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As filed with the Securities & Exchange Commission on April 23, 1999
Registration No. 333-71503
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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ONLINE SYSTEM SERVICES, INC.
(Exact name of issuer as specified in its charter)
Colorado 84-1293864
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1800 Glenarm Place, Suite 700
Denver, Colorado 80202
(303) 296-9200
(Address and telephone number of principal executive offices)
-------------------------
R. Steven Adams
Online System Services, Inc.
1800 Glenarm Place, Suite 700
Denver, Colorado 80202
(303) 296-9200
(Name, address and telephone number of agent for service)
Copy to:
Lindley S. Branson
Scott A. Hendrickson
Gray, Plant, Mooty, Mooty & Bennett, P.A.
33 South Sixth Street
3400 City Center
Minneapolis, Minnesota 55402
(612) 343-2800
-------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. | |
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
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If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of earlier effective registration
statement for same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of securities to Amount to be Proposed maximum Proposed maximum aggregate Amount of
be registered registered offering price (1) offering price (1) registration fee*
===========================================================================================================================
<S> <C> <C> <C> <C>
Common Stock, no par
value (2)(4) 820,000 $16.4375 $13,478,750 $3,976.23
Common Stock, no par
value (3)(4) 20,000 $16.4375 $328,750 $96.98
-------------------- ---------------------------- -------------------
Total 840,000 $13,807,500 $4,073.21
</TABLE>
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* Fee previously paid.
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of Regulation C as of the close of the market on
January 27, 1999.
(2) Common stock issuable by OSS upon conversion of OSS' issued and outstanding
Series C Preferred Stock. Assumes a conversion price of $3.66.
(3) Common stock issuable by OSS upon exercise of issued and outstanding
transferable warrants of OSS.
(4) An indeterminate number of additional shares of common stock are registered
hereunder in accordance with Rule 416 under the Securities Act of 1933, as
amended, that may be issued as provided in such warrants in the event that
the provisions against dilution in such warrants become operative.
-------------------------------
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
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The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer of sale is not permitted.
SUBJECT TO COMPLETION, DATED APRIL 23, 1999
PROSPECTUS
ONLINE SYSTEM SERVICES, INC.
This is a public offering of a minimum of 252,564 and a maximum of 840,000
shares of common stock of Online System Services, Inc. The selling shareholders,
Arrow Investors II LLC and EBI Securities Corporation, are offering all of the
shares to be sold. We will not receive any of the proceeds from the offer and
sale of the shares, however, the 20,000 shares offered by EBI and, as of April
15, 1999, 173,442 of the shares offered by Arrow are issuable upon the exercise
of issued and outstanding transferable warrants of OSS. If these warrants are
exercised in full, we will receive proceeds of $2,114,200.
The shares to be sold by the selling shareholders consist of shares of
common stock issuable to them upon:
o Their conversion of OSS' Series C Preferred Stock; or
o Their exercise of issued and outstanding transferable warrants of OSS
exercisable at a price per share of $5.71.
The Nasdaq SmallCap Market lists our common stock under the symbol "WEBB".
Investing our common stock involves risks. You should not purchase our
common stock unless you can afford to lose your entire investment. See "Risk
Factors" beginning on page 3 of this prospectus.
The shares may be offered and sold at various times by the selling
shareholders. 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, we have 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 _______________, 1999.
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THE COMPANY
OSS develops, markets and supports products and services that enable
individuals and organizations to create and manage their own Internet Web
presence and online communities. We have developed a proprietary suite of Web
site development tools, known as WEBBbuilder and Portal Objects which enable
individuals and organizations to create their own personal/organizational
portals. These Web site development tools were formerly marketed under our i2u
brand name. We have targeted the following market opportunities:
o Community - Customized community and communication portals or start
pages for broadband and other operators who provide Internet access.
o Consumer - Personal portals for individual Internet users.
o Enterprise - Internet and Extranet services for businesses,
associations and government institutions.
o Education - Classroom applications for elementary and secondary
schools, including parent/teacher communications, virtual campuses for
colleges and universities and online classrooms for corporate
training.
o Financial Services - Online banking services for banks, credit unions
and other financial institutions.
Underpinning the evolution of our products and services is our belief that
the Internet is evolving from its origins as an information access and delivery
tool to one that supports communications and community interactivity. The
WEBBbuilder software includes sophisticated personal communications tools which
allow users to establish, maintain and enhance online communications with
others. These communications tools include:
o E-Mail services o Virtual communities
o Chat o Calendars
o Instant messaging o Conferencing
o Newsletters o Friends online
As part of our product enhancement efforts, we have agreed to acquire
Durand Communications, Inc., 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 has been
integrated into our suite of products and services. In March 1999, we completed
the acquisition of a majority interest in NetIgnite 2, LLC. NetIgnite is
applying emerging technologies to develop private-label Web-based services that
allow directory publishers, search engines and Internet service providers to
enhance end-user and advertiser value by facilitating data-driven comparison
shopping and the development of business Web pages. We expect NetIgnite's first
products to be available around mid 1999.
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
Our limited operating history could affect our business. We were founded in
March 1994, commenced sales in February 1995, and were in the development stage
through December 31, 1995. DCI was founded in 1993. Accordingly, we have a
limited operating history upon which you may evaluate us. Our business is
subject to the risks, expenses and difficulties frequently encountered by
companies with a limited operating history including:
o Limited ability to respond to competitive developments,
o Exaggerated effect of unfavorable changes in general economic and
market conditions,
o Ability to attract qualified personnel, and
o Ability to develop and introduce new product and service offerings.
There is no assurance we will be successful in addressing these risks. If we are
unable to successfully address these risks our business could be significantly
affected.
We have accumulated losses since inception and we anticipate that we will
continue to accumulate losses for the foreseeable future. We have incurred net
losses since inception totaling $20,774,129 through December 31, 1998. DCI has
incurred net losses since its formation totaling $8,397,347 through December 31,
1998. In addition, we expect to incur additional substantial operating and net
losses in 1999 and for one or more years thereafter. We expect to incur these
additional losses because:
o We currently intend to increase our capital expenditures and operating
expenses to expand the functionality and performance of our
WEBBbuilder products and services, support additional subscribers of
our ISP customers in future markets, and market and provide our
products and services.
o We will be required to recognize as a loss in the fiscal period in
which the DCI acquisition is consummated that portion of the purchase
price for DCI which we allocate to in-process research and
development.
o We will be required to record goodwill and other intangible assets in
connection with the DCI acquisition which we will amortize over their
estimated useful lives of approximately three years. We currently
expect to allocate approximately $12.5 million to goodwill and other
intangible assets, however, this amount could change significantly
once the actual amount is determined after the consummation of the DCI
acquisition.
We expect to complete the DCI acquisition in the second quarter of 1999. If
we do not complete the DCI acquisition, it is likely that we would have to
record as a loss all or a portion of the note receivable from DCI of
approximately $996,141, including accrued interest, at March 31, 1999. 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 we are unable to raise additional working capital funds, we may not be
able to sustain our operations. We believe that our present cash and cash
equivalents and working capital will be adequate to sustain our current level of
operations only through May 1999. If we cannot raise additional funds when
needed, we may be required to curtail or scale back our operations. These
actions could have a material adverse effect on our business, financial
condition, or results of operations. We estimate that we will need to raise
through equity, debt or other external financing at least $9 million to sustain
operations for the next 12 months and $1 million to pay DCI indebtedness which
would be assumed as part of the DCI acquisition. There is no assurance that we
will be able to raise additional funds in amounts required or upon acceptable
terms. In addition, we may discover that we have underestimated our working
capital needs, and we may need to obtain additional funds to sustain our
operations. In its report accompanying the audited financial statements for the
years ended December 31, 1998 and 1997, our auditor, Arthur Andersen LLP,
expressed substantial doubt about our ability to continue as a going concern.
We may never become or remain profitable. We may never become or remain
profitable. Our ability to become profitable depends on the ability of our
WEBBbuilder products and services to generate revenues. The revenue model for
some of our i2u/WEBBbuilder products and services assumes that our broadband
customers and other distribution partners will share with us a percentage of
their revenues generated by advertising and e-commerce conducted through our
WEBBbuilder products. The success of our revenue model will depend upon many
factors including:
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o The success of broadband operators and other distribution partners in
marketing Internet services to subscribers in their local areas, and
o The extent to which consumers and businesses use our WEBBbuilder
products and conduct e-commerce transactions and advertising utilizing
our products.
Because of the new and evolving nature of the Internet, we cannot predict
whether our revenue model will prove to be viable, whether demand for our
products and services will materialize at the prices we expect to be charged, or
whether current or future pricing levels will be sustainable.
Our revenue model may not generate significant revenues, if any, until some
time in the future. We expect a significant portion of our revenues to come from
advertising revenues and in connection with e-commerce transactions conducted
using our products. However, we do not expect to realize these revenues, if at
all, until a significant time after we have licensed our WEBBbuilder products
and services. This expectation is based on the fact that we believe that it may
take broadband operators and other distribution partners several months or more
to:
o Market and sell Internet access to their subscribers, and
o Establish a significant enough user base to attract advertisers and
for users to conduct significant e-commerce transactions.
Our business depends on the growth of the Internet. Our business plan
assumes that the Internet will develop into a significant source of
communication and communication interactivity. However, the Internet market is
new and rapidly evolving and there is no assurance that the Internet will
develop in this manner. If the Internet does not develop in this manner, our
business, operating results, and financial condition would be materially
adversely effected. Numerous factors could prevent or inhibit the development of
the Internet in this manner, including:
o The failure of the Internet's infrastructure to support Internet usage
or electronic commerce,
o The failure of businesses developing and promoting Internet commerce
to adequately secure the confidential information, such as credit card
numbers, needed to carry out Internet commerce, and
o Regulation of Internet activity
Use of some of our products and services may be dependent on broadband
operators. Because we have elected to partner with broadband operators for the
distribution of many of our products and services, many users of our WEBBbuilder
products and services are expected to subscribe through a broadband operator. As
a result, the broadband operator, and not us, will substantially control the
customer relationship with these users. If the business of broadband operators
with whom we partner is adversely affected in any manner, business, operating
results, and financial condition could be materially adversely effected. Many
factors may affect the business of broadband operators, including:
o General economic and market conditions,
o Competition among broadband operators,
o Costs associated with the renewal of operator licenses, and
o Costs associated with the operation and maintenance of an Internet
service provider business segment.
We may be unable to develop desirable products. Our products are subject to
rapid obsolescence and our future success will depend upon our ability to
develop new products and services that meet changing customer and marketplace
requirements. There is no assurance that we will be able to successfully:
o Identify new product and service opportunities, or
o Develop and introduce new products and services to market in a timely
manner.
If we are unable to accomplish these items, our business, including the
business of DCI if the DCI acquisition is completed, operating results, and
financial condition could be materially adversely affected.
Our products and services may not be successful. Even if we are able to
successfully identify, develop, and introduce new products and services there is
no assurance that a market for these products and services will materialize to
the size and extent that we anticipate. If a market does not materialize as we
anticipate, our business,
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including the business of DCI if the DCI acquisition is completed, operating
results, and financial condition could be materially adversely affected. The
following factors could affect the success of our products and services:
o The failure of our business plan to accurately predict the rate at
which the market for Internet products and services will grow,
o The failure of our business plan to accurately predict the types of
products and services the future Internet marketplace will demand,
o Our limited experience in marketing our products and services,
o The failure of our business plan to accurately predict our future
participation in the Internet marketplace,
o The failure of our business plan to accurately predict the estimated
sales cycle, price, and acceptance of our products and services,
o The development by others of products and services that renders our
and DCI's, products and services noncompetitive or obsolete, or
o Our failure to keep pace with the rapidly changing technology,
evolving industry standards, and frequent new product and service
introductions that characterize the Internet marketplace.
The intense competition that is prevalent in the Internet market could have
a material adverse effect on our business. DCI's and our current and prospective
competitors include many companies whose financial, technical, marketing and
other resources are substantially greater than ours. There is no assurance that
we will have the financial resources, technical expertise, or marketing, sales
and support capabilities to compete successfully. The presence of these
competitors in the Internet marketplace could have a material adverse effect on
our business, operating results, or financial condition by causing us to:
o Reduce the average selling price of our products and services, or
o Increase our spending on marketing, sales, and product development.
There is no assurance that we would be able to offset the effects of any
price reductions or increases in spending through an increase in the number of
our customers, higher sales from premium services, cost reductions or otherwise.
In addition, our financial condition may put us at a competitive disadvantage
relative to our competitors. If we fail to, or cannot, meet competitive
challenges, our business, operating results and financial condition could be
materially adversely affected.
A limited number of our customers generates a significant portion of our
revenues. For the year ended December 31, 1998, four of our customers produced
approximately 71% of our revenues, including one customer, Starstream, Inc., who
produced approximately 28% of our revenues. 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 these major customers could
have a material adverse effect on our business, operating results, cashflow, and
financial condition.
The sales cycle for our products and services is lengthy and unpredictable.
While our sales cycle varies from customer to customer, it typically has ranged
from one to six months for WEBBbuilder projects. Our pursuit of sales leads
typically involves an analysis of our prospective customer's needs, preparation
of a written proposal, one or more presentations and contract negotiations. We
often provide significant education to prospective customers regarding the use
and benefits of Internet technologies and products. Our sales cycle may also be
affected by a prospective customer's budgetary constraints and internal
acceptance reviews, over which we have little or no control.
We may be unable to adjust our spending to account for potential
fluctuations in our quarterly results. As a result of our limited operating
history and the recent increased focus on our WEBBbuilder 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
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have an immediate adverse effect on our business, operating results and
financial condition. Further, we currently intend to increase our capital
expenditures and operating expenses to fund product development and increase
sales and marketing efforts. To the extent that expenses precede or are not
subsequently followed by increased sales, our business, operating results and
financial condition will be materially adversely affected.
We may be unable to retain our key executives and research and development
personnel. We are highly dependent on the technical and management skills of our
key employees, including in particular R. Steven Adams, our founder, 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. In addition, the success of the DCI acquisition 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 acquisition.
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 personnel is
intense and there is no assurance that we can identify or hire additional
qualified personnel.
Executives and research and development personnel who leave us may compete
against us in the future. We generally enter into written nondisclosure and
nonsolicitation agreements with our officers and employees which restrict the
use and disclosure of proprietary information and the solicitation of customers
for the purpose of selling competing products or services. Other than Andre
Durand, who, as a condition to the acquisition of DCI, will be required to
execute a three-year non-compete agreement with us, we generally do not require
our employees to enter into non-competition agreements. Thus, if any of these
officers or key employees left, they could compete with us, so long as they did
not solicit our customers. This competition could have a material adverse effect
on our business.
We may be unable to manage our expected growth. If we are able to implement
our growth strategy, we will experience significant growth in the number of our
employees, the scope of our operating and financial systems, and the geographic
area of our operations. There is no assurance that we will be able to implement
in whole or in part our growth strategy or that our management or other
resources will be able to successfully manage any future growth in our business.
Any failure to do so could have a material adverse effect on our operating
results and financial condition.
We may be unable to protect our intellectual property rights. Intellectual
property rights are important to our success and our competitive position. There
is no assurance that the steps we take to protect our intellectual property
rights will be adequate to prevent the imitation or unauthorized use of our
intellectual property rights. Policing unauthorized use of proprietary systems
and products is difficult and, while we are unable to determine the extent to
which piracy of our software exists, we expect software piracy to be a
persistent problem. In addition, the laws of some foreign countries do not
protect software to the same extent as do the laws of the United States. Even if
the steps we take to protect our proprietary rights prove to be adequate, our
competitors may develop products or technologies that are both non-infringing
and substantially equivalent or superior to our products or technologies.
Computer viruses and similar disruptive problems could have a material
adverse effect on our business. Our software and equipment may be vulnerable to
computer viruses or similar disruptive problems caused by our customers or other
Internet users. Our business, financial condition, or operating results could be
materially adversely effected by:
o Losses caused by the presence of a computer virus that causes us or
third parties with whom we do business to interrupt, delay or cease
service to our customers,
o Losses caused by the misappropriation of secured or confidential
information by a third party who, in spite of our security measures,
obtains illegal access to this information,
o Costs associated with efforts to protect against and remedy security
breaches, or
o Lost potential revenue caused by the refusal of consumers to use our
products and services due to concerns about the security of
transactions and commerce that they conduct on the Internet.
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Future government regulation could materially adversely effect our
business. There are currently few laws or regulations directly applicable to
access to, communications on, or commerce on the Internet. Therefore, we are not
currently subject to direct regulation of our business operations by any
government agency, other than regulations applicable to businesses generally.
Due to the increasing popularity and use of the Internet, however, federal,
state, local, and foreign governmental organizations are currently considering a
number of legislative and regulatory proposals related to the Internet. The
adoption of any of these laws or regulations may decrease the growth in the use
of the Internet, which could, in turn:
o Decrease the demand for our products and services;
o Increase our cost of doing business; or
o Otherwise have a material adverse effect on our business, results of
operations and financial condition.
Moreover, the applicability to the Internet of existing laws governing
issues such as property ownership, copyright, trademark, trade secret,
obscenity, libel and personal privacy is uncertain and developing. Our business,
results of operations and financial condition could be materially adversely
effected by the application or interpretation of these existing laws to the
Internet.
Our systems may not be year 2000 compliant. We have reviewed our internal
software and hardware systems. Based on this review, we believe that our
internal software and hardware systems will function properly with respect to
dates in the year 2000 and thereafter. We expect to incur no significant costs
in the future for Year 2000 problems. Nonetheless, there is no assurance in this
regard until our internal software and hardware systems are operational in the
year 2000.
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. The failure to correct
material Year 2000 problems by our suppliers and vendors could result in an
interruption in, or a failure of, some of our normal business activities or
operations. Due to the general uncertainty inherent in the Year 2000 problem,
resulting from the uncertainty of the Year 2000 readiness of third-party
suppliers and vendors and of our customers, we are unable to determine at this
time that the consequences of Year 2000 failures will not have a material impact
on our results of operations, liquidity or financial condition.
Our articles of incorporation and bylaws may discourage lawsuits and other
claims against our directors. Our articles of incorporation provide, as
permitted by Colorado law, that our directors shall have no personal liability
for certain breaches of their fiduciary duties to us. In addition, our bylaws
provide for mandatory indemnification of directors and officers to the fullest
extent permitted by Colorado law. These provisions may reduce the likelihood of
derivative litigation against directors and may discourage shareholders from
bringing a lawsuit against directors for a breach of their duty.
The completion of the DCI acquisition will have an immediate dilutive
effect on our current shareholders. If the DCI acquisition is consummated, we
will issue 955,649 shares of our common stock as consideration for DCI. The
issuance of these shares will have an immediate dilutive effect on our current
shareholders and will increase our outstanding common stock by approximately
17%. There is no assurance that our results of operations will improve enough,
if at all, as a result of the DCI acquisition, to offset this dilution.
On a pro forma basis, we estimate that the issuance of these shares would
have resulted in an increase to our net book value per share as of December 31,
1998 from $0.43 (actual) to $2.20 (pro forma) and $2.48 (pro forma adjusted to
reflect the subsequent conversions of 10% Preferred Stock and Series A Preferred
Stock, the subsequent exercise of warrants to purchase 140,000 shares of common
stock issued in connection with the issuance of the Series A Preferred Stock,
and the subsequent issuance and conversions of Series C Preferred Stock).
In addition to issuing these shares of common stock, in connection with the
DCI acquisition we will reserve for issuance shares that, when issued, may have
a dilutive effect on our shareholders. There is no assurance that our results of
operations will improve enough, if at all, as a result of the DCI acquisition,
to offset this possible future dilution. These shares consist of approximately:
o 240,000 shares of our common stock for issuance upon exercise of
outstanding options and warrants that will be issued in connection
with the DCI acquisition, and
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o 40,000 shares of our common stock for issuance upon conversion of
convertible securities of DCI that we will assume in connection with
the DCI acquisition.
The price of our common stock has been highly volatile due to factors that
will continue to effect the price of our stock. Our common stock traded as high
as $15.25 per share and as low as $3.75 per share during the year ended December
31, 1998. Historically, the over-the-counter markets for securities such as our
common stock have experienced extreme price and volume fluctuations. Some of the
factors leading to this volatility include:
o Price and volume fluctuations in the stock market at large that do not
relate to our operating performance;
o Fluctuations in our quarterly operating results;
o Announcements of product releases by us or our competitors;
o Announcements of acquisitions and/or partnerships by us or our
competitors; and
o Increases in outstanding shares of common stock upon exercise or
conversion of derivative securities. (See "We have issued numerous
options, warrants and convertible securities to acquire our common
stock that could have a dilutive effect on our shareholders.")
The trading volume of our common stock may diminish significantly if our
common stock is prohibited from being traded on the Nasdaq SmallCap Market.
Although our shares are currently traded on The Nasdaq SmallCap Market, there is
no assurance that we will remain eligible to be included on Nasdaq. If our
common stock was no longer eligible for quotation on Nasdaq, it could become
subject to rules adopted by the Securities and Exchange Commission regulating
broker-dealer practices in connection with transactions in "penny stocks." If
our common stock became subject to the penny stock rules, many brokers may be
unwilling to engage in transactions in our common stock because of the added
regulation, thereby making it more difficult for purchasers of our common stock
to dispose of their shares.
We have issued numerous options, warrants, and convertible securities to
acquire our common stock that could have a dilutive effect on our shareholders.
We have issued numerous options, warrants, and convertible securities to acquire
our common stock. During the terms of these outstanding options, warrants, and
convertible securities, the holders of these securities will have the
opportunity to profit from an increase in the market price of our common stock
with resulting dilution to the holders of shares who purchased shares for a
price higher than the respective exercise or conversion price. The existence of
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 these 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 these options or warrants.
As of April 15, 1999, we have issued the following warrants and options to
acquire shares of our common stock:
o Options and warrants to purchase 1,751,648 shares of common stock upon
exercise of these options and warrants, exercisable at prices ranging
from $0.50 to $18.25 per share, with a weighted average exercise price
of approximately $7.42 per share.
o Warrants issued in connection with our initial public offering on May
23, 1996 (the "IPO Warrants") to purchase 634,025 shares upon exercise
of the IPO Warrants at an exercise price of $9.00 per share.
o Options issued to EBI Securities Corporation, the representative of
the underwriters involved in our initial public offering (the
"Representative's Option"), to purchase 106,700 shares upon exercise
of the Representative's Option at a purchase price of $8.10 per share.
o 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 to
purchase up to 53,350 shares upon exercise of these IPO Warrants at an
exercise price of $9.00 per share.
o Warrants issued in connection with the issuance of the 10% Preferred
Stock to purchase 53,500 shares of common stock upon exercise of these
warrants, exercisable at $15.00 per share.
o Warrants issued in connection with the issuance of the 5% Preferred
Stock to purchase 100,000 shares of common stock upon exercise of
these warrants, exercisable at $16.33 per share.
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o Warrants issued in connection with the issuance of the Series A
Preferred Stock to purchase 20,000 shares of common stock upon
exercise of these warrants, exercisable at $5.71 per share.
In addition to these warrants and options, we:
o Will issue 955,649 shares of our common stock upon the completion of
the DCI acquisition,
o Will reserve approximately 240,000 shares of common stock for issuance
upon exercise of options and warrants to be issued in connection with
the DCI acquisition,
o 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 acquisition, and
o Have reserved an indeterminate number of shares of common stock for
issuance upon conversion of outstanding shares of our 10% and Series C
Preferred Stock.
Based on the market value for the common stock as of April 15, 1999, the
then outstanding 10% Preferred Stock and Series C Preferred Stock were
convertible into approximately 95,945 shares and 43,361 shares, respectfully, of
common stock. The number of shares of common stock issuable upon conversion of
the 10% Preferred Stock and the Series C Preferred Stock could increase
significantly if the market value for our common stock decreases in the future.
We may need to issue additional similar securities in connection with our need
to raise additional working capital.
Future sales of our common stock in the public market could adversely
affect the price of our common stock. Sales of substantial amounts of common
stock in the public market that is not currently freely tradable, or even the
potential for sales of our common stock, 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. As of
April 15, 1999, these shares consist of:
o Approximately 1,300,000 shares issued without registration under the
securities laws ("Restricted Shares"),
o Approximately 60,000 shares owned by our officers, directors and
holders of 10% of our outstanding common stock ("Affiliate Shares"),
and
o 955,469 shares to be issued upon consummation of the DCI acquisition.
Unless the Restricted Shares and the Affiliate Shares are further
registered under the securities laws, they may not be resold except in
compliance with Rule 144 promulgated by the SEC, or some other exemption from
registration. Rule 144 does not prohibit the sale of these shares but does place
conditions on their resale which must be complied with before they can be
resold. Before September 30, 1999, the shares of the common stock to be issued
to the shareholders of DCI in connection with the DCI acquisition will be
subject to contractual limitations on their transfer, however, these shares or a
portion of them could be sold before September 30, 1999.
Future sales of our common stock in the public market could limit our
ability to raise capital. Sales of substantial amounts of common stock in the
public market in compliance with Rule 144, upon exercise or conversion of
derivative securities or otherwise, or even the potential for sales of our
common stock, could affect our ability to raise capital through the sale of
equity securities. (See "We have issued numerous options, warrants, and
convertible securities to acquire our common stock that could have a dilutive
effect on our shareholders" and "Future sales of our common stock in the public
market could adversely affect the price of our common stock.")
Provisions in our articles of incorporation allow us to issue shares of
stock that could make a third party acquisition of us difficult. Our articles of
incorporation authorize our board of directors to issue up to 20,000,000 shares
of common stock and 5,000,000 shares of preferred stock in one or more series,
the terms of which may be determined at the time of issuance by the board of
directors, without further action by our shareholders. Preferred stock
authorized by the board of directors may include voting rights, preferences as
to dividends and liquidation, conversion and redemptive rights and sinking fund
provisions. If the board of directors authorizes the issuance of preferred stock
in the future, this authorization could affect the rights of the holders of
common stock, thereby reducing the value of the common stock, and could make it
more difficult for a third party to acquire us, even if a majority of the
holders of our common stock approved of an acquisition. Other than the 2,000
shares of Series C Preferred Stock that will be issued if the warrant to
purchase these shares is exercised, our board of directors has no present plans
to issue any shares of preferred stock.
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Our issuance of our Series C Preferred Stock will require us to record a
non-operating expense which will, in turn, increase our net loss available to
shareholders. Based on current accounting standards, we will be required to
record a non-operating expense of approximately $4,200,000 for the quarter ended
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
this period, they are expected to result in an increase of approximately
$4,200,000 in the net loss available to our holders of common stock for the
quarter ended March 31, 1999. In addition, to the extent that we exercise our
right to issue or the investor exercises its right to acquire up to $2,000,000
additional principal amount of the Series C Preferred Stock, we may incur
similar non-operating expenses in excess $2,000,000 at the time that these
additional shares of Series C Preferred Stock are issued.
We do not anticipate paying dividends on our common stock for the
foreseeable future. We have never paid dividends on our common stock and do not
intend to pay any cash dividends on our common stock in the foreseeable future.
Any decision by us to pay dividends on our common stock will depend on a number
of factors, including our profitability at the time and available cash. We
anticipate that we will devote profits, if any, to our future operations.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the 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 (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 of these terms 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' 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. We have attempted to identify, in context,
some of the factors that we 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 of the proceeds from the offer and sale of the
shares, however, the 20,000 shares offered by EBI Securities Corporation and, as
of April 15, 1999, 173,442 shares offered by Arrow Investors II LLC are issuable
upon the exercise of issued and outstanding transferable warrants of OSS. If
these warrants are exercised in full, we will receive proceeds of $2,114,200.
RECENT DEVELOPMENTS
Proposed Acquisition of DCI
On March 19, 1998 we executed an Agreement and Plan of Merger pursuant to
which we agreed to acquire Durand Communications, Inc., a California
corporation, via a merger of our wholly owned subsidiary, Durand Acquisition
Corporation, with DCI. We anticipate that the DCI merger will occur in the
second quarter of 1999.
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A significant element of our strategy to achieve our 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.
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 our software. Since the execution of the DCI merger agreement,
representatives of DCI and OSS have worked together to incorporate the
CommunityWare technology into our software. Following the DCI merger, we intend
to fully integrate DCI's product development efforts with our own and to fully
integrate DCI's products with our products and to market them as part of our
product offerings and not on a stand-alone basis. In the event that the DCI
merger is not completed, DCI has agreed to grant us a license for CommunityWare
on as favorable terms as it licenses its technology to others.
We believe that the primary value of DCI to OSS is:
o DCI's proprietary technology, particularly DCI's CommunityWare
technology,
o DCI's software development capabilities which we believe are 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
o The ability the DCI acquisition will give us to greatly reduce the
time it will take us to introduce new proprietary software products.
Andre Durand, Chief Executive Officer of DCI, has, subject to the completion of
the DCI merger 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 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.
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:
o 955,649 shares of our common stock to be issued to the stockholders of
DCI,
o 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 at exercise prices ranging
from $4.31 to $20.33 per share; and
o 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.
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 portion of this amount and liabilities assumed on a consolidated
basis has been identified as intangible assets. 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
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period the DCI merger is consummated. We currently expect to complete the DCI
merger in the second quarter of 1999.
DCI completed the acquisition of CompuLearning Systems, d/b/a Electronic
University Network ("EUN") during January 1998. Based on preliminary financial
information provided by DCI and EUN, the combined revenues for DCI and EUN for
the year ended December 31, 1998 totaled $813,522, including $540,372 of
services provided to OSS and DCI's combined loss for the same period equaled
($1,564,160). In addition, DCI's accumulated deficit at December 31, 1998 was
($8,397,347) and DCI's shareholders' deficit at December 31, 1998 was
($1,492,548). We estimate that, on a pro forma basis, the acquisition of DCI
would have resulted in an increase to the net book value of our shares of common
stock as of December 31, 1998 from $0.43 (actual) to $2.20 (pro forma) and $2.48
(pro forma adjusted to reflect the subsequent conversions of 10% Preferred Stock
and Series A Preferred Stock, the subsequent exercise of the warrants to
purchase 140,000 shares of common stock issued in connection with the issuance
of the Series A Preferred Stock, and the subsequent issuance and conversions of
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.
We expect that the DCI merger will be completed in the second quarter of
1999. If, for some unanticipated reason, the DCI merger was not completed, we
would be required to license the CommunityWare technology from DCI for a license
fee which would need to be negotiated. In addition, we would need to hire
additional software development engineers to replace those that would have
joined us had the DCI merger been completed.
Acquisition of NetIgnite
On March 10, 1999, we acquired a controlling interest in a newly formed
company, NetIgnite 2, LLC ("NetIgnite"). NetIgnite is a development stage
company which we formed with a predecessor company by the name of NetIgnite,
Inc. ("NI"), the sole shareholder and founder of which was Perry Evans, the
founder and past President of MapQuest.com. In connection with the formation of
NetIgnite, NI contributed all of its rights to certain technology to NetIgnite
and we agreed to provide $1,500,000 of funding which it is believed will be
required to implement NetIgnite's business plan during the next 12 to 18 months.
We are entitled to 99.5% of NetIgnite's operating income and approximately 60%
of any proceeds upon the sale of NetIgnite. NI is entitled to .5% of NetIgnite's
operating income and approximately 40% of any proceeds upon the sale of
NetIgnite. We have entered into a Buy-Sell Agreement with NI pursuant to which
either we or NI could acquire all of the other's interest in NetIgnite. In the
event that we sold our interest to NetIgnite in accordance with the Buy-Sell
Agreement, we would be entitled to retain a limited non-exclusive license to
utilize the technology developed by NetIgnite. Mr. Evans has entered into an
Employment Agreement with OSS and NetIgnite which has an initial term of two
years, provides for a minimum annual salary of $190,000 and the granting of
stock options to purchase 80,000 shares of our common stock at an exercise price
of $12.25. These options vest in one-third increments annually during the next
three years subject to Mr. Evans' continuous employment by OSS.
NetIgnite is applying emerging technologies to develop private-label
Web-based services designed to allow directory publishers, online search engines
and Internet service providers to enhance end-user and advertiser value by
facilitating data-driven comparison shopping. NetIgnite plans to employ XML, a
next generation web language that makes it possible to add database capability
to information found on a web page, to solve the following problems:
o Make it far easier for potential customers to find local business web
sites by searching the information presented within the web site, not
just the domain name or limited description fields of today's
technology.
o Allow consumers to compare price, product offering, and other
information of their choosing among competing providers.
o Allow directory services, Internet service providers, and community
start page providers to generate advertising and e-commerce revenue
from local web site owners who heretofore have seen limited traffic
from internal site promotions or general advertising placements.
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o Enhance the value of small and geographically-focused web sites by
making them easier to create and maintain, as well as by increasing
targeted page views.
NetIgnite intends to provide its services on a hosted, private label basis,
earning an annual fee from its customers for each business web site its products
and services enable. We believe that NetIgnite's products and services may be
marketed directly to online directory publishers, online search engines and
Internet service providers as well as part of our Community product and service
offering for broadband operators and other Internet service providers. We expect
NetIgnite's first products to be available during the third quarter of 1999.
However, there can be no assurance that NetIgnite will be successful in
developing its proposed products or that, if developed, that they can be
successfully introduced and marketed or that NetIgnite's business will be
profitable.
SELLING SHAREHOLDERS
The selling shareholders have indicated that the shares offered by this
prospectus may be sold from time to time by them or by their pledgees, donees,
transferees or other successors in interest. The following table sets forth:
o The name of each of the selling shareholders,
o The number of shares of our common stock beneficially owned by each of
the selling shareholders as of April 15, 1999, and
o The number and percentage of securities offered by this prospectus
that may be sold from time to time by each of the selling
shareholders.
As indicated in note (1) below, the number of shares of common stock
beneficially owned by and offered by Arrow Investors II LLC represents an
estimate of the number of shares of common stock beneficially owned by and
offered by Arrow Investors II based on the market price of our common stock as
of April 15, 1999. The actual number of shares of common stock beneficially
owned by and offered by Arrow Investors II is indeterminate and could be
materially less or more than this estimated number depending on factors that we
cannot predict at this time, including the future market price of our common
stock. Under the registration statement of which this prospectus is a part we
have registered an aggregate total of 820,000 shares which may be issued to and
offered by Arrow Investors II.
In addition, under the registration statement of which this prospectus is a
part we have registered an additional number of shares of our common stock that
we may be required to issue to Arrow Investors II or EBI Securities Corporation
as a result 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. In the following table, we have calculated
percentage ownership by assuming that 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 outstanding for the purpose of calculating the percentage of
common stock owned by the selling shareholder.
Arrow Investors II LLC is an investment fund managed by WEC Asset
Management LLC. Messrs. Daniel Saks, Ethan Benovitz, and Mark Nordlicht are the
managing partners and controlling persons of WEC Asset Management LLC. EBI
Securities Corporation is a wholly owned subsidiary of Eastbrokers International
Incorporated, a publicly held company.
There is no assurance that the selling shareholders will sell the shares
offered by this prospectus.
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<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Percentage of
Shares of Common Shares of Common Common Stock
Stock Owned Stock Owned Owned Beneficially
Name of Selling Beneficially Shares of Common Beneficially After Before Offering/After
Shareholder Before Offering Stock Offered Hereby Offering Offering
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arrow Investors II LLC 549,367 (1) (2) 449,367 (1) 100,000 9.3% / 1.8%
EBI Securities Corporation ________ (3) 20,000 ________ (3) ___% / ___%
</TABLE>
- ---------------
* Less than 1% of shares outstanding.
(1) Includes:
o 43,361 shares issuable upon the conversion of the currently
outstanding Series C Preferred Stock, including accrued but unpaid
dividends, if this conversion occurred as of the close of business on
April 15, 1999 and
o 173,442 shares issuable upon the conversion of 2,000 shares of Series
C Preferred Stock issuable upon the exercise of a warrant to purchase
these 2,000 shares at a per share exercise price of $1,000 if this
exercise and conversion occurred as of the close of business on April
15, 1999.
Upon the actual conversion of the remaining issued and outstanding Series C
Preferred Stock and the Series C Preferred Stock that may be issued upon
the exercise of the warrant to purchase Series C Preferred Stock, the
number of shares into which the Series C Preferred Stock is convertible may
be more or less than 216,803 shares, but in no event will be more than
697,436 shares or less than 121,065 shares. On April 15, 1999, the
conversion price would be approximately $11.65. For a discussion of the
conversion mechanism of our Series C Preferred Stock, see "Description of
Securities--Series C Preferred Stock--Redemption and Conversion."
(2) Includes 100,000 shares issuable to affiliates of Arrow Investors II LLC
upon the exercise of warrants to purchase shares at a per share exercise
price of $16.33.
(3) Includes:
o 67,100 shares of common stock issuable upon the exercise of an option
to purchase shares at a per shares exercise price of $8.10,
o 33,550 shares of common stock issuable upon the exercise of warrants
to purchase shares at a per share exercise price of $9.00, and
o 20,000 shares issuable upon the exercise of a warrant to purchase
shares at a per share exercise price of $5.71 being offered by this
prospectus
Does not include shares held by EBI Securities Corporation in its capacity
as a market maker in our securities.
PLAN OF DISTRIBUTION
The sale of the shares offered by this prospectus may be made in the Nasdaq
SmallCap Market or other over-the-counter markets or otherwise at prices and at
terms then prevailing or at prices related to the then current market price or
in negotiated transactions. These shares may be sold by one or more of the
following:
o 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.
o Purchases by a broker or dealer as principal and resale by a broker or
dealer for its account in accordance with this prospectus.
o Ordinary brokerage transactions and transactions in which the broker
solicits purchasers.
o 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. These
brokers or dealers and any other participating brokers or dealers may be deemed
to be "underwriters" within the meaning of the Securities Act of
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1933 in connection with these 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 the shares will
receive the usual and customary selling commissions.
To comply with the securities laws of some states, if applicable, the
shares will be sold in these states only through brokers or dealers. In
addition, in some states, the shares may not be sold in those states unless they
have been registered or qualified for sale in these 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 par value and
rights, preferences and privileges as are determined by our board of directors.
Common Stock
As of April 15, 1999, 5,613,253 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 and present in person
or by proxy, together with any preferred stock issued and outstanding and
entitled to vote and 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 a meeting and entitled to vote at a meeting, together with any
preferred stock present and entitled to vote at a meeting, will decide any
question brought before the 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 the 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 our shareholders after payment of all liabilities and after
distributions to holders of preferred stock legally entitled to distributions
paid prior to distributions to holders of our common stock. 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.
Series C Preferred Stock
As of April 15, 1999, 500 shares of our Series C Preferred Stock were
outstanding. The following is a summary of the material rights, privileges and
preferences of the Series C Preferred Stock.
Voting. Each share of Series C 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 C Preferred Stock held by the holder are convertible
immediately after the close of business on the record date fixed for the meeting
at which the vote is to be taken. The holders of the Series C Preferred Stock do
not have cumulative voting for the election of directors.
Dividends. The cumulative noncompounded dividend on the Series C Preferred
Stock is 4% per year 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:
o The redemption or conversion of the Series C Preferred Stock or
o The liquidation of OSS.
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We may not declare and pay any dividends on the common stock unless we first
declare and pay all unpaid dividends on the Series C Preferred Stock. Dividends
on the Series C Preferred Stock are equal in preference to any dividends
declared on our 10% Preferred Stock.
Redemption and Conversion. We may redeem the Series C Preferred Stock, in
whole or in part, at any time for a price per share equal to $1,200 per share
plus any accrued but unpaid dividends plus a warrant to purchase a number of
shares of common stock equal to each Series C Preferred Stockholder's pro-rata
allocation of 100,000 shares of common stock based on the number of shares of
Series C Preferred Stock held by the holder in relation to the total authorized
shares of Series C Preferred Stock. The warrant would have a term of three years
from the date of issuance and a per share exercise price equal to the Maximum
Conversion Price (as defined below) for the Series C Preferred Stock being
redeemed. In addition, we may redeem the Series C Preferred Stock upon the
receipt of a notice of conversion with respect to the Series C Preferred Stock
for which the Conversion Price (as defined below) is less than $5.40 per share
for a per share price equal to the product of:
o The number of shares of our common stock otherwise issuable upon
conversion of the shares of Series C Preferred Stock on the date of
conversion and
o The closing bid price of our common stock on the date of conversion.
Each share of the outstanding Series C Preferred Stock is convertible, at
any time at the election of the holder, into the number of shares of common
stock equal to $1,000 divided by the lesser of:
o The Maximum Conversion Price (as defined below) for the Series C
Preferred Stock being converted or
o The Market Price (as defined below) for our common stock at the time
of conversion (the "Conversion Price").
The Market Price is defined 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. The Maximum Conversion
Price is defined as 140% of the closing bid price of our common stock on the
date of the issuance of the Series C Preferred Stock being converted, initially
$20.65, or, if less and if the conversion is occurring at least 120 days after
the issuance of the Series C Preferred Stock being converted, 100% of the
closing bid price of our common stock on the trading day closest to the date
that is 120 days after the Series C Preferred Stock was issued. In addition, we
may require the conversion of the Series C Preferred Stock at any time during
the 20 day period immediately following 20 consecutive trading days during which
the closing bid price of our common stock is 200% or more of the Maximum
Conversion Price. The Series C Preferred Stock must be converted five years
after the date on which it was issued.
If we elect to redeem the Series C Preferred Stock, we must give at least
30 days notice to the holders of the Series C Preferred Stock of our intent to
redeem the Series C Preferred Stock. During this 30 day period, the holders of
the Series C Preferred Stock may convert their shares of Series C Preferred
Stock into common stock at the Conversion Price applicable on the day the holder
elects to convert the Series C Preferred Stock. After the 30 day period, the
holders of the Series C Preferred Stock may not convert the Series C Preferred
Stock into shares of common stock. Upon any conversion of the Series C Preferred
Stock we have the option to pay the accrued but unpaid dividend on the Series C
Preferred Stock either
o In cash or
o By issuing additional shares of common stock calculated by adding the
amount of the accrued but unpaid dividend to the $1,000 stated value.
Preemptive Rights. The holders of the Series C 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 C 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 C Preferred Stock in cash plus
payment of all accrued but unpaid dividends. The liquidation
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preference on the Series C Preferred Stock is equal in preference to the
liquidation preference on the 10% Preferred Stock. Thereafter, holders of the
Series C Preferred Stock shall be entitled to share in any distributions made to
the holders of our common stock as if each share of Series C Preferred Stock was
converted 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 the
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):
o Our Annual Report on Form 10-KSB for the year ended December 31, 1998.
o 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.
o 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 giving said
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reports. You should refer to their 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 he or she 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 may be permitted to our directors, officers and
controlling persons in accordance with these provisions, or otherwise, we have
been advised that, in the opinion of the SEC, indemnification for liabilities
arising under the Securities Act of 1933 is against public policy as expressed
in the Securities 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:
o Any breach of the duty of loyalty to OSS or its shareholders,
o Acts or omissions not in good faith or that involved intentional
misconduct or a knowing violation of law,
o Dividends or other distributions of corporate assets that are in
contravention of specified statutory or contractual restrictions,
o Violations of specified laws, or
o 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 OSS. 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.................................................................3
Special Note Regarding Forward-Looking Statements...........................10
Use of Proceeds.............................................................10
Recent Developments.........................................................10
Selling Shareholders........................................................13
Plan of Distribution........................................................14
Description of Securities...................................................15
Where You Can Find More Information.........................................17
Legal Matters...............................................................17
Experts.....................................................................17
Indemnification.............................................................18
================================================================================
================================================================================
ONLINE SYSTEM
SERVICES, INC.
_______________
PROSPECTUS
_______________
____________, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED TO BE IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses of OSS in connection
with the sale and distribution of the Shares being registered pursuant to this
Form S-3 Registration Statement. All of the amounts shown are estimates, except
for the Securities and Exchange Commission registration fee and the Nasdaq
listing fee. All of such expenses will be paid by OSS.
Securities and Exchange Commission fee $4,073.21
Accounting fees and expenses $1,500.00
Legal fees and expenses $3,000.00
Printing, Mailing $1,000.00
Transfer Agent fees $500.00
Miscellaneous $926.79
-----------------
TOTAL $11,000.00
Item 15. Indemnification of Officers and Directors
OSS' articles of incorporation provide that OSS shall indemnify, to the
full extent permitted by Colorado law, any director, officer, employee or agent
of OSS made or threatened to be made a party to a proceeding, by reason of the
fact that such person is or was a director, officer, employee or agent of OSS
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 directors, officers and controlling
persons of OSS pursuant to the foregoing provisions, or otherwise, OSS has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
OSS' articles of incorporation limit the liability of its directors to the
fullest extent permitted by Colorado law. Specifically, the articles of
incorporation provide that directors of OSS 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 or contractual restrictions, (iv) violations
of certain laws, or (v) any transaction from which the director derives an
improper personal benefit. Liability under federal securities law is not limited
by the Articles.
Item 16. Exhibits
3.1 Articles of Incorporation, as amended, of Online System
Services, Inc. (4)
3.2 Bylaws of Online System Services, Inc. (1)
4.1 Specimen form of Online System Services, Inc. Common Stock
certificate (2)
4.2 Form of Warrant issued to EBI Securities Corporation (3)
5.1 Opinion of Counsel (4)
23.1 Consent of Arthur Andersen LLP*
- ----------
* Filed herewith
(1) Filed with the initial Registration Statement on Form SB-2, filed April 5,
1996, Commission File No. 333-3282-D.
(2) Filed with Amendment No. 1 to the Registration Statement on Form SB-2,
filed May 3,1996, Commission File No. 333-3282-D.
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<PAGE>
(3) Filed as Exhibit 4.6 to the Registration Statement on Form S-3, filed
December 22, 1998, Commission File No. 333-69477.
(4) Filed with the Registration Statement on Form S-3, filed January 29, 1999,
Commission File No. 333-71503.
Item 17. Undertakings
A. The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement to:
(a) include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933,
(b) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
together, represent a fundamental change in the information in
the registration statement, and
(c) to include any additional or changed material information on the
plan of distribution;
(2) to treat, for determining liability under the Securities Act of
1933, each such post-effective amendment as a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof; and
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the
termination of the offering.
B. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant as discussed above, or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this amendment to the
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Denver, State of Colorado, on April 23, 1999.
ONLINE SYSTEM SERVICES, INC.
By /s/ R. Steven Adams
------------------------------
R. Steven Adams, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below on the 23rd day of April,
1999, by the following persons in the capacities indicated:
/s/ R. Steven Adams
- ---------------------------------------------------
R. Steven Adams,
(President, Chief Executive Officer and a Director)
/s/ William R. Cullen by R. Steven Adams attorney-in-fact
- ---------------------------------------------------
William R. Cullen
(Chief Financial Officer and a Director)
/s/ Stuart J. Lucko
- ---------------------------------------------------
Stuart J. Lucko
(Controller)
- ---------------------------------------------------
Robert J. Lewis
(Director)
/s/ Richard C. Jennewine by R. Steven Adams
attorney-in-fact
- ---------------------------------------------------
Richard C. Jennewine
(Director)
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<PAGE>
Online System Services, Inc.
Form S-3
Index to Exhibits
3.1 Articles of Incorporation, as amended, of Online System Services,
Inc. (4)
3.2 Bylaws of Online System Services, Inc. (1)
4.1 Specimen form of Online System Services, Inc. Common Stock
certificate (2)
4.2 Form of Warrant issued to EBI Securities Corporation (3)
5.1 Opinion of Counsel (4)
23.1 Consent of Arthur Andersen LLP*
- ----------
* Filed herewith
(1) Filed with the initial Registration Statement on Form SB-2, filed April 5,
1996, Commission File No. 333-3282-D.
(2) Filed with Amendment No. 1 to the Registration Statement on Form SB-2,
filed May 3,1996, Commission File No. 333-3282-D.
(3) Filed as Exhibit 4.6 to the Registration Statement on Form S-3, filed
December 22, 1998, Commission File No. 333-69477.
(4) Filed with the Registration Statement on Form S-3, filed January 29, 1999,
Commission File No. 333-71503.
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Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement on Form S-3, to be filed on January 23,
1999, of our report dated March 10, 1999, included in Online System Services,
Inc. Form 10-KSB for the year ended December 31, 1998 and to all references to
our Firm included in this Registration Statement.
/s/ Arthur Andersen LLP
Denver, Colorado
April 23, 1999
