or both), or give rise to a right of termination,
cancellation or acceleration under (i) any loan or credit agreement,
note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license applicable to
the Merged Corporation or its properties or assets or (ii) any
judgment, order, decree, statute, law, ordinance, rule, regulation or
arbitration award applicable to the Merged Corporation or its
properties or assets, or (c) result in the creation of any lien upon
any of the properties or assets of the Merged Corporation. No
consent, approval, order or authorization of, or registration,
declaration or filing with, or notice to, any governmental entity is
required by or with respect to the Merged Corporation or in
connection with the execution and delivery of this Agreement by the
Merged Corporation or the consummation by the Merged Corporation, as
the case may be, of any of the transactions contemplated by this
Agreement, except for (i) the filing with the SEC of such reports
under the Securities Act of 1933, as amended (the "Securities Act")
and the Securities Exchange Act of 1934 (the "Exchange Act") as may
be required in connection with this Agreement and the transactions
contemplated hereby, (ii) the filing of the Articles of Merger with
the Secretary of State of the State of Colorado and appropriate
documents with the relevant authorities of other states in which the
Company is qualified to do business, and (iii) such other consents,
approvals, orders, authorizations, registrations, declarations,
filings or notices as may be required under the "takeover" or "blue
sky" laws of various states.
(c) NetIgnite 2, LLC . The Merged Corporation has good, clear and
marketable title to __ Units of NetIgnite 2, LLC (the "LLC"), free
and clear of all liens. The Merged Corporation has not transferred or
otherwise disposed of any interest in the LLC that it received upon
the formation and organization of the LLC.
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(d) Absence of Liabilities and Obligations. The Merged Corporation does
not have any liabilities or obligations of any nature (whether known
or unknown, accrued, absolute, contingent or otherwise).
(e) Capitalization. Perry Evans is the sole shareholder of the Merged
Corporation. There are no options, warrants, or any other rights
obligating the Merged Corporation to issue, deliver or sell
additional shares of capital stock or other equity securities of the
Merged Corporation.
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6.02 Representations and Warranties of the Surviving Corporation.
(a) Organization, Standing and Corporate Power. The Surviving Corporation
is duly organized, validly existing and in good standing under the
laws of the jurisdiction in which it is incorporated and has the
requisite corporate power and authority to carry on its business as
now being conducted. The Surviving Corporation is duly qualified or
licensed to do business and is in good standing in each jurisdiction
in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary, other
than in such jurisdictions where the failure to be so qualified or
licensed (individually or in the aggregate) would not have a material
adverse effect with respect to the Merged Corporation.
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(b) Authority; Noncontravention. The Surviving Corporation has all
requisite corporate power and authority to enter into this Agreement
and to consummate the transactions contemplated by this Agreement.
The execution and delivery of this Agreement by the Surviving
Corporation and the consummation by the Surviving Corporation of the
transactions contemplated by this Agreement have been duly authorized
by all necessary corporate action on the part of the Surviving
Corporation and no other corporate action on the part of the
Surviving Corporation is necessary to authorize the execution and
delivery of this Agreement or the consummation by the Surviving
Corporation of the transactions contemplated hereby. This Agreement
has been duly executed and delivered by and constitutes a valid and
binding obligation of the Surviving Corporation, enforceable against
it in accordance with its terms. The execution and delivery of this
Agreement does not, and the consummation of the transactions
contemplated by this Agreement and compliance with the provisions
hereof will not (a) conflict with or result in any breach of any
provision of the articles of incorporation or bylaws of the Surviving
Corporation, or (b) conflict with, or result in any breach or
violation of, or constitute a default under (with or without notice
or lapse of time, or both), or give rise to a right of termination,
cancellation or acceleration under (i) any loan or credit agreement,
note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license applicable to
the Surviving Corporation or its properties or assets or (ii) any
judgment, order, decree, statute, law, ordinance, rule, regulation or
arbitration award applicable to the Surviving Corporation or its
properties or assets, or (c) result in the creation of any lien upon
any of the properties or assets of the Surviving Corporation, other
than, in the case of clauses (b) and (c), any such conflicts,
breaches, violations, defaults, rights, losses or liens that
individually or in the aggregate could not have a material adverse
effect with respect to the Merged Corporation or could not prevent,
hinder or materially delay the ability of the Merged Corporation to
consummate the transactions contemplated by this Agreement. No
consent, approval, order or authorization of, or registration,
declaration or filing with, or notice to, any governmental entity is
required by or with respect to the Surviving Corporation or in
connection with the execution and delivery of this Agreement by the
Surviving Corporation or the consummation by the Surviving
Corporation, as the case may be, of any of the transactions
contemplated by this Agreement, except for (i) the filing with the
SEC of such reports under the Securities Act of 1933, as amended (the
"Securities Act") and the Securities Exchange Act of 1934 (the
"Exchange Act") as may be required in connection with this Agreement
and the transactions contemplated hereby, (ii) the filing of the
Articles of Merger with the Secretaries of State of the State of
Colorado and appropriate documents with the relevant authorities of
other states in which the Company is qualified to do business, and
(iii) such other consents, approvals, orders, authorizations,
registrations, declarations, filings or notices as may be required
under the "takeover" or "blue sky" laws of various states.
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6.03 Representations and Warranties of the Sole Shareholder. The Sole
Shareholder is the sole shareholder of the Merged Corporation. The Sole
Shareholder has been given full access to information regarding the
Surviving Corporation (including the opportunity to meet with the officers
of the Surviving Corporation and to review all the documents that the Sole
Shareholder may have requested) and has utilized such access to his
satisfaction for the purpose of obtaining information necessary to make an
informed investment decision. The Sole Shareholder has sufficient
knowledge and experience in financial and business matters that the Sole
Shareholder is capable of evaluating the merits and risks of receiving the
Merger Shares. The Sole Shareholder understands that the receipt of the
Shares is a speculative investment and involves a high degree of economic
risk. The Merger Shares are being acquired for the Sole Shareholder's own
account and for investment without the intention of reselling or
redistributing the same, that no agreement has been made with others
regarding the Merger Shares and that the Sole Shareholder's financial
condition is such that it is not likely that it will be necessary to
dispose of any of such Merger Shares in the foreseeable future. There are
no options, warrants, or any other rights obligating the Merged
Corporation to issue, deliver or sell additional shares of capital stock
or other equity securities of the Merged Corporation. The Sole Shareholder
is a resident of the State of Colorado.
ARTICLE VII
Effect of the Merger
At the Effective Date of the Merger, the Surviving Corporation shall
succeed to and shall possess and enjoy all the rights, privileges, immunities,
powers and franchises, both of a public and private nature, of the Constituent
Corporations, and all property, real, personal, and mixed, including patents,
trademarks, tradenames, and all debts due to either of the Constituent
Corporations on whatever account, for stock subscriptions as well as for all
other things in action or all other rights belonging to either of said
corporations; and all said property, rights, privileges, immunities, powers and
franchises, and all and every other interest shall be thereafter the property of
the Surviving Corporation as effectively as they were of the respective
Constituent Corporations, and the title of any real estate vested by deed or
otherwise in either of said Constituent Corporations shall not revert or be in
any way impaired by reason of the Merger; provided, however, that all rights of
creditors and all liens upon any property of either of said Constituent
Corporations shall be preserved unimpaired, limited in lien to the property
affected by such liens prior to the Effective Date of the Merger, and all debts,
liabilities, and duties of said Constituent Corporations, respectively, shall
thenceforth attach to the Surviving Corporation and may be enforced against it
to the same extent as if said debts, liabilities, and duties had been incurred
or contracted in the first instance by the Surviving Corporation.
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ARTICLE VIII
Accounting Matters
The assets and liabilities of the Constituent Corporations as of the
Effective Date of the Merger shall be taken up on the books of the Surviving
Corporation at the amounts at which they were carried at that time on the books
of the respective Constituent Corporations. The surplus of the Surviving
Corporation after the Merger, including any surplus arising in the Merger, shall
be available to be used for any lawful purposes for which surplus may be used.
Accounting procedures and depreciation schedules and procedures of any
Constituent Corporation may be converted to those procedures and schedules
selected by the Surviving Corporation.
ARTICLE IX
Filing of Plan of Merger
Upon adoption and approval of the Plan of Merger by the Board of Directors
of the Surviving Corporation and the Board of Directors and Shareholders of the
Merged Corporation, Articles of Merger shall be executed and delivered to the
Secretary of State of the State of Colorado for filing as provided by the
Colorado Business Corporation Act. The Constituent Corporations shall also
cause to be performed all necessary acts within the State of Colorado and
elsewhere to effectuate the Merger.
ARTICLE X
Registration of Parent Stock
Within sixty (60) days after the Effective Date, the Surviving Corporation
shall prepare and file a registration statement, covering the Merger Shares
issued to the Sole Shareholder in accordance with Section 5.02 of this Agreement
with the Securities and Exchange Commission (the "SEC") and use its best efforts
to cause the Registration Statement to be declared effective under the
Securities Act of 1933, as amended (the "Securities Act"), as promptly as
practicable after its filing. The Registration Statement shall be on form SB-2,
Form S-1, Form S-3 or such other form as is appropriate in order to register
such Merger Shares with the SEC pursuant to section 5 of the Securities Act. The
Surviving Corporation shall use its best efforts to cause the Registration
Statement to be declared effective by the SEC as soon as possible following the
filing thereof and shall use its best efforts to maintain the Registration
Statement continually effective under the Securities Act for a period of two (2)
years after the date on which the Registration Statement is declared effective
by the SEC. Notwithstanding the Registration Statement, if in connection with a
public offering of the Surviving Corporation's stock, the Surviving Corporation,
an underwriter, the National Association of Dealers, Inc., or the Nasdaq Stock
Market requests certain holders of the Surviving Corporation's outstanding stock
to lock-up certain of the Surviving Corporation's stock or any portion thereof,
the Sole Shareholder agrees that beginning on the date of the closing of such
public offering and continuing for a period of six (6) months thereafter, the
Sole Shareholder shall not, without consent of the requesting party, offer,
sell, contract to sell, pledge, hypothecate, or otherwise dispose of any shares
of the Surviving Corporation's stock.
ARTICLE XI
General Provisions
9
<PAGE>
The respective representations and warranties of each of the parties to
this Agreement shall not be deemed to be waived or otherwise affected by any
investigation made by the other parties to this Agreement. The representations
of the Merged Corporation and the Surviving Corporation contained in this
Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Merger. Neither party may assign this Agreement or delegate the
rights and responsibilities hereunder without the other party's prior written
consent. No amendment to this Agreement or waiver of the rights or obligations
of either party shall be effective unless in writing signed by the parties. This
Agreement is governed by the laws of the State of Colorado without regard to
conflicts of laws principles. If any provision of this Agreement is held
invalid or unenforceable by any court of competent jurisdiction, the other
provisions of this Agreement will remain in full force and effect. Any
provision of this Agreement held invalid or unenforceable only in part or degree
will remain in full force and effect to the extent not held invalid or
unenforceable. This Agreement contains the entire agreement and understanding
of the parties concerning the subject matter of this Agreement. This Agreement
may be signed by facsimile and in counterparts.
Executed as of the date first written above.
ONLINE SYSTEM SERVICES, INC.
By /s/ R. Steven Adams
-------------------------------
R. Steven Adams, President and Chief Executive Officer
NETIGNITE, INC.
By /s/ Perry Evans
-------------------------------
Perry Evans, President
SOLE SHAREHOLDER (as to Section 6.03 only)
/s/ Perry Evans
---------------------------------
Perry Evans
10
<PAGE>
JOINT WRITTEN ACTION
BY THE SOLE DIRECTOR
AND THE SOLE SHAREHOLDER
OF NETIGNITE, INC.
The undersigned, being the sole shareholder and the sole director of
NetIgnite, Inc., a Colorado corporation ("Corporation"), acting pursuant to
Colorado Statutes Sections 7-107-104 and 7-108-202, hereby adopt the following
resolutions effective _________, 1999.
RESOLVED, that the Plan of Merger dated ____________, 1999, which is
attached hereto and hereby incorporated herein, for the merger of
NetIgnite, Inc., with and into Online System Services, Inc., be, and it
hereby is approved and adopted.
FURTHER RESOLVED, that the President of the Corporation be, and hereby is,
authorized and directed to execute Articles of Merger and to cause such
Articles of Merger to be filed in the Colorado Secretary of State.
FURTHER RESOLVED, that the officers of the Corporation be, and they hereby
are, authorized and directed to execute such documents and to take such
other actions as they, acting singly or jointly, deem necessary or
desirable to effectuate the foregoing resolutions and the Plan of Merger
approved in the foregoing resolutions.
Executed as of the date first written above.
/s/ Perry Evans
---------------------------------
Perry Evans
Sole Shareholder and Sole Director
11
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