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PROSPECTUS Filed Pursuant to Rule 424(b)(3)
File Number 333-58653
ONLINE SYSTEM SERVICES, INC.
This Prospectus relates to the offer an sale of a minimum of 183,710 shares
and a maximum of 574,281 shares of common stock, no par value (the "Shares"), of
Online System Services, Inc. (the "Company" or "OSS"), issuable upon conversion
of 3,000 shares of the Company's 5% Preferred Stock (the "5% Preferred Stock"),
which may be sold from time to time by Arrow Investors LLC (the "Selling
Shareholder") for its own account. The Company is registering the Shares
pursuant to a Securities Purchase Agreement by and among the Company the Selling
Shareholder and West End Capital LLC dated May 22, 1998. Each share of 5%
Preferred Stock is convertible, at any time at the election of the holder
thereof, into the number of shares of common stock of the Company equal to
$1,000 divided by the lesser of (i) $16.33 or (ii) 86% of the average per share
closing bid price of the Company's common stock for the five trading days
immediately preceding the date on which the holder elects to convert the 5%
Preferred Stock. As of July 2, 1998, the 3,000 outstanding shares of 5%
Preferred Stock are convertible into 329,094 shares of common stock of the
Company. See "Selling Shareholder."
The Company has been advised that the Selling Shareholder may from time to
time sell the Shares to or through brokers or dealers in one or more
transactions, on the Nasdaq SmallCap Market or otherwise, at market prices
prevailing at the time of sale, at prices relating to such prevailing market
prices, or at negotiated prices.
The Company's common stock is traded on the Nasdaq SmallCap Market under
the symbols "WEBB". On July 2, 1998, the last reported sale price of the
Company's common stock, as reported on the Nasdaq Small Cap Market was $10.375
per share. See and "Description of Securities."
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THE SECURITIES OFFERED HEREBY ARE SPECULATIVE, INVOLVE A HIGH DEGREE OF
RISK AND SHOULD NOT BE PURCHASED BY PERSONS WHO CANNOT AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. SEE "RISK FACTORS" AT PAGE 6.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "SEC"), NOR HAVE THEY BEEN APPROVED BY THE
SECURITIES REGULATORY AUTHORITY OF ANY STATE. NEITHER THE SEC NOR
ANY REGULATORY AUTHORITY HAVE PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
Since the Shares registered hereunder are being offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, as
amended (the "Act"), the Company cannot include herein information about the
price to the public of the Shares or the proceeds to the Selling Shareholder.
The Company will receive no proceeds from any sales of the Shares by the Selling
Shareholder, and the Company is obligated to pay the expenses of this offering,
which are estimated at $10,000. The Selling Shareholder will pay its own
expenses in connection with sales of the Shares. The Selling Shareholder and any
brokers or dealers executing selling orders on their behalf may be deemed
"underwriters" within the meaning of the Act, in which event the usual and
customary selling commissions which may be paid to the brokers or dealers may be
deemed to be underwriting commissions under the
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Act. There can be no assurance that any or all of the Shares registered
hereunder will be sold. See "Plan of Distribution."
The date of this Prospectus is July 23, 1998.
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AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports, proxy or information statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices
located at 500 West Madison, Suite 1400, Chicago, Illinois 60661 and Seven World
Trade Center, Suite 1300, New York, New York 10048. Copies of such material can
also be obtained at prescribed rates from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of such material can also be obtained through the Web site maintained by
the Commission located at http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act of 1933, as amended (the "Act"), with respect to
the securities offered hereby. This Prospectus omits certain information
included in such Registration Statement. For further information about the
Company and its securities, reference is made to such Registration Statement and
to the exhibits filed as part thereof or otherwise incorporated therein. Each
summary in this Prospectus of information included in the Registration Statement
or any exhibit thereto is qualified in its entirety by this reference to such
information or exhibit.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission pursuant to the Exchange Act (File No. 0-28462), are incorporated by
reference in this registration statement:
(a) The Company's Annual Report on Form 10-KSB, as amended, for the
year ended December 31, 1997.
(b) The Company's Quarterly Report on Form 10-QSB for the quarter
ended March 31, 1998.
(c) The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A, as amended, filed under the
Exchange Act on May 22, 1996.
All documents subsequently filed by the Company with the Commission
pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act, prior to
the filing of a post-effective amendment that indicates that all securities
offered have been sold or that deregisters all securities then remaining unsold,
shall be deemed to be incorporated by reference herein and to be a part hereof
from the date of filing such documents.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein, modifies or supersedes such document. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company undertakes to provide without charge to each person, including
any beneficial owner, to whom a Prospectus is delivered, upon written or oral
request of such person, a copy of any and all of the information that has been
incorporated by reference in this Prospectus. Requests may be directed to Thomas
S. Plunkett, Chief Financial Officer, Online System Services, Inc., 1800 Glenarm
Place, Suite 700, Denver, Colorado 80202. The Company's phone number is (303)
296-9200.
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THE COMPANY
Online System Services, Inc. (the "Company" or "OSS") develops, markets and
supports products and services that enable broadband operators to provide
high-speed Internet access to their customers. The Company's objective is to
partner with cable television companies (wired and wireless), telephone
companies and other broadband operators, both domestically and internationally,
to create online communities that drive commerce and communications. The
Company's I2U(TM) software further permits the broadband operators to offer a
wide range of online services. The broadband operator, its subscribers and local
merchants can develop and update local content on the Internet. The local
content portion of I2U promotes the sharing of local information and the
fostering of e-commerce and e-banking through data-based Internet Web sites. A
time-saving and cost advantage to the broadband operators from the use of the
Company's software is that a significant portion of the local content is
generated by the people actually using the Internet, thus enhancing content
quality and developing a commitment to the local community of Internet Web
sites.
Prior to the quarter ended September 30, 1997, the Company's 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 ("CME"). These
activities were divided into three separate units early in fiscal 1997, the
Business Resource Group ("BRG") for Web site-related activities; Community
Access America ("CAA") for the ISP activities; and Healthcare for the CME and
healthcare information activities.
Each of these activities involved in varying degrees the establishment of
online communities. As an outgrowth of the Company's BRG and CAA activities, and
in recognition of the need to increase the availability of high-speed Internet
access, the Company's focus during fiscal 1997 increasingly was on the
development of online communities for broadband (high bandwidth or high data
transmission capabilities) operators such as cable TV operators (wired and
wireless) who the Company believes are in the best position today to provide
high-speed Internet access. This focus has resulted in the introduction of the
Company's I2U (formerly "CAP" or "Community Access Partnership") products and
services which include a wide range of online services which enable operators
and operators' customers to generate online local content, create Web pages and
conduct online commerce and banking and a turnkey product and service package
which provides the equipment, training and systems necessary for the broadband
operator to become a fully operational ISP. The Company intends to focus its
future efforts primarily on its I2U products and services.
During November 1997, the Company announced to its customers that it was
terminating Web site development, maintenance and hosting activities and began
to transition this business to other companies. OSS is ceasing Web site
development activities which are not related to the development of products for
its I2U products and services or which do not involve the creation of online
communities for particular businesses or information purposes. In addition,
during October 1997, the Company licensed its MD Gateway Web site to Medical
Education Collaborative ("MEC") and is no longer developing products for the
healthcare market. In the future, revenues from the healthcare market are
expected to be limited to license fees received from MEC in connection with the
use of MD Gateway.
On March 19, 1998, the Company executed an Agreement and Plan of Merger
pursuant to which the Company agreed to acquire Durand Communications, Inc.
("DCI") in exchange for up to 971,250 shares of the Company's common stock (the
"DCI Merger"). DCI develops and markets Internet "community" building tools and
services; training in the use of these tools and services; and online service
for hosting these communities. The information regarding DCI included in this
Prospectus has been provided by DCI. See "Recent Developments--DCI Acquisition."
On May 22, 1998, the Company issued 3,000 shares of its 5% Preferred Stock
in a private placement offering of such stock. In connection with such offering,
the Company issued warrants to purchase up to 100,000 shares of its common stock
at $16.33 per share. The Company received $3,000,000 in gross proceeds from such
offering. The Company intends to use such proceeds for general working capital
purposes. See "Risk Factors--Ability to Issue Common Stock and Preferred Stock;
Anti-Takeover Devices," "Risk Factors--Affect of Issuance of 10% Preferred Stock
and 5% Preferred Stock on Net Loss," and "Risk Factors--No Dividends."
On June 5, 1998, the Company executed an Agreement and Plan of Merger
pursuant to which the Company agreed to acquire Skyconnect, Inc. ("Skyconnect")
in consideration for 1,100,000 shares of the Company's common
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stock, the assumption of approximately $8,500,000 in liabilities of Skyconnect,
and the issuance of warrants representing the right to acquire 250,000 shares of
the Company's common stock at the initial exercise price of $18.00 per share
(the "Skyconnect Merger"). Skyconnect is a leading provider of software-based
products that manage, store, and distribute digital video for cable television
operators. The information regarding Skyconnect in this Prospectus has been
provided by Skyconnect. See "Recent Developments--Skyconnect Acquisition."
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RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE, INVOLVE A HIGH DEGREE
OF RISK AND SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISKS AND SPECULATIVE FACTORS INHERENT IN AND AFFECTING THE BUSINESS OF THE
COMPANY, AS WELL AS ALL OF THE OTHER MATTERS SET FORTH ELSEWHERE IN THE
PROSPECTUS, PRIOR TO THE PURCHASE OF ANY OF THE SECURITIES OFFERED HEREBY.
CAUTIONARY STATEMENTS
The following cautionary statements are made pursuant to the Private
Securities Litigation Reform Act of 1995 in order for the Company to avail
itself of the "safe harbor" provisions of that Act. The discussions and
information in this Prospectus may contain both historical and forward-looking
statements. To the extent that the Prospectus contains forward-looking
statements regarding the financial condition, operating results, business
prospects or any other aspect of the Company, prospective investors should be
aware that the Company's actual financial condition, operating results and
business performance may differ materially from that projected or estimated by
the Company in forward-looking statements. The Company has attempted to
identify, in context, certain of the factors that it currently believes may
cause actual future experience and results to differ from the Company's current
expectations. The differences may be caused by a variety of factors, including
but not limited to adverse economic conditions, intense competition, including
entry of new competitors, adverse federal, state and local government
regulation, inadequate capital, unexpected costs, lower sales and net income (or
higher net losses) than forecasted, price increases for equipment, inability to
raise prices, failure to obtain new customers, the possible fluctuation and
volatility of the Company's operating results and financial condition, inability
to carry out marketing and sales plans, loss of key executives, and other
specific risks that may be alluded to in this Prospectus or in other reports
issued by the Company.
RISKS RELATED TO THE COMPANY
LIMITED OPERATING HISTORY; ACCUMULATED LOSSES. The Company was founded in
March 1994, commenced sales in February 1995 and was in the development stage
through December 31, 1995. Accordingly, the Company has only a limited operating
history upon which an evaluation of the Company and its prospects can be based.
The Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets. To
address these risks, the Company must, among other things, respond to
competitive developments, continue to attract, retain and motivate qualified
persons, and continue to upgrade and commercialize products and services. There
can be no assurance that the Company will be successful in addressing such
risks. The Company has incurred net losses since inception totaling $6,974,392
through March 31, 1998.
ADDITIONAL ANTICIPATED LOSSES. OSS currently intends to increase its
capital expenditures and operating expenses in order to expand its I2U products
and services and to support additional subscribers of OSS' broadband customers
in future markets and to market and provide the Company's products and services
to a growing number of potential subscribers. As a result, the Company expects
to incur additional substantial operating and net losses for the balance of
fiscal 1998 and for one or more fiscal years thereafter. The profit potential
for the Company's I2U business model is unproven, and to be successful, the
Company must, among other things, develop and market products and services that
are widely accepted by consumers and businesses at prices that will create a
profit. The Company's I2U products and services have only recently been launched
and there can be no assurance that they will achieve broad consumer or
commercial acceptance. The success of the Company's I2U products and services
will depend upon the willingness of subscribers of the Company's broadband
customers to pay monthly fees and installation costs of the Internet service,
both of which will be set by local broadband operators. In addition, since a
significant portion of the Company's future sales are expected to be transaction
based, the success of the Company's I2U products and services may also be
dependent upon the extent to which consumers and businesses conduct e-commerce
and e-banking. Accordingly, it is difficult to predict whether OSS' pricing
model will prove to be viable, whether demand for the Company's products and
services will materialize at the prices the Company expects the broadband
operators to charge or whether current or future pricing levels will be
sustainable. If such pricing levels are not achieved or sustained or if the
Company's products and services do not achieve or sustain broad market
acceptance, the Company's business, operating results and financial condition
will be materially adversely affected. OSS' ability to generate future sales
will be dependent on a number of factors, many of which are beyond the Company's
control, including, among others, the success of broadband operators in
marketing Internet services to subscribers in their local areas, the extent that
subscribers conduct online e-commerce and e-banking transactions
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and the prices that the broadband operators set for Internet services. Because
of the foregoing factors, among others, OSS is unable to forecast its sales with
any degree of accuracy. There can also be no assurance that the Company will
ever achieve profitability. In addition, if the DCI Merger and the Skyconnect
Merger are consummated, the portion of the purchase price for DCI and Skyconnect
which are allocated to in-process research and development, estimated to be $11
million for DCI and estimated to be $14 million for Skyconnect, will be
recognized in the fiscal period of OSS that the Mergers are consummated. In the
event of the Mergers, OSS' net loss for the year ending December 31, 1998, will
therefore be increased by up to $25 million. In connection with the Mergers, the
Company will also record goodwill and other intangible assets estimated to be
$4.3 million which will be amortized over the estimated useful life of three
years. The amortization of the balance of the goodwill and other intangible
assets to be acquired in the Mergers will increase OSS' expenses by an estimated
$350,000 for fiscal 1998, $1,400,000 for fiscal 1999 and 2000 and $1,150,000 for
fiscal 2001. In addition, DCI and Skyconnect, which had accumulated deficits of
($6,833,187) at December 31, 1997 for DCI and ($31,499,847) at March 31, 1998
for Skyconnect, respectively, have incurred net losses in each of their
respective fiscal years since their formation. There can be no assurance that
the acquisition of either DCI or Skyconnect will ever make a positive
contribution to OSS' results of operations.
INCREASED NEED FOR WORKING CAPITAL. OSS believes that its cash and cash
equivalents and working capital will be adequate to sustain operations only to
September 1998. The acquisition of DCI, if consummated, is expected to increase
monthly working capital needs by approximately $130,000 for at least the balance
of the fiscal year ending December 31, 1998. In addition, if the Company is
required to redeem the 5% Preferred Stock, such redemption could have a
materially adverse effect on the Company's ability to maintain an adequate
amount of working capital. See "Ability to Issue Common Stock and Preferred
Stock; Anti-Takeover Devices." OSS has entered into a letter of intent with an
underwriter for a secondary offering of its securities for proceeds of $15-20
million, which is expected to occur during the third or fourth quarter of 1998.
OSS estimates that it needs to raise $25 million or more through equity, debt or
other external financing, to implement its business development plan. There can
be no assurance that OSS will be able to complete such offerings in amounts
required by OSS or upon terms acceptable to OSS. In its report accompanying the
audited financial statements for the years ended December 31, 1997 and 1996, the
Company's auditor, Arthur Andersen LLP, expressed substantial doubt about the
Company's ability to continue as a going concern.
NEW AND UNCERTAIN MARKETS. The market for Internet products and services
has only recently developed. Since this market is relatively new and because
current and future competitors are likely to introduce competing Internet
products and services, it is difficult to predict the rate at which the market
will grow or at which new or increased competition will result in market
saturation. If the Internet markets fail to grow, grow more slowly than
anticipated or become saturated with competitors, the Company's business,
including the business of DCI and Skyconnect that will be acquired if the
Mergers are consummated, operating results and financial condition will be
materially adversely affected.
PRODUCT DEVELOPMENT; TECHNOLOGICAL CHANGE. The Company's success depends
upon its ability to develop new products and services that meet changing
customer requirements. The market for the Company's products and services is
characterized by rapidly changing technology, evolving industry standards,
emerging competition and frequent new product and service introductions. There
can be no assurance that the Company can successfully identify new product and
service opportunities or develop and bring new products and services to market
in a timely manner, or that products and services or technologies developed by
others will not render the Company's products, services, and technologies,
including the products and services and technologies of DCI and Skyconnect that
will be acquired if the Mergers are consummated, noncompetitive or obsolete.
GENERAL RISKS OF BUSINESS. The Company has formulated its business plans
and strategies based on the rapidly increasing size of the Internet markets, the
Company's anticipated participation in those markets, and the estimated sales
cycle, price and acceptance of the Company's products and services. Although
these assumptions are based on the best estimates of management, there can be no
assurance that these assumptions will prove to be correct. No independent
marketing studies have been conducted on behalf of or otherwise obtained by the
Company, either with respect to its current business or the business, products
and technologies of DCI and Skyconnect that will be acquired if the Mergers are
consummated, nor are any such studies planned. Any future success that the
Company might enjoy will depend upon many factors including some beyond the
control of the Company or that it cannot predict at this time.
INTENSE COMPETITION. The market for Internet products and services is
highly competitive and the Company expects that this competition will intensify
in the future. The Company's current and prospective competitors
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include many companies that have substantially greater financial, technical,
marketing and other resources than the Company. Increased competition could
result in price reductions and increased spending on marketing, sales and
product development. Any of these events could have a materially adverse effect
on the Company's financial condition and operating results. Many nationally
known companies and regional and local companies across the country are involved
in Internet applications and the number of competitors is growing. The Company
will also compete with broadband companies who are developing their own Internet
access and content and the internal departments of prospective customers who are
choosing whether to outsource Internet-related activities or retain or develop
that function in-house. Customers who desire to outsource these services may
desire to work with companies larger than OSS. Increased competition could
result in significant price competition, which in turn could result in
significant reductions in the average selling price of the Company's products
and services. There is no assurance that the Company will be able to offset the
effects of any such price reductions through an increase in the number of its
customers, higher sales from enhanced services, cost reductions or otherwise.
Increased competition or price reductions could adversely affect the Company's
operating results. There is no assurance that the Company will have the
financial resources, technical expertise or marketing, sales and support
capabilities to continue to compete successfully.
LIMITED AVAILABILITY OF PROPRIETARY PROTECTION. The Company does not
believe that its current products or services, or the products or services of
DCI and Skyconnect that will be acquired if the Mergers are consummated, are
patentable. The Company relies on a combination of copyright, trade secret and
trademark laws, and nondisclosure and other contractual provisions to protect
its proprietary rights. Notwithstanding these safeguards, it may be possible for
competitors of the Company to imitate the Company's, DCI's and Skyconnect's
products and services or to develop independently competing products and
services.
LENGTH OF SALES CYCLE. The decision to enter the Internet services
provisioning business and the development and implementation of interactive Web
sites are often enterprise-wide decisions by prospective customers and may
require the Company to engage in lengthy sales cycles. The pursuit of sales
leads typically involves an analysis of the prospective customer's needs,
preparation of a written proposal, one or more presentations and contract
negotiations. The Company often provides significant education to prospective
customers regarding the use and benefits of Internet technologies and products.
While the sales cycle varies from customer to customer, it typically has ranged
from one to three months for I2U projects. The sales cycle may also be subject
to a prospective customer's budgetary constraints and internal acceptance
reviews, over which the Company has little or no control. Consequently, if sales
forecasted from a specific customer for a particular quarter are not realized in
that quarter, the Company is unlikely to be able to generate revenue from
alternate sources in time to compensate for the shortfall. If a larger order is
delayed or lost to a competitor, the Company's revenues for that quarter could
be materially diminished. Moreover, to the extent that significant sales occur
earlier than expected, operating results for subsequent quarters may be
adversely affected. A significant portion of the Company's future sales are
expected to come from Internet access fees paid by subscribers of the Company's
broadband operator customers and in connection with e-commerce and e-banking
transactions these subscribers conduct on the broadband operators' systems. OSS
expects that it may take broadband operators several months or more to market
and sell high-speed Internet access to their subscribers and that it will take
even longer for these subscribers to conduct significant e-commerce or e-banking
transactions. For these reasons, OSS does not expect to realize significant
sales, if at all, from these activities until a significant time after OSS has
licensed its I2U products and services to broadband operators.
DEPENDENCE ON KEY PERSONNEL; ABSENCE OF EMPLOYMENT AND NONCOMPETITION
AGREEMENTS. The Company is highly dependent on the technical and management
skills of its key employees, including in particular R. Steven Adams, the
Company's founder, President and Chief Executive Officer. The loss of Mr. Adams'
services could have a material adverse effect on the Company's business and
operating results. The Company has not entered into employment agreements with
Mr. Adams, or any of its other officers or employees and has not purchased key
person insurance for Mr. Adams or any other member of management. The Company
generally enters into written nondisclosure and nonsolicitation agreements with
its 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. Thus, if any of the Company's officers or key
employees left the Company, they could compete with the Company, so long as they
did not solicit the Company's customers, which could have a material adverse
effect on the Company's business. The Company's future success also depends in
part on its 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 the
Company can identify or hire additional qualified personnel. In addition, the
success of the DCI Merger, if consummated, is highly dependent on the
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technical and management skills of Andre Durand, the founder, President and CEO
of DCI and of the Skyconnect Merger, if consummated, is highly dependent on the
skills of Michael Pohl, President of Skyconnect. The loss of Mr. Durand's
services could have a material adverse affect on the value of the DCI Merger,
and the loss of Michael Pohl's services could have a material adverse affect on
the value of the Skyconnect Merger. The DCI Merger is contingent on Mr. Durand
entering into a three-year non-compete agreement with OSS, and the Skyconnect
Merger is contingent upon Mr. Pohl entering into a one-year employment and
noncompete agreement with the Company.
MANAGEMENT OF GROWTH. The Company has and expects to continue to experience
significant growth in the number of its employees, the scope of its operating
and financial systems, and the geographic area of its operations, including an
expansion of its recently initiated international operations. This growth will
result in new and increased responsibilities for both existing and new
management personnel. In addition, as the Company expands its I2U products and
services, it will be necessary to hire additional employees who will be located
at many widely separated offices, including international offices. The Company's
success depends on the ability of its managers to operate effectively, both
independently and as a group. The Company's ability to effectively manage any
such growth will require it to continue to implement and improve its
operational, financial and management information systems and to train, motivate
and manage its employees. This will require the addition of new management
personnel and the development of additional expertise by existing management.
There can be no assurance that the Company's management or other resources will
be sufficient to manage any future growth in the Company's business or that the
Company will be able to implement in whole or in part its growth strategy, and
any failure to do so could have a material adverse effect on the Company's
operating results.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. As a result of the Company's
limited operating history and the recent increased focus on its I2U products and
services, the Company does not have historical financial data for a sufficient
number of periods on which to base planned operating expenses. Accordingly, the
Company's expense levels are based in part on its expectations as to future
sales and to a large extent are fixed. The Company typically operates with
little backlog and the sales cycles for its products and services may vary
significantly. As a result, quarterly sales and operating results generally
depend on the volume and timing of and ability to close customer contracts
within the quarter, which are difficult to forecast. The Company may be unable
to adjust spending in a timely manner to compensate for any unexpected sales
shortfalls. Accordingly, any significant shortfall of demand for the Company's
products and services in relation to the Company's expectations would have an
immediate adverse effect on the Company's business, operating results and
financial condition. In addition, since a significant portion of the Company's
future sales are expected to be based on Internet access fees and e-commerce and
e-banking activities, OSS does not expect to realize significant sales, if at
all, from these activities until a significant time after OSS has licensed its
I2U products and services to broadband operators. Further, the Company plans to
increase its operating expenses to fund product development and increase sales
and marketing. To the extent that such expenses precede or are not subsequently
followed by increased sales, the Company's business, operating results and
financial condition will be materially adversely affected.
SECURITY RISKS. The Company's software and equipment are vulnerable to
computer viruses or similar disruptive problems caused by OSS customers or other
Internet users. Computer viruses or problems caused by third parties could lead
to interruptions, delays or cessation in service to the Company's customers.
Furthermore, inappropriate use of the Internet by third parties could also
potentially jeopardize the security of confidential information stored in the
computer systems of the Company's customers. The Company has information
technology insurance which provides limited coverage for losses caused by
computer viruses. However, certain losses resulting from misuse of software or
equipment by third parties or losses from computer viruses which exceed the
liability limits under such insurance may not be protected. Although the Company
attempts to limit its liability to customers for these types of risks through
contractual provisions, there is no assurance that these limitations will be
enforceable.
DEPENDENCE ON THE INTERNET. Sales of the Company's Internet related
products and services will depend in large part upon a robust industry and
infrastructure for providing Internet access and carrying Internet traffic. The
Internet may not prove to be a viable commercial marketplace because of
inadequate development of the necessary infrastructure, such as a reliable
network backbone or timely development of complementary products. Because global
commerce and online exchange of information on the Internet and other similar
open wide area networks are new and evolving, it is difficult to predict with
any assurance whether the Internet will prove to be a viable commercial
marketplace. There can be no assurance that the infrastructure or complementary
products necessary to make the Internet a viable commercial marketplace will be
developed, or, if developed, that the Internet will become a viable commercial
marketplace. If the necessary infrastructure or complementary products are not
developed, or if
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the Internet does not become a viable commercial marketplace, the Company's
business, operating results and financial condition will be materially impaired.
LIMITATION OF DIRECTORS' LIABILITY. The Company's Articles of Incorporation
provide, as permitted by Colorado law, that its directors shall have no personal
liability for certain breaches of their fiduciary duties to the Company. This
provision may reduce the likelihood of derivative litigation against directors
and may discourage shareholders from bringing a lawsuit against directors for a
breach of their duty. In addition, the Company's Bylaws provide for mandatory
indemnification of directors and officers to the fullest extent permitted by
Colorado law.
POSSIBLE VOLATILITY OF STOCK PRICES; PENNY STOCK RULES. The
over-the-counter markets for securities such as the Company's common stock
historically have experienced extreme price and volume fluctuations during
certain periods. These broad market fluctuations and other factors, such as new
product developments and trends in the Company's industry and the investment
markets generally, as well as economic conditions and quarterly variations in
the Company's results of operations, may adversely affect the market price of
the Company's common stock. Although the common stock is listed on the Nasdaq
Small Cap Market, there can be no assurance that it will remain eligible to be
included on Nasdaq. In the event that the Company's common stock was no longer
eligible for quotation on Nasdaq, the common stock could become subject to rules
adopted by the Securities and Exchange Commission (the "Commission") regulating
broker-dealer practices in connection with transactions in "penny stocks." If
the Company's common stock became subject to the penny stock rules, many brokers
may be unwilling to engage in transactions in the Company's securities because
of the added regulation, thereby making it more difficult for purchasers in this
Offering to dispose of their securities.
CONTROL BY EXISTING MANAGEMENT. As of May 31, 1998, the current officers
and directors of the Company own beneficially approximately 33% of the Company's
outstanding common stock. Accordingly, it should be anticipated that the current
executive officers and directors of the Company will continue to have the
ability to significantly influence the outcome of elections of the Company's
directors and other matters presented to a vote of shareholders.
SHARES ELIGIBLE FOR FUTURE SALE. Approximately 1,130,000 of the currently
outstanding shares of the Company's common stock are "restricted securities," as
defined under the Securities Act of 1933 ("Securities Act") and the rules and
regulations thereunder. Restricted shares and shares of the Company's common
stock owned by "affiliates" may be publicly sold only by complying with Rule 144
under the Securities Act unless further registered under the Securities Act, or
some other exemption from further registration thereunder is available. Sales of
substantial amounts of these shares, or even the potential for such sales, could
have an adverse effect on the market price for shares of the Company's common
stock, and could impair the ability of purchasers of the securities covered
hereby to resell them to recoup their investment or make a profit, and the
Company's ability to raise capital through the sale of its equity securities.
RIGHTS TO ACQUIRE SHARES. The following warrants and options to acquire
common stock were outstanding as of May 31, 1998: (i) options and warrants to
purchase 1,406,500 shares of the Company's common stock issuable upon exercise
of such options and warrants, exercisable at prices ranging from $0.50 to $15.00
per share, with a weighted average exercise price of approximately $4.75 per
share, (ii) warrants issued in connection with the Company's initial public
offering on May 23, 1996 (the "IPO Warrants") to purchase 634,150 shares of the
Company's common stock issuable upon exercise of the IPO Warrants at an exercise
price of $9.00 per share, (iii) options issued to Cohig & Associates, Inc., the
representative of the underwriters involved in such initial public offering (the
"Representative's Option"), to purchase 106,700 shares of the Company's common
stock issuable upon exercise of the Representative's Option at a purchase price
of $8.10 per share and (iv) the Representative's Option to purchase 106,700 IPO
Warrants issuable upon exercise of the Representative's Option at a purchase
price of $.001 per IPO Warrant. The IPO Warrants referred to in (iv) above
entitle the holder thereof to purchase up to 53,350 shares of the Company's
common stock issuable upon exercise of such IPO Warrants at an exercise price of
$9.00 per share. During the terms of the outstanding options and warrants, the
holders thereof will have the opportunity to profit from an increase in the
market price of the Company's common stock with resulting dilution to the
holders of common stock who purchased shares for a price higher than the
respective exercise price. The existence of such stock options and warrants may
adversely affect the terms on which the Company can obtain additional financing,
and the holders of such options or warrants can be expected to exercise or
convert those securities at a time when the Company, in all likelihood, would be
able to obtain additional capital by offering shares of its common stock on
terms more favorable to the Company than those provided by the exercise or
conversion of such options or warrants.
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POSSIBLE DILUTION TO OSS SHAREHOLDERS CAUSED BY THE DCI MERGER AND THE
SKYCONNECT MERGER. If the DCI Merger and the Skyconnect Merger are consummated,
the Mergers will result in an increase in the Company's outstanding shares of
Common Stock by approximately 2,070,000 shares (approximately 62%). The Company,
on a pro forma basis, estimates that the issuance of such shares of common stock
would have resulted in a decrease to the Company's net book value per share as
of March 31, 1998 from $1.14 (actual) to $.71 (estimated pro forma). In
addition, in connection with the Mergers, OSS will be required to reserve
approximately 330,000 shares of its common stock for issuance upon exercise or
conversion of outstanding options, warrants and convertible securities of OSS
which will be issued to replace similar securities of DCI in connection with the
Mergers. There can be no assurance that OSS' results of operations will be
improved enough, if at all, as a result of the either the DCI Merger or the
Skyconnect Merger, to offset possible future dilution which could occur to
current shareholders of OSS in the event that OSS' operations achieve
profitability.
ABILITY TO ISSUE COMMON STOCK AND PREFERRED STOCK; ANTI-TAKEOVER DEVICES.
The Company is authorized to issue up to 10,000,000 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 the Company's shareholders, and may include voting rights,
preferences as to dividends and liquidation, conversion and redemptive rights
and sinking fund provisions. As of May 31, 1998, the Board of Directors has
authorized the issuance of up to 500,000 shares of 10% Preferred Stock (the "10%
Preferred Stock"), of which 267,500 shares were outstanding as of May 31, 1998,
and the Board of Directors has authorized the issuance of up to 3,000 shares of
5% Preferred Stock, of which 3,000 shares were outstanding as of May 31, 1998.
If not redeemed by the Company on or before October 1, 1998, then each share of
the outstanding 10% Preferred Stock becomes convertible, at the election of the
holder thereof, into the number of shares of common stock of the Company equal
to $10.00 divided by the lesser of (i) $10.00 or (ii) 80% of the average per
share closing bid price of the Company's common stock for the five trading days
immediately preceding the election by the holder thereof. In addition, upon any
redemption or conversion of the 10% Preferred Stock, the Company may pay
dividends owing on the 10% Preferred Stock either (i) in cash, or (ii) by
issuing additional shares of common stock utilizing a price per share equal to
the lesser of (a) $10.00 or (b) if a redemption or a conversion occurring in
connection with the receipt of a notice of redemption, the average per share
closing bid price for the five trading days immediately preceding the date on
which notice of such redemption is first given to the holders of the 10%
Preferred Stock, or, if a conversion occurring without connection to the receipt
of a notice of redemption, the average per share closing bid price of the
Company's common stock for the five trading days immediately preceding the
election to convert by the holder of the 10% Preferred Stock. Each share of the
outstanding 5% Preferred Stock is convertible, at any time at the election of
the holder thereof, into the number of shares of common stock of the Company
equal to $1,000.00 plus the amount of any accrued and unpaid dividends the
Company elects to pay in common stock divided by the lesser of (i) $16.33 or
(ii) 86% of the average per share closing bid price of the Company's common
stock for the five trading days immediately preceding the date on which the
holder thereof elects to convert such 5% Preferred Stock. The Company may redeem
the 5% Preferred Stock at any time prior to September 19, 1998. If, upon the
conversion of the 5% Preferred Stock, the number of shares of common stock of
the Company issued upon such conversion is equal to 574,281 shares, the Company
must redeem all of the then remaining outstanding shares of 5% Preferred Stock.
Although the Company has no present plans to issue any other shares of preferred
stock, the issuance of preferred stock in the future could affect the rights of
the holders of common stock and thereby reduce the value of common stock. In
particular, specific rights granted to future holders of preferred stock could
be used to restrict the Company's ability to merge with or sell its assets to a
third party, or otherwise delay, discourage, or prevent a change in control of
the Company.
AFFECT OF ISSUANCE OF 10% PREFERRED STOCK AND 5% PREFERRED STOCK ON NET
LOSS. Based on current accounting standards, the Company estimates that it will
be required to record a non-operating expense of approximately $2,300,000 for
the fiscal year ending December 31, 1998 as a result of the issuance of the 10%
Preferred Stock and the 5% Preferred Stock. While these charges will not affect
the Company's operating loss or working capital during such period, they are
expected to result in an increase of approximately $2,300,000 in the Company's
net loss for the fiscal year ending December 31, 1998. Further, the Company's
working capital will be reduced by the amount of the dividends paid on the 10%
Preferred Stock and the 5% Preferred Stock if such dividends are paid in cash.
NO DIVIDENDS. No cash dividends have been paid on the common stock of the
Company. It is anticipated that profits, if any, received from operations will
be devoted to the Company's future operations. The Company does not anticipate
the payment of cash dividends on its common stock in the foreseeable future, and
any decision to pay dividends will depend upon the Company's profitability at
the time, cash available therefor, and other factors. Except as otherwise
required by law, the Company is required to pay a quarterly cumulative
noncompounded
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dividend on the 10% Preferred Stock of 10% per annum based on the stated value
of $10.00 per share of 10% Preferred Stock, and the Company is required to pay
all accrued but undeclared dividends on the 5% Preferred Stock on the earlier of
(i) the redemption or conversion of the 5% Preferred Stock, or (ii) the
liquidation of the Company.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the securities
offered hereby.
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RECENT DEVELOPMENTS
DCI ACQUISITION
On March 19, 1998 the Company executed an Agreement and Plan of Merger (the
"DCI Merger Agreement") pursuant to which the Company agreed to acquire Durand
Communications, Inc., a California corporation ("DCI"), via a merger of the
Company's wholly owned subsidiary, Durand Acquisition Corporation, with DCI (the
"DCI Merger"). As consideration for the DCI Merger, the Company will issue up to
971,250 shares of its common stock and will acquire 100% of the outstanding
shares of common stock, no par value, of DCI. In connection with the DCI Merger,
OSS will also assume DCI liabilities of approximately $1,400,000 and issue
options, warrants and convertible securities for up to 200,000 shares of OSS
Common Stock at exercise or conversion prices ranging from $4.31 to $16.26 in
replacement of similar securities of DCI. Under the rules of The Nasdaq SmallCap
Market the issuance of common stock by the Company as consideration in the DCI
Merger requires the approval of the Company's shareholders. Approval by the
Company's shareholders is a condition precedent to the Company's obligation to
consummate the DCI Merger. If the issuance of shares of common stock is not
approved by the shareholders, it is unlikely that the Company will consummate
the DCI Merger. The Company anticipates that the meeting at which the
shareholders will consider the issuance of such common stock will occur in
August or September 1998.
It is intended that the DCI Merger, for federal income tax purposes, will
be treated as a reorganization within the meaning of Section 368 of the Internal
Revenue Code (the "Code") and that each of the Company, DCI and Durand
Acquisition Corporation will be a party to the reorganization within the meaning
of Section 368(b) of the Code. Based on the facts, representations, warranties
and agreements set forth in the DCI Merger Agreement, the Company believes that
the DCI Merger will so qualify. However, no ruling has been requested from the
Internal Revenue Service (the "IRS") with respect to these matters. Therefore,
the IRS may determine that the DCI Merger does not qualify to be treated as a
reorganization within the meaning of Section 368 of the Code.
The long-term success of the Company's business development strategy is
highly dependent upon the Company's ability to develop proprietary systems for
establishing online communities and online commerce which distinguishes OSS'
product and service offerings for broadband operators from those offered by
other Internet product and service providers. The providing of high-speed
Internet access by broadband operators is in the early development stage. The
Company believes it is important to quickly establish OSS as one of the leaders
in providing high-speed Internet access products and services for broadband
operators, as those companies that are among the first established providers of
these products and services, will have a distinct advantage in obtaining market
share as this business continues to develop.
OSS believes that the primary value of DCI to OSS is (i) DCI's proprietary
technology, including DCI's CommunityWare(R) product, (ii) DCI's software
development capabilities which management believes is important to OSS' ability
to continue to develop state-of-the-art proprietary software products required
to maintain long-term relationships with OSS' broadband operator customers, and
(iii) the ability the DCI acquisition will give OSS to greatly reduce the time
it will take OSS to introduce new proprietary software products. Management of
OSS believes DCI's technology can be quickly integrated with OSS' I2U products
to expand the breadth and functionality of this product offering. Andre Durand,
Chief Executive Officer of DCI, will become Vice President-Product Development
of OSS following the DCI Merger and will be responsible for the Company's
product development efforts. A condition to the DCI Merger is that Mr. Durand
enter into a three-year noncompete agreement with the Company. OSS intends to
continue to employ all of DCI's product development personnel following the DCI
Merger.
OSS also believes that DCI's Electronic University Network ("EUN")
business, which offers accredited online courses for colleges, universities and
corporations, represents a valuable business opportunity. OSS expects to
continue to develop this business both as a separate product offering and as an
adjunct to OSS' product offerings for broadband operators.
OSS did not seek an opinion from an independent financial advisor as to the
value of the DCI transaction, as management and the Board of Directors
determined that management of OSS was best able to determine the value of the
acquisition since its value was primarily based on the capabilities and
prospects for DCI's technology, the compatibility of DCI's and OSS' technologies
and the ability to quickly integrate the two technologies in order to
significantly reduce OSS' time to develop and introduce new products.
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The acquisition of DCI will increase the outstanding number of shares of
the Company's common stock by 971,250 shares (approximately 29%, not including
the shares of common stock which may be issued in connection with the Skyconnect
Merger) (excluding shares issuable upon the exercise of options and warrants or
the conversion of convertible securities issued in connection with the DCI
Merger), will increase the Company's liabilities, on a consolidated basis, by
approximately $1,400,000 and is expected to increase the Company's operating net
loss by approximately $140,000 per month for at least the balance of fiscal
1998. The acquisition of DCI will also increase the Company's working capital
requirements. As indicated in the Risk Factors section of this Prospectus, the
Company has initiated efforts to obtain additional working capital. However,
there can be no assurance that the Company will be successful in obtaining
additional working capital or, if successful, the cost of such capital.
The DCI Merger Agreement contemplates that OSS will acquire 100% of the
outstanding common stock of DCI. Based on the closing price of the Company's
common stock on and around March 19, 1998, the day that the transaction was
announced, the total purchase price is estimated to be $12,400,000, consisting
of (i) 971,250 shares of the Company's common stock to be issued to the
stockholders of DCI, (ii) approximately 200,000 shares of the Company's common
stock to be reserved for issuance pursuant to exercise or conversion of options,
warrants and convertible securities of DCI to be converted to similar securities
of OSS; (iii) $1,400,000 of liabilities to be assumed; and (iv) approximately
$380,000 of expenses to be incurred.
The DCI Merger will be accounted for under the purchase method of
accounting, with the purchase price allocated to the fair value of assets
acquired and liabilities assumed. A significant portion of the purchase price
has been identified as intangible assets, including approximately $11 million of
research and development in process. The portion of the purchase price which is
allocated to in-process research and development will be recognized as expense
in the period the DCI Merger is consummated and will cause a resulting increase
in the accumulated deficit of the Company of approximately $11 million.
DCI completed the acquisition of CompuLearning Systems, d/b/a Electronic
University Network ("EUN") during January 1998. Based on financial information
provided by DCI and EUN, the combined revenues for DCI and EUN for the year
ended December 31, 1997 totaled $740,739 and their combined loss for the same
period equaled ($2,867,973). In addition, their combined accumulated deficit and
stockholder's deficit for the same period were ($7,709,344) and ($1,804,709),
respectively. The Company estimates that, on a pro forma basis, the acquisition
of DCI would have resulted in a decrease to the net book value of its shares of
common stock as of December 31, 1997 from $1.54 (actual) to $1.18 (pro forma).
SKYCONNECT ACQUISITION
On June 5, 1998 the Company executed an Agreement and Plan of Merger (the
"Skyconnect Merger Agreement") pursuant to which the Company agreed to acquire
Skyconnect, Inc., a Colorado corporation ("Skyconnect"), via a merger of the
Company's wholly owned subsidiary, Skyconnect Acquisition Corporation, with
Skyconnect (the "Skyconnect Merger"). As consideration for the Skyconnect
Merger, the Company will issue up to 1,100,000 shares of its common stock and
will acquire 100% of the outstanding shares of common stock, no par value, of
Skyconnect. In connection with the Skyconnect Merger, OSS will also assume
Skyconnect liabilities of approximately $8,500,000 and issue options and
warrants for up to 130,000 shares of OSS common stock at exercise or conversion
prices ranging from $12.00 to $14.40 or the market value for the Company's
common stock, if less, in replacement of similar securities of Skyconnect. In
addition, OSS will issue to a Skyconnect shareholder a warrant to acquire
250,000 shares of its common stock at an initial exercise price of $18.00 per
share. Under the rules of The Nasdaq SmallCap Market the issuance of common
stock by the Company as consideration in the Skyconnect Merger requires the
approval of the Company's shareholders. Approval by the Company's shareholders
is a condition precedent to the Company's obligation to consummate the
Skyconnect Merger. If the issuance of shares of common stock is not approved by
the shareholders, it is unlikely that the Company will consummate the Skyconnect
Merger. The Company anticipates that the meeting at which the shareholders will
consider the issuance of such common stock will occur in August or September
1998.
It is intended that the Skyconnect Merger, for federal income tax purposes,
will be treated as a reorganization within the meaning of Section 368 of the
Internal Revenue Code (the "Code") and that each of the Company, Skyconnect and
Skyconnect Acquisition Corporation will be a party to the reorganization within
the meaning of Section 368 of the Code. Based on the facts, representations,
warranties and agreements set forth in the Skyconnect Merger Agreement, the
Company believes that the Skyconnect Merger will so qualify. However, no
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ruling has been requested from the Internal Revenue Service (the "IRS") with
respect to these matters. Therefore, the IRS may determine that the Skyconnect
Merger does not qualify to be treated as a reorganization within the meaning of
Section 368 of the Code.
The long-term success of the Company's business development strategy is
highly dependent upon the Company's ability to develop proprietary systems which
distinguishes OSS' product and service offerings for broadband operators from
those offered by other Internet product and service providers. The providing of
high-speed Internet access by broadband operators is in the early development
stage. The Company believes it is important to quickly establish OSS as one of
the leaders in providing high-speed Internet access products and services for
broadband operators, as those companies that are among the first established
providers of these products and services, will have a distinct advantage in
obtaining market share as this business continues to develop.
OSS believes that the primary value of Skyconnect to OSS is (i)
Skyconnect's proprietary technology, including Skyconnect's advertising,
scheduling and insertion systems, as well as its near-video-on-demand ("NVOD")
and video-on-demand ("VOD") systems for cable television and hotel operators,
(ii) Skyconnect's product development and sales capabilities, (iii) the ability
the Skyconnect acquisition will give OSS to integrate advertising insertion and
NVOD and VOD capabilities with OSS' I2U products to expand the breadth and
functionality of this product offering, and (iv) Skyconnect's existing revenue
base with cable television operators.
The acquisition of Skyconnect will increase the outstanding number of
shares of the Company's common stock by 1,100,000 shares (approximately 32% not
including the shares which may be issued in the DCI Merger) (excluding shares
issuable upon the exercise of options and warrants in connection with the
Skyconnect Merger) and will increase the Company's liabilities, on a
consolidated basis, by approximately $8,500,000. The acquisition of Skyconnect
may also increase the Company's working capital requirements. As indicated in
the Risk Factors section of this Prospectus, the Company has initiated efforts
to obtain additional working capital. However, there can be no assurance that
the Company will be successful in obtaining additional working capital or, if
successful, the cost of such capital.
The Skyconnect Merger Agreement contemplates that OSS will acquire 100% of
the outstanding common stock of Skyconnect. Based on the closing price of the
Company's common stock on and around June 9, 1998, the day that the transaction
was announced, the total purchase price is estimated to be 24,700,000,
consisting of (i) 1,100,000 shares of the Company's common stock to be issued to
the stockholders of Skyconnect, (ii) approximately 130,000 shares of the
Company's common stock to be reserved for issuance pursuant to exercise or
conversion of options and warrants of Skyconnect to be converted to similar
securities of OSS; (iii) 250,000 shares of the Company's common stock to be
reserved for a warrant to be granted to a Skyconnect shareholder; (iv)
$8,500,000 of liabilities to be assumed; and (v) approximately $60,000 of
expenses to be incurred.
The Skyconnect Merger will be accounted for under the purchase method of
accounting, with the purchase price allocated to the fair value of assets
acquired and liabilities assumed. A significant portion of the purchase price
has been identified as intangible assets, including up to approximately $14
million of research and development in process. The portion of the purchase
price which is allocated to in-process research and development will be
recognized as expense in the period the Skyconnect Merger is consummated and
will cause a resulting increase in the accumulated deficit of the Company of up
to approximately $14 million.
Based on financial information provided by Skyconnect, the revenues for
Skyconnect for the year ended March 31, 1998 totaled $11,820,779 and its loss
for the same period equaled ($6,754,688). In addition, its accumulated deficit
was ($31,499,847). The Company estimates that, on a pro forma basis, the
acquisition of Skyconnect would have resulted in a decrease to the net book
value of its shares of common stock as of March 31, 1998 from $1.14 (actual) to
$1.35 (estimated pro forma).
SELLING SHAREHOLDER
The following table sets forth, as of July 2, 1998, the name of the Selling
Shareholder, certain beneficial ownership information with respect to the
Selling Shareholder, and the number and percentage of securities offered hereby
that may be sold from time to time by the Selling Shareholder pursuant to this
Prospectus. The number of shares of common stock set forth in the following
table represents an estimate of the number of shares of common stock that will
be offered by the Selling Shareholder. The actual number of shares of common
stock issuable upon conversion of the 5% Preferred Stock is indeterminate, is
subject to adjustment, and could be materially less or more than such estimated
number depending on factors that cannot be predicted by the Company at this
time, including, among other factors, the future market price of the Company's
common stock. The actual number of shares of common stock offered hereby, and
included in the Registration Statement of which this Prospectus is part,
includes such additional number of shares of common stock as may be issued or
issuable upon conversion of the 5% Preferred Stock by reason of the floating
rate conversion price mechanism or the other adjustment mechanisms described
therein, or by reason of any stock split, stock dividend or similar transaction
involving the Company's common stock, in order to prevent dilution, in
accordance with Rule 416 under the Securities Act of 1933, as amended. There can
be no assurance that the securities offered hereby will be sold.
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<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Shares of Percentage of
Common Stock Shares of Common Common Stock
Owned Shares of Common Stock Owned Owned Beneficially
Name of Selling Beneficially Stock Offered Beneficially After Before Offering/
Shareholder Before Offering Hereby Offering After Offering(1)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arrow Investors LLC 379,094 (2) 329,094 (3) 50,000 (4) 9.9% 1.4%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In calculating percentage ownership, all shares of Common Stock which
the Selling Shareholder has the right to acquire within 60 days from
July 1, 1998 upon the exercise of options, warrants, or convertible
securities are deemed to be outstanding for the purpose of calculating the
percentage of common stock owned by the Selling Shareholder.
(2) Represents the number of shares of common stock issuable to the Selling
Shareholder (after taking into account the terms of the 5% Preferred Stock
which provide that at no time shall the Selling Shareholder convert the 5%
Preferred Stock as shall result in the Selling Shareholder beneficially
owning, after such conversion, a number of shares of common stock exceeding
9.9% of the Company's then outstanding common stock) upon the conversion of
the 5% Preferred Stock held by the Selling Shareholder if such conversion
occurred as of the close of business on July 2, 1998 plus the 50,000 shares
of common stock issuable to the Selling Shareholder upon the exercise of a
warrant to purchase shares of common stock at a per share exercise price of
$16.33. If this limitation on beneficial ownership were not taken into
account, the number of shares of common stock issuable to the Selling
Shareholder upon conversion of the 5% Preferred Stock held by the Selling
Shareholder if such conversion occurred as of the close of business on July
2, 1998 plus the 50,000 shares of common stock issuable to the Selling
Shareholders upon the exercise of the warrant would be 383,930 shares. Upon
the actual conversion of the 5% Preferred Stock by the Selling Shareholder,
the number of shares of common stock of the Company into which such 5%
Preferred Stock is convertible may be more or less than 329,094 shares, but
in no event will be more than 574,281 shares or less than 183,710 shares.
Pursuant to the terms of the 5% Preferred Stock, on July 2, 1998 the
conversion price would have been approximately $9.43.
(3) Represents the number of shares of common stock issuable to the Selling
Shareholder (after taking into account the terms of the 5% Preferred Stock
which provide that at no time shall the Selling Shareholder convert the 5%
Preferred Stock as shall result in the Selling Shareholder beneficially
owning, after such conversion, a number of shares of common stock exceeding
9.9% of the Company's then outstanding common stock) upon the conversion of
the 5% Preferred Stock held by the Selling Shareholder if such conversion
occurred as of the close of business on July 2, 1998.
(4) Represents 50,000 shares of common stock issuable to the Selling
Shareholder upon the exercise of a warrant to purchase such shares at a
per share exercise price of $16.33.
PLAN OF DISTRIBUTION
The Company has been advised that the Shares may be sold from time to time
by the Selling Shareholder or by pledgees, donees, transferees or other
successors in interest. Such sales may be made in the Nasdaq SmallCap Market or
such other over-the-counter market or otherwise at prices and at terms then
prevailing or at prices related to the then current market price or in
negotiated transactions. Such securities may be sold by one or more of the
following: (a) a block trade in which the broker or dealer so engaged will
attempt to sell Shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction; (b) purchases by a broker or
dealer as principal and resale by such broker or dealer for its account pursuant
to this Prospectus; (c) ordinary brokerage transactions and transactions in
which the broker solicits purchasers; and (d) in privately negotiated
transactions not involving a broker or dealer. In effecting sales, brokers or
dealers engaged to sell such securities may arrange for other brokers or dealers
to participate. Brokers or dealers engaged to sell such securities will receive
compensation in the form of commissions or discounts in amounts to be negotiated
immediately prior to each sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933, as amended, in connection with such
sales. The Company will receive no proceeds from any resales of the securities
offered hereby, and it is anticipated that the brokers or dealers, if any,
participating in the sales of such securities will receive the usual and
customary selling commissions. To comply with the securities laws of certain
states, if applicable, the Shares will be sold therein only through brokers or
dealers. In addition, in certain states, the Shares may not be sold unless they
have been registered or qualified for sale in such states or an exemption from
registration or qualification is available and is complied with.
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized to issue 15,000,000 shares of capital stock,
including 10,000,000 shares of common stock, no par value, and 5,000,000 shares
of preferred stock, with such par value and such rights, preferences and
privileges as are determined by the Company's Board of Directors.
COMMON STOCK
As of May 31, 1998, 3,386,307 shares of common stock were outstanding.
Holders of common stock are entitled to dividends when, as and if declared by
the Board of Directors out of funds available therefor, subject to loan
agreement limitations and priority as to dividends for preferred stock that may
be outstanding. Holders of common stock are entitled to cast one vote for each
share held at all stockholder meetings for all purposes, including the election
of directors. The holders of more than 50% of the voting power of the common
stock issued and outstanding and entitled to vote, present in person or by
proxy, (together with any preferred stock issued and outstanding and entitled to
vote, present in person or by proxy) constitute a quorum at all meetings of
stockholders. The vote of the holders of a majority of common stock present at
such a meeting (together with any preferred stock present and entitled to vote
at such meeting) will decide any question brought before such meeting, except
when a greater vote is required by law, the Company's Articles of Incorporation,
or the Company's Bylaws and except when a vote of any preferred stock issued and
outstanding, voting as a separate class, is required by law to approve a
question brought before such meeting. Upon liquidation or dissolution, the
holder of each outstanding share of common stock will be entitled to share
equally in the assets of the Company legally available for distribution to such
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stockholder after payment of all liabilities and after distributions to holders
of preferred stock legally entitled to such distributions. Holders of common
stock do not have any preemptive, subscription or redemption rights. There is no
cumulative voting for the election of directors. All outstanding shares of
common stock are fully paid and nonassessable and the shares of common stock
offered hereby will be, upon issuance, fully paid and nonassessable. The holders
of the common stock do not have any registration rights with respect to the
common stock.
5% PREFERRED STOCK
As of May 31, 1998, the 3,000 shares of 5% Preferred Stock were
outstanding. The following is a summary of the rights, privileges and
preferences of the 5% Preferred Stock. This summary is qualified in its entirety
by reference to the terms of the 5% Preferred Stock incorporated by reference as
an exhibit to the Registration Statement relating to this Prospectus.
VOTING. Each share of 5% Preferred Stock entitles the holder thereof to
cast the number of votes equal to the number of whole shares of common stock
into which the 5% Preferred Stock held by such holder are convertible
immediately after the close of business on the record date fixed for meeting at
which the vote is to be taken.
DIVIDENDS. The cumulative noncompounded dividend on the 5% Preferred Stock
is 5% per annum based on the stated value of $1,000 per share, payable as
permitted by law, at the option of the Company, in cash or common stock upon the
earlier of (i) the redemption or conversion of the 5% Preferred Stock or (ii)
the liquidation of the Company. No dividends may be paid on the common stock
unless all unpaid dividends on the 5% Preferred Stock are first declared and
paid. Dividends on the 5% Preferred Stock are equal in preference to any
dividends declared on the 10% Preferred Stock.
REDEMPTION AND CONVERSION. The 5% Preferred Stock may be redeemed, in whole
or in part, by the Company at any time prior to September 19, 1998 for a price
per share equal to (i) $1,000 plus all accrued but unpaid dividends divided by
the Conversion Price (defined below) as of the date on which the notice of
redemption of the 5% Preferred Stock is given by the Company multiplied by (ii)
the average per share closing bid price of the common stock for the five trading
days immediately preceding such date. Each share of the outstanding 5% Preferred
Stock is convertible, subject to the limitation described below, at any time at
the election of the holder thereof, into the number of shares of common stock
equal to $1,000 divided by the lesser of (i) $16.33 or (ii) 86% of the average
per share closing bid price of the common stock for the five trading days
immediately preceding the date on which the holder thereof elects to convert
such 5% Preferred Stock (the "Conversion Price"). If the Company elects to
redeem the 5% Preferred Stock, the Company shall give at least ten days notice
to the holders of the 5% Preferred Stock of the Company's intent to redeem such
5% Preferred Stock. Upon the giving of such notice by the Company, the holders
of the 5% Preferred Stock shall not thereafter be entitled to convert the 5%
Preferred Stock into shares of common stock unless a notice of conversion
relating to such 5% Preferred Stock has previously been submitted. Upon any
conversion of the 5% Preferred Stock the Company will have the option to pay the
accrued but unpaid cumulative dividend on the 5% Preferred Stock either (i) in
cash or (ii) by issuing additional shares of common stock calculated by adding
the amount of the accrued but unpaid dividend into the $1,000 stated value set
forth in the formula above. If, upon conversion of the 5% Preferred Stock and
the payment of dividends thereon, the Company has issued 574,281 shares of its
common stock, then the Company must redeem all of the 5% Preferred Stock which
have not previously been converted, unless the shareholders of the Company
approve the issuance of shares of common stock upon conversion of the 5%
Preferred Stock in excess of 574,281 shares.
PREEMPTIVE RIGHTS. A holder of the 5% Preferred Stock has no preemptive
rights to subscribe for any additional shares of any class of stock of the
Company or for any issue of bonds, notes or other securities convertible into
any class of stock of the Company.
LIQUIDATION PREFERENCE. In the event of a liquidation, dissolution or
winding-up of the Company, whether voluntary or otherwise, after payment of the
debts and other liabilities of the Company, the holders of the 5% Preferred
Stock will be entitled to receive from the remaining net assets of the Company,
before any distribution to the holders of the common stock, the amount of
$1,000.00 per share of 5% Preferred Stock in cash plus payment of all accrued
but unpaid dividends. The liquidation preference on the 5 % Preferred Stock is
equal in preference to the liquidation preference on the 10% Preferred Stock.
Thereafter, holders of the 5% Preferred Stock shall be entitled to share in any
distributions made to the holders of the common stock as if each share of 5%
Preferred Stock was converted (pursuant to the formula set forth above) into the
number of shares of common stock into which it is convertible immediately prior
to the close of business on the business day fixed for such distribution.
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LEGAL MATTERS
The legality of the Shares will be passed upon for the Company by the firm
of Gray, Plant, Mooty, Mooty & Bennett, P.A.
EXPERTS
The audited financial statements of the Company for the years ended
December 31, 1997 and 1996, which are included by reference in this Registration
Statement have been audited by Arthur Andersen LLP, as indicated in their
reports with respect thereto, and are incorporated by reference in reliance upon
the authority of said firm as experts in accounting and auditing in giving such
report. Reference is made to said report, which includes an explanatory
paragraph that discusses substantial doubt about the Company's ability to
continue as a going concern.
INDEMNIFICATION
The Company's Articles of Incorporation provide that the Company shall
indemnify, to the full extent permitted by Colorado law, any director, officer,
employee or agent of the Company made or threatened to be made a party to a
proceeding, by reason of the former or present official of the person, against
judgments, penalties, fines, settlements and reasonable expenses incurred by the
person in connection with the proceeding if certain standards are met. At
present, there is no pending litigation or proceeding involving any director,
officer, employee or agent of the Company where indemnification will be required
or permitted. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
The Company's Articles of Incorporation limit the liability of its
directors to the fullest extent permitted by the Colorado Business Corporation
Act. Specifically, directors of the Company will not be personally liable for
monetary damages for breach of fiduciary duty as directors, except for (i) any
breach of the duty of loyalty to the Company or its shareholders, (ii) acts or
omissions not in good faith or that involved intentional misconduct or a knowing
violation of law, (iii) dividends or other distributions of corporate assets
that are in contravention of certain statutory or contractual restrictions, (iv)
violations of certain laws, or (v) any transaction from which the director
derives an improper personal benefit. Liability under federal securities law is
not limited by the Articles of Incorporation.
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No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to sell
or the solicitation of any offer to buy any security other than the securities
offered by this Prospectus, nor does it constitute an offer to sell or a
solicitation of any offer to buy the securities offered hereby by anyone in any
jurisdiction in which such offer or solicitation is not authorized, or in which
the person making such offer or solicitation is not qualified to do so, or to
any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that information contained herein is
correct as of any time subsequent to the date hereof.
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TABLE OF CONTENTS
Page
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Available Information.....................................................3
Incorporation of Certain Documents by Reference...........................3
The Company...............................................................4
Risk Factors..............................................................6
Use of Proceeds..........................................................12
Recent Developments......................................................13
Selling Shareholders.....................................................15
Plan of Distribution.....................................................16
Description of Securities................................................16
Legal Matters............................................................17
Experts..................................................................17
Indemnification..........................................................18
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ONLINE SYSTEM
SERVICES, INC.
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PROSPECTUS
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JULY 23, 1998
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