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Filed Pursuant to Rule 424(b)(3)
File No: 333-69477
PROSPECTUS
ONLINE SYSTEM SERVICES, INC.
This is a public offering of a minimum of 861,923 and a maximum of
994,740 shares of common stock of Online System Services, Inc. The selling
shareholders identified in this prospectus are offering all of the shares to be
sold. OSS will not receive any of the proceeds from the offer and sale of the
shares, however certain shares offered by this prospectus are issuable upon
the exercise of issued and outstanding transferable warrants of OSS. If these
warrants are excerised in full and the exercise price is paid in cash rather
than by a surrender of a portion of the warrants being exercised (a cashless
exercise), OSS will receive proceeds of $3,234,900.
The shares to be sold by the selling shareholders consist of 104,869
issued and outstanding shares of common stock and shares of common stock
issuable to them upon:
- Their conversion of OSS' 10% Preferred Stock;
- Their conversion of OSS' Series A Preferred Stock;
- Their exercise of issued and outstanding transferable warrants of
OSS exercisable at a price per share of $15.00;
- Their exercise of issued and outstanding transferable warrants of
OSS exercisable at a price per share of $16.33; or
- Their exercise of issued and outstanding transferable warrants of
OSS exercisable at a price per share of $5.71.
The Nasdaq SmallCap Market lists the common stock under the symbol
"WEBB".
INVESTING IN THE COMMON STOCK INCLUDES CERTAIN RISKS. YOU SHOULD NOT
PURCHASE THE COMMON STOCK UNLESS YOU CAN AFFORD TO LOSE YOUR ENTIRE INVESTMENT.
SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
The shares may be offered and sold at various times by the selling
shareholders identified in this prospectus pursuant to rules promulgated by the
Securities and Exchange Commission. The selling shareholders will offer and sell
the shares at market prices prevailing at the time of sale or at negotiated
prices and may sell the shares to or through brokers or dealers. Because the
selling shareholders will offer and sell the shares at various times, OSS has
not included in this prospectus information about the price to the public of the
shares or the proceeds to the selling shareholders.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OR PASSED ON THE
ADEQUACY OF THE DISCLOSURES IN THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is January 13, 1999.
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THE COMPANY
Online System Services, Inc. develops, markets and supports products
and services that enable individuals to create and manage their own Internet
Web presence, create public or private online communities and manager their own
interactions. Our i2u foundation software provides users with the ability
to create their own home pages using simple, on-screen templates, as well as
integrated online communications, commerce and publishing tools. We have
targeted the following market opportunities:
- i2u Community - Customized community and communication portals
or start pages for broadband (high bandwidth or high data
transmission capabilities) operators who provide Internet
access.
- i2u Enterprise - Internet and Extranet services for
businesses, associations and government institutions.
- i2u Education - Classroom applications for elementary and
secondary schools, including parent/teacher communications,
virtual campuses for colleges and universities and online
classrooms for corporate training.
- i2u Financial Services - Online banking services for banks,
credit unions and other financial institutions.
Our integrated i2u software permits the generation of Internet Web site
content by individual users, Internet service providers ("ISPs"), local merchant
and others. Personal user home pages, enhanced business Web pages, business
directories, community events, online discussion groups and forums and
programming guides can all be developed and updated by users. The i2u software
includes personal communication tools which facilitate user interaction and
community "groupware" which enables any group to create a public or private
community for personal interaction and information exchange.
In order to gain market share and to create a foundation for future
content revenues, we have developed a suite of products, marketed under the i2u
brand, which provides broadband operators with our proprietary software, as well
as the equipment, training, systems and services required for the broadband
operator to become fully operational Internet service provider. These products
and services are provided at minimal or no initial cost to the operator in
in exchange for which we share in the revenues from Internet advertising and
commerce and, if the operator utilizes our access products and services,
Internet access.
We have utilized the i2u foundation software to develop an online
product designed for elementary and secondary schools which facilitates
communications and information exchange among teachers, administrators, parents
and students. We have also developed "RE/MAX Mainstreet," a system designed to
be RE/MAX International, Inc.'s primary communcation tool linking its real
estate agents, management and approved suppliers worldwide and a
state-of-the-art system for providing online banking services for Rockwell
Federal Credit Union.
As part of our product enhancement efforts, we have agreed to acquire
Durand Communications, Inc. ("DCI"), a developer and marketer of Internet
"community" building tools and services which allow users to set up their own
password-protected virtual communities. DCI's CommunityWare product is being
integrated into the i2u suite of products and services. DCI has provided the
information regarding DCI included in this prospectus. See "Recent
Developments--DCI Acquisition."
Our strategies to achieve our growth objective include:
- Gaining early market share by offering the i2u Community
products and services to broadband operators at minimal or no
initial cost in exchange for a larger share of the revenues
from Internet commerce and access;
- Continuing to expand the i2u suite of products and services;
- Leveraging the i2u platform software to develop products for
the development of online communities for specific industries
and markets;
- Aggregating subscribers of multiple online communities to
develop unique channels of distribution for Internet products,
advertising and services; and
- Acquisitions; and
- Developing strategic alliances.
On January 11, 1999 we sold 3,000 shares of our Series C Preferred
Stock to Arrow Investors II LLC, an affiliate of certain of the Selling
Shareholders listed in this prospectus, in a private placement offering of such
stock. We received $3,000,000 in gross proceeds from such offering. We intend to
use such proceeds for general working capital purposes. In connection with such
offering, we also issued a warrant to Arrow Investors II LLC to purchase an
additional 2,000 shares of Series C Preferred Stock for an aggregate purchase
price of $2,000,000 on or before June 30, 1999. This warrant also grants us the
right to require Arrow Investors II LLC to exercise such warrant. See "Risk
Factors--Rights to Acquire Shares; Potential Substantial Dilution," "Risk
Factors--Pending Acquisition of DCI; Possible Dilution to OSS Shareholders
Caused by the Acquisition," "Risk Factors--Ability to Issue Common Stock and
Preferred Stock; Anti-Takeover Devices," and "Risk Factors--Affect of Issuance
of 10%, 5%, Series A and Series C Preferred Stock on Net Loss."
OSS was incorporated under the laws of the State of Colorado on
March 22, 1994. Our executive offices are located at 1800 Glenarm Place, Suite
700, Denver, Colorado 80202, telephone number (303) 296-9200.
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RISK FACTORS
The common stock offered by this prospectus is highly speculative and
involves a high degree of risk. Before you purchase any common stock you should
carefully read this entire prospectus, and you should consider the following
risks and speculative factors. You should purchase common stock only if you can
afford the loss of your entire investment in the common stock.. You should also
be aware that certain statements set forth below are "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995.
Please refer to the "Special Note Regarding Forward-Looking Statements" on page
12 of this prospectus for more information.
RISKS RELATED TO BUSINESS OF OSS
LIMITED OPERATING HISTORY; ACCUMULATED LOSSES. OSS was founded in March
1994, commenced sales in February 1995 and was in the development stage through
December 31, 1995. DCI was founded in 1993. Accordingly, we have only a limited
operating history upon which you can base your evaluation of our prospects, DCI
and us. In conducting your evaluation, you should consider our prospects,
including the prospects of DCI, 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 such as the Internet
market. These risks include our ability to respond to competitive developments,
our ability to continue to attract, retain and motivate qualified persons, and
our ability to continue to upgrade and commercialize our products and services.
There is no assurance that we will be successful in addressing these and other
risks. Economic and market conditions over which we have no control may also
significantly affect our business. We have incurred net losses since inception
totaling $13,158,897 through September 30, 1998. DCI has incurred net losses
since its formation totaling $8,061,004 through September 30, 1998.
ADDITIONAL ANTICIPATED LOSSES. We currently intend to increase our
capital expenditures and operating expenses in order to expand the functionality
and performance of our i2u products and services, support additional subscribers
of our ISP customers in future markets, and market and provide our products and
services. In addition, we adopted a new pricing structure in the second quarter
of 1998 which will provide our i2u Community products and services to broadband
operators, including the equipment required for the operator to provide high-
speed Internet access to its subscribers, at little or no initial charge to the
operator in return for a percentage of the operator's future Internet access and
e-commerce transaction fees. This new pricing structure will increase our costs
and lower our revenues at the time that we sell our i2u products and services to
broadband operators. As a result of our increased capital expenditures and
operating expenses and our new pricing structure, we expect to incur additional
substantial operating and net losses in fiscal 1999 and for one or more fiscal
years thereafter.
Furthermore, if we complete the DCI acquisition, we will incur
additional losses for the fiscal year in which the acquisition occurs (currently
anticipated to be in the first quarter of fiscal 1999). These losses will occur
because accounting rules require us to recognize as a loss in the fiscal period
in which the acquisition is consummated that portion of the purchase price for
DCI which we allocate to in-process research and development. We expect to
allocate approximately $500,000 to in-process research and development. In
addition, if the DCI acquisition is completed, we will record goodwill and other
intangible assets estimated to be approximately $12.5 million which we will
amortize over their estimated useful life of three years. There can be no
assurance that the acquisition of DCI will ever make a positive contribution to
our results of operations. The final determination of the value of consideration
issued by OSS and the liabilities assumed will be made at the effective time of
the DCI Merger. Accordingly, the determination of the total purchase price,
liabilities assumed and the allocations may change significantly from the
amounts reflected above. If we do not complete the DCI Merger, it is likely that
we would have to write-off the note receivable of $805,320 at September 30,
1998, which would increase our losses.
INCREASED NEED FOR WORKING CAPITAL; ABILITY TO CONTINUE AS GOING
CONCERN. We believe that our present cash and cash equivalents and working
capital (including the proceeds from the sale of the Series C Preferred Stock
described below) will be adequate to sustain operations only through June 1999.
In addition, we expect the acquisition of DCI to increase our monthly working
capital needs by approximately $130,000 for at least the next six months. On
January 11, 1999, we issued 3,000 shares of our Series C Preferred Stock for an
aggregate purchase price of $3,000,000, and we received a commitment to purchase
an additional 2,000 shares of Series C Preferred Stock for an aggregate purchase
price of $2,000,000 on or before June 30, 1999. We estimate that we will need to
raise at least an additional $5 million through equity, debt or other external
financing to fund proposed operations for fiscal 1999 and to pay DCI
indebtedness which would be assumed as part of the DCI Merger. Our estimate of
our working capital needs may change due to factors some of which are outside of
our control. There is no assurance that we will be able to raise additional
funds in amounts required or upon acceptable terms. If we cannot raise funds
when needed, we may be required to curtail or scale back our operations. These
actions could have a material
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adverse effect on our business, financial condition, or results of operations.
In its report accompanying the audited financial statements for the years ended
December 31, 1997 and 1996, our auditor, Arthur Andersen LLP, expressed
substantial doubt about our ability to continue as a going concern.
UNCERTAINTY OF FUTURE PROFITABILITY. Our ability to become profitable
in the future depends on the success of our i2u products and services in
generating revenues. This success will depend upon, among other things, the
willingness of subscribers of our broadband customers to pay the installation
costs of Internet service and monthly Internet access fees, both of which will
be set by our broadband customers. Furthermore, since we expect a significant
portion of our future revenues to be based on advertising and e-commerce
transactions conducted through our i2u products, this success will also depend
upon the extent to which consumers and businesses use our i2u products and
conduct e-commerce transactions and advertising utilizing our products. Our
pricing model assumes that our broadband customers will share with us a
percentage of their revenues generated by installation and Internet access fees
(if we provide the access capability) and a percentage of their revenues
generated by advertising and e-commerce conducted through our i2u products.
Because of the new and evolving nature of the Internet, we cannot predict
whether our pricing 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 ability to
generate future sales will be dependent on a number of factors, many of which
are beyond our control, including, among others, the success of broadband
operators in marketing Internet services to subscribers in their local areas,
the extent that users utilize our i2u products and conduct online e-commerce
transactions and the prices that the broadband operators set for Internet
services. Because of the foregoing factors, among others, we are unable to
forecast our revenues with any degree of accuracy. We may never become or remain
profitable.
CABLE SYSTEM OPERATORS AFFILIATION WITH NATIONAL PROVIDERS. @Home
Corporation and RoadRunner (the "National Providers") offer high-speed Internet
access and related services to cable system operators. The National Providers
historically have focused their activities on larger markets because they
generally require cable system systems with two-way high speed data transmission
to fully implement their high-speed Internet access programs. Approximately 70%
of all cable system operators are currently affiliated with one of the National
Providers and this percentage could increase as a result of consolidations
within the cable industry. The terms of the agreements between the National
Providers and their affiliated cable operators prevent affiliated cable
operators from working with any person other than the National Providers to
provide high-speed Internet access. Although we have designed our i2u products
and services to be complementary to that of the National Providers, we have no
assurance from the National Providers that they will permit their affiliated
cable companies from working with us to provide high-speed Internet access in
markets in which the National Providers are not currently providing high speed
Internet access. If the National Providers prohibit us from providing high-speed
Internet access to these affiliated cable system providers, we would be able to
provide the high-speed Internet access portion of our i2u product and service
offering to only those broadband operators who are not affiliated with the
National Providers. This would significantly reduce the size of the domestic
market for our Internet access products and services. We do not believe that the
affiliation agreements between the affiliated cable system operators and the
National Providers limit our ability to partner with the affiliated cable system
operators to provide the local content portion of our i2u Community product and
services.
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, and because both DCI and we have only limited
market experience for our respective products and services, we cannot predict
the rate at which the market for our products and services or for DCI's products
and services will grow or at which new or increased competition will result in
market saturation. If the Internet markets or the markets for our products and
services or DCI's products and services fail to grow, grow more slowly than we
anticipate or become saturated with competitors, our business, including the
businesses of DCI if the DCI Merger is completed, operating results and
financial condition will be materially adversely affected.
DEPENDENCE ON BROADBAND OPERATORS. Certain of our services are
dependent on the quality of the cable system infrastructure. Cable system
operators have announced and have begun to implement major infrastructure
upgrades in order to increase the capacity of their networks and to deploy two-
way capability. These upgrades have placed a significant strain on the
financial, managerial, operating and other resources of cable system operators,
most of which are already significantly leveraged. Further, cable system
operators must periodically renew their franchises with city, county, or state
governments and, as a condition of obtaining such renewal, may have to meet
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certain conditions imposed by the issuing jurisdiction. These conditions may
have the effect of causing the cable system operator to delay such upgrades.
Although we provide Internet access services to cable system operators
irrespective of their two-way capabilities, to the extent we provide Internet
access services over cable systems to the home with a telephone line return path
for data from the home, our services may not provide the high speed, quality of
experience, and availability of certain applications, such as video
conferencing, necessary to attract and retain subscribers to our Internet
services. In addition, cable system operators are primarily concerned with
increasing television programming capacity to compete with other modes of
multichannel entertainment delivery systems such as DBS and may, therefore,
choose to roll-out set-top boxes that are incompatible with and do not support
high-speed Internet access services, rather than to upgrade their network
infrastructures as described above. The failure of cable system operators to
complete these upgrades in a timely and satisfactory manner, or at all, would
adversely affect the market for our products and services.
We expect our contracts with cable system operators for our i2u
Community products and services to have terms of up to five years. There can be
no assurance that we will be able to renew any such contracts. Moreover, even if
cable system operators renew these contracts, there can be no assurance that
such renewals will be on terms satisfactory to the Company.
Because users of our i2u Community products and services generally are
expected to subscribe through a broadband operator, the broadband operator (and
not us) will substantially control the customer relationship with the users.
Therefore, in addition to our business being subject to general economic and
market conditions and factors relating to ISPs and online services specifically,
the success and future growth of our business may also be subject to economic
and other factors affecting broadband operators.
PRODUCT DEVELOPMENT; TECHNOLOGICAL CHANGE. Our future success will
depend upon our ability to develop new products and services that meet changing
customer requirements. The markets for our, and DCI's, products and services are
characterized by rapidly changing technology, evolving industry standards,
emerging competition and frequent new product and service introductions. We may
not be able to successfully identify new product and service opportunities or
develop and bring new products and services to market in a timely manner. 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 will
materialize. Furthermore, products and services or technologies developed by
others may render ours, and DCI's, products, services, and technologies
noncompetitive or obsolete.
GENERAL RISKS OF BUSINESS. We have formulated our business plans and
strategies based on the rapidly increasing size of the Internet markets, our
anticipated participation in those markets, and the estimated sales cycle, price
and acceptance of our products and services. Although these assumptions are
based on our best estimates, there is no assurance that our assumptions will
prove to be correct. We have not commissioned or obtained any independent
marketing studies, either with respect to our current business, or the business,
products and technologies of DCI, nor are any such studies planned. Any future
success that we might enjoy will depend upon many factors including some beyond
our control or that we cannot predict at this time.
SIGNIFICANT CONCENTRATION OF CUSTOMERS. Our customer base is highly
concentrated among a limited number of customers, seven as of November 30, 1998,
primarily due to the fact that the cable television and telecommunications
industries in the United States are dominated by a limited number of large
companies and to the relatively short time that we have been offering our
current products and services. Except for geographically contiguous systems, our
customers do not experience significant economies of scale by purchasing
additional systems from us. 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, any of our major customers could have a
material adverse effect on our business, operating results, cashflows and
financial condition.
INTENSE COMPETITION. The market for Internet products and services is
highly competitive, and we expect this competition to intensify in the future.
Many nationally known companies and regional and local companies across the
country are involved in Internet applications and the number of competitors is
growing. We also compete with broadband companies who are developing their own
Internet access and content and with the internal departments of prospective
customers who are retaining Internet-related activities in-house. Even if a
prospective customer chooses to outsource its Internet-related activities, that
customer may choose to outsource these activities to a company other than us.
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DCI's and our current and prospective competitors include many
companies whose financial, technical, marketing and other resources are
substantially greater than ours. Increased competition could result in
significant price competition, which in turn could result in significant
reductions in the average selling price of our products and services. In
addition, increased competition could cause us to increase our spending on
marketing, sales and product development. There is no assurance that we will 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 enhanced
services, cost reductions or otherwise. Therefore, any of these events could
have a materially adverse effect on our financial condition and operating
results. There is no assurance that we will have the financial resources,
technical expertise or marketing, sales and support capabilities to compete
successfully.
LIMITED AVAILABILITY OF PROPRIETARY PROTECTION. We do not believe that
our current products or services, or the products or services of DCI, are
patentable. We rely on a combination of copyright, trade secret and trademark
laws, and nondisclosure and other contractual provisions to protect our
proprietary 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. There is no assurance
that the steps we take to protect our proprietary rights will be adequate to
prevent the imitation or unauthorized use of our proprietary rights. 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.
LENGTH OF SALES CYCLE. The decision to enter the Internet services
provisioning business is often an enterprise-wide decision by prospective
customers and may require us to engage in lengthy sales cycles. 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 Internet technologies and products. While our
sales cycle varies from customer to customer, it typically has ranged from one
to six months for i2u projects. Our sales cycle may also be subject to a
prospective customer's budgetary constraints and internal acceptance reviews,
over which we have little or no control. A significant portion of our revenues
are expected to come from Internet access fees paid by subscribers of our
broadband operator customers, advertising revenues and in connection with
e-commerce transactions conducted using our products. We expect that it may take
broadband operators several months or more to market and sell high-speed
Internet access to their subscribers, to establish a significant enough user
base to attract advertisers and for users to conduct significant e-commerce
transactions. For these reasons, we do not expect to realize significant
revenues, if at all, from these activities until a significant time after we
have licensed our i2u products and services.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. As a result of our limited
operating history and the recent increased focus on our i2u 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 in order 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.
DEPENDENCE ON KEY PERSONNEL; ABSENCE OF EMPLOYMENT AND NONCOMPETITION
AGREEMENTS. We are highly dependent on the technical and management skills of
our key employees, including in particular R. Steven Adams, our founder,
President and Chief Executive Officer. The loss of Mr. Adams' services could
have a material adverse effect on our business and operating results. We have
not entered into employment agreements with Mr. Adams, or any of our other
officers or employees. We do not maintain key person insurance for Mr. Adams or
any other member of management. 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
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customers for the purpose of selling competing products or services. Thus, if
any of these officers or key employees left OSS, 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.
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. In addition, the success of the DCI Merger is highly
dependent on the technical and management skills of Andre Durand, the founder,
President and Chief Executive Officer of DCI. The loss of Mr. Durand's services
could have a material adverse affect on the value of the DCI Merger. The DCI
Merger is contingent on Mr. Durand entering into a three-year non-compete
agreement with OSS.
MANAGEMENT OF EXPECTED GROWTH. We expect to experience significant
growth in the number of our employees, the scope of our operating and financial
systems, and the geographic area of our operations, including the expansion of
our international operations. In addition, as we expand our i2u products and
services, we will need to hire additional employees who will be located at many
widely separated offices, including international offices. Our ability to
successfully manage any such growth will require us to continue to implement and
improve our operational, financial and management information systems. In
addition, this growth will result in new and increased responsibilities for
existing management personnel and will require us to hire and train new
management personnel. There can be no assurance that our management or other
resources will be sufficient to manage any future growth in our business or that
we will be able to implement in whole or in part our growth strategy and any
failure to do so could have a material adverse effect on our operating results
and financial condition.
SECURITY RISKS. Our software and equipment may be vulnerable to
computer viruses or similar disruptive problems caused by our customers or other
Internet users. Computer viruses or problems caused by third parties could lead
to interruptions, delays or cessation in service to our customers. In addition,
while our i2u software integrates software designed to provide a secure
environment for e-commerce, these safeguards may prove to be inadequate. We have
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
we attempt to limit our 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. The success of our business depends in
large part upon a robust industry and infrastructure for providing Internet
access and carrying Internet traffic and upon the widespread acceptance and use
of electronic commerce over the Internet. 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 the
extent to which the Internet will prove to be a significant commercial
marketplace. If the Internet does not become a significant commercial
marketplace, our business, operating results and financial condition could be
materially impaired.
RISKS ASSOCIATED WITH INTERNATIONAL SALES. We have and are currently
pursuing marketing opportunities in international markets. International sales
are subject to a variety of risks, including difficulties in establishing and
managing international distribution channels, obtaining export licensing,
servicing and supporting overseas products and in translating the products'
graphical user interfaces into foreign languages. International operations are
subject to difficulties in collecting accounts receivable, staffing and managing
personnel and enforcing intellectual property rights. Other factors that can
also adversely affect international operations include fluctuations in the value
of foreign currencies and currency exchange rates, changes in import/export
duties and quotas, introduction of tariff or non-tariff barriers and regulatory,
economic or political changes in international markets.
GOVERNMENT REGULATION. We are not currently subject to direct
regulation by any government agency, other than regulations applicable to
businesses generally, and there are currently few laws or regulations directly
applicable to access to or commerce on the Internet. However, due to the
increasing popularity and use of the Internet, a number of legislative and
regulatory proposals are under consideration by federal, state, local and
foreign governmental organizations, and it is possible that a number of laws or
regulations may be adopted with respect to the Internet relating to such issues
as user privacy, user screening to prevent inappropriate uses of the Internet
by, for example, minors or convicted criminals, taxation, infringement, pricing,
content regulation, quality of products
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and services and intellectual property ownership and infringement. The adoption
of any such 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 any new
legislation or regulation, or application or interpretation of existing laws to
the Internet.
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 believe that our internal software and hardware systems will
function properly with respect to dates in the year 2000 and thereafter and we
have completed our internal IT and non-IT assessment. We expect to incur no
significant costs in the future for Year 2000 problems. Nonetheless, there is 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. We expect to have completed this
review by the second quarter of fiscal 1999. In the event any of our suppliers
or vendors prove not to be Year 2000 compliant, we believe that we could find a
replacement vendor or supplier which is Year 2000 compliant without significant
delay or expense. However, if substantially all of our suppliers and vendors
prove not to be Year 2000 compliant and if we experience difficulties in finding
replacement vendors, then, as a result, our business could be materially
adversely affected. 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. Such failures could
materially and adversely affect our results of operations, liquidity and
financial condition. 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 whether the consequences of Year 2000 failures will have
a material impact on our results of operations, liquidity or financial
condition.
LIMITATION OF DIRECTORS' LIABILITY. 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 reduce the
likelihood of derivative litigation against directors and may discourage
shareholders from bringing a lawsuit against directors for a breach of their
duty.
RISKS RELATED TO THE OFFERING
PENDING ACQUISITION OF DCI; POSSIBLE DILUTION TO OSS SHAREHOLDERS
CAUSED BY THE ACQUISITION. On March 19, 1998, we executed an Agreement and Plan
of Merger pursuant to which we agreed to acquire DCI. We have filed a Proxy
Statement/Prospectus with the Securities and Exchange Commission relating to
this acquisition, and we expect that the acquisition will be completed in the
first quarter of fiscal 1999. The acquisition is subject to, among other things,
approval by our shareholders and the shareholders of DCI. In the event that the
DCI acquisition is not completed as proposed, DCI has agreed to license its
CommunityWare product to us on at least as favorable terms as it licenses such
product to others. As of the date of this prospectus, we have loaned DCI
approximately $1,388,000 to maintain its operations pending completion of the
acquisition and have paid DCI, by reducing the balance of the note receivable,
approximately $540,000 for services rendered in connection with the integration
of CommunityWare with our i2u products and services. If the DCI acquisition is
not completed, DCI would not have the ability to repay our advances without
obtaining significant additional working capital through the sale of its
securities. There is no assurance that DCI would be able to raise working
capital in the amounts required.
If the DCI acquisition is consummated, it will result in an increase in
our outstanding shares of common stock by 955,649 (approximately 23%). On a
pro forma basis, we estimate that the issuance of such shares would have
resulted in an increase to our net book value per share as of September 30, 1998
from $0.76 (actual) to $2.83 (pro forma) and $3.36 (pro forma adjusted to
reflect the subsequent conversions of 10% Preferred Stock and 5% Preferred Stock
and the subsequent issuances of Series A Preferred Stock and Series C Preferred
Stock). In addition to issuing the shares of common stock, we will reserve
approximately 240,000 shares of our common stock for issuance upon exercise of
outstanding options and warrants
8
<PAGE>
of OSS that will be issued in connection with the acquisition, and we will
reserve approximately 40,000 shares of our common stock for issuance upon
conversion of convertible securities of DCI that will be assumed by OSS in
connection with the DCI Merger. There is no assurance that our results of
operations will improve enough, if at all, as a result of the DCI acquisition,
to offset possible future dilution which could occur to our shareholders as a
result of the DCI acquisition if our operations achieve profitability.
POSSIBLE VOLATILITY OF STOCK PRICES; PENNY STOCK RULES. The over-the-
counter markets for securities such as our 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 our industry and the investment markets generally, as well as
economic conditions and quarterly variations in our results of operations, may
adversely affect the market price of our shares. Although our shares are listed
on The Nasdaq SmallCap Market ("Nasdaq"), there can be no assurance that they
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 the common stock became
subject to the penny stock rules, many brokers may be unwilling to engage in
transactions in the common stock because of the added regulation, thereby making
it more difficult for purchasers of our common stock to dispose of their shares.
RIGHTS TO ACQUIRE SHARES; POTENTIAL SUBSTANTIAL DILUTION. As of
November 30, 1998, we had issued the following warrants and options to acquire
shares of common stock:
- Options and warrants to purchase 1,651,614 shares of common
stock upon exercise of such options and warrants, exercisable
at prices ranging from $0.50 to $8.50 per share, with a
weighted average exercise price of approximately $5.65 per
share.
- Warrants issued in connection with our initial public offering
on May 23, 1996 (the "IPO Warrants") to purchase 634,150
shares upon exercise of the IPO Warrants at an exercise price
of $9.00 per share.
- Options issued to EBI Securities Corporation, the
representative of the underwriters involved in such initial
public offering (the "Representative's Option"), to purchase
106,700 shares upon exercise of the Representative's Option at
a purchase price of $8.10 per share.
- 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. These IPO Warrants
entitle the holder thereof to purchase up to 53,350 shares
upon exercise of such IPO Warrants at an exercise price of
$9.00 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 in connection with the issuance of the Series
A Preferred Stock to purchase 140,000 shares of common stock
upon exercise of such warrants, exercisable at $5.71 per
share.
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 A Preferred Stock, we will issue 955,649 shares of
our common stock upon the completion of the DCI Merger, we will reserve
approximately 240,000 shares for issuance upon exercise of options and warrants
to be issued in connection with the DCI acquisition, and we will reserve
approximately 40,000 shares of our common stock for issuance upon conversion of
convertible securities of DCI that will be assumed by OSS in connection with the
DCI Merger. We have also reserved an indeterminate number of shares of common
stock for issuance upon conversion of outstanding shares of our Series C
Preferred Stock issued on January 11, 1999. The 10% Preferred Stock is
convertible into shares of common stock at the lesser of $10 or 80% of the
market value (as defined) of the common stock at the time of the conversion of
such 10% Preferred Stock. The Series A Preferred Stock is convertible into
shares of common stock at the lesser of $5.71 or 80% of the market value (as
defined) of the common stock at the time of the conversion of such Series A
Preferred Stock. The Series C Preferred Stock is convertible, at any time after
February 1, 1999, into shares of common stock at a variable conversion price
equal to the lesser of the Maximum Conversion Price (as defined in the terms of
the Series C Preferred Stock), initially $20.65, or the market price for our
common stock at the time of conversion. The terms of the Series C Preferred
Stock define market price as the average of the five lowest closing bid prices
for our common stock during the 44 consecutive trading days immediately
preceding the conversion of the Series C Preferred Stock. Based on the market
value for the common stock as of November 30, 1998, the 10% Preferred Stock is
convertible into approximately 367,228 shares of common stock and the Series A
Preferred Stock is convertible into approximately 339,137 shares of common
stock. Based on the market value for the common stock as of January 11, 1999, on
February 1, 1999 the Series C Preferred Stock would be convertible into
approximately 287,425 shares of common stock. The number of shares of common
stock issuable upon conversion of the 10% Preferred Stock, the Series A
Preferred Stock and the Series C Preferred Stock could increase significantly
9
<PAGE>
in the event that the market value for the common stock decreases in the future.
During the terms of the outstanding options, warrants and convertible
securities, the holders thereof will have the opportunity to profit from an
increase in the market price of the 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.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of common
stock in the public market, or even the potential for such sales, could have an
adverse effect on the market price for shares of our common stock, and could
impair the ability of purchasers of our common stock recoup their investment or
make a profit. Furthermore, such sales could affect our ability to raise capital
through the sale of equity securities. As of November 30, 1998 approximately
1,130,000 of our currently outstanding shares of common stock are
"restricted shares." Restricted shares and shares of the common stock owned by
our affiliates (officers, directors and holders of 10% of our outstanding common
stock) 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. While the shares of the
common stock to be issued to the shareholders of DCI in connection with the
acquisition of DCI will be subject to certain contractual limitations on the
transfer of such shares prior to September 30, 1999, such shares or a portion
thereof could be sold prior to September 30, 1999.
ABILITY TO ISSUE COMMON STOCK AND PREFERRED STOCK; ANTI-TAKEOVER
DEVICES. 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. As of January 11, 1999, our Board of Directors has
authorized the issuance of up to (i) 500,000 shares of 10% Preferred Stock (the
"10% Preferred Stock"), of which 245,000 shares were outstanding, (ii) 3,000
shares of 5% Preferred Stock, of which no shares were outstanding, (iii) 1,400
shares of Series A Preferred Stock, of which 1,400 shares were outstanding, and
(iv) 5,000 shares of Series C Preferred Stock, of which 3,000 shares were
outstanding. Although our Board of Directors has no present plans to issue any
other shares of preferred stock, if the Board of Directors authorizes the
issuance of preferred stock in the future, such 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 OSS, even
if a majority of the holders of common stock approved of such acquisition.
AFFECT OF ISSUANCE OF 10%, 5%, SERIES A AND SERIES C PREFERRED STOCK ON
NET LOSS. Based on current accounting standards, we estimate that we will be
required to record a non-operating expense of approximately $4,100,000 for the
fiscal year ending December 31, 1998 as a result of the issuance of the 10%, 5%
and Series A Preferred Stock. While these charges will not affect our operating
loss or working capital during such period, they are expected to result in an
increase of approximately $4,100,000 in the Company's net loss available to our
holders of common stock for the fiscal year ending December 31, 1998. In
addition, we estimate that we will be required to record a non-operating expense
of approximately $1,500,000 for the quarter ending March 31, 1999 as a result of
the issuance of the Series C Preferred Stock. While these charges will not
affect our operating loss or working capital during such period, they are
expected to result in an increase of approximately $1,500,000 in the Company's
net loss available to our holders of common stock for the quarter ending March
31, 1999.
NO DIVIDENDS. 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 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. Except as otherwise required
by law, we are required to pay a quarterly cumulative noncompounded dividend on
the 10% Preferred Stock of 10% per annum based on the stated value of $10.00 per
share of 10% Preferred Stock, we are required to pay all accrued but undeclared
dividends on the Series A Preferred Stock on the earlier of (1) the redemption
or conversion of the Series A Preferred Stock, or (2) the liquidation of the
Company, and we are required to pay all accrued but undeclared dividends on the
Series C Preferred Stock on the earlier of (1) the redemption or conversion of
the Series C Preferred Stock or (2) the liquidation of the Company.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made in this prospectus and the documents
incorporated by reference in this prospectus under the captions "The Company",
"Risk Factors," "Recent Developments" and elsewhere in this prospectus
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995
10
<PAGE>
(the "Reform Act"). These statements are subject to the safe harbor provisions
of the Reform Act. Forward-looking statements may be identified by the use of
the terminology such as "may," "will," "expect," "anticipate," "intend,"
"believe," "estimate," "should," or "continue" or the negatives thereof or other
variations thereon or comparable terminology. To the extent that this prospectus
contains forward-looking statements regarding the financial condition, operating
results, business prospects or any other aspect of OSS or DCI, you should be
aware that OSS's and DCI's actual financial condition, operating results and
business performance may differ materially from that projected or estimated by
OSS or DCI in the forward- looking statements. OSS and DCI have attempted to
identify, in context, certain of the factors that they currently believe may
cause actual future experience and results to differ from their current
expectations. These differences may be caused by a variety of factors, including
but not limited to adverse economic conditions, intense competition, including
entry of new competitors, ability to obtain sufficient financing to support OSS'
and DCI's operations, progress in research and development activities,
variations in costs that are beyond OSS' and DCI's control, changes in capital
expenditure budgets for cable companies, 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 OSS' and DCI'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.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares offered by
this prospectus, however, certain shares offered by this prospectus are issuable
only upon the exercise of issued and outstanding transferable warrants of OSS.
If these warrants are exercised in full and the exercise price is paid in cash
rather than by a surrender of a portion of the warrants being exercised (a
cashless exercise), we will receive proceeds of $3,234,9000. We will use such
proceeds, if any, for general working capital purposes.
RECENT DEVELOPMENTS
DCI ACQUISITION
On March 19, 1998 we executed an Agreement and Plan of Merger (the "DCI
Merger Agreement") pursuant to which we agreed to acquire Durand Communications,
Inc., a California corporation ("DCI"), via a merger of our wholly owned
subsidiary, Durand Acquisition Corporation, with DCI (the "DCI Merger"). As
consideration for the DCI Merger, we will issue 955,649 shares of our common
stock in exchange for 100% of the outstanding shares of common stock, no par
value, of DCI. In connection with the DCI Merger, we will also issue options and
warrants for approximately 240,000 shares of our common stock at exercise prices
ranging from $4.31 to $20.33 in replacement of similar securities of DCI. We
expect DCI to have liabilities of approximately $1,200,000 (including
approximatley $381,000 of convertible securities which will be converted into
similar convertible securities of OSS) at the time of the DCI Merger, which
will become the liabilities of the consolidated entities upon consummation
of the DCI Merger. We will reserve approximately 40,000 shares of our common
stock to be issued upon the conversion of these convertible securities. Under
the rules of The Nasdaq SmallCap Market ("Nasdaq") our issuance of our common
stock as consideration for the DCI Merger requires the approval of our
shareholders. Approval by our shareholders is a condition precedent to our
obligation to consummate the DCI Merger. If our issuance of shares of common
stock is not approved by our shareholders, it is unlikely that we will
consummate the DCI Merger. We anticipate that the meeting at which our
shareholders will consider the issuance of such common stock will occur in
the first quarter of fiscal 1999.
We anticipate 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 OSS, 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, we believe that the DCI
Merger will so qualify. However, we have not requested a ruling 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.
A significant element of OSS' strategy to achieve its growth objective
is to seek acquisitions that add immediate revenue, provide product or
technology enhancements in one or more of our targeted markets or provide an
existing customer base to increase advertising or e-commerce opportunities. Our
acquisition of DCI will provide us with DCI's technology, including both
completed technology and technology in development and product development
expertise.
11
<PAGE>
Our product development strategy is based upon our belief that the Web
is evolving from an information access and delivery tool to a system that
supports communication and community interactivity. We believe that DCI's
CommunityWare technology, which enables users to organize themselves on the
Internet in a matter of minutes, and to thereafter manage and expand their own
public and private online community to facilitate and promote communications,
information sharing and commerce among the users that comprise the various
constituent communities, is particularly well suited for providing the
communications component for OSS' i2u software. Since the execution of the DCI
Merger Agreement, representatives of DCI and OSS have worked together to
incorporate the CommunityWare technology into our i2u software. We recently
introduced a version of the i2u product which incorporates elements of the
CommunityWare technology. Following the DCI Merger, we intend to integrate DCI's
product development efforts with our own. In addition, we expect to fully
integrate DCI's products with our i2u products and to market them as part of our
product offerings and not on a stand-alone basis.
We believe that the primary value of DCI to OSS is (i) DCI's
proprietary technology, particularly DCI's CommunityWare technology, (ii) DCI's
software development capabilities which our management believes is important to
our ability to continue to develop state-of-the-art proprietary software
products required to maintain long-term relationships with our customers, and
(iii) the ability the DCI acquisition will give us to greatly reduce the time it
will take us to introduce new proprietary software products. Our management
believes DCI's technology can be quickly integrated with our i2u products to
expand the breadth and functionality of our product offerings. Andre Durand,
Chief Executive Officer of DCI, has been elected Senior Vice President-Product
Development of OSS and will be responsible for our product development efforts.
A condition to the DCI Merger is that Mr. Durand enter into a three-year
noncompete agreement with OSS. We intend to continue to employ most of DCI's
product development personnel following the DCI Merger.
We also believe that DCI's Electronic University Network ("EUN")
business, which offers accredited online courses for colleges, universities and
corporations, represents a valuable business opportunity. We expect to continue
to develop this business both as a separate product offering and as an adjunct
to our product offerings for broadband operators.
We 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 and to
increase the value of OSS' product offerings. In connection with the
negotiations with DCI, we also considered the fact that DCI had sold shares of
its common stock at prices, based on the conversion ratio of DCI common stock
into OSS common stock in connection with the DCI Merger, from $8.11 to $18.94
per share since December 31, 1996. Based on these factors, the OSS Board of
Directors determined that the proposed purchase price for DCI was reasonable and
fair to OSS and its shareholders.
The acquisition of DCI will increase the outstanding number of shares
of our common stock by 955,649 shares (approximately 23%) (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
our liabilities, on a consolidated basis, by approximately $1,200,000 and is
expected to increase our operating net loss by approximately $130,000 per month
for at least the next six months. The acquisition of DCI will also increase our
working capital requirements. On January 11, 1999, we issued 3,000 shares of our
Series C Preferred Stock for an aggregate purchase price of $3,000,000, and we
received a commitment to purchase an additional 2,000 shares of Series C
Preferred Stock for an aggregate purchase price of $2,000,000 on or before June
30, 1999. We estimate that we will need to raise at least an additional $5
million through equity, debt or other external financing to fund proposed
operations for fiscal 1999 and to pay DCI indebtedness which would be assumed as
part of the DCI Merger. Our estimate of our working capital needs may change due
to factors some of which are outside of our control. There is no assurance that
we will be able to raise additional funds in amounts required or upon acceptable
terms.
The DCI Merger Agreement contemplates that we will acquire 100% of the
outstanding common stock of DCI. Based on the average closing price of our
common stock for the two days before and the two days after March 19, 1998, the
day that the transaction was announced, the total purchase price is estimated to
be approximately $13,100,000, consisting of (i) 955,649 shares of our common
stock to be issued to the stockholders of DCI, (ii) approximately 240,000 shares
of our common stock to be reserved for issuance upon the exercise of options and
warrants of DCI to be exchanged for similar securities of OSS; and (iii)
approximately $400,000 of expenses to be incurred. In addition, DCI will have
approximately $1,200,000 of liabilities (including approximately $381,000 of
convertible securities which will be converted into similar convertible
securities of OSS) at the time of the DCI Merger, which will become the
liabilities of the consolidated entities upon consummation of the DCI Merger. We
will reserve approximately 40,000 shares of our common stock to be issued upon
the conversion of these convertible securities.
12
<PAGE>
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. A significant portion of such amount and liabilities assumed on a
consolidated basis has been identified as intangible assets, including
approximately $500,000 of research and development in process. The portion
of the purchase price and liabilities assumed on a consolidated basis which is
allocated to in-process research and development will be recognized as expense
in the period the DCI Merger is consummated (currently expected to be the first
quarter of fiscal 1999).
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). For the nine months ended September 30,
1998, revenues for DCI were $545,353, including $290,251 of services provided to
OSS. In addition, DCI's accumulated deficit at September 30, 1998 was
$(8,061,004) and DCI's shareholders' deficit at September 30, 1998 was
$(1,219,356). We estimate that, on a pro forma basis, the acquisition of DCI
would have resulted in a decrease to the net book value of our shares of common
stock as of September 30, 1998 from $0.76 (actual) to $2.83 (pro forma) and
$3.36 (pro forma adjusted to reflect the subsequent conversions of 10% Preferred
Stock and 5% Preferred Stock and the subsequent issuances of Series A Preferred
Stock and Series C Preferred Stock).
The final determination of the value of consideration issued by OSS and
the liabilities assumed will be made at the effective time of the DCI Merger.
Accordingly, the determination of the total purchase price, liabilities assumed
and the allocations may change significantly from the amounts stated in this
prospectus.
SELLING SHAREHOLDERS
The following table sets forth, as of November 30, 1998, the name of
each of the Selling Shareholders, certain beneficial ownership information with
respect to each of the Selling Shareholders, and the number and percentage of
securities offered by this prospectus that may be sold from time to time by the
Selling Shareholders pursuant to this prospectus. Unless otherwise indicated,
the number of shares of common stock set forth in the following table that is
being offered by the Selling Shareholders who will receive their shares of
common stock upon the conversion of the 10% Preferred Stock or the conversion of
the Series A Preferred Stock represents an estimate of the number of shares of
common stock that such Selling Shareholder will offer. The actual number of
shares of our common stock that we may issue to such Selling Shareholders upon
conversion of the 10% Preferred Stock or the Series A Preferred Stock is
indeterminate, is subject to adjustment, and could be materially less or more
than such estimated number depending on factors that we cannot predict at this
time, including, among other factors, the future market price of our common
stock. The actual number of shares of common stock offered by this prospectus,
and included in the Registration Statement of which this prospectus is a part,
includes such additional number of shares of common stock that we may be
required to issue upon conversion of the 10% Preferred Stock or the Series A
Preferred Stock by reason of the floating rate conversion price mechanism or the
other adjustment mechanisms described in this prospectus, or by reason of any
stock split, stock dividend or similar transaction involving our common stock,
in order to prevent dilution, in accordance with Rule 416 under the Securities
Act of 1933, as amended. There is no assurance that the Selling Shareholders
will sell the shares offered by this prospectus.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Percentage of
Shares of Common Shares of Common Common Stock
Stock Owned Stock Owned Owned Beneficially
Name of Selling Beneficially Before Shares of Common Beneficially After Before Offering/After
Shareholder Offering Stock Offered Hereby Offering Offering (1)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William R. Cullen 34,000 (2) 24,000 10,000 * *
Arrow Investors LLC 50,000 (3) (4) 50,000 0 (4) 1.2% *
West End Capital LLC 50,000 (5) (6) 50,000 0 (6) 1.2% *
Archer Investors LLC 418,283 (7) (8) 418,283 0 (8) 9.9% *
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Susan M. Duncan 19,485 (9)(10) 16,985 2,500 (10) * *
Susan M. Duncan Irrevocable 38,171 (11)(12) 33,971 5,000 (12) * *
Gift Trust
William D. Brennick, DDS PC 46,485 (9) 16,985 29,500 1.1% *
Profit Sharing Plan
Lee E. Schlessman 160,386 (13)(14) 135,886 24,500 (14) 3.7% *
Lee E. Schlessman, as power of 19,485 (9)(15) 16,985 2,500 (15) * *
attorney for Sandra Garnett
(24)
Lee E. Schlessman, as power of 19,485 (9)(16) 16,985 2,500 (16) * *
attorney for Cheryl Bennett
Lee E. Schlessman, as power of 19,485 (9)(17) 16,985 2,500 (17) * *
attorney for Gary Schlessman
The Schlessman Family 19,485 (9)(18) 16,985 2,500 (18) * *
Foundation
Southwest Contracting, Inc. 19,485 (9) 16,985 2,500 * *
Cal J. and Amanda Rae Rickel 19,485 (9) 16,985 2,500 * *
Bushrod Burns Hanifen Imhoff, 81,585 (9)(19) 16,985 2,500 (19) * *
Inc. Custodian IRA
Stephen P. Clifford 60,947 (20) 25,797 35,150 1.4% *
Charles E. Wynot, DMD 45,821 (21) 31,321 14,500 1.1 *
Robert H. Stange 9,742 (22) 8,492 1,250 * *
Larry B. and Deanna D. Fulton 11,992 (22) 8,492 3,500 * *
C. Wayne and Sheila Clayton 19,485 (9) 16,985 2,500 * *
Mercer
Brian W. and Rachel T. Brazell 9,742 (22) 8,492 1,250 * *
Carl M. Williams Revocable 196,385 (9) 16,985 179,350 4.6% 4.2%
Trust
Schield Management Cormpany 10,535 (23) 8,385 2,150 * *
I. Joseph Shyne Trust 6,247 (24) 5,622 625 * *
Arab Commerce Bank Ltd. 19,271 (25) 16,771 2,500 * *
Dwayne E. and Sarah H. Thomas 9,635 (23) 8,385 1,250 * *
</TABLE>
- ----------------------
* Less than 1% of shares outstanding.
(1) In calculating percentage ownership, all shares of common stock which the
Selling Shareholder has the right to acquire within 60 days from the date
of this Prospectus 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.
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<PAGE>
(2) Includes options for the purchase of 10,000 shares, but excludes options
for the purchase 120,000 shares that are not exercisable during the next 60
days.
(3) Represents 50,000 shares issuable upon the exercise of a warrant to
purchase shares at a per share exercise price of $16.33.
(4) Excludes shares of common stock beneficially owned by its affiliates, West
End Capital LLC, Archer Investors LLC and Arrow Investors II LLC.
(5) Represents 50,000 shares issuable upon the exercise of a warrant to
purchase shares at a per share exercise price of $16.33.
(6) Excludes shares of common stock beneficially owned by its affiliates, Arrow
Investors LLC, Archer Investors LLC and Arrow Investors II LLC.
(7) Represents shares issuable (after taking into account the terms of the
Series A Preferred Stock which provide that at no time shall Archer
Investors LLC, together with its affiliates, among whom are West End
Capital LLC, Arrow Investors LLC and Arrow Investors II LLC, convert the
Series A Preferred Stock to result in Archer Investors LLC, together with
its affiliates, beneficially owning, after such conversion, a number of
shares exceeding 9.9% of OSS' then outstanding common stock) upon the
conversion of the Series A Preferred Stock if such conversion occurred as
of the close of business on November 30, 1998 plus the 140,000 shares
issuable to Archer Investors LLC upon the exercise of a warrant to purchase
shares at a per share exercise price of $5.71. If the limitation on
beneficial ownership described above was not taken into account, the number
of shares issuable upon the conversion of the Series A Preferred Stock held
by Archer Investors LLC if such conversion occurred as of the close of
business on November 30, 1998 plus the 140,000 shares issuable upon the
exercise of the warrant would be 479,137 shares. Upon the actual conversion
of the Series A Preferred Stock, the number of shares into which the Series
A Preferred Stock is convertible may be more or less than 339,137 shares,
but in no event will be more than 630,000 shares or less than 245,183
shares. Pursuant to the terms of the Series A Preferred Stock, on November
30, 1998 the conversion price was approximately $4.14.
(8) Excludes shares of common stock beneficially owned by its affiliates, Arrow
Investors LLC, West End Capital LLC and Arrow Investors II LLC.
(9) Includes 14,985 shares issuable upon the conversion of shares of 10%
Preferred Stock, including accrued but unpaid dividends thereon, if such
conversion occurred as of the close of business on November 30, 1998 plus
2,000 shares issuable upon the exercise of a warrant to purchase shares at
a per share exercise price of $15.00 being offered by this prospectus. Upon
the actual conversion of the 10% Preferred Stock, the number of shares into
which the 10% Preferred Stock is convertible may be more or less than
14,985 shares, but in no event will be less than 10,000 shares. Pursuant to
the terms of the 10% Preferred Stock, on November 30, 1998 the conversion
price was approximately $7.16.
(10) Excludes shares of common stock beneficially owned by the Susan M. Duncan
Irrevocable Gift Trust.
(11) Includes 29,971 shares issuable upon the conversion of shares 10% Preferred
Stock, including accrued but unpaid dividends thereon, if such conversion
occurred as of the close of business on November 30, 1998 plus 4,000 shares
issuable upon the exercise of a warrant to purchase shares of common stock
at a per share exercise price of $15.00 being offered by this prospectus.
Upon the actual conversion of the 10% Preferred Stock, the number of shares
into which the 10% Preferred Stock is convertible may be more or less than
29,971 shares, but in no event will be less than 20,000 shares. Pursuant to
the terms of the 10% Preferred Stock, on November 30, 1998 the conversion
price was approximately $7.16.
(12) Excludes shares of common stock beneficially owned by Susan M. Duncan.
(13) Includes 119,886 shares issuable upon the conversion of shares of 10%
Preferred Stock, including accrued but unpaid dividends thereon, if such
conversion occurred as of the close of business on November 30, 1998 plus
16,000 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 $15.00 being offered by this prospectus. Upon the actual
conversion of the 10% Preferred Stock, the number of shares into which the
10% Preferred Stock is convertible may be more or less than 119,886 shares,
but in no event will be less than 80,000 shares. Pursuant to the terms of
the 10% Preferred Stock, on November 30, 1998 the conversion price was
approximately $7.16.
(14) Excludes shares of common stock beneficially owned by (1) Lee E. Schlessman
as power of attorney for Sandra Garnett, (2) Lee E. Schlessman as power of
attorney for Cheryl Bennett, (3) Lee E. Schlessman as power of attorney for
Gary Schlessman, or (4) The Schlessman Family Foundation.
(15) Excludes shares of common stock beneficially owned by (1) Lee E.
Schlessman, (2) Lee E. Schlessman as power of attorney for Cheryl Bennett,
(3) Lee E. Schlessman as power of attorney for Gary Schlessman, or (4) The
Schlessman Family Foundation.
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<PAGE>
(16) Excludes shares of common stock beneficially owned by (1) Lee E.
Schlessman, (2) Lee E. Schlessman as power of attorney for Sandra Garnett,
(3) Lee E. Schlessman as power of attorney for Gary Schlessman, or (4) The
Schlessman Family Foundation.
(17) Excludes shares of common stock beneficially owned by (1) Lee E.
Schlessman, (2) Lee E. Schlessman as power of attorney for Sandra Garnett,
(3) Lee E. Schlessman as power of attorney for Cheryl Bennett, or (4) The
Schlessman Family Foundation.
(18) Excludes shares of common stock beneficially owned by (1) Lee E.
Schlessman, (2) Lee E. Schlessman as power of attorney for Sandra Garnett,
(3) Lee E. Schlessman as power of attorney for Cheryl Bennett, or (4) Lee
E. Schlessman as power of attorney for Gary Schlessman.
(19) Includes shares of common stock beneficially owned by Bushrod Burns and by
BushDoll Family Ltd. Partnership.
(20) Includes 23,797 shares issued upon conversion of shares of 10% Preferred
Stock, including accrued but unpaid dividends thereon, on November 10, 1998
at a per share conversion price of $4.49 plus 2,000 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 $15.00
being offered by this prospectus.
(21) Includes 29,321 shares issued upon conversion of shares of 10% Preferred
Stock, including accrued but unpaid dividends thereon, on November 4, 1998
at a per share conversion price of $3.64 plus 2,000 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 $15.00
being offered by this prospectus.
(22) Includes 7,492 shares issuable upon the conversion of shares of 10%
Preferred Stock, including accrued but unpaid dividends thereon, if such
conversion occurred as of the close of business on November 30, 1998 plus
1,000 shares issuable to the Selling Shareholder upon the exercise of a
warrant to purchase shares of common stock at a per share exercise price of
$15.00 being offered by this prospectus. Upon the actual conversion of the
10% Preferred Stock, the number of shares of common stock into which the
10% Preferred Stock is convertible may be more or less than 7,492 shares,
but in no event will be less than 5,000 shares. Pursuant to the terms of
the 10% Preferred Stock, on November 30, 1998 the conversion price was
approximately $7.16.
(23) Includes 7,385 shares issuable upon the conversion of shares of 10%
Preferred Stock, including accrued but unpaid dividends thereon, if such
conversion occurred as of the close of business on November 30, 1998 plus
1,000 shares issuable to the Selling Shareholder upon the exercise of a
warrant to purchase shares of common stock at a per share exercise price of
$15.00 being offered by this prospectus. Upon the actual conversion of the
10% Preferred Stock, the number of shares of common stock into which the
10% Preferred Stock is convertible may be more or less than 7,385 shares,
but in no event will be less than 5,000 shares. Pursuant to the terms of
the 10% Preferred Stock, on November 30, 1998 the conversion price was
approximately $7.16.
(24) Includes 5,122 shares issued upon conversion of shares of 10% Preferred
Stock, including accrued but unpaid dividends thereon, on November 11, 1998
at a per share conversion price of $5.14 plus 500 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 $15.00
being offered by this prospectus.
(25) Includes 14,771 shares issuable upon the conversion of shares of 10%
Preferred Stock, including accrued but unpaid dividends thereon, if such
conversion occurred as of the close of business on November 30, 1998 plus
2,000 shares issuable to the Selling Shareholder upon the exercise of a
warrant to purchase shares of common stock at a per share exercise price of
$15.00 being offered by this prospectus. Upon the actual conversion of the
10% Preferred Stock, the number of shares of common stock into which the
10% Preferred Stock is convertible may be more or less than 14,771 shares,
but in no event will be less than 10,000 shares. Pursuant to the terms of
the 10% Preferred Stock, on November 30, 1998 the conversion price was
approximately $7.16.
PLAN OF DISTRIBUTION
We have been advised that the shares offered by this Prospectus may be
sold from time to time by the Selling Shareholders 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 shares may be sold by one or
more of the following:
- 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.
- Purchases by a broker or dealer as principal and resale by
such broker or dealer for its account pursuant to this
prospectus.
- Ordinary brokerage transactions and transactions in which the
broker solicits purchasers.
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<PAGE>
- In privately negotiated transactions not involving a broker or
dealer.
In effecting sales, brokers or dealers engaged to sell the shares may
arrange for other brokers or dealers to participate. Brokers or dealers engaged
to sell the shares 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. OSS will receive no proceeds from any
resales of the shares offered by this prospectus, and we anticipate that the
brokers or dealers, if any, participating in the sales of such shares 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
Our Articles of Incorporation authorize our Board of Directors to issue
25,000,000 shares of capital stock, including 20,000,000 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 Board of
Directors.
COMMON STOCK
As of November 30, 1998, 4,225,088 shares of our 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
our shareholders. 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 Colorado law, our Articles of Incorporation, or our Bylaws require a
greater vote and except when Colorado law requires a vote of any preferred stock
issued and outstanding, voting as a separate class, to approve a question
brought before such meeting. If we liquidate or dissolve, the holders of each
outstanding share of common stock will be entitled to share equally in our
assets legally available for distribution to such shareholder 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. Holders of common stock do not
have 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 by this prospectus 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.
10% PREFERRED STOCK
As of November 30, 1998, 245,000 shares of our 10% Preferred Stock were
outstanding. The following is a summary of the rights, privileges and
preferences of the 10% Preferred Stock. This summary is qualified in its
entirety by reference to the terms of the 10% Preferred Stock incorporated by
reference as an exhibit to the registration statement of which this prospectus
is a part.
VOTING. Each share of 10% Preferred Stock entitles the holder to one
vote per share. The holders of the common stock and the 10% Preferred Stock vote
as a single class on all matters on which our shareholders vote, except where
otherwise required by law. The holders of the 10% Preferred Stock do not have
cumulative voting for the election of directors.
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DIVIDENDS. The cumulative noncompounded dividend on the 10% Preferred
Stock is 10% per annum based on the stated value of $10.00 per share, payable
quarterly as permitted by law, or upon the redemption or conversion of the 10%
Preferred Stock into common stock. We may not declare or pay any dividends on
the common stock unless we first declare and pay all unpaid dividends on the 10%
Preferred Stock.
REDEMPTION AND CONVERSION. We may redeem the 10% Preferred Stock at any
time for $10.00 per share. Each share of the outstanding 10% Preferred Stock is
convertible, at the election of the holder thereof, into the number of shares of
our common stock 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 our common stock for the five
trading days immediately preceding the election by the holder thereof (as
calculated, the "Average Per Share Closing Bid Price"). If we elect to redeem
the 10% Preferred Stock, then we must give not more than 60 days and not less
than 30 days notice to the holders of the 10% Preferred Stock of our intent to
redeem the 10% Preferred Stock. This notice must provide the holders of the 10%
Preferred Stock the option to have their 10% Preferred Stock either (1) redeemed
by us or (2) converted into shares of our common stock pursuant to the formula
set forth in (i) and (ii) above except that for the purposes of calculating the
conversion rate the Average Per Share Closing Bid Price shall be defined as the
average per share closing bid price of our common stock for the five trading
days immediately preceding that date on which we first give such notice to the
holders of the 10% Preferred Stock. At any time while any shares of the 10%
Preferred Stock are outstanding, we may not incur any obligations (other than
trade payables and other short-term indebtedness issued in the ordinary course
of business) that are senior to the 10% Preferred Stock in any respect,
including liquidation. Upon any redemption or conversion of the 10% Preferred
Stock, we will have the option to pay the accrued but unpaid cumulative
dividends 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 we first give notice of such redemption 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 our common
stock for the five trading days immediately preceding the election to convert by
the holder of the 10% Preferred Stock.
PREEMPTIVE RIGHTS. The holders of the 10% Preferred Stock do not have
preemptive rights to subscribe for any additional shares of any class of our
capital stock or for any issue of bonds, notes or other securities convertible
into any class of our capital stock.
LIQUIDATION PREFERENCE. If we liquidate, dissolve or wind-up our
business, whether voluntary or otherwise, after we pay our debts and other
liabilities, the holders of the 10% Preferred Stock will be entitled to receive
from our remaining net assets, before any distribution to the holders of our
common stock, the amount of $10.00 per share of 10% Preferred Stock in cash plus
payment of all accrued but unpaid cumulative dividends. Holders of the 10%
Preferred Stock will not be entitled to receive any other payments if we
liquidate, dissolve or wind-up our business.
SERIES A PREFERRED STOCK
As of November 30, 1998, 1,400 shares of our Series A Preferred Stock
were outstanding. The following is a summary of the rights, privileges and
preferences of the Series A Preferred Stock. This summary is qualified in its
entirety by reference to the terms of the Series A Preferred Stock incorporated
by reference as an exhibit to the Registration Statement of which the prospectus
is a part.
VOTING. Each share of Series A Preferred Stock entitles the holder to
cast the number of votes equal to the number of whole shares of common stock
into which the Series A 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. The holders of the Series A Preferred Stock do
not have cumulative voting for the election of directors.
DIVIDENDS. The cumulative noncompounded dividend on the Series A
Preferred Stock is 5% per annum based on the stated value of $1,000 per share,
payable as permitted by law, at our option, in cash or in common stock upon the
earlier of (1) the redemption or conversion of the Series A Preferred Stock or
(2) the liquidation of OSS. We may not declare and pay any dividends on the
common stock unless all we first declare and pay all unpaid dividends on the
Series A Preferred Stock. Dividends on the Series A Preferred Stock are equal in
preference to any dividends declared on the 10% Preferred Stock.
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REDEMPTION AND CONVERSION. We may redeem the Series A Preferred Stock,
in whole or in part, at any time on or prior to February 7, 1999 for a price per
share equal to $1,000 plus any accrued but unpaid dividends. The redemption
price per share will increase to $1,150 plus any accrued but unpaid dividends if
the registration statement to be filed with the Securities and Exchange
Commission to register the shares of common stock issuable upon the conversion
of the Series A Preferred Stock and the shares of common stock issuable upon the
exercise of certain warrants issued in connection with the issuance of the
Series A Preferred Stock has not been declared effective and remains effective
on the date that we give notice of redemption of the Series A Preferred Stock.
Each share of the outstanding Series A 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 lower of (1) $5.71 or (2) 80% of the average per share closing bid price of
the common stock for any five consecutive trading days during the twenty trading
days immediately preceding the date on which the holder thereof elects to
convert such Series A Preferred Stock (the "Conversion Price"). If we elect to
redeem the Series A Preferred Stock, we must give at least thirty days notice to
the holders of the Series A Preferred Stock of our intent to redeem the Series A
Preferred Stock. During this thirty day notice period, the holders, the holders
of the Series A Preferred Stock are entitled to convert their shares of Series A
Preferred Stock into common stock at the Conversion Price applicable on the day
such holder elects to convert such Series A Preferred Stock. After such thirty
day period, the holders of the Series A Preferred Stock may not thereafter
convert the Series A Preferred Stock into shares of common stock. Upon any
conversion of the Series A Preferred Stock we have the option to pay the accrued
but unpaid cumulative dividend on the Series A Preferred Stock either (1) in
cash or (2) 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.
PREEMPTIVE RIGHTS. The holders of the Series A Preferred Stock have no
preemptive rights to subscribe for any additional shares of any class of our
capital stock or for any issue of bonds, notes or other securities convertible
into any class of our capital stock.
LIQUIDATION PREFERENCE. If we liquidate, dissolve or wind-up our
business, whether voluntary or otherwise, after we pay our debts and other
liabilities, the holders of the Series A Preferred Stock will be entitled to
receive from our remaining net assets, before any distribution to the holders of
our common stock, the amount of $1,000 per share of Series A Preferred Stock in
cash plus payment of all accrued but unpaid dividends. The liquidation
preference on the Series A Preferred Stock is equal in preference to the
liquidation preference on the 10% Preferred Stock. Thereafter, holders of the
Series A Preferred Stock shall be entitled to share in any distributions made to
the holders of our common stock as if each share of Series A 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.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document we file with
the SEC at the SEC's public reference room located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's public reference rooms located at it's
regional offices in New York, New York and Chicago, Illinois. Please call the
SEC at 1-800-SEC-0300 (1-800-732-0300) for further information on the operation
of public reference rooms. You can also obtain copies of this material from the
SEC's Internet web site located at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be a part of this prospectus, and information that we file later
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings we
will make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 (file no. 0-28462):
(a) Our Annual Report on Form 10-KSB, as amended, for the year
ended December 31, 1997.
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(b) Our Quarterly Reports on Form 10-QSB for the quarters
ended March 31, 1998, June, 30, 1998 and September 30, 1998.
(c) The description of our common stock contained in our
Registration Statement on Form 8-A, as amended, filed with the SEC on
May 22, 1996.
(d) Our current report on Form 8-K dated January 11, 1999.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address and telephone number:
Shareholder Services
Attn: Kim Castillo
Online System Services, Inc.
1800 Glenarm Place
Suite 700
Denver, Colorado 80202
(303) 296-9200
This prospectus is part of a registration statement we filed with the
SEC. You should rely only on the information or representations provided in this
prospectus. We have authorized no one to provide you with different information.
The Selling Shareholders will not make an offer of these shares in any state
where the offer is not permitted. You should not assume that the information in
this prospectus is accurate as of any date other than the date on the front page
of this prospectus.
LEGAL MATTERS
Our legal counsel, Gray, Plant, Mooty, Mooty & Bennett, P.A.,
Minneapolis, Minnesota, will issue an opinion about the legality of the shares
registered by this prospectus.
EXPERTS
The financial statements incorporated by reference in this prospectus
and elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports. You should refer to
such report, which includes an explanatory paragraph that discusses substantial
doubt about our ability to continue as a going concern.
INDEMNIFICATION
Our Articles of Incorporation provide that we shall indemnify, to the
full extent permitted by Colorado law, any of our directors, officers, employees
or agents who are made, or threatened to be made, a party to a proceeding by
reason of the fact that such person is or was one of our directors, officers,
employees or agents against judgments, penalties, fines, settlements and
reasonable expenses incurred by the person in connection with the proceeding if
certain standards are met. Insofar as indemnification for liabilities arising
under the Securities Act of 1933 (the "Act") may be permitted to our directors,
officers and controlling persons pursuant to these provisions, or otherwise, we
have been advised that, in the opinion of the SEC, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
Our Articles of Incorporation also limit the liability of our directors
to the fullest extent permitted by the Colorado law. Specifically, our Articles
of Incorporation provide that our directors 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 OSS 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
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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 our 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.
_______________
TABLE OF CONTENTS
Page
----
The Company.......................................................... 2
Risk Factors......................................................... 4
Special Note Regarding Forward-Looking Statements.................... 12
Use of Proceeds...................................................... 12
Recent Developments.................................................. 12
Selling Shareholders................................................. 15
Plan of Distribution................................................. 18
Description of Securities............................................ 19
Where You Can Find More Information.................................. 21
Legal Matters........................................................ 22
Experts.............................................................. 22
Indemnification...................................................... 22
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ONLINE SYSTEM
SERVICES, INC.
_______________
PROSPECTUS
_______________
January 13, 1999
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