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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
OMB APPROVAL
OMB Number: 3235-0418
Expires: February 28, 2000
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FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Amendment No. )
ONLINE STOCK MARKET GROUP
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(Exact name of small business issuer in its charter)
California 7389 95-4655142
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(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
1875 Century Park East, Suite: 1880, Los Angeles, CA 90067 (310) 201-9700
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(Address and telephone number of principal executive offices)
1875 Century Park East, Ste: 1880, Los Angeles, CA 90067
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(Address of principal place of business or intended principal place of business)
Michael B. Cratty, 1875 Century Park East, Suite: 1880, Los Angeles, CA 90067 (310) 201-9700
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(Name, Address and telephone number of agent for service)
COPIES TO:
Miles Garnett, Esq., 66 Wayne Avenue, Atlantic Beach, NY 11509 (516) 371-4598
Approximate date of proposed sale to the public: As soon as practicable after the effective date of this
Registration Statement.
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the
Securities Act, please check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the 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 the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the
following box and list the Securities Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Common Stock 1,000,000 $4.00 $4,000,000.00 $1,056.00
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Title of each Share Proposed maximum Proposed maximum Amount of
class of securities amount to be offering price aggregate offering registration fee
to be registered registered per unit price
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Note: Specific details relating to the fee calculation shall be furnished in
notes to the table, including references to provisions of Rule 457 (ss.230.457
of this chapter) relied upon, if the basis of the calculation is not otherwise
evident from the information presented in the table. If the filing fee is
calculated pursuant to Rule 457(o) under the Securities Act, only the title of
the class of securities to be registered, the proposed maximum aggregate
offering price for that class of securities and the amount of registration fee
need to appear in the Calculation of Registration Fee table. Any difference
between the dollar amount of securities registered for such offerings and the
dollar amount of securities sold may be carried forward on a future registration
statement pursuant to Rule 429 under the Securities Act.
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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PROSPECTUS
An Initial Registered Public Offering
ONLINE STOCK MARKET GROUP
1,000,000 shares of Common Stock
The purchase price of our shares offered to the public is $4.00.
We are selling 1,000,000 shares of common stock at no par value per share (the
"Common Stock") which represents 9% of the total outstanding shares based on the
maximum amount of the offering. We are a California corporation. We have fixed
the price of the 1,000,000 shares made in this offering at $4.00 each.
We will sell the shares ourselves and do not plan to use underwriters or pay any
commissions. We will be selling our shares in a direct participation offering
and no one has agreed to buy any of our shares. We are offering a minimum of
100,000 shares at the offering price of $4.00 per share ("Minimum Offering"),
for total minimum offering proceeds of $400,000 ("Minimum Offering Proceeds").
The Minimum Offering Proceeds will be held in escrow until we reach the Minimum
Offering. If we reach the Minimum Offering, all escrowed proceeds will be
released and used for the purposes described in Use of Proceeds hereafter. If we
do not reach the Minimum Offering, we win return all proceeds to the subscribers
along with the pro-rata interest earned on their funds. The offering will remain
open until June 30, 2001, and may be extended by a period of an additional year
unless we decide to cease selling efforts prior to this date.
This is our public offering, and no public market exists for our shares. We hope
to have prices for our shares quoted on the Nasdaq SmallCap Market after we
complete our offering.
Prior to this offering, there has been no public market for the shares and there
can be no assurance that such a market will develop. The offering price for the
common stock has been arbitrarily determined by us. The minimum subscription is
1000 shares.
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The securities offered hereby are highly speculative and involve a high degree
of risk. See the caption "Risk Factors" commencing on page 7.
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PER SHARE TOTAL
MINIMUM MAXIMUM
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Public offering price .................................... $4.00 $400,000 $4,000,000
Underwriting discounts and commissions ................... none none none
Proceeds, before expenses, to us......................................... $400,000 $4,000,000
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The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
The date of this Prospectus is , 2000
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TABLE OF CONTENTS
Summary ..................................................................... 5
Our Company ................................................................. 5
Risk Factors ................................................................ 7
Use of Proceeds ............................................................. 19
Capitalization .............................................................. 20
Dilution .................................................................... 21
Business .................................................................... 22
Management Discussion of Analysis of Condition and Results of Operations .... 34
Principal Shareholders ...................................................... 36
Management .................................................................. 37
Certain Transactions ........................................................ 42
Description of Securities ................................................... 42
Shares Eligible for Future Sale ............................................. 44
Available Information ....................................................... 45
Dividend Policy ............................................................. 46
Stock Transfer Agent ........................................................ 46
Experts ..................................................................... 47
Legal Matters ............................................................... 47
Index to Financial Statements .............................................. F-1
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Summary
Our Company
Online Stock Market Group is a California corporation formed in October
1997. We have 100% ownership of a full-service broker/dealer firm registered
with the National Association of Securities Dealers (NASD) and which provides
traditional brokerage services for individual and corporate investors, as well
as offers state-of-the-art electronic online securities investing services on
the Internet. A "general securities" registration with the NASD allows our
brokerage firm to provide a broad range of securities brokerage services,
including purchasing, selling private and publicly traded stocks, corporate
bonds and other securities for customers. We also expect our brokerage firm to
apply for regulatory approval to trade for its own account and to provide
underwriting and investment banking services for small and medium size
businesses, specializing in raising capital for companies on the Internet.
We have authorized 20,000,000 shares at no par value per share. We are
selling 1,000,000 shares of common stock which have no par value per share (the
"Common Stock") which represents 9% of the total outstanding shares based on the
maximum amount of the offering. We incorporated in October, 1997, as a
California corporation. We have fixed the price of the 1,000,000 shares made in
this offering at $4.00 each.
We expect our revenues and profits, if any, to be earned from the
following basic sources: (a) commissions earned when purchasing and selling
securities for customers of the broker/dealer firm, (b) commissions and other
underwriting fees earned when raising capital for other businesses, (c)
financial consulting fees earned when assisting companies to establish web
sites, and for other more traditional financial advisory services as allowed by
law and regulation, (d) equity issued to us by companies for which we raise
capital, including common stock, options, and warrants, and (e) if approved,
potential profits earned from trading securities for our own account as a
dealer. There is no assurance that we or our securities broker/dealer will earn
any profits or revenues. See "Risk Factors."
We have established our own broker/dealer firm by forming a 100% owned
subsidiary called Online Stock Market, Inc. ("OSM"), which is registered as a
general securities brokerage firm with the NASD, Securities and Exchange
Commission ("SEC"), and thirty-four state jurisdictions. We have begun staffing
with securities professionals, including principals, brokers, compliance
officers, financial analysts and administrative personnel. Our present officers
are two Series 24 principals and a Series 27 financial operations principal. See
"Business - Employees," "Risk Factors - No Operating History - New Business,"
and "Business - Government Regulation."
Our executive offices are located at 1875 Century Park East, Suite
1880, Los Angeles, California 90067, and our telephone numbers are (888)
892-5578 and (310) 201-9700. Our Internet address is: www.obroker.com and our
e-mail address is: [email protected].
Online Stock Market, Inc.
Online Stock Market, Inc. (OSM) is a wholly-owned subsidiary of Online
Stock Market Group, formed in February 1998 for the purpose of becoming a
broker/dealer firm registered with the NASD. In April 1999, OSM filed Form BD
with the NASD, the SEC, and selected states to register as a fully-disclosed
introducing member broker/dealer. This registration has been approved by the
NASD, the SEC, and 34 states, with additional state registrations in progress.
There can be no assurance that additional state registrations will be obtained.
OSM commenced operations and began opening customer trading accounts in December
1999.
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The Offering
Common Stock offered
for sale hereby
Up to a maximum of 1,000,000 shares by us.
Offering Price
$4.00 per share offered to the public. The shares
are being sold on a "best efforts" basis.
Terms of the Offering
A minimum offering of 100,000 shares at $4.00 per
share ("Minimum Offering"), and proceeds of $400,000
("Minimum Offering Proceeds"). Offering proceeds will be
held in escrow until subscriptions reach the Minimum
Offering. If we reach the Minimum Offering, all escrowed
proceeds will be released and used for the purposes
described in Use of Proceeds hereafter. If we do not
reach the Minimum Offering, we will return all proceeds
to the subscribers along with the prorata interest
earned on their funds. The offering will remain open
until June 30, 2001, unless we decide to terminate the
selling efforts prior to this date. The minimum
subscription is 1000 shares.
Common Preferred
Authorized and Stock Stock
Outstanding ----- ----
Shares of Authorized: 20,000,000 4,000,000
Stock Outstanding:
Prior to Offering: 9,312,921 1,338,205
After Offering*: 10,312,921 1,338,205
*Assuming the maximum amount of the offering has been subscribed.
Unless otherwise indicated, the information in this prospectus,
irrespective of the date referenced, assumes that there is no exercise of
outstanding options or warrants to purchase additional shares.
Plan of Distribution
This is a direct participation with no minimum
offering requirement, and with no commitment by anyone
to purchase any shares. The shares will be offered and
sold on a "best efforts" basis by our principal
executive officers and directors, although we may retain
the services of one or more NASD registered
broker/dealers as selling agent(s) to effect offers and
sales on our behalf. The broker/dealers will receive a
commission on their sales. None have been retained as of
this date.
Use of Proceeds
Assuming that the entire offering will be sold then
up to the first $400,000 that we raise will be used to
pay the expenses of the offering. The priority for funds
raised in excess of that amount will be applied in the
following order (i) marketing; (ii) personnel(1); (iii)
technology; (iv) working capital; (v) brokerage
operations; and (vi) expansion. See "Use of Proceeds."
(1) Michael B. Cratty, the Chief Executive Officer, is expected to earn a salary
of $100,000 during the fiscal year ending March 31, 2000, and an amount
equal to at least $50,000 will be set aside to pay one other general
securities principal for that period. Actual revenues and workloads during
that time period may cause a higher salary to become appropriate. See
"Management."
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Risk Factors
The securities offered hereby are highly speculative and involve
substantial risks. Prospective investors should carefully consider the following
risk factors before making an investment decision.
We have a limited operating history and expectations of future losses, so that
there is an uncertainty of profitability.
We were formed in October, 1997, and have only recently engaged in the
broker/dealer business and have not begun to engage in underwriting or been
approved to deal for our own account. Our executive officers do not have prior
experience in supervising a general securities broker/dealer firm, although they
have previously been registered with the NASD as representatives. We have
received approval from the NASD which imposes limitations on the kinds of
securities business we may conduct and the number of registered personnel we may
engage. We are hiring registered securities professionals to operate our
business. There is absolutely no assurance that we will be able to operate a
general securities brokerage firm capable of conducting a securities brokerage
and underwriting business. As a result of our lack of an operating history in
any business, we do not have historical financial data on which to base
operating expenses. We may be unable to adjust spending in a timely manner to
compensate for any unexpected shortfall of revenues. Accordingly, any
significant shortfall of demand for our products and services in relation to our
expectations would have an immediate adverse impact on our business, operating
results, and financial condition.
We expect to have competition some of which might be substantial.
The market for our broker/dealer and underwriting business is intensely
competitive and is characterized by rapid changes in technology and user needs
as well as the frequent introduction of new services and web sites. Our
principal competitors include other securities brokerage firms, many of which
already provide online securities brokerage, underwriting, and related services.
These competitors are licensed, operating, and well capitalized. These
competitors have longer operating histories, greater name recognition, larger
installed customer bases, and substantially greater financial, technical, and
marketing resources than we do, which is a new business with no operating
history. Securities brokerage firms, including regional brokerage firms, online
IPO firms such as Wit Capital and W.R. Hambrecht, and large discount brokerage
firms such as E-Trade and Schwab & Co., have established Internet web sites and
online information and trading services. We believe that the principal
competitive factors which affect the market for our online brokerage services
are quality of service, securities expertise, technical reliability, ease of
use, graphical user interface look and feel, ability to respond to changing
customer needs, depth and breadth of services, price, and financial strength.
Other than licensing requirements, technical expertise, and the limited time
available to enter the market, there are no significant proprietary or other
barriers to entry that could keep potential competitors from developing or
acquiring similar tools and providing competing services in our proposed market.
Our ability to compete successfully in the securities business will depend in
large part upon our ability to attract high quality securities professionals and
new customers, develop product enhancements, and respond effectively to
continuing technological changes. There can be no assurance that we will be able
to compete successfully in the future, or that future competition for securities
brokerage and financial services will not have a material adverse effect on our
business, operating results, and financial condition.
We expect to have future additional capital requirements.
Our capital requirements depend on numerous factors, including the
rate of market acceptance of our products and services, our ability to maintain
and expand our customer base, the rate of expansion of our network
infrastructure, the level of resources required to expand our market,
information systems and research and development activities, the pricing and
timing of acquisi-
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tions, the availability of hardware and software provided by third party
vendors, and other factors. The timing and amount of such capital requirements
cannot be accurately predicted. If capital requirements vary materially from
those currently planned, or if we are unable to sell the entire amount of the
offering, we may require additional financing sooner than anticipated.
Additional capital requirements are not anticipated during the next twelve
months. We have no commitments for any additional financing, and there can be no
assurance that any such commitments can be obtained on favorable terms, if at
all.
Any additional equity financing may be dilutive to our shareholders,
and debt financing, if available, may involve restrictive covenants with respect
to dividends, raising future capital and other financial and operational
matters. If we are unable to obtain additional financing as needed, we may be
required to reduce the scope of our operations or our anticipated expansion,
which could have a material adverse effect on our business, operating results
and financial condition.
We are affected by general economic conditions which may cause our business
irreparable losses.
We believe that the securities industry is necessarily affected by
general economic conditions, which may affect interest rates, corporate
earnings, employment, and specifically participation in the securities markets
by the general public, investment professionals, and financial institutions.
Unexpected market volatility or illiquidity or tightening of credit markets
could adversely impact investors perceptions of the market, resulting in less
overall market volume. Such events could have a material adverse affect on our
business, possibly resulting in losses.
The speculative nature of the securities brokerage business may cause you a very
high risk.
The securities brokerage business is inherently speculative and risky.
We have not hired the experienced securities professionals necessary to operate
a securities brokerage firm, and there is no assurance that we will be able to
engage such personnel. While our current officers have received the minimum
registrations from the NASD to permit a brokerage firm to operate, there is no
assurance that we will be able to retain such personnel. See "MANAGEMENT." The
securities brokerage business requires extensive compliance procedures and
policies, and involves substantial fiduciary duties to its clients. Brokerage
firms can incur unexpected losses in a number of ways, including but not limited
to (i) legal claims for misconduct by its brokers, (ii) legal claims alleging
the failure of the firm to conduct adequate due diligence on a securities
underwriting, (iii) losses incurred in trading securities for its own account,
(iv) extensive costs incurred on securities offerings that are not completed,
resulting in the failure to earn commissions and other incentive compensation,
(v) loss of customers due to trading and investment losses incurred by them or
for other reasons, (vi) revocation of necessary government and NASD licenses due
to violations of applicable rules and regulations by the firm, (vii) failure to
obtain the necessary operating licenses, and (vii) other risks inherent in
establishing, owning, and operating a securities brokerage firm. In general,
securities firms are directly affected by national and international economic
and political conditions, broad trends in business and finance, and substantial
fluctuations in volume and price levels of securities and futures transactions.
In October 1987, October 1989, and April 2000, the stock market suffered three
of the largest declines in history. As a result of these declines, many firms in
the industry suffered financial losses, and the level of individual investor
trading activity decreased. Reduced trading volume and prices have historically
resulted in reduced transaction revenues. In periods of low volume, our
profitability would be adversely affected because certain expenses, consisting
primarily of salaries and benefits, computer hardware costs, and occupancy
expenses, remain relatively fixed. Severe market fluctuations in the future
could have a material adverse effect on our business, financial condition, and
operating results. Certain of our competitors with more diverse product and
service offerings may be better positioned to withstand such a downturn in the
securities industry. See "RISK FACTORS - Competition." Our brokerage business,
by its nature, would be subject to various other risks, including customer
defaults and employees' misconduct and errors.
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In addition, to the extent that we permit customers to purchase securities on
margin, we are subject to risks inherent in extending credit, especially during
periods of rapidly declining markets in which the value of the collateral held
by us could fall below the amount of a customer's indebtedness. Under specific
regulatory guidelines, the borrowing and lending of securities by us would be
accompanied, respectively, by the disbursement and receipt of cash deposits.
Failure to maintain cash deposit levels at all times at least equal to the value
of the related securities could subject us to risk of loss, should there be
sharp changes in the market value of securities, and parties to the borrowing
and lending transactions fail to honor their commitments. Any such losses could
have a material adverse effect on our business, financial condition, and
operating results.
Our income could be affected by the market's volatility which impacts electronic
trading.
We expect that most of our revenues will be from electronic brokerage
services, and expect this business to continue to account for almost all of our
revenues in the foreseeable future. As with other securities firms, we will be
directly affected by economic and political conditions, broad trends in business
and finance and changes in volume and price levels of securities and futures
transactions. In recent months, the U.S. securities markets have fluctuated
considerably and a downturn in these markets could adversely affect our
operating results. In October 1987, October 1989, and April 2000, the stock
market suffered major declines, as a result of which many firms in the industry
suffered financial losses, and the level of individual investor trading activity
decreased after these events. Reduced trading volume and prices have
historically resulted in reduced transaction revenues. When trading volume is
low, our profitability may be adversely affected because our overhead should
remain relatively fixed. Severe market fluctuations in the future could have a
material adverse effect on our business, financial condition and operating
results. Some of our competitors with more diverse product and service offerings
might withstand such a downturn in the securities industry better than we would.
See "Risk Factors-Competition."
Our brokerage business, by its nature, is subject to various other
risks, including customer default and employees' misconduct and errors. We allow
certain customers to purchase securities on margin; therefore, we would be
subject to risks inherent in extending credit. This risk is especially great
when the market is rapidly declining and the value of the collateral we hold
could fall below the amount of a customer's indebtedness. Under specific
regulatory guidelines, any time we borrow or lend securities, we must
correspondingly disburse or receive cash deposits. If we fail to maintain
adequate cash deposit levels at all times, we could run the risk of loss if
there are sharp changes in market values of many securities and parties to the
borrowing and lending transactions fail to honor their commitments. Any such
losses could have a material adverse effect on our business, financial condition
and operating results.
There are risks of systems failure.
We expect our brokerage firm to receive and process trade orders
through the Internet, online services, and touch-tone telephone. This method of
trading is heavily dependent on the integrity of the electronic systems
supporting it. We do not have our own proprietary electronic trading technology
and must license the technology from another source. While we have identified
and licensed a specific system, there is no assurance that it will be
satisfactory or integrate and operate properly with our services. Orders placed
from the close of the stock markets one day until the opening the next business
day must be processed through the electronic system in a short period of time
prior to the opening of the stock markets. Heavy stress placed on the systems
during peak trading times could cause our systems to operate at unacceptably low
speed or fail. Any significant degradation or failure of our systems or any
other systems in the trading process (e.g., online service providers, record
keeping and data processing functions performed by third parties, and
third-party software such as Internet browsers), even for a short time, could
cause customers to suffer delays in trading. Such delays could cause substantial
losses for customers and could subject us to claims from customers loss
including litigation claiming fraud or negligence. Any such lawsuits would
require the attention of senior management and could have a material adverse
effect on our busi-
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ness, financial condition, and operating results. During a systems failure, we
may be able to take orders by telephone. However, under applicable regulations,
all our associates accepting telephone orders would have to have securities
brokers' licenses. An adequate number of personnel with securities brokers'
licenses may not be available to take calls in the event of a systems failure.
There can be no assurance that our network structure will operate appropriately
in the event of a sub-system, component, or software failure or that, in the
event of an earthquake, fire, or any other natural disaster, power or
telecommunications failure, act of God, or act of war, we will be able to
prevent an extended systems failure. Any systems failure that causes
interruptions in our operations could have a material adverse effect on our
business, financial condition, and operating results. In addition, we could
receive adverse publicity in the press in the event of systems failures.
A failure to service customers could have a drastic effect on our business.
We may fall short of our target response time for customer service
calls. Sub-optimal customer service would damage our reputation and lead
customers to transfer their business to other online brokers, limit their
trading activity, or cause them to refrain from electronic trading entirely. On
any given day, a surge of activity could cause us to fail to provide adequate
customer service. There can be no assurance that we will be able to serve our
customers adequately, and the failure to do so could have a material adverse
effect on our business, financial condition, and operating results.
There are risks associated with entering new markets.
No assurance can be given that we will be able to successfully operate
in any new markets. We plan to engage in best-efforts underwriting, raising
public and private equity capital for companies over the Internet and other
electronic media. In addition, our strategy provides full service electronic
online brokerage services to our customers. There can be no assurance that we
will be successful in our pursuit of these opportunities.
There are costs associated with clearing operations.
We do not implement self-clearing operations because of the substantial
capital commitments, financial risks, management requirements, and regulatory
restraints involved in providing our own clearing operation. Consequently, we
incur the costs of having a third party provide clearing services, which could
have a material adverse effect on our business, financial condition, and
operating results.
We are in an early stage of market development and depend on online commerce and
the Internet.
The market for electronic brokerage services, particularly over the
Internet, is at an early stage of development and is rapidly evolving. As is
typical for new and rapidly evolving industries, demand and market acceptance
for recently introduced services and products are subject to a high level of
uncertainly. With respect to us, this uncertainty is compounded by the risks
that consumers will not adopt online commerce and that an appropriate
infrastructure necessary to support increased commerce on the Internet will fail
to develop, in each case, to a sufficient extent and within an adequate time
frame to permit us to succeed. Sales of many of our services and products are
expected to depend upon the adoption of the Internet by consumers as a widely
used medium for commerce and communication. The Internet may not prove to be a
viable commercial marketplace because of inadequate development of the necessary
infrastructure, such as a reliable network backbone, or timely development of
complementary services and products, such as high speed modems and high speed
communication lines. The Internet has experienced, and is expected to continue
to experience, significant growth in the number of users and amount of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. In addition,
the Internet could lose its viability due to delays in the development or
adoption of new standards and protocols to handle increased levels of Internet
activity or
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due to increased governmental regulation. Moreover, if critical issues
concerning the commercial use of the Internet are not favorably resolved, if the
necessary infrastructure is not developed, or if the Internet does not become a
viable commercial marketplace, our business, financial condition, and operating
results would be materially adversely affected.
Adoption of online commerce, particularly by those individuals that
have historically relied upon traditional means of commerce, will require a
broad acceptance by such individuals of new and substantially different methods
of conducting business. Moreover, our brokerage services over the Internet are
believed to offer a distinctive look and functionality and, as a result,
intensive marketing and sales efforts may be necessary to educate prospective
customers regarding the uses and benefits of our brokerage services and
products. For example, consumers who already obtain brokerage services from more
traditional full commission brokerage firms, or even discount brokers, may be
reluctant or slow to change to obtaining brokerage services over the Internet.
Moreover, the security and privacy concerns of existing and potential users of
our services may inhibit the growth of online commerce generally, and online
brokerage trading in particular, which could have a material adverse effect on
our business, financial condition, and operating results.
There is rapid technological change which could result in delays in introduction
of new services and products.
The information and financial services and communications industries
are characterized by rapid technological change, changes in customer
requirements, frequent new service and product introductions and enhancements,
and emerging industry standards. The introduction of services or products
embodying new technologies and the emergence of new industry standards and
practices can render existing services or products obsolete and unmarketable.
Our future success will depend, in part, on our ability to develop or implement
leading technologies, develop new services and products that address the
increasingly sophisticated and varied needs of our existing and prospective
customers, and respond to technological advances and emerging industry standards
and practices on a timely and cost-effective basis. The development of new
services and products or enhanced versions of existing services and products
entails significant technical risks. There can be no assurance that we will be
successful in effectively using new technologies, adapting our services and
products to emerging industry standards, or developing, introducing and
marketing new or enhanced services and products. There is also no assurance that
we will not experience difficulties that could delay or prevent the successful
development, introduction or marketing of our services and products, or that any
new service and product enhancements will adequately meet the requirements of
the marketplace and achieve market acceptance. If we are unable, for technical
or other reasons, to develop and introduce new or enhanced services and products
in a timely manner in response to changing market conditions or customer
requirements, if new services and products do not achieve market acceptance, our
business, financial condition, and operating results would be materially
adversely affected.
There are risks associated with encryption technology.
A significant barrier to online commerce and communication is the
secure transmission of confidential information over public networks. We rely on
encryption and authentication technology to provide the security and
authentication necessary to effect secure transmission of confidential
information. There can be no assurance that advances in computer capabilities,
new discoveries in the field of cryptography, or other events or developments
will not result in a compromise or breach of algorithms used by us to protect
customer transaction data. If any such compromise of our security were to occur,
it could have a material adverse effect on our business, financial conditions
and operating results.
Our industry is substantially operated under government regulations.
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. Broker/dealers are subject to
regulations covering all aspects of the
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securities business, including sales methods, trade practices among
broker/dealers, use and safe-keeping of customers' funds and securities, capital
structure, record keeping, and the conduct of directors, officers, and
employees. We are required to comply with many complex laws and rules. All
securities brokerage firms and their sales, supervisory, and compliance
personnel must be registered with the NASD, the SEC, and state securities
agencies before they are permitted to engage in the securities business. The
registration process is time consuming, expensive, and subject to regulatory
discretion. Securities professionals must pass examinations and meet certain
standards in order to receive registrations to engage in the business.
Registered personnel must also complete continuing education programs annually
to maintain their registrations. Securities brokerage firms must have registered
principals responsible for managing the business and supervising brokers and
other personnel, as well as strict compliance procedures and policies.
Securities brokerage firms owe a fiduciary duty to all of their customers and
have a due diligence responsibility to investors with respect to companies for
which they raise capital. Securities brokerage firms are legally responsible for
the conduct of their brokers and other employees in the course of providing
services to customers. SEC rules and regulations require brokerage firms to
maintain certain levels of financial reserves (i.e., net capital requirements),
depending on the scope of their business. Public offerings of securities are
subject to review and generally must be registered with or qualified by the SEC,
the NASD, and state securities administrators. Federal, state and local
employment, health, and safety laws apply to securities brokerage firms to the
same extent as other businesses. Government regulation regarding trading and
offering securities on the Internet, and providing online brokerage services, is
rapidly evolving and still uncertain. Creating dedicated securities exchanges
for companies on the Internet is subject to numerous requirements and special
conditions delineated in a series of letters and releases issued by the SEC.
There is no assurance that registration requirements, net capital requirements,
regulatory review, and government regulations in general will not cause
substantial delays in the conduct or expansion of our business. Government
regulation may also subject us to substantial unanticipated costs and
liabilities, all of which could have a material adverse impact on the financial
condition, operating results, and our business performance. See "Business -
Government Regulation." Additional legislation, changes in rules promulgated by
the SEC, the NASD, the Board of Governors of the Federal Reserve System, the
various stock exchanges, and other self-regulatory organizations, or changes in
the interpretation or enforcement of existing laws and rules, may directly
affect the mode of operation and profitability of broker/dealers. The SEC, the
NASD or other self-regulatory organizations, and state securities commissions
may conduct administrative proceedings, which can result in censure, fine, the
issuance of cease-and-desist orders, or the suspension or expulsion of a
broker/dealer or any of its officers or employees. Our ability to comply with
all applicable laws and rules is dependent in large part upon the establishment
and maintenance of a compliance system reasonably designed to ensure such
compliance, as well as our ability to attract and retain qualified compliance
personnel. The principal purpose of regulation and discipline of broker/dealers
is the protection of customers and the securities markets, rather than
protection of creditors and stockholders of broker/dealers. We could in the
future be subject to disciplinary or other actions due to claimed noncompliance,
which could have a material adverse effect on our business, financial condition,
and operating results.
Furthermore, there can be no assurance that other federal, state, or
foreign agencies will not attempt to regulate our online and other electronic
activities. We anticipate that we may be required to comply with record keeping,
data processing, and other regulatory requirements as a result of proposed
federal legislation or otherwise, and we may be subject to additional regulation
as the market for online commerce evolves. Because of the growth in the
electronic commerce market, Congress has held hearings on whether to regulate
providers of services and transactions in the electronic commerce market, and
federal or state authorities could enact laws, rules, or regulations affecting
our business or operations. We may also may be subject to federal, state, and
foreign money transmitter laws and state and foreign sales and use tax laws. If
enacted or deemed applicable to us, such laws, rules, or regulations could be
imposed on our activities, thereby rendering our business or operations more
costly or burdensome, less efficient, or even impossible, any of which could
have a material adverse effect on our business, financial condition, and
operating results.
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Because of the increasing popularity of the Internet, it is possible
that laws and regulations may be enacted with respect to the Internet covering
issues such as user privacy, pricing, content, and quality of products and
services. The Telecommunications Act of 1996, which was enacted in January 1996,
prohibits the transmission over the Internet of certain types of information and
content. Although certain of these prohibitions have been held unconstitutional
by the US Supreme Court, modified legislation has since been introduced in
Congress and, in any event, the increased attention focused upon these liability
issues as a result of the Telecommunications Act would adversely affect the
growth of Internet and private network use. In addition, the adoption of other
laws or regulations may reduce the rate of growth of the Internet, which could
in turn decrease the demand for our services or could otherwise have a material
adverse effect on our business, financial condition, and operating results.
As a securities brokerage firm that intends to assist small and medium
size businesses to raise capital, primarily via the Internet, OSM will be
subject to the rules and regulations of the SEC, the NASD, and state securities
administrators regarding offering procedures, and the amount, type, and timing
of compensation which it may earn. These rules and regulations limit the amount
of compensation which we may earn from rendering underwriting or other capital
raising services. There is no assurance that such rules and regulations will not
have a material adverse impact on our financial condition, operating results,
and business performance.
We are affected by the net capital requirements.
The SEC, the NASD, and various other regulatory agencies have stringent
rules with respect to the maintenance of specific levels of net capital by
securities brokers, including the SEC's Uniform Net Capital Rule (the "Net
Capital Rule"), which governs OSM. Net capital is the net worth of a broker or
dealer (assets minus liabilities), less certain deductions that result from
excluding assets that are not readily convertible into cash and from
conservatively valuing certain other assets. Failure to maintain the required
net capital may subject a firm to suspension or revocation of registration by
the SEC and suspension or expulsion by the NASD and other regulatory bodies,
ultimately requiring the firm's liquidation. In addition, a change in the net
capital rules, the imposition of new rules, or any unusually large charge
against net capital could limit those operations of OSM that require the
intensive use of capital, such as trading activities and the financing of
customer account balances, and also could restrict our ability to pay dividends,
repay debt, and redeem or purchase shares of our outstanding stock. A
significant operating loss or any unusually large charge against net capital
could adversely affect our ability to expand or even maintain our business,
which would have a material adverse effect on our business, financial condition,
and operating results.
There are risks associated with acquisitions, joint ventures and other strategic
relationships.
While the we have no current agreements or negotiations underway with
respect to any potential acquisitions, we may make acquisitions of other
companies or technologies in the future. Acquisitions entail numerous risks,
including difficulties in the assimilation of acquired operations and products,
diversion of management's attention to other business concerns, amortization of
acquired intangible assets, and potential loss of key employees of acquired
companies. We have no experience in assimilating acquired organizations. No
assurance can be given as to our ability to integrate successfully any
operations, personnel, services, or products that might be acquired in the
future, and our failure to do so could have a material adverse effect on our
business, financial condition, and operating results.
There are risks associated with international business.
A component of our strategy is our effort to attract international
customers. To date, we have no experience in providing brokerage services
internationally. There can be no assurance that we will be able to market
successfully our services and products in domestic or international markets. In
addition, there are certain risks inherent in doing business in international
markets,
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particularly in the heavily regulated brokerage industry, such as unexpected
changes in regulatory requirements, tariffs, and other trade barriers,
difficulties in staffing and managing foreign operations, political instability,
fluctuations in currency exchange rates, reduced protection for intellectual
property rights in some countries, seasonal reductions in business activity
during the summer months in Europe and certain other parts of the world, and
potentially adverse tax consequences, any of which could adversely impact the
success of our attempt to conduct international operations. There can be no
assurance that one or more of such factors will not have a material adverse
effect on our business, financial condition, and operating results.
Our financial projections may be inaccurate.
Financial projections concerning our estimated operating results and
financial condition may be prepared by management, although no projections or
forecasts are included in the prospectus. Any projection regarding us would be
based on certain assumptions which may prove to be inaccurate and which are
subject to future conditions which may be beyond our control, such as general
industry conditions. We may experience unanticipated costs, or anticipated
revenues may not materialize, resulting in lower revenues than forecast. There
is no assurance that the results illustrated in any financial projections will
in fact be realized by us. Any financial projections would be prepared by our
management and would not have been examined or compiled by independent certified
public accountants. Accordingly, neither the independent certified public
accountants nor our counsel would be able to provide any level of assurance on
them.
We have made a determination of the purchase price arbitrarily.
The purchase price for the Shares has been determined by our Board of
Directors. Although the Board of Directors believes the purchase price to be
reasonable, no independent valuation has been performed to determine whether
this represents fair value for these securities. There can be no assurance that
this price will necessarily reflect the true market value of these securities,
if such a market ever develops.
There is uncertainty of current and future demand for Online Stock Market(TM).
Although we believe that the market for online brokerage and
underwriting services will grow significantly, there can be no assurance that
this market will develop to the extent anticipated by us. Investors and
companies may continue to utilize traditional securities brokerage and
investment banking services outside of the Internet, or with competitors on the
Internet. Because of these factors, development of the market for online
financial services is uncertain and unpredictable. If the market fails to
increase or increases more slowly than anticipated, our business, operating
results, and financial condition could be materially and adversely affected.
We have conflicts of interest.
Our officers and directors may engage in other businesses from time to
time which may divert their management time from our business. Furthermore, our
officers and directors from time to time may form new entities and open other
businesses in the future. Our officers and directors believe that they will have
the resources necessary to fulfill their obligations to all entities for which
they are responsible. See "Management." The consultants', officers', and
directors' compensation from us has not been determined pursuant to arm's-length
negotiation. The licensing agreement between us and Virtual Wall Street, Inc.,
is not an arms-length agreement. See "Use of Proceeds" and "Business - License
Agreement with Virtual Wall Street, Inc."
We must depend on key personnel.
Our success is substantially dependent on the performance of our
executive officers and key employees. Given our early stage of development in
the Online Stock Market(TM) business, we are dependent on our ability to retain
and motivate high quality personnel, including personnel regis-
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<PAGE>
tered with the NASD. Although we believe we will be able to hire qualified
personnel for such purposes, an inability to do so could materially adversely
affect our ability to market, sell, and enhance our services. The market for
qualified personnel has historically been, and we expect that it will continue
to be, intensely competitive. The demand for experienced securities
professionals, consultants, marketers, and programmers is expected to continue
to increase significantly over the next several years, particularly as Internet
utilization grows. The loss of one or more of our key employees or our inability
to hire and retain other qualified employees could have a material adverse
effect on our business.
Our officers and directors have limited liability.
We have adopted provisions to our Articles of Incorporation and By-laws
which limit the liability of our officers and directors and provide for
indemnification by us of our officers and directors to the fullest extent
permitted by California corporate law. Our Articles of Incorporation generally
provide that our officers and directors shall have no personal liability to us
or our stockholders for monetary damages for breaches of their fiduciary duties
as directors, except for breaches of their duties of loyalty, acts or omissions
not in good faith or which involve intentional misconduct or knowing violation
of law, acts involving unlawful payment of dividends or unlawful stock purchases
or redemptions, or any transaction from which a director or officer derives an
improper personal benefit. Such provisions substantially limit the shareholders'
ability to hold officers and directors liable for breaches of fiduciary duty and
may require us to indemnify our officers and directors.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by us
of expenses incurred or paid by a director, officer or controlling person 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
offered, we will submit to a court of appropriate jurisdiction the question of
whether such indemnification by us is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
We may have an innability to address technological changes and customer
requirements.
Our success will depend significantly on our ability to continually
enhance our products and to develop or acquire new services to satisfy evolving
industry standards, technological developments, and changing customer needs.
There can be no assurance that we will successfully develop or acquire product
or service enhancements or new services or products, introduce such services,
products, or enhancements on a timely basis, or successfully market them. Our
delay or failure to develop or acquire technological improvements or to adapt
our services to technological change would have a material adverse effect on our
business, operating results, and financial condition. There can also be no
assurance that new technologies will not be developed by one or more third
parties that render our services technologically obsolete.
We may have an inability to protect proprietary rights.
We will attempt to protect our Online Stock Market(TM) business under a
combination of copyright, trade secret, and trademark laws as well as by
contractual restrictions on employees and third parties. Despite these
precautions, it may be possible for unauthorized parties to copy our services or
otherwise obtain and use information that we regard as proprietary. We have no
patents, and existing trade secret and copyright laws provide only limited
protection. Furthermore, in certain extreme circumstances, we could lose our
exclusive perpetual license to Online Stock Market(TM) granted to it by our
former principal stockholder. See "BUSINESS - License Agreement with Vir-
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<PAGE>
tual Wall Street, Inc." Certain provisions of other license and distribution
agreements we intend to use, including provisions protecting against
unauthorized use, copying, transfer, and disclosure, may be unenforceable under
the laws of certain jurisdictions. Furthermore, we may be required to negotiate
limits on these provisions from time to time. In addition, the laws of some
foreign countries do not protect our proprietary rights to the same extent as do
the laws of the United States. There can be no assurance that the steps taken by
us will be adequate to deter misappropriation of proprietary information or that
we will be able to detect unauthorized use and take appropriate steps to enforce
our intellectual property rights. Significant and protracted litigation may be
necessary to protect our intellectual property rights, to determine the scope of
the proprietary rights of others, or to defend against claims for infringement.
There can be no assurance that third-party claims, with or without merit,
alleging infringement will not be asserted against us. Such assertions can be
time consuming and expensive to defend. They could require us to cease the use,
marketing, and sale of infringing products and services, to incur significant
litigation costs and expenses, to develop or acquire non-infringing technology,
and to obtain licenses to the alleged infringing technology. There can be no
assurance that we would be able to develop or acquire alternative technologies
or to obtain such licenses on commercially acceptable terms.
We have not registered any trademarks and trade names.
We believe that our trademarks and trade names will have significant
value and will be important to the marketing of our services and products. We
have filed registrations for the marks "Online Stock Market" and "Obroker.com."
There can be no assurance, however, that we will be able to complete our
trademark registration with the United States Patent and Trademark Office, that
our marks and names will not violate the proprietary rights of others, that our
marks and names would be upheld if challenged, or that we will not be prevented
from using our marks and names, any of which could have an adverse effect on us.
In addition, there can be no assurance that we will have the financial resources
necessary to enforce or defend our trademarks and service marks.
Other people may register domain names similar to ours.
We and OSM depend on identification with our domain names,
onlinestockmarket.com, obroker.com, and others. Many other domain names are
available that are similar to these, including identical names with different
country suffixes. We do not expect to be able to protect all of these possible
names from acquisition by others. Should a web site be established with one of
these similar domain names, visitors attempting to reach our web sites may reach
someone else's web site instead, which would reduce our or OSM's customer
traffic and diminish the value of our trademarks. Domain names generally are
regulated by Internet regulatory bodies. The regulation of domain names in the
United States and in foreign countries is evolving. Regulatory bodies could
establish additional top-level domains, appoint additional domain name
registrars, or modify the requirements for holding domain names. The
relationship between regulations governing domain names and laws protecting
trademarks and similar intellectual property rights is unclear. Additionally,
there may be online companies in other countries using domain names that
potentially infringe on our trademarks. We may be unable to prevent them from
using these domain names, and this use may decrease the value of our trademarks
and brand names, which could have a material adverse effect on our business,
financial condition, and operating results. In which event, the value of an
investment in us would be adversely affected.
There is potential for product and service liability.
Our securities products and services will be designed to satisfy our
customers' needs. A failure to satisfy a customer's need or an adverse impact on
a customer from our products or services could result in a claim for damages
against us, regardless of our responsibility for such failure. Our broker/dealer
and underwriting business is subject to a variety of litigation risks, including
but not limited to class action lawsuits by investors, arbitration proceedings
with the NASD or in other forums, claims relating to the negligence or breach of
fiduciary duty by our principals, securities
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<PAGE>
representatives, brokers, investment bankers, and other personnel, and other
investment related claims. The supervisory responsibilities in the securities
brokerage business are substantial. We include an arbitration clause in our
agreement with our brokerage customers. Despite this precaution, there can be no
assurance that we will not be involved in costly and protracted judicial
litigation. Potential liability under federal and state securities laws could
adversely affect us to the extent it renders advice or participates in
securities offerings on the Internet. The successful assertion of one or more
large claims against us that exceed available insurance coverages, or changes in
our insurance policies, such as premium increases or the imposition of large
deductible or co-insurance requirements, could materially and adversely affect
our business, operating results, and financial condition.
We have no sinking fund to protect shareholders.
There will be no sinking fund or other reserve established for the
purpose of paying distributions to the holders of the Shares upon dissolution or
liquidation. Furthermore, outstanding Preferred Stock has a preference over the
Shares to our assets upon liquidation. As a consequence, it is possible that
holders of the Shares may not be able to recover any amount of their investment
upon our liquidation or dissolution.
There may be uninsured losses.
There is no assurance that we will not incur uninsured liabilities and
losses as a result of the conduct of our business. We plan to maintain
comprehensive liability and property insurance at customary levels. We will also
evaluate the availability and cost of business interruption insurance. However,
should uninsured losses occur, the Shareholders could lose their invested
capital.
We may incur liabilities to lenders or suppliers that we might not be able to
satisfy.
We may have liabilities to affiliated or unaffiliated lenders or
suppliers. These liabilities would represent fixed costs which would be required
to be paid regardless of the level of business or profitability experienced by
us. There is no assurance that we will be able to pay all of our liabilities.
Furthermore, we are always subject to the risk of litigation from licensees,
suppliers, employees, and others because of the nature of our business.
Litigation can cause us to incur substantial expenses and, if cases are lost,
judgments and awards can add to our costs.
We may issue shares at some time in the future which will dilute the
shareholders' investments.
We have outstanding approximately 9,000,000 shares out of a total of
20,000,000 shares of common stock authorized and 1,338,205 shares of preferred
stock. Up to 1,000,000 shares will be issued in this offering. The remaining
shares not issued or reserved for specific purposes may be issued without any
action or approval of our stockholders. Our Articles of Incorporation also
authorize the issuance of a maximum of 4,000,000 shares of Preferred Stock on
terms that may be fixed by our Board of Directors without further stockholder
action. Consequently, we may issue additional series of Preferred Stock, which
may include claims to assets and dividends, and special voting rights, which
could adversely affect the rights of holders of the Common Stock. There can be
no assurance that we will not undertake to issue additional shares of Common
Stock or Preferred Stock if we deem the issuance appropriate. See "Dilution."
We have not paid any dividends and in the foreseeable future we expect that
there will be a lack of dividends.
To date, we have not paid any dividends. We are not currently
restricted from paying cash dividends. We are under no obligation to declare any
dividends, and if we do, outstanding Preferred Stock has a dividend preference
over the Shares. We do not anticipate the payment of any dividends on the Shares
or the Preferred Stock in the foreseeable future, although if cash flow in the
future is available, we would consider the declaration and payment of dividends.
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We have broad discretion as the use of proceeds.
Our management shall have wide discretion as to the exact allocation,
priority and timing of the allocation of funds raised from this offering. The
allocation of the Proceeds of the offering may vary significantly depending upon
numerous factors, including the success that we have marketing our services.
Accordingly, we will have broad discretion with respect to the expenditure of
the net proceeds of this offering.
We have used our own attorney to draw all the documents with respect to this
offering and no separate investors' counsel was retained by us.
We have not retained any independent professionals to review or comment
on this offering or otherwise protect the interest of the investors hereunder.
Although we have retained our own counsel, neither such firm nor any other firm
has made, on behalf of the investors, any independent examination of any factual
matters represented by management herein, and purchasers of the shares should
not rely on the firm so retained with respect to any matters herein described.
There is no underwriter for this offering and we are relying on our own best
efforts.
There is no underwriter for this offering; therefore, offerees will not
have the benefit of an underwriter's due diligence efforts, which would
typically include the underwriter to be involved in the preparation of
disclosure and the pricing of the common stock offered hereby, among other
matters. As we have never engaged in the public sale of our common stock, we
have no experience in the underwriting of any such offering. Accordingly, there
is no prior experience from which investors may judge our ability to consummate
this offering. In addition, the common stock is being offered on a 'best
efforts" basis. Accordingly, there can be no assurances as to the number of
shares that may be sold or the amount of capital that may be raised pursuant to
this offering.
We cannot assure you that there will be a public market for our securities.
Our securities are not traded publicly at the present time. However, it
is our intention to be listed on the Nasdaq Small Cap Market. There is presently
no public market for our securities and no assurance a market will develop for
the securities upon completion of this offering. There is also no assurance as
to the depth or liquidity of any potential market or the prices at which holders
may be able to sell the securities. An investment in the shares may be totally
illiquid and investors may not be able to liquidate their investment readily or
at all when they need or desire to sell.
There is volatility in the shares of low priced stocks and in the stock market.
If a public market develops for the Shares, many factors will influence
the market prices. The Shares will be subject to significant fluctuation in
response to variations in operating results, investor perceptions, supply and
demand, interest rates, general economic conditions and those specific to the
industry, developments with regard to our activities, future financial condition
and management.
There are risks relating to low-priced stocks which may affect us.
If our stock does not get listed or being listed, if it gets delisted,
since the price of our common stock is below $5.00 per share, trading in such
securities might also be subject to the requirements of certain rules
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which require additional disclosure by broker/dealers in connection with
any trades involving a stock defined as a penny stock (generally, any non-Nasdaq
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
bro-
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ker/dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions). For these types of
transactions, the broker/dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to sale. The additional burdens imposed upon broker/dealers by
such requirements may discourage broker/dealers from effecting transactions in
our securities, which could severely limit the market price and liquidity of
such securities and the ability of purchasers in this offering to sell their
securities in the secondary market. Disclosure is also required to be made about
commissions payable to both the broker/dealer and the registered representative
and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock held
in the account and information on the limited market in penny stocks.
The foregoing penny stock restrictions will not apply to our securities
if such securities have certain price and buying information provided on a
current and continuing basis or meet certain minimum net tangible assets or
average revenue criteria. If we are successful in raising at least $4 million,
now, or at some time in the future, our securities would qualify for the
exemptions from the penny stock restrictions. Otherwise we will remain subject
to Section 15(b)(6) of the Exchange Act governing these penny stock
restrictions. If our securities were subject to the existing rules on penny
stocks, the market liquidity for our securities could be adversely affected.
Use of Proceeds
We estimate that the net proceeds from this offering, after deducting
offering expenses of approximately $400,000, will be approximately $3,600,000 if
we receive the maximum amount. We plan to use these proceeds to increase our
marketing efforts, upgrade our technology infrastructure, add personnel, expand
our operations, and provide additional working capital. If we raise less than
the maximum amount, then we intend to carry out a portion of our plan, as long
as we receive at least the minimum amount. In the table below, we have detailed
the amount that we will spend on each item if we receive the maximum or minimum
amount of funding.
Minimum Amount Maximum Amount
Required of Net Proceeds
-------- ---------------
Company Proceeds from
the Offering $400,000 $4,000,000
Less: Offering Expenses 40,000 400,000
-------- ----------
Net Proceeds from
Offering $360,000 $3,600,000
-------- ----------
Use of Net Proceeds:
Internet marketing $ 40,000 $1,000,000
Traditional marketing -0- 800,000
Technology 100,000 500,000
Brokerage operations 30,000 400,000
Personnel 150,000 200,000
Expansion -0- 300,000
Working capital 40,000 400,000
Total Use of Net -------- ----------
Proceeds $360,000 $3,600,000
======== ==========
We have not determined the timing and exact amounts of operating
expenditures at this time. We anticipate that proceeds from the offering,
combined with current working capital and operating revenue, should be
sufficient to allow us to continue operating for the foreseeable future.
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If we receive significantly less than the maximum amount, or even no funding, we
believe that we will have sufficient funding to continue operations for the
foreseeable future, although we will have to reduce the rate at which we expand
our business.
We plan to use a significant portion of the funding to allow OSM to
conduct Internet and traditional marketing of its products and services, subject
to all applicable regulations. Internet marketing may include banner ads,
strategic search placements including Internet Names, newsgroups, chat rooms,
bulletin boards, press releases, and targeted email. Traditional marketing may
include radio, cable or print, targeted mailing or phone calls, and cold
calling.
We plan to upgrade our technology and OSM's brokerage operations to
increase throughput, redundancy, security, and stress tolerance. Technology
upgrades may include redundant Web servers and bandwidth, additional disaster
recovery capabilities, and software capabilities. OSM may upgrade our brokerage
operations with additional telephone and customer-handling resources, enhanced
security, and as permitted by regulatory agencies, expanded products and
services.
We plan to use a portion of the funding as salaries for additional key
personnel for us or OSM.
We may use a portion of the funding to allow OSM to expand our
traditional brokerage operations to one or more additional locations. Expenses
associated with expansion are expected to include rent, equipment and
furnishings, technology and communications, services and utilities, and
additional key personnel.
We expect offering expenses to include legal and accounting expenses,
registration and "Blue Sky" fees, printing costs, document delivery costs, order
fulfillment, transfer agent fees, and similar costs.
We plan to use a portion of the funding as working capital and for
general business purposes including accounts payable when cash flow is
insufficient for these purposes. The specific amounts to be allocated to working
capital and other purposes will be in our discretion. We reserve the right to
alter our use of proceeds depending on business conditions which are unforeseen
at this time.
Because we anticipate selling the shares through the efforts of our
officers and directors, the numbers above do not include any deductions for
selling commissions. If broker/dealers are used in the sale of shares, up to 10%
of any gross proceeds raised in this offering will probably be payable to one or
more NASD registered broker/dealers. In such event, net proceeds to us will be
decreased and the use of proceeds may be correspondingly reallocated in our sole
discretion. There are no current agreements, arrangements, or other
understandings in connection with any of the foregoing.
Until we reach the minimum offering, subscription funds will be held in
an interest-bearing escrow account. Once we reach the minimum offering, the
funds will be released from escrow and used according to the plan above. To the
extent that the net proceeds are not used immediately, we intend to invest them
in short-term, investment-grade, interest-bearing securities. We do not intend
to use any proceeds to make loans to officers or directors.
Capitalization
<TABLE>
This table represents our capitalization as of March 31, 2000 as
adjusted to give effect to this offering.
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<CAPTION>
Shares Shares
Maximum Minimum sold
ACTUAL ADJUSTED ADJUSTED
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stockholders' Equity
Preferred Stock, no par value
Authorized 4,000,000
Issued and Outstanding- 1,338,205 Shares $ 627,780 $ 627,780 $ 627,780
Common Stock, no par value
Authorized- 20,000,000 Shares
Issued and Outstanding- 9,312,921 Shares $ 763,926 $4,363,926 $1,123,926
Additional Paid in Capital- $ 652,779 $ 652,779 $ 652,779
Deficit Accumulated during the development stage ($1,457,992) ($1,457.992) ($1,457,992)
----------- ----------- -----------
Total Stockholders Equity $ 586,493 $4,186,493 $ 946,493
=========== =========== ===========
</TABLE>
Dilution
We were initially capitalized by the sale of common stock to our
founders. The following table sets forth the difference between our founders and
purchasers of the shares in this offering with respect to the number of shares
purchased from us, the total consideration paid and the average price per share
paid.
<TABLE>
The table below assumes the minimum amount of the Shares offered hereby are
sold.
<CAPTION>
Shares Issued Total Consideration Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Investors 9,312,921 99% $763,926 68% $0.08
New Investors 100,000 1% $360,000 32% $3.60
--------- --- ---------- ---
Total 9,412,921 100% $1,123,926 100% $0.12
--------- --- ---------- ---
</TABLE>
<TABLE>
The table below assumes the maximum amount of the Shares offered hereby are
sold.
<CAPTION>
Shares Issued Total Consideration Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Investors 9,312,921 90% $763,926 18% $0.08
New Investors 1,000,000 10% $3,600,000 82% $3.60
---------- --- ---------- ---
Total(1) 10,812,921 100% $4,363,926 100% $0.42
---------- --- ---------- ---
</TABLE>
As of March 31, 2000, the net tangible book value of our common stock
was $586,493 or $.06 per share based on the 9,312,921 shares outstanding. "Net
tangible book value" per share represents the amount of total tangible assets
less total liabilities, divided by the number of shares. After giving effect to
the sale by us of 1,000,000 shares at an offering price of $4.00 per share and
after deducting estimated expenses and underwriting discounts, our pro-forma net
tangible book value as of that date would be $4,586,493 or $.44 per share, based
on the 10,312,921 shares outstanding at that time. This represents an immediate
dilution (i.e., the difference between the offering price per share of common
stock and the net tangible book value per share of common stock after the
offering) of $3.56 per share to the new investors who purchase shares in the
offering ("New Investors"), as illustrated in the following table (amounts are
expressed on a per share basis):
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(1) Calculations concerning dilution are based on an assumption of the offering
being fully subscribed.
The following table represents the dilution per share based on the percentage
sold of the total amount of shares being offered.
Shares Shares
Minimum sold 100% sold
------------ ---------
Offering price ................................... $4.00 $4.00
Net tangible book value before offering $ .06 $ .06
Increase attributable to the offering ............ $ .04 $ .38
Net tangible book value
after giving effect to the offering .............. $ .10 $ .44
----- -----
Per share Dilution to new investors .............. $3.90 $3.56
Percent Dilution per share 98% 89%
We do not intend to pay any cash dividends with respect to our common
stock in the foreseeable future. We intend to retain any earnings for use in the
operation of our business. Our Board of Directors will determine dividend policy
in the future based upon, among other things, our results of operations,
financial condition, contractual restrictions and other factors deemed relevant
at the time. We intend to retain appropriate levels of our earnings, if any, to
support our business activities.
Business
General
Online Stock Market Group is a California corporation formed in October
1997. We have 100% ownership of a full-service broker/dealer firm registered
with the National Association of Securities Dealers (NASD) and which provides
traditional brokerage services for individual and institutional investors, as
well as offers state-of-the-art electronic online securities investing services
on the Internet. We intend for the firm to eventually specialize in underwriting
or consulting for public offerings on the Internet for small and medium size
businesses. The burgeoning world-wide demand for securities and financial
services by both investors and businesses seeking to raise capital, including
via the Internet, causes us to believe that the operation of a full service
securities brokerage firm can be profitable and a valuable business.
We have established a new firm by forming a wholly owned subsidiary,
capitalizing it, staffing it with securities professionals, and obtaining
registration from the appropriate agencies. The process of forming a new firm
entails a substantial amount of time, expense, and regulatory review. Our
subsidiary, OSM, commenced operations and began opening customer trading
accounts in December 1999. There is no assurance that OSM will earn any revenue
or profits.
A fully registered "general securities" brokerage firm is permitted to
offer a broad range of brokerage and financial services to retail customers and
the investment community. Furthermore, depending on regulatory approval and the
level of its net capital, a "general securities" firm may offer underwriting and
capital raising services to businesses seeking to raise capital, and may trade
securities for its own account as a dealer and market maker. We axe operating a
full service securities brokerage firm potentially earning revenue and profits
from purchase and sale commissions, financial consulting fees, underwriting
fees, equity (i.e. stock, warrants, and options) issued to us by companies for
which we raise capital, and subject to regulatory approval, securities trading
for our own account.
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License Agreement With Virtual Wall Street, Inc.
Effective October 18, 1997, we entered into an exclusive license
agreement with Virtual Wall Street, Inc. Pursuant to the exclusive license
agreement, Virtual Wall Street, Inc. granted us an exclusive worldwide license
in perpetuity to develop, enhance and utilize for profit or for any other proper
purpose the concept, trade name, trademark, copyright, and trade secrets of
Virtual Stock Market(TM). The license includes all rights and ancillary rights
to the Virtual Stock Market(TM) concept and web site, including goodwill, name
recognition, web site architecture, marketing, advertising and sponsorship
ideas, programming and merchandising, and to conduct securities and investment
related businesses on the Internet. In consideration for the exclusive worldwide
perpetual license, we paid Virtual Wall Street, Inc. a one-time licensing fee of
$60,000 in cash. No other license fee or royalty will be payable by us for the
license. The license may be terminated by Virtual Wall Street, Inc. in the event
that we enter into voluntary or involuntary bankruptcy proceedings, makes an
assignment for the benefit of creditors, or otherwise becomes insolvent.
We have also obtained a perpetual license at no cost to use the name
Online Stock Market(TM). The terms of this license are substantially similar to
those of the Virtual Stock Market license except for the absence of a licensing
fee. See "Risk Factors - Inability to Protect Proprietary Rights."
Change of Name
In May 1999, we changed our name from "Virtual Stock Market, Inc." to
"Online Stock Market Group." This change emphasizes our independence from our
former affiliate, Virtual Wall Street, Inc., and reinforces the connection with
our broker/dealer subsidiary, Online Stock Market, Inc.
Traditional Brokerage Services
As a base for our securities brokerage service, we have established a
"general securities" full service retail securities brokerage firm, OSM. OSM
strives to provide our customers with, among other services: (a) execution of
purchase and sale orders for stocks, bonds, mutual fund shares, treasury bills
and notes, and other securities, (b) the establishment and maintenance of retail
brokerage accounts for individuals, institutions, Individual Retirement
Accounts, and qualified retirement, profit sharing, and Keogh plans, (c)
continual quotes, news and other information from the securities markets, (d)
portfolio tracking and records management, (e) cash management and checking
services, (f) institutional sales, (g) foreign investment banking, (h) margin
accounts provided through the clearing firm.
We do not expect to implement self-clearing operations in the
foreseeable future because of the substantial capital requirements, financial
risks, regulatory requirements, and management demands associated with
self-clearing operations. Instead, OSM has contracted, as a fully disclosed
correspondent, with Miller, Johnson & Kuehn, Inc. ("MJK") of Minneapolis, MN to
provide clearing services for our customers. MJK is a well established and fully
registered securities clearing firm. Clearing services include holding
customers' funds and securities, extending margin credit for customers
(collateralized by their securities), collecting dividends and interest for
customers, facilitating the transmission of proxy and tender offer materials,
facilitating customers' subscriptions for securities, and transferring and
processing certificates evidencing our customers' securities. Clearing firms
typically carry substantial fidelity bonds and related insurance coverage.
Background of Electronic Commerce
Advancements in telecommunication and information technology have
fundamentally altered the way individuals conduct business. For example, the
development of the microprocessor and the personal computer revolutionized the
way individuals use computers by providing inexpensive and powerful
capabilities. Consumers have embraced the personal computer and expressed
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strong preferences for the convenience and control it provides. In a similar
fashion, consumers also have begun using a variety of other electronic devices
such as the automatic teller machine ("ATM") and the facsimile machine, which
are now seen as valuable tools for expediting and controlling transactions and
eliminating human intermediaries.
Just as the microprocessor has changed the use of computers, the
emergence of the Internet as a tool for communications and commerce is driving a
revolution in the world of financial transactions and information services.
Consumers are rapidly embracing the Internet because it is simple to access,
makes vast amounts of information available instantaneously, and allows
individuals to communicate with one another regardless of location. With the
proliferation of personal computers and modems and the development of
easy-to-use web browsers, use of the Internet grew to over 300 million users
worldwide by March 2000, according to Nua Ltd.
The Emergence of Electronic Commerce
The Internet and online services have provided organizations and
individuals with innovative ways of conducting business. With the emergence of
the Internet as a globally accessible, fully interactive and individually
addressable communications and computing medium, companies that have
traditionally conducted business in person, through the mail or over the
telephone are increasingly utilizing electronic commerce. Increased use of
credit cards, ATMs, the incidence of electronic funds transfers and online
banking and bill paying has automated, simplified and reduced the costs of
financial transactions for consumers, businesses and financial institutions.
Consumers are showing a preference for transacting certain types of business
such as paying bills, buying insurance, booking airline tickets, and buying and
selling securities, electronically rather than in person or over the telephone.
These transactions are being streamlined through online commerce and can now be
performed directly by individuals virtually anywhere at any time. Consumers have
accepted and even welcomed self-directed online transactions because such
transactions can be faster, less expensive and more convenient than transactions
conducted through a human intermediary.
Development of Online Brokerage Services
In the past, the individual investor could access the financial markets
only through a full-commission broker, who would give investment advice and
place trades. With the deregulation of brokerage commissions in 1975 and the
resulting unbundling of brokerage services, investors began to realize that they
could separate financial advisory services from securities trading. This brought
about the advent of the discount brokerage firm, which provided an alternative
investment approach by completing trades at a reduced cost.
With the emergence of electronic brokerage services, investors are
being given the ability to further unbundle the costs associated with the human
interaction required by full commission and traditional discount brokerage
firms. By requiring personnel to handle each transaction, most transitional
brokerage firms restrict their customers' access to trading and information to
the availability of the person processing the transaction. In addition, although
full commission and discount brokerage firms are able to offer electronic
trading services, their continued reliance on personnel, branch offices, and the
associated infrastructure for a major part of their business prevents them from
reducing their cost structure to the lower level achievable through an all
electronic model. As a result of these factors, online brokerage accounts are
gaining popularity. A well-known research organization reports that by the year
2002, over $650 billion of financial assets are expected to be managed on the
Internet.
We believe that a shift in demographics and societal norms is
fundamentally altering the way consumers manage their personal financial assets.
We also believe that consumers are increasingly taking direct control over their
personal financial affairs, not simply because they are able to do so, but
because they find it more convenient and less expensive than relying on
financial intermediaries. Investors want the flexibility to transact business at
times and places that are convenient for them. In addition, the broad
availability of financial information online has dramati-
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cally narrowed the gap between the resources available to the individual
investor and the institutional investor. Individual investors have become
increasingly sophisticated and knowledgeable about investing, having experienced
greater access to stock quotes, company financial information, investment
advice, and other investment information on the web or through other online
services. As investors obtain even more access to investment information, we
believe they will desire greater control over their financial decisions and seek
alternative ways to invest more conveniently and cost-effectively, and with less
interaction with brokers and other financial services professionals. We believe
that this trend has created a growing opportunity to provide online trading
services that are easy to access, easy to use, cost-effective, and secure.
Our Online Brokerage Service
We have implemented our electronic securities brokerage service in
parallel with a traditional securities brokerage business. We have licensed
technology from Automated Financial Services (AFS) of New York NY to provide
consumers with online securities brokerage services designed to be easy-to-use
and cost-effective. The service is designed to be accessible through multiple
gateways such as the Internet, direct modem access, online service providers
such as CompuServe and America Online, touch-tone telephone, and, to a lesser
extent, interactive television. We offer order placement services 24 hours a
day, seven days a week, thereby shifting the financial transactions paradigm
from a business hours only, intermediary-based model to one in which consumers
have the ultimate control over where and when they initiate transactions.
Our services are designed to be highly automated, with most customer
orders being entered, processed, and confirmed electronically and without human
intervention. By avoiding the inefficiencies, personnel requirements, and
associated costs of non-automated order entry and processing, we endeavor to
provide our services at a lower cost than traditional full commission or
discount brokerage firms. We expect the modular architecture of the system's
technology to be scalable to handle increasing transaction volumes. Modular
architecture allows for application programs to be quickly modified in response
to changing business requirements. In addition, the modular hardware design is
intended to allow additional computers and bandwidth to be added with minimal
changes in the controlling software.
Our goal is to empower our customers to take control of their own
financial transactions through the following features:
o User-Friendly Web Trading Interface. Through easy-to-use graphical
trading interface, we intend to make online trading simple, fast,
and fun. Consumers accessing the system for the first time should
be able to understand quickly the wide variety of services
available and how to access those services. We seek to reduce
barriers to first-time investing online, enabling new users to
feel just as comfortable trading online as technologically savvy
early users. The look and feel of the graphical user interface on
the web is being replicated on other gateways.
o Personalized Environments. The system will be designed to so that
customers can create "personalized environments," including
personalized watch lists and portfolios for tracking securities. A
customer's investing experience will be designed to be enhanced
with portfolio, account, and market information readily available
prior to initiating a trade. We plan to enable customers to
customize further their user interfaces by allowing them to select
the market indicators, portfolio views, and value-added
information services, including news, charts, and market analysis,
that are most valuable to them.
o Anywhere Any Time Access. By maintaining multiple gateways through
which customers may access the system virtually anywhere at any
time, we plan to accommodate increases in the number of customers
served and transactions pro-
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cessed. The system is designed to enable customers to trade
securities through such points of access as the Internet, direct
modem access, online service providers such as CompuServe and
America Online, touch-tone telephone, and, to a lesser extent,
interactive television.
o Cost-Effective Services. By unbundling the services that many full
commission and discount brokerage firms include in their
transaction costs, we endeavor to offer customers just the
services that they want at lower costs.
o Secure Operations. We believe that account security is one of the
key factors for success in the brokerage industry. By offering
highly secure services through the use of encryption and
authentication technology, we endeavor to provide security for our
online brokerage services.
o Personal Portfolio Manager. The ability to access account
information by computer carries its own advantages. We intend to
augment the current customer portfolio management tool with
additional options for analyzing the value of assets.
o Virtual Stock Market(TM) Game. A simulated stock trading game
would attract Internet users who would not otherwise choose or
have the resources to engage in actual trading. It would also
accustom visitors to the concept of online trading and serve as a
distinctive marketing tool.
Marketing
Our marketing strategy is based on an integrated marketing model which
employs a mix of communications media. The goals of our marketing programs are
to establish and increase our name recognition and to attract new customers.
Because our broker/dealer business is in the start-up phase, our marketing task
will be formidable. We intend to pursue our marketing goals through
direct-response advertising, marketing through our own web site and OSM's
Obroker.com web site, an aggressive public relations program, and co-marketing.
All communications with the public by OSM are regulated by the NASD. See
"BUSINESS - Government Regulation."
Direct Response Advertising and Web Site Marketing
We plan to focus a significant amount of our advertising on marketing
online investing as a better way of initiating transactions, building awareness,
and selling the benefits of our services. Advertising will be designed to direct
interested prospects to Obroker.com for additional information, as opposed to
generating primarily telephone-based inquires. Print advertisements are intended
to be placed in a broad range of business, technology, and financial
publications, initially in local publications and subsequently in national
publications such as the Wall Street Journal, Investor's Business Daily, Forbes,
Barron's, SmartMoney, and Wired. We may also advertise on local and eventually
national business television and radio stations and networks.
At Obroker.com, prospective customers can obtain detailed information
on our services, use an interactive demonstration of the trading system, request
additional information, and complete an account application online. We believe
that maximizing the use of the internet in our marketing strategy will lower our
customer acquisition costs. We may capitalize on the popularity of our web site
by selling advertising to third parties who are interested in targeted
marketing. We regard this potential revenue as additional income, raised without
a significant increase in overall costs and with no increase in capital costs.
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Public Relations Program
We intend to aggressively pursue public relations opportunities to
build awareness of our products and services. We will attempt to forge links to
the Obroker.com home page from other sites on the web. We have placed links on
our strategic partners' web sites, which we believe could be a significant
factor to develop awareness and generate leads, as consumers increasingly look
to the internet as a key source of information and commercial activity. We will
also actively seek speaking opportunities at industry conferences and events.
Co-Marketing And Promotion
We will attempt to establish a number of significant co-marketing
relationships to promote our products. These are expected to include
participation in software and hardware product promotional offers. We intend to
enter into co-marketing relationships as a component of our marketing strategy.
We intend to enter into strategic relationships with web sites encompassing
services and products that will help individuals make informed investment
decisions and increase awareness of our products and services.
International Customer Base
We intend that our customers be able to buy and sell securities online
from anywhere in the world. The Internet and potentially online subscriber
services such as America Online and CompuServe permit our customers to access
its system from almost any geographic location. We may eventually develop a
marketing program directed specifically at consumers outside the United States
to open accounts directly with us. We will attempt to establish an international
customer base encouraged by the continued proliferation of the Internet and
increasing free trade, although there can be no assurance that foreign customers
will embrace the Internet as an investment medium.
The Expansion of After Hours Investing
Until recently in the United States, the vast majority of securities
transactions have occurred during market hours of the large East Coast exchanges
and Nasdaq. Opportunities existed for placing orders at other times, but these
orders were generally executed at the beginning of the next trading session.
However, opportunities for trading outside the market hours of 9:30 a.m. to 4:00
p.m. Eastern Time have recently expanded for retail investors. We believe that
this trend indicates increasing interest by investors in actual 24 hours per day
7 days per week electronic trading.
After-hours trading began to expand with the development of so-called
electronic communications networks (ECNs), first approved by the Commission in
January 1997. We know of nine ECNs, at least three of which offer expanded
trading hours. The largest ECN, Instinet, operates almost continually. An ECN
operates as a computerized trading system similar to the Nasdaq system, but with
buyers and sellers matched up automatically by computers.
Recently, several online brokerages have announced partnerships with
select ECNs or have made investments in ECNs. ECNs that have made such alliances
include Island, Archipelago, and Instinet. We believe this signals increased
interest by retail investors in after-hours trading.
Most ECNs offer trading in only a few high-volume securities, compared
to the major exchanges. During market hours, ECNs transmit orders to Nasdaq or
an exchange. In the first quarter of 1999, ECNs accounted for 22% of the trade
volume on Nasdaq and 30% of the trades. During 1999, several exchanges,
including the NYSE, Chicago Exchange, and Nasdaq, announced plans for extended
trading hours. We believe this to be a response to competition by the ECNs.
We plan to take advantage of the interest we perceive in after-hours
trading. Through OSM, we plan to investigate offering extended trading hours
either with an ECN or on an exchange. Our ultimate goal is for OSM to offer true
24/7 investing on its Web site in addition to order taking.
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Customer Service
We believe that providing an effective customer service team to handle
customer needs will be critical to our success. We believe that we must
establish a customer service organization to help customers get online, handle
product and service inquiries, and address all brokerage and technical
questions. The customer service team will also be expected to make welcome calls
to verify the satisfaction of our customers. We believe that we can further
enhance the quality of customer service by leveraging currently available
technology. For example, current interactive voice response ("IVR") technology
has the capability of allowing customers to request forms from their touch-tone
telephones and immediately receive them via fax. We believe that these
"faxes-on-demand" could reduce call volume. We have placed answers to likely
frequently asked questions on the Internet, as well as online help for the
interactive trading software. We believe that access to a broad range of answers
regarding terms, procedures, and policies could reduce the number of customer
service calls which would otherwise be received by us.
Investment Banking Services
We plan to engage in the business of raising capital for small and
medium size companies, especially on the Internet in the form of initial and
direct public offerings. By consulting for companies on direct public offerings
over the Internet with a fully registered securities brokerage firm, we expect
to be able to provide broker support for the sale of securities for our clients,
as well as consulting services for the offering and, contingent on regulatory
approval, making a market in the client's stock to encourage and enhance
liquidity. On direct public offerings, companies offer securities directly to
the public to raise capital without underwriters, which generally do not handle
smaller offerings in any event. We believe that direct public offerings on the
Internet are a rapidly growing business, spurred by the need of small companies
to raise capital efficiently, the favorable regulatory environment for capital
formation by small companies, and the prominent role small companies have played
in creating new employment opportunities, especially in the past eight to ten
years. Direct public offerings also give small investors an opportunity to
invest in the early stages of a company's growth, which is where the most profit
potential often exists despite the risks associated with such investments.
One of the drawbacks of direct public offerings, however, is the lack
(or the perception that there is a lack) of independent due diligence performed
on the issuer by a professional securities firm. In the absence of a formal
securities underwriter for such offerings, investors often must rely on their
own investigation of the companies, generally through review of the prospectus
or offering circular. Another drawback is often the absence of market makers and
after-market support for the issuer's stock, resulting in the absence of
liquidity that investors expect from a public offering. Direct offerings on the
Internet generally have not qualified for listing on the Nasdaq SmallCap Market
or the stock exchanges and generally must trade, if at all, on the OTC Bulletin
Board Market. We will endeavor to remedy these problems and thereby capture a
significant share of the direct public offering market by (i) providing the
sales support of OSM's licensed brokers for the offering, (ii) as a fully
licensed "general securities" brokerage firm, making a market in the issuer's
stock after the offering, (iii) with the permission of the NASD, underwriting
those offerings which we believe merit a formal underwriting, (iv) conducting
due diligence and issuing reports with respect to the issuers, including
research reports, and (v) providing public relations work for issuers to the
investment community and other securities brokerage firms and subject to
regulatory approval. If OSM receives NASD approval to formally underwrite
initial public offerings, we expect to initially do them on a "best efforts"
basis rather than on a "firm commitment" basis (in a "firm commitment"
underwriting, the underwriter commits to purchase and resell the entire
offering).
As consideration for our consulting and planned underwriting services
on direct and initial public offerings, we expect to earn (a) financial
consulting fees, (b) selling commissions, (c) equity in the form of stock,
warrants, and options to purchase stock in our clients, and (d) underwriting
fees. On direct public offerings on the Internet, our consulting services are
expected to
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include but not be limited to (1) pre-offering strategic management, (2)
prospectus development, (3) coordination of SEC and state securities
registration, and (4) marketing and public relations services, design and
establishment of a web site on the Internet for the direct public offering. In
this regard, we also plan to establish our own web site on the Internet to
provide information regarding direct public offerings and other placements of
securities which our clients are conducting. Our web site will be designed to
support a traditional securities brokerage function, except that the majority of
the leg work is planned to be done online. We plan that when a new offering is
posted, prospective investors will receive an e-mail message pursuant to which
they can then go see the tombstone, request a prospectus, open an account with
one of OSM's brokers online, fund the account, make an electronic indication of
interest, and obtain an e-mail confirmation on the effective date. We also
intend to forward leads to OSM's brokers. There is no assurance that we will
earn revenue or profits from our investment banking business.
Wall Street: In the Beginning
Wall Street is the center of the financial industry in the United
States, and indeed the world. The street is named for the defensive wall begun
in 1654 by the Dutch settlement on Manhattan, called New Amsterdam. Originally a
defense vs. the Indians and hostile English settlements, the wall was a highly
visible component of the city's defense for nearly fifty years. By 1693, houses
in the growing city (now British and known as New York) had reached to within
ten feet of the decaying wall. In that year, the ten-foot-strip called Wall
Street was paved. The wall was demolished in 1698.
Even in its earliest days, Wall Street was the site of many important
buildings, including churches and prominent homes. A new city hall was erected
on Wall Street in 1700, the judicial and administrative center of the city. Here
were held the Zenger libel trial (1735) and the Stamp Act Congress (1765). The
state government met here. Eventually, the first meetings of the national
government (the Continental Congress in 1784) were held at city hall on Wall
Street.
Thus, this street was the center of power of the new United States. The
national delegates to Congress met here to consider foreign policy, war, and the
soundness of the treasury. The financial history of Wall Street really began
with the chartering of the Bank of New York in 1791. By the time the merchant
exchange was founded (1827), Wall Street was well established as the place to be
for brokers and bankers.
Brokers, bankers, and investors met in New York to trade shares of
financial companies and bonds of the new government. They were a noisy lot and
met outdoors, frequently under a buttonwood tree on Wall Street. There, basic
rules of trading were drafted and agreed to in 1792. This Buttonwood Agreement
is the beginning of the New York Stock Exchange (NYSE).
The Maturing of the Securities Industry
The NYSE in the nineteenth century began as a place where foreign
capital fueled most of the country's growth. Domestic capital became plentiful
only later. Unfortunately, the exchange was also a club for sharp-witted
manipulators. Short sales, wash sales, forward-trading, and the like were tools
to conceal true stock activity from the outside investor. It is only the modern
attitude of strong enforcement and self-regulation that makes the financial
markets accessible to the general public.
On the positive side, the nineteenth century saw the creation of
investment banks, credit rating services, and other elements of a maturing
financial system. Emerging at the end of this period were powerful railroad,
steel, and oil companies supported by a system of powerful banks and financiers.
The expansion following World War I and the subsequent world-wide crash
are well known. The Great Depression produced the legislation and the
institutions that mediate the mod-
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ern American financial markets. In particular, the Securities and Exchange
Commission sets rules to prohibit fraudulent and manipulative practices. The
American securities industry may now be the most heavily regulated industry in
the world.
Initial Public Offerings
Initial public offerings are as old as American capitalism. In the days
when financiers met under the buttonwood tree on Wall Street, public offerings
were done as so-called direct public offerings (DPOs). A DPO is an offering by
the issuer directly. In the nineteenth century, the process grew to be centered
on a few large investment families - again, mostly in Manhattan - but also
expanding to Boston, Philadelphia, and primarily east coast cities. After World
War II, the DPO practice declined with the rise of huge investment banking firms
and the spread of the telephone. With the dramatic rise of the stock markets
worldwide and the incursion of the Internet, DPOs are on the move again. The
number of companies filing DPOs has increased by more than a factor of ten since
a mere thirty in 1990.
IPOs of all kinds remain strong, with approximately $70 billion raised
in 1999, up from approximately $40 billion in each of 1997-8. Most of this
capital, though, is raised in selected offerings concentrated among only seven
underwriting firms. Smaller offerings, most of them direct, are on the increase
but are generally neglected by the securities industry.
On the other side of the offering equation, investors appear ready and
willing to buy more IPOs, as suggested by the $9 billion in IRA assets in this
country or the record level of trading on the major stock exchanges (see below).
In fact, corporate stock now comprises 25% of all household assets, according to
the Federal Reserve.
Electronic Trading
Securities trading in the United States had always been dominated by
the NYSE, the world's busiest exchange. However, a new form of trading emerged
in 1971 when the NASD created a computerized quotation and trading system,
Nasdaq. Nasdaq is a decentralized, fully electronic system in which current bid
and ask prices are displayed for everyone. This is very different from the
traditional open auction whereby the price of any stock is decided at a single
spot on the trading floor. As a result of this decentralization, Nasdaq since
1994 has traded more shares each year than even the NYSE.
The growth of the Internet, in particular the World-Wide Web, brings
yet another advance in electronic trading. Nasdaq is a quotation system among
securities dealers, in other words, professionals. The web is accessible to
anyone with a computer and a modem, which brings electronic trading into the
home. This is a young and growing area of the industry. Corporate underwritings
raised $2 trillion in 1999, up from $300 billion in 1990. Private placements
raised $500 billion, compared with $130 billion in 1990.
The Growth of the United States Securities Industry
The US securities markets continue to be the world's most liquid. For
example, market cap on the NYSE increased from $2.8 trillion to $16.8 trillion
in the period 1990-1999 and dollar volume increased from $1.8 trillion to $19.5
trillion. This represents much more activity than any other exchange in the
world.
The securities industry in recent years has seen increasing revenue and
substantial returns on equity. According to the Securities Industry Association,
total revenue in 1999 was an estimated $180 billion, up from $54 billion in
1990, with pre-tax profits of $16 billion. Online accounts and online investing
in particular are notable, with one well-known research organization projecting
15 million online accounts worth $690 billion by 2002.
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<PAGE>
History of Capitalization
In consideration for the issuance of 9,000,000 shares of our Common
Stock to Virtual Wall Street, Inc. in October 1997, Virtual Wall Street, Inc.
contributed $100,000 in cash to us, along with start up computer and office
equipment and software, and furniture and fixtures. Subsequently, we conducted a
private placement of our shares in which we issued 1,200,000 Shares of Series A
Preferred Stock in exchange for approximately $1,170,500. See "Capitalization."
We also conducted a second private placement of our shares in which we
issued 401,750 shares of common stock in exchange for approximately $1.0
million.
Competition
The market for securities brokerage services, particularly electronic
service over the Internet, is new, rapidly evolving, and intensely competitive.
We expect competition to continue and intensify in the future. We expect to
encounter direct competition from smaller discount brokerage firms who emphasize
service, offering both traditional and online brokerage services. Many regional
and specialty firms fit this classification. We also expect competition from the
relatively new category of online IPO and DPO firms, particularly if we secure
regulatory permission to list IPOs online ourselves or engage in underwriting.
Examples of these firms include OffRoad Capital, Wit Capital, and W.R.
Hambrecht.
We also compete indirectly with all online discount brokerage firms,
including major firms such as eSchwab, E*Trade, Ameritrade, and Datek. In
addition, we anticipate competition with financial institutions, mutual fund
sponsors, and other organizations, some of which provide electronic and online
brokerage services. We believe that the principal competitive factors which
affect the market for our online brokerage services are quality of service,
securities expertise, technical reliability, ease of use, graphical user
interface look and feel, ability to respond to changing customer needs, depth
and breadth of services, price, and financial strength. We believe that we can
compete favorably on these points.
There are only about 170 online brokerage firms in the United States,
as compared with over 5000 NASD member firms. The major barriers to entry
include licensing requirements, technical expertise, infrastructure needs, and
reluctance to innovate. The substantial licensing requirements are discussed
below. See "Government Regulation." The other three elements require resources
and training that fall outside the financial realm. Many NASD members are
regional or specialty "boutique" firms with an established clientele and a
business model that emphasizes traditional brokerage methods. For larger firms,
we believe that there is a significant psychological barrier to using the
Internet, as exemplified by the late entry into online trading of leading
traditional firms such as Merrill Lynch.
Nevertheless, we expect competition in our market to increase and
intensify. Many of our existing competitors have longer operating histories and
significantly greater financial, technical, marketing, and other resources than
us. In addition, many of these competitors offer a wider range of services and
financial products than we do, and thus may be able to respond more quickly to
new or changing opportunities, technologies, and customer requirements. Many
current and potential competitors also have greater name recognition and more
extensive customer bases than we do. Such competitors will be able to undertake
more extensive promotional activities, offer more attractive terms to customers
than we can, and adopt more aggressive promotional policies. Moreover, current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to enhance their services
and products. For example, Charles Schwab's One-Source mutual fund service and
similar, more complete, services may discourage potential customers from using
our brokerage services. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share.
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<PAGE>
The general financial success of companies within the securities
industry over the past several years has strengthened existing competitors. We
believe that such success will continue to attract new competitors to the
industry, subject to the entry barriers described above. New competitors may
include banks, software development companies, insurance companies, providers of
online financial and information services, and others, as such companies expand
their product lines. Commercial banks and other financial institutions have
become a competitive factor in the securities industry by offering their
customers certain corporate and individual financial services traditionally
provided by securities firms. The current trend toward consolidation in the
commercial banking industry could further increase competition in all aspects of
our business. Commercial banks generally are expanding their securities
activities, assisted by the 1999 Financial Services Modernization Act which
relaxes the separation between banks and brokerage firms. While it is not
possible to predict the type and extent of competitive services that commercial
banks and other financial institutions ultimately may offer, securities
brokerage firms such as OSM may be adversely affected by such competitions.
Particularly as financial services and products proliferate, to the extent our
competitors are able to attract and retain customers on the basis of the
convenience of one-stop shopping, our business or our ability to grow could be
adversely affected. In many instances, we will compete with such organizations
for the same customers.
Government Regulation
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. The SEC is the federal agency
responsible for the administration of the federal securities laws. Much of the
regulation of broker/dealers has been delegated to self-regulatory
organizations, principally the NASD. These self-regulatory organizations adopt
rules (subject to approval by the SEC) that govern the industry and will conduct
periodic examinations our securities operations. Securities firms are also
subject to regulation by state securities administrators in those states in
which they conduct business.
Broker/dealers are subject to regulations covering all aspects of the
securities business, including sales methods, trade practices among
broker/dealers, use and safekeeping of customers' funds and securities, capital
structure, record keeping, and the conduct of directors, officers, and
employees. We will be required to comply with many complex laws and rules.
Additional legislation, changes in rules promulgated by the SEC, the NASD, the
Board of Governors of the Federal Reserve System, the various stock exchanges,
and other self-regulatory organizations, or changes in the interpretation or
enforcement of existing laws and rules, may directly affect the mode of
operation and profitability of broker/dealers. The SEC, the NASD, or other
self-regulatory organizations, and state securities commissions may conduct
administrative proceedings which can result in censure, fine, the issuance of
cease-and-desist orders, or the suspension or expulsion of a broker/dealer or
any of our officers or employees. Broker/dealers are also subject to periodic
examinations by the NASD, SEC, and states in which they are licensed. These
examinations can focus on a particular area of a firm's business, or they can
cover the entire range of a firm's products and operations. These examinations
can result in disciplinary actions such as fines, suspension or expulsion of
personnel, or the withdrawal of certain products or services that a firm can
offer its customers.
Our ability to comply with all applicable laws and rules is dependent
in large part upon the establishment and maintenance of a compliance system
reasonably designed to ensure such compliance, as well as our ability to attract
and retain qualified compliance personnel. The principal purpose of regulation
and discipline of broker/dealers is the protection of customers and the
securities markets, rather than protection of creditors and stockholders of
broker/dealers. We could in the future be subject to disciplinary or other
actions due to claimed noncompliance, which could have a material adverse effect
on our business, financial condition, and operating results. OSM is also
required to be a member of the Securities Investor Protection Corporation
("SIPC"), which provides, in the event of the liquidation of a broker/dealer,
protection for customers' accounts which may be held by the broker/dealer. We
pay premiums to the SIPC for such coverage.
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All marketing activities by OSM are regulated by the NASD, and all such
marketing materials are required by the NASD to be reviewed by our compliance
officer prior to release. The NASD can impose certain penalties, including
censure, fine, suspension of all advertising, the issuance of cease-and-desist
orders, or the suspension or expulsion of a broker/dealer or any of its officers
or employees for violations of the NASD's advertising regulations. If OSM were
to engage in soliciting orders from customers and making investment
recommendations, it would become subject to additional rules and regulations
governing, among other things, the suitability of recommendations to customers
and sales practices. If we endeavor to expand our services globally, we will be
required to comply with the regulatory controls of each specific country in
which we conduct business. The varying compliance requirements of other national
regulatory jurisdictions will impose a limit to our ability to expand
internationally.
Net Capital Requirements
As a registered broker/dealer and member of the NASD, OSM is subject to
the Net Capital Rules. The Net Capital Rules, which specify minimum net capital
requirements for registered brokers and dealers, are designed to measure the
general financial integrity and liquidity of a broker/dealer and require that at
least a minimum part of its assets be kept in relatively liquid form. Failure to
maintain the required net capital may subject a firm to suspension or revocation
of registration by the SEC and suspension or expulsion by the NASD and other
regulatory bodies, and ultimately could require the firm's liquidation. The Net
Capital Rules prohibit payments of dividends, redemption of stock, the
prepayment of subordinated indebtedness, and the making of any unsecured advance
or loan to a stockholder, employee, or affiliate, if "aggregate debit items"
(i.e., assets that have as their source transactions with customers) rise beyond
eight times net capital (fifteen times net capital after the first year). The
Net Capital Rules also provide that the SEC may restrict for up to 20 business
days any withdrawal of equity capital or any unsecured loans or advances to
stockholders, employees, or affiliates ("capital withdrawal") if such capital
withdrawal, together with all other net capital withdrawals during a 30-day
period, exceeds 30% of excess net capital and the SEC concludes that the capital
withdrawal may be detrimental to the financial integrity of the broker/dealer.
The Net Capital Rules also provide that the total outstanding principal amount
of a broker/dealer's indebtedness under certain subordination agreements, the
proceeds of which are included in its net capital, may not exceed 70% of the sum
of the outstanding principal amount of all subordinated indebtedness included in
net capital, par, or stated value of capital stock, paid in capital in excess of
par, retained earnings, and other capital accounts for a period in excess of 90
days.
Net capital is essentially defined as net worth (assets minus
liabilities), plus qualifying subordinated borrowings and certain discretionary
liabilities, and less certain mandatory deductions that result from excluding
assets that are not readily convertible into cash and from valuing
conservatively certain other assets. Among these deductions are adjustments
(called "haircuts") which reflect the possibility of a decline in the market
value of an asset prior to disposition.
A change in the Net Capital Rules, the imposition of new rules, or any
unusually large charge against net capital could limit those operations that
require the intensive use of capital, such as trading activities, and also could
restrict our ability to pay dividends, repay debt, and redeem or purchase shares
of our outstanding stock. A significant operating loss or any unusually large
charge against net capital could adversely affect our ability to expand or even
maintain our business, which could have a material adverse effect on our
business, financial condition, and operating results.
Employees
We presently have 5 full-time employees and principals, plus outside
consultants and professionals. See "Management - Executive Compensation." We and
our subsidiary expect to require several additional full and part-time
employees, primarily in the securities industry. The employees include Michael
B. Cratty, our President and Chief Executive Officer, who oversees and
coordinates marketing operations for the broker/dealer firm. Mr. Cratty holds
Series 7, 22, 24, and
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<PAGE>
63 registrations with the NASD in order to provide supervisory services for OSM,
in accordance with NASD rules and regulations. David A. Berge, our Chief
Information Officer, holds Series 7, 27, and 63 registrations with the NASD in
order to oversee the financial integrity of OSM, in accordance with NASD rules
and regulations. See "Business - Government Regulation." We expect to engage
additional employees, NASD principals, licensed representatives, consultants,
and trainers. Michael Cratty and other of our officers or OSM will be paid
customary salaries for their positions. None of their salaries is expected to
excccd $50,000 for the balance of the current year except for Mr. Cratty's
salary of $100,000; however, actual revenues and workloads during that time
period may cause a higher salary to become appropriate. See "Management."
Property
We currently have a three year lease for office facilities, measuring
approximately 2443 square feet, at 1875 Century Park East, Suite 1880, Los
Angeles, California 90067. The facilities are shared with OSM.
Seasonality
Our operations are not expected to be affected by seasonal
fluctuations, although our cash flow may be affected by fluctuations in the
timing of cash receipts. Furthermore, we may experience slower operations during
holiday seasons when the securities markets usually experience lower volume.
Trade Names and Trademarks
Virtual Wall Street, Inc., originally our principal stockholder, filed
a trademark application with the United States Patent and Trademark Office
(USPTO) for Virtual Stock Market. The trademark application is pending on the
Supplemental Register. We have filed a trademark application with USPTO for
Obroker.com, which has been allowed. We have obtained the following Internet
domain names for use as web sites: obroker.com, onlinestockmarket.com,
onlinestockexchange.com, and virtualstockmarket.com. Virtual Wall Street, Inc.
licenses to us in perpetuity and on an exclusive basis the use of "Virtual Stock
Market" as a trade name and trademark in exchange for a one time fee equal to
$60,000. We also have a perpetual license with Virtual Wall Street, Inc. for the
use of "Online Stock Market" under substantially similar terms except for the
absence of a licensing fee. There is no assurance that the Virtual Stock Market
trademark will be accepted for registration by the United States Patent and
Trademark Office or will not be challenged by third parties. We would bear an
unanticipated expense in the event of such challenge or if our trademarks had to
be modified, or if we were forced to cease using them. Our policy is to pursue
registrations of our marks wherever possible and to oppose vigorously any
infringement of our marks. We are not aware of any infringing uses that could
materially affect our business or any prior claim to trademarks that would
prevent us from using trademarks in our business.
Management Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion concerning our plan of operation contains
forward-looking statements which involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those described under "Risk
Factors" and elsewhere in this prospectus.
We have experienced substantial changes in the startup phase of our
business and since our brokerage firm commenced operations in December 1999. We
expect to expand our business by seeking to accumulate brokerage clients and
assets, which will require us to increase our personnel and supporting
technology. We expect to increase our marketing efforts substantially.
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Cash Requirements
We expect our available cash to be sufficient to continue operations
for the near future. We have no significant debts. We have long-term contracts
with service providers totaling approximately $4,000 per month. If we do not
raise at least the minimum amount from this offering, we may need to raise
additional funds to continue operations past 12 months. If we do raise at least
the minimum amount from this offering, then we expect to use the funds as
described in "Use of Proceeds".
Results of Operations
In the period from inception to March 31, 1998, the end of our first
year, we experienced a loss of approximately $292,000. In this period, we formed
our company and our subsidiary OSM. We initiated our first private placement of
shares to acquire our initial funding.
In the fiscal year ending March 31, 1999, we experienced a loss of
approximately $556,000. In this period, we completed our first private placement
of shares and explored the preliminary regulatory requirements to marketing a
registered broker/dealer firm. We spent significant effort assisting our
then-parent company, Virtual Wall Street, in drafting and qualifying a
Regulation A public offering and in creating a financial services Web site to
promote the offering. We were then spun off as an independent company and
changed our name.
In the fiscal year ending March 31, 2000, we increased our business
activity and experienced a loss of approximately $610,000. We began a second
private placement of our shares to secure additional funding.
We completed the necessary regulatory steps to establish OSM as an NASD
member firm, and our officers earned the necessary licenses to operate the firm.
We made the necessary business arrangements to begin operations, including
selecting a clearing firm and creating a web site for online investing.
Our brokerage firm began operations in December 1999. It is now in the
early stages of acquiring customers and assets and has earned minimal revenues.
As of March 31, 2000, OSM has customer accounts containing assets of $8,735,000
and has earned revenues of $9,000.
Plan of Operations
In the fiscal year ending March 31, 2001, we expect to add personnel,
accelerate our marketing efforts, and increase OSM's customer and asset base. We
also expect to add supporting technology, and we may expand our operations to
one or more additional offices. See "Use of Proceeds."
We expect to locate and hire one additional Series 24 General Principal
with sales management experience. We expect to add up to approximately 10
licensed brokers as independent contractors, whom we plan to pay out of sales
commissions rather than drawing salaries. We may add minimal additional support
staff.
We plan to use a significant portion of the funding from this offering
to allow OSM to conduct Internet and traditional marketing to increase its
customer and asset base, subject to all applicable regulations. Based on the
clients and assets acquired to date with minimum marketing expenditures, we
expect significant marketing success, though there can be no guarantee that OSM
will achieve any increase in its customer and asset base. If it does achieve an
increase, however, we expect increasing revenues to begin offsetting operating
losses.
We expect to upgrade our technology to increase throughput, redundancy,
security, and stress tolerances. We do not expect such expenditures to directly
increase revenues, but may allow
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OSM to maintain quality of service during periods of unusually high market
activity, possibly more so than competing brokerage firms.
OSM plans to commence best-efforts underwriting and offering private
placements. We expect OSM to apply for regulatory approval to expand its
products and services on the basis of continuing operations, more experienced
personnel, and increasing financial health. Subject to approval, OSM plans to
consider acting as a dealer for its own account. We believe that these
activities may offer a higher profit margin than traditional retail brokerage
operations.
OSM also expects to expand access to its services to include touch-tone
telephones, pagers and wireless devices, and other electronic gateways. We
expect that some of OSM's current and future customers without convenient
Internet access may wish to use some of these gateways.
Finally, if we raise most or all of the funding, we plan to expand our
brokerage operation to one or more additional offices. An additional office
would allow OSM to add more licensed brokers and seek customers in a different
geographic market. An additional office would require supervisory personnel,
equipment, and communications infrastructure. We believe that an additional
brokerage office would increase the rate of customer and asset acquisition.
Principal Shareholders
<TABLE>
The following table sets forth certain information regarding beneficial
ownership of our common stock as of March 31, 2000, by (i) each person
(including any "group" as that term is used in Section 13(d)(3) of the
Securities Act of 1934 (the "Exchange Act") who is known by us to own
beneficially 5% or more of the common stock, (ii) each of our directors, and
(iii) all directors and executive officers as a group. Unless otherwise
indicated, all persons listed below have sole voting power and investment power
with respect to such shares. The total number of common shares authorized is
20,000,000 shares, each of which has no par value. 9,312,921 common shares and
1,338,205 preferred shares have been issued and are outstanding.
<CAPTION>
Series A Common Common
Preferred Shares Beneficially Shares Beneficially
Stock Owned Prior to Offering Owned after Offering(2)
Name of Owner(1) Number Number Percent Number Percent
------------- ------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Adin J. Buhalis 2,000,000 21% 2,000,000 19%
James Christopherson 250,000
Michael B. Cratty 100,000 2,083,197 22% 2,083,197 20%
Michael R. Hoeper 500,000 5% 500,000 5%
Linda L. Schaitberger 2,500,000 27% 2,500,000 24%
Total 7,083,197 75% 7,083,197 68%
Directors and officers
as a group(2) 100,000 5,083,197 55% 5,083,197 49%
<FN>
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to the rights their spouses may have under California community property
laws.
(2) Assumes the issuance of 1,000,000 shares offered by this prospectus and that
no officer, director, or current shareholder purchases shares in the offering.
</FN>
</TABLE>
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MANAGEMENT
There are currently three (3) occupied seats on the Board of Directors.
The following table sets forth information with respect to the directors and
executive officers.
DATE SERVICE
NAME AGE OFFICE COMMENCED
------ ----- -------- -----------
Michael B. Cratty* 34 Chairman, President October 1997
& Chief Executive Officer
Michael R. Hoeper* 34 Director October, 1998
Linda Lee Schaitberger* 54 Director October, 1998
David Anders Berge 41 Chief Information October, 1999
Officer, Corporate
Secretary
* Indicates Board Member
All directors will hold office until the next annual stockholder's
meeting and until their successors have been elected or qualified or until their
death, resignation, retirement, removal, or disqualification. Vacancies on the
board will be filled by a majority vote of the remaining directors. Our officers
serve at the discretion of the Board of Directors.
The Officers and Directors are set forth below.
Michael B. Cratty has been the Chairman of the Board of Directors and
the Chief Executive Officer of the Company since its inception in October 1997.
Mr. Cratty holds Series 7, 22, 24, and 63 securities registrations from the
NASD. Mr. Cratty was also an Executive Vice President of Virtual Wall Street,
Inc. from July 1997 to December 1999 and a director of that company from July
1997 to the present. Prior to joining Virtual Wall Street, Inc., Mr. Cratty was
a registered representative holding Series 22 and 63 registrations with Travco
Financial Group, Inc., an NASD member broker/dealer firm in Westlake Village,
California, for which he worked from May 1992 until October 1995, and from April
1996 until July 1997. From October 1995 until April 1997, Mr. Cratty was a
registered representative with Gerwin Stinziano Securities, Inc. in Calabasas,
California. At those brokerage firms Mr. Cratty primarily marketed investments
in oil and gas operations and waste disposal projects. Mr. Cratty served in the
United States Army from October 1990 until April 1992, where he completed
advanced individual training as a communications systems circuit controller, and
served a tour of duty in South Korea, working on the installation fiber optic
communication networks. Mr. Cratty has also been licensed in the State of
California for life and disability insurance sales, and worked in the insurance
industry as an agent for Inter-Rex Financial in Encino, California in 1986. Mr.
Cratty attended the University of Kentucky from August 1987 until November 1990,
majoring in Political Science.
Michael Richard Hoeper has served as a Director of the Company since
October 1998. Mr. Hoeper is also a director of Virtual Wall Street. Mr. Hoeper
has been involved in the financial services industry since 1987. Since 1993 he
has been an independent marketing consultant assisting corporations in various
stages of growth and development. From 1991 to 1993, he was a licensed real
estate salesman, working in real estate finance and real estate trust deed sales
for Westworld Financial. From 1987 to 1991, he was a registered broker with
Geotech Securities Corporation, where he held Series 22 and 63 registrations and
worked with both income and growth investment vehicles. Mr. Hoeper attended
Santa Monica College, majoring in business.
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Linda Lee Schaitberger is a former house designer and independent
contractor. From 1984 to 1989, she was Vice President of Lionheart Corporation,
where she supervised home design, including general design, development, and
landscaping. She also ran a sole proprietorship business as an artist and
writer. Ms. Schaitberger graduated from the Legate School in 1963. She also
attended Michigan State University and the Art School of the Society of Arts and
Crafts in Detroit MI.
David Anders Berge has been Chief Information Officer and Corporate
Secretary for the Company since October 1999. From September 1997 to September
1999, he was Chief Information Officer of Virtual Wall Street, Inc., and from
October 1997 to October 1998 was the President and Chief Financial Officer of
Sparta Group. Mr. Berge holds Series 7, 27, and 63 securities registrations from
the NASD. Prior to joining Virtual Wall Street, Mr. Berge was a developer for
Access By Design, a web site development company based in Long Beach,
California, from April 1997 to September 1997. From October 1981 to February
1992, Mr. Berge worked as Project Research Scientist for Dynamics Technology,
Inc. of Torrance, California. At Dynamics Technology, Mr. Berge collaborated to
plan, execute, and analyze large oceanographic experiments. He wrote numerous
detailed simulation programs and data-analysis tools and presented results for
review to industry conferences and government representatives. Mr. Berge's work
with Dynamics Technology involved government classified data. Mr. Berge is also
a founder and Vice President of Heroic Publishing, Inc., a position he has held
since its incorporation in 1987. Mr. Berge graduated from the California
Institute of Technology in July 1981 with a Bachelor of Science degree in
Applied Physics.
Consultants
RND Resources David Banerjee has been since 1989 President and Chief
Executive Officer of RND Resources of Encino, California, a leading accounting
and compliance consulting firm for banks and financial services firms dealing
with the Federal Reserve, Securities and Exchange Commission, National
Association of Securities Dealers, Department of Insurance, National Futures
Association and various State and Foreign Governmental regulators. From 1986 to
1989 Mr. Banerjee was Senior Vice President at Liberty Financial Services,
responsible for the fiscal and compliance health of this diversified asset
management company with over $47 billion under management. Its subsidiaries
include Stein Roe and Farham, Keyport Life Insurance, the Colonial Group and
Liberty Asset Management. From 1982 to 1986 he was Senior Vice President of
First Interstate Bank, responsible for the primary dealer arm including
government and agency securities, federal funds desk, commercial paper,
municipal dealer desk, mortgage banking and the futures commission merchant
subsidiary for all derivative transaction. First Interstate was one of two
primary government dealers on the West Coast. From 1980 to 1982 he was Senior
Bank Consultant for Computer Associates, responsible for the development of
application based solutions (IBM OSNSI, CMS and CICS) utilizing assembler,
Fortran and COBOL languages for International Banks and securities firms such as
World Bank, IBRD, Bank of Boston, BONY, Irving Trust, Chemical Bank, J.P.
Morgan, Salomon Brothers and was responsible for the first commercial asset
liability management software for banks. He is a graduate of the Indian
Institute Technology with a Bachelor of Science in Engineering, of Calcutta
University with a Master's in Business Administration, of the American Graduate
School of International Management with a Master's in International Management
and has a Graduateship in Operations Research. He is a Certified Public
Accountant (CPA) and hold NASD Licenses 7, 24, 27, 63; Insurance Broker; and is
also Chairman of the California Committee For The Securities Industry (CPA
Society).
Stonefield Josephson, the largest independent CPA firm in California,
is used by the Company for accounting and auditing services including NASD
compliance.
Sam D. Wild, CPA, is a Business Consultant at Stonefield Josephson. Mr.
Wild along with selected members of staff at Stonefield Josephson provide
accounting, auditing, tax planning, financial advisory, insolvency, and
litigation consulting services to both public and closely-held businesses and
executives. Prior to joining Stonefield Josephson, Sam was a partner at a "big
six" accounting firm. Mr. Wild holds a Bachelor of Science in Accounting from
Arizona State University
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and a Master of Science in Taxation from Golden Gate University. Mr. Wild also
holds a certificate in Executive Management from Kellogg Graduate School of
Management, Northwestern University.
Nanette Lee Miller, CPA, is a Business Consultant and Management
Information Systems Director at Stonefield Josephson, specializing in working
for NASD member firms. Ms. Miller provides audit services, financial reporting,
forecasting and projections, strategic planning, assistance with initial public
offerings and systems design and implementation services to closely-held
businesses and their executives. Ms. Miller currently works with over ten NASD
member firms.
Blue Sky MLS of Rutherford NJ works with OSM to handle blue sky and
state broker/dealer regulatory matters. Blue Sky MLS was the first company to
offer blue sky administration and is the largest provider of these services.
Blue Sky MLS currently works for dozens of NASD broker/dealers across the
country, assisting them with their regulatory and compliance needs.
Executive Compensation
The following table sets forth the past 3 year's remuneration for our
officers and directors:
Officer Fiscal Year Ending Salary Restricted Stock Options
--------------------------------------------------------------------------------
Michael Cratty, CEO 2000 $78,000 - -
1999 $60,784 - -
1998 $22,278 $100,000 50,000
David Berge, CIO 2000 $32,208 - 75,000
Note: All restricted shares vest immediately and are expected to
receive normal dividends, if any, with other shares of their class.
The following table sets for options awarded to officers and directors
in the most recent fiscal year:
Officer Number Percent of Total Exercise Expiration
--------------------------------------------------------------------------------
Michael Cratty - 0% - -
David Berge 75,000 33% $2.50 2010
Total Options awarded
to employees: 225,000
Directors receive no cash compensation for their services to us as
directors, but are reimbursed for expenses actually incurred in connection with
attending meetings of the Board of Directors. Outside directors may receive a
nominal salary in the future.
The Board of Directors intends to appoint an Audit Committee. The Audit
Committee will be authorized by the Board of Directors to review, with our
independent accountants, our annual financial statements prior to publication,
and to review the work of, and approve non-audit services preformed by, such
independent accountants. The Audit Committee will make annual recommendations to
the Board for the appointment of independent public accountants for the ensuing
year. The Audit Committee will also review the effectiveness of our financial
and accounting functions and the organization, operations, and management. We
have retained the independent certified public accounting firm of Stonefield
Josephson with offices in Santa Monica, California and San Francisco,
California, as our certified public accounting firm.
Employment Agreements
We have entered into written employment agreements with our officers
and key employees which set forth the terms and conditions of their employment.
All employment agree-
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<PAGE>
ments provide that the executive officers may resign at any time, and that we
may terminate the officer or employee at any time with or without cause. None of
the agreements provide for any severance payment to the employee upon
termination or payment upon the change of control of the Company.
Stock Options
A stock incentive program for our executive officers will be
established pursuant to which authorized but unissued stock equal to 10% of the
issued and outstanding Common Stock of the Company will be reserved for issuance
to the officers and employees if certain earnings goals are achieved, as
determined by the Compensation Committee of the Board of Directors.
We have adopted an incentive stock option plan for our officers and key
employees. One million shares of Common Stock have been reserved for
distribution under this plan. The Compensation Committee of the Board of
Directors administers the plan, selects recipients to whom options are granted
and determines the number of shares to be awarded. Options granted under the
plan are exercisable at a price determined by the Compensation Committee at the
time of grant, but in no event less than fair market value.
Directors' Compensation
Our Board of Directors presently consists of three members, Michael B.
Cratty, Michael R. Hoeper, and Linda Lee Schaitburger. The Board of Directors
may be expanded in the future, especially if an additional executive is added to
our management. All employee and consultant compensation, including payroll
expenditures, salaries, stock options, stock incentives, and bonuses, must be
approved by the unanimous consent of the members of the Compensation Committee
of the Company's Board of Directors, whose members have not yet been determined.
The Compensation Committee may be comprised of members who are not officers or
directors of the Company. The Board of Directors will also have an Audit
Committee comprised of the same members as the Compensation Committee. Our
Bylaws generally provide for majority approval of directors in order to adopt
resolutions.
Indemnification of Officers and Directors
Under California Corporation Law and the Company's Articles of
Incorporation, our directors will have no personal liability to us or our
stockholders for monetary damages incurred as the result of the breach or
alleged breach by a director of his "duty of care". This provision does not
apply to the directors' (i) acts or omissions that involve intentional
misconduct or a knowing and culpable violation of law, (ii) acts or omissions
that a director believes to be contrary to the best interests of the corporation
or its shareholders or that involve the absence of good faith on the part of the
director, (iii) approval of any transaction from which a director derives an
improper personal benefit, (iv) acts or omissions that show a reckless disregard
for the director's duty to the corporation or its shareholders in circumstances
in which the director was aware, or should have been aware, in the ordinary
course of performing a director's duties, of a risk of serious injury to the
corporation or its shareholders, (v) acts or omissions that constituted an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the corporation or its shareholders, or (vi) approval of an unlawful
dividend, distribution, stock repurchase, or redemption. This provision would
generally absolve directors of personal liability for negligence in the
performance of duties, including gross negligence.
The effect of this provision in our Articles of Incorporation is to
eliminate our rights and our stockholders' rights (through stockholder's
derivative suits on our behalf) to recover monetary damages against a director
for breach of his fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior) except in the situations
described in clauses (i) through (vi) above. This provision does not limit nor
eliminate our rights or any stockholder's rights to seek non-monetary relief
such as an injunction or rescission in the event of a
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<PAGE>
breach of a director's duty of care. In addition, our Articles of Incorporation
provide that if California law is amended to authorize the future elimination or
limitation of the liability of a director, then the liability of the directors
will be eliminated or limited to the fullest extent permitted by the law, as
amended. The California Corporations Code grants corporations the right to
indemnify their directors, officers, employees, and agents in accordance with
applicable law. Our Bylaws provide for indemnification of such persons to the
full extent allowable under applicable law. These provisions will not alter the
liability of the directors under federal securities laws.
We intend to enter into agreements to indemnify our directors and
officers, in addition to the indemnification provided for in our bylaws. These
agreements, among other things, indemnify our directors and officers for certain
expenses (including attorneys' fees), judgments, fines, and settlement amounts
incurred by any such person in any action or proceeding, including any action by
or in our right, arising out of such person's services as a director or officer
of the Company, any subsidiary of the Company or any other company or enterprise
to which the person provides services at our request. We believe that these
provisions and agreements are necessary to attract and retain qualified
directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933, as amended,
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by us of expenses incurred or
paid by a director, officer or controlling person 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, we will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by us is against public policy as expressed in the
Securities Act of 1933, as amended, and we will be governed by the final
adjudication of such case.
Amendment of Articles of Incorporation and Bylaws
Under the California Corporations Code, the Company's Articles of
Incorporation can be amended by the affirmative vote of the holders of a
majority of the outstanding shares entitled to vote, and a majority of the
outstanding stock of each class entitled to vote as a class, unless the Articles
of Incorporation require the vote of a larger portion of the stock. Our Articles
of Incorporation do not require a larger percentage affirmative vote. The
Certificate of Determination setting forth the rights of the Series A Preferred
Stock states that the separate approval of a majority of the outstanding Series
A Preferred Stock, voting as a class, is necessary to approve: (i) any amendment
to the Articles of Incorporation or Certificate of Determination which adversely
affects the rights, preferences, or privileges of the Series A Preferred Stock;
(ii) the creation of any class of stock which has rights, preferences, or
privileges which are prior to the Series A Preferred Stock; or (iii) any
increase in the authorized number of shares of Series A Preferred Stock or any
split or combination of the Series A Preferred Stock.
As is permitted by, and subject to certain limitations stated in, the
California Corporations Code, our bylaws give our Board of Directors the power
to adopt, amend, or repeal our bylaws. Our shareholders entitled to vote have
concurrent power to adopt, amend, or repeal our bylaws.
Directors and Officers Insurance
We are exploring the possibility of obtaining directors and officers
("D & O") liability insurance. We have obtained several premium quotations but
have not entered into any contract with any insurance company to provide said
coverages as of the date of this prospectus. There is no assurance that we will
be able to obtain such insurance.
Page 41
<PAGE>
Keyman Life Insurance
Keyman Life Insurance is expected to be purchased after the effective
date of this offering in amounts up to $1 million, 50% payable to the Company
and 50% payable to family beneficiaries. We are planning to purchase such
insurance towards the cross purchase of shares from the estate of an officer or
director and to provide us with the capital to replace the executive loss
(executive search for successor, etc.).
Certain Transactions
We sublease office space in Los Angeles to Virtual Wall Street, and our
CEO, Mr. Cratty, is a director of that company. Virtual Wall Street pays us
$1,000 per month in rent for 700 square feet.
We have also executed trademark license agreements with Virtual Wall
Street, Inc. whereby we license the use of their trademarks. We entered into an
Exclusive License Agreement with Virtual Wall Street when our name was Virtual
Stock Market, Inc., for the use of the trademark "Virtual Stock Market" for the
one-time License Fee of $60,000. The license may not be assigned or subleased.
The license is perpetual but may be terminated upon a material breach that is
not corrected within 14 days after notice by the licensee. We have entered into
a separate license agreement with Virtual Wall Street for exclusive use of the
trademark "Online Stock Market." This license was granted to us at no cost but
with terms otherwise substantially identical to the foregoing license.
Descriptions of Securities
All material provisions of our capital stock are summarized in this
prospectus. However the following description is not complete and is subject to
applicable California law and to the provisions of our articles of incorporation
and bylaws. We have filed copies of these documents as exhibits to the
registration statement related to this prospectus. We are authorized to issue
20,000,000 shares, at no par value per share. As of the date of this prospectus
there are 9,312,921 common shares issued and outstanding and 4,000,000 shares of
Preferred Stock authorized, no par value per share, of which 1,338,205 shares
are issued or outstanding. After giving effect to the maximum offering, the
issued and outstanding capital common stock of the Company will consist of
10,312,921 common shares. See "Capitalization".
Common Stock
We are authorized to issue 20,000,000 shares of Common Stock, no par
value per share, of which 9,312,921 shares are issued and outstanding. Holders
of Common Stock are entitled to dividends when, as, and if declared by the Board
of Directors out of funds available for that purpose, subject to any priority as
to dividends for Preferred Stock that may be outstanding.
You have the voting rights for your shares. You and all other holders
of common stock are entitled to one vote for each share held of record on all
matters to be voted on by stockholders. You have cumulative voting rights with
respect to the election of directors, with the result that your vote will allow
you a proportionate representation on the Board of Directors.
You have dividend rights for your shares. You and all other holders of
common stock are entitled to receive dividends and other distributions when, as
and if declared by the Board of Directors out of funds legally available, based
upon the percentage of our common stock you own. We will not pay dividends. You
should not expect to receive any dividends on shares in the near future. This
investment may be inappropriate for you if you need dividend income from an
investment in shares.
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<PAGE>
You have rights if we are liquidated. Upon our liquidation, dissolution
or winding up of affairs, you and all other holders of our common stock will be
entitled to share in the distribution of all assets remaining after payment of
all debts, liabilities and expenses, and after provision has been made for each
class of stock, if any, having preference over our common stock. Holders of
common stock, as such, have no conversion, preemptive or other subscription
rights, and there are no redemption provisions applicable to the common stock.
All of the outstanding common stock are, and the common stock offered hereby,
when issued in exchange for the consideration paid as set forth in this
Prospectus, will be, fully paid and nonassessable. Our directors, at their
discretion, may borrow funds without your prior approval, which potentially
further reduces the liquidation value of your shares.
You have no right to acquire shares of stock based upon the percentage
of our common stock you own when we sell more shares of our stock to other
people. This is because we do not provide our stockholders with preemptive
rights to subscribe for or to purchase any additional shares offered by us in
the future. The absence of these rights could, upon our sale of additional
shares, result in a dilution of our percentage ownership that you hold.
Preferred Stock
We are authorized to issue 4,000,000 shares of Preferred Stock with
such rights, preferences, and privileges as are determined by our Board of
Directors. 1,338,205 shares of Preferred Stock are presently issued and
outstanding. The Series A Preferred Stock is the only series of Preferred Stock
which the Board of Directors has authorized to date.
The Series A Preferred Stock possesses a dividend preference of $0.10
per share per annum, which must be paid in full or reserved for payment before
payment of any dividend or other distribution (other than a distribution upon
our liquidation) may be made to the holders of Common Stock. The dividend
preference is noncumulative. Dividends are payable solely at the option of the
Board of Directors, and there is no requirement that any dividend be declared or
paid with respect to any class of stock.
The Series A Preferred Stock has a liquidation preference of $0.60 per
share, which must be paid in full or reserved for payment before any
distribution upon liquidation of the Company may be paid to holders of the
Common Stock. Upon payment in full or reservation for payment of the preferences
of the Series A Preferred and Common Stock described above, the Series A
Preferred Stock and the Common Stock will be entitled to participate on an equal
basis in all additional distributions made by us. Each share of Series A
Preferred Stock will be deemed to equal the number of shares of Common Stock
into which the Series A Preferred Stock could be converted as of the date of the
distribution for the purpose of calculating the amount of additional
distributions to which each share the Series A Preferred Stock is entitled.
Holders of the Series A Preferred Stock do not possess redemption or
preemptive rights. We are not required to maintain a sinking fund or reserve any
other amounts for the payment of any preference for the Series A Preferred
Stock. The Series A Preferred Stock is not subject to calls or assessments.
The Series A Preferred Stock is convertible into one share of our
Common Stock at any time at the option of the holder. In addition, each share of
Series A Preferred Stock will automatically convert into one share of Common
Stock upon the occurrence of any of the following events:
(i) Upon the vote or written consent of the holders of no less than
66.67% of the outstanding Series A Preferred Stock;
(ii) Upon the completion of a public offering of the Common Stock (or
securities convertible into Common Stock) of the Company through
which the gross proceeds to the Company (without deducting
underwriter's discounts and commissions) equals or exceeds
$5,000,000; or
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<PAGE>
(iii) When, at the end of any fiscal year, the book value of the
Company, calculated using generally accepted accounting
principles and excluding goodwill, equals $1.50 per share (with
each share of Series A Preferred Stock being deemed to equal that
number of shares of Common Stock into which it could be converted
as of that time).
The number of shares of Common Stock into which each share of Series A
Preferred Stock may be converted shall be increased on a pro-rata basis to take
into account stock splits, stock dividends or other issuances of Common Stock
without consideration. Similarly, the number of shares of Common Stock into
which the Series A Preferred Stock may be converted shall be reduced on a
pro-rata basis if there are any reverse stock splits or other combinations with
respect to the Common Stock.
The Series A Preferred Stock is entitled to vote or grant consents with
respect to all matters submitted for approval by the shareholders. Each share of
Series A Preferred Stock has a number of votes equal to that number of shares of
Common Stock into which that shares of Series A Preferred Stock could be
converted as of the record date for that vote or effective date of that consent.
The Series A Preferred Stock will vote together with the Common Stock on all
matters, and not as a separate class. However, the approval of the Series A
Preferred Stock, voting as a separate series and class, is required before the
Company may: (i) alter the rights of the Series A Preferred Stock in a manner
which adversely affects that series; (ii) increase the authorized number of
shares of Series A Preferred Stock; (iii) effect any split or combination of the
Series A Preferred Stock; or (iv) authorize or issue any class or series of
stock which has superior dividend or liquidation preferences to the Series A
Preferred Stock.
The rights, preferences and restrictions on each class of stock are set
forth in greater detail in the Certificate of Determination. The foregoing
discussion of these rights is a summary only, and is qualified in its entirety
by the more complete description set forth in the Certificate of Determination.
Warrants
The number of warrants outstanding are 803,500. Each warrant entitles
the holder to purchase one share of the common stock of Online Stock Market
Group at a price of $3.75 per Share. The warrants are exercisable from July 2,
2000 until July 1, 2002 (the "Exercise Period"). The holder may exercise any
number of warrants by delivering them to us along with an exercise form and a
check for the proper amount payable to us. The number of shares of common stock
purchasable upon exercise of one Exchange Warrant will be adjusted upon the
occurrence of certain of our events, including stock dividends, stock splits,
reclassifications, reorganizations, consolidations, or mergers.
Exchange Warrants
Each two shares of Series A Preferred Stock were issued attached to a
warrant to purchase one share of Common Stock of Virtual Wall Street, Inc. The
warrant is exercisable beginning December 31, 1999 and for a period of one year
thereafter. The warrant may be exercised only by delivery of the two shares of
Series A Preferred Stock.
Shares Eligible for Future Sale
Upon completion of this offering, we will have 10,312,921 shares issued
and outstanding, assuming all the shares offered herein are sold. The common
stock sold in this offering will be freely transferable without restrictions or
further registration under the Securities Act, except for any of our shares
purchased by an "affiliate" (as that term is defined under the Act) who will be
subject to the resale limitations of Rule 144 promulgated under the Act.
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<PAGE>
There will be approximately 9,312,921 shares outstanding that are
"restricted securities" as that term is defined in Rule 144 promulgated under
the Securities Act.
The common stock owned by insiders, officers, and directors are deemed
"restricted securities" as that term is defined under the Securities Act and in
the future may be sold under Rule 144, which provides, in essence, that a person
holding restricted securities for a period of one (1) year may sell every three
(3) months, in brokerage transactions and/or market maker transactions, an
amount equal to the greater of (a) one percent (1%) of our issued and
outstanding common stock or (b) the average weekly trading volume of the common
stock during the four (4) calendar weeks prior to such sale. Rule 144 also
permits, under certain circumstances, the sale of common stock without any
quantity limitation by a person who is not an affiliate of the Company and who
has satisfied a two (2) year holding period. Additionally, common stock
underlying employee stock options granted, to the extent vested and exercised,
may be resold beginning on the ninety-first day after the Effective Date of a
Prospectus, or Offering Memorandum pursuant to Rule 701 promulgated under the
Securities Act.
As of the date hereof and upon completion of the offering,
approximately 1,860,127 of our common stock (other than those which are
qualified by the SEC in connection with this offering) are available for sale
under Rule 144. Future sales under Rule 144 may have an adverse effect on the
market price of the Common stock. Our officers, directors and certain of our
security holders have agreed not to sell, transfer, or otherwise dispose of
their common stock or any securities convertible into common stock for a period
of 12 months from the date hereof.
Under Rule 701 of the Securities Act, persons who purchase shares upon
exercise of options granted prior to the date of this Prospectus are entitled to
sell such common stock after the 90th day following the date of this Prospectus
in reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having to
comply with the public information, volume limitation, or notice provisions of
Rule 144. Affiliates are subject to all Rule 144 restrictions after this 90-day
period, but without a holding period.
There has been no public market for our common stock. With a relatively
minimal public float and without a professional underwriter, there is no
guarantee that an active and liquid public trading market, as that term is
commonly understood, will develop, or if developed that it will be sustained,
and accordingly, an investment in our common stock should be considered highly
illiquid. Although we believe a public market will be established in the future,
there can be no assurance that a public market for the common stock will
develop. If a public market for the common stock does develop at a future time,
sales by shareholders of substantial amounts of our common stock in the public
market could adversely affect the prevailing market price and could impair our
future ability to raise capital through the sale of our equity securities.
Available Information
We have filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 relating to the common stock
offered hereby. This Prospectus, which is part of the Registration Statement,
does not contain all of the information included in the Registration Statement
and the exhibits and schedules thereto. For further information with respect to
us, the common stock offered hereby, reference is made to the Registration
Statement, including the exhibits and schedules thereto. Statements contained in
this prospectus concerning the provisions or contents of any contract,
agreement, or any other document referred to herein are not necessarily
complete. With respect to each such contract, agreement, or document filed as an
exhibit to the Registration Statement, reference is made to such exhibit for a
more complete description of the matters involved.
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<PAGE>
The Registration Statement, including the exhibits and schedules
thereto, may be inspected and copied at prescribed rates at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
DC 20549 and at the Commission's regional offices at 7 World Trade Center, 13th
Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. The Commission also maintains a web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including the Company.
The address of such site is http://www.sec.gov.
We intend to furnish to our shareowners annual reports containing
audited consolidated financial statements certified by independent public
accountants for each fiscal year and quarterly reports containing unaudited
consolidated financial statements for the first three quarters of each fiscal
year.
We will provide without charge to each person who receives a
prospectus, upon written or oral request of such person, a copy of any of the
information that was incorporated by reference in the prospectus (not including
Exhibits to the information that is incorporated by reference unless the
Exhibits are themselves specifically incorporated by reference). Any such
request shall be directed to Michael B. Cratty, President and Chairman of the
Board of Directors of Online Stock Market Group, 1875 Century Park East, Suite
1880, Los Angeles, CA 90067, Tel.# (310) 201-9700.
Within five days of our receipt of a subscription agreement accompanied
by a check for the purchase price, we will send by first class mail a written
confirmation to notify the subscriber of the extent, if any, to which such
subscription has been accepted. We reserve the right to reject orders for the
purchase of shares in whole or in part. Upon acceptance of each subscriber, we
will promptly provide our stock transfer agent the information to issue shares.
You can also call or write us at any time with any questions you may
have. We would be pleased to speak with you about any aspect of this offering.
Special Note Regarding Forward-Looking Statements
This prospectus contains forward-looking statements that reflect our
views about future events and financial performance. Our actual results,
performance or achievements could differ materially from those expressed or
implied in these forward-looking statements for various reasons, including those
in the "Risk Factors" section beginning on page 7. Therefore, you should not
place undue reliance upon these forward-looking statements.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance, or achievements.
Dividend Policy
We have never declared or paid cash dividends on our common stock and
anticipate that all future earnings will be retained for development of our
business. The payment of any future dividends will be at the discretion of our
Board of Directors and will depend upon, among other things, future earnings,
capital requirements, the financial condition of the Company and general
business conditions.
Stock Transfer Agent
Our transfer agent and registrar of the common stock is Registrar and
Transfer Company, 10 Commerce Drive, Cranford, New Jersey 07016.
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<PAGE>
Experts
Our consolidated combined financial statements as of and for the year
ending March 31, 1998, 1999, and 2000 have been audited by Stonefield Josephson,
Inc., CPAs, 1620 26th Street, Suite 400 South, Santa Monica, CA 90404,
independent auditors, as set forth in their report included herein and
incorporated herein by reference. Such financial statements have been included
in reliance upon such report given upon their authority as experts in accounting
and auditing.
Legal Matters
There is no past, pending or, to our knowledge, threatened litigation
or administrative action which has or is expected by our management to have a
material effect upon our business, financial condition or operations, including
any litigation or action involving our officers, directors, or other key
personnel.
The Law Offices of Miles Garnett, Esq., 66 Wayne Avenue, Atlantic
Beach, NY 11509, Tel. #(516) 371-4598, will pass upon certain legal matters
relating to the offering.
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<PAGE>
ONLINE STOCK MARKET GROUP AND SUBSIDIARY
(FORMERLY VIRTUAL STOCK MARKET, INC.)
(A CALIFORNIA CORPORATION AND
A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2000
CONTENTS
Page
----
Independent Auditors' Report 1
Financial Statements:
Consolidated Balance Sheet 2
Consolidated Statements of Operations 3
Consolidated Statement of Stockholders' Equity 4-5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-11
<PAGE>
Stonefield Josephson, Inc.
LOGO CERTIFIED PUBLIC ACCOUNTANTS
BUSINESS & PERSONAL ADVISORS
Members: DFK, IAPA, Institute of Profit Advisors
INDEPENDENT AUDITORS' REPORT
Board of Directors
Online Stock Market Group and Subsidiary
Los Angeles, California
We have audited the accompanying consolidated balance sheet of Online Stock
Market Group and Subsidiary (a California corporation and a development stage
company) as of March 31, 2000, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended March 31,
2000 and 1999. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Online
Stock Market Group and Subsidiary as of March 31, 2000, and the results of its
operations and its cash flows for the years ended March 31, 2000 and 1999 in
conformity with generally accepted accounting principles.
/s/ Stonefield Josephson, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
April 10, 2000
<PAGE>
ONLINE STOCK MARKET GROUP AND SUBSIDIARY
(A CALIFORNIA CORPORATION AND
A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET - MARCH 31, 2000
ASSETS
Current assets:
Cash and cash equivalents $ 606,443
Accounts receivable 2,530
Prepaid expenses 10,244
-----------
Total current assets $ 619,217
Property and equipment, net of
accumulated depreciation 69,013
Trademark and license, net of amortization 30,500
Other assets:
Deferred offering costs 12,000
Deposit 6,644
Investment in NASD warrants 3,300
-----------
Total other assets 21,944
-----------
$ 740,674
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities -
accounts payable and accrued expenses $ 9,500
Due to Virtual Wall Street, Inc. 144,681
Stockholders' equity:
Preferred stock; 4,000,000 shares authorized,
1,338,205 shares issued and outstanding $ 627,780
Common stock; 20,000,000 shares authorized,
9,312,921 shares issued and outstanding 763,926
Additional paid-in capital 652,779
Deficit accumulated during the development stage (1,457,992)
-----------
Total stockholders' equity 586,493
-----------
$ 740,674
===========
See accompanying independent auditors' report and notes to consolidated
financial statements.
<PAGE>
2
<TABLE>
ONLINE STOCK MARKET GROUP AND SUBSIDIARY
(A CALIFORNIA CORPORATION AND
A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
For the period from
October 9, 1997
Year ended Year ended (inception) to
March 31,2000 March 31, 1999 March 31, 2000
------------- -------------- --------------
<S> <C> <C> <C>
Revenues $ 9,095 $ -- $ 9,095
Cost of sales -- -- --
------------ ------------ ------------
Gross profit 9,095 -- 9,095
------------ ------------ ------------
Interest income 7,490 19,591 27,081
Operating expenses 626,394 575,501 1,494,168
------------ ------------ ------------
Net loss $ (609,809) $ (555,910) $ (1,457,992)
============ ============ ============
Net loss per share - basic and diluted $ (.06) $ (.05)
============ ============
Weighted average shares outstanding -
basic and diluted 10,489,521 10,314,102
============ ============
<FN>
See accompanying independent auditors' report and notes to consolidated
financial statements.
</FN>
3
</TABLE>
<PAGE>
<TABLE>
ONLINE STOCK MARKET GROUP AND SUBSIDIARY
(A CALIFORNIA CORPORATION AND
A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM OCTOBER 9, 1997 (INCEPTION) TO MARCH 31, 2000
<CAPTION>
Preferred stock Common stock Additional Total
--------------------- ---------------------- paid-in stockholders'
Shares Amount Shares Amount capital Deficit equity
------ ------ ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock on
October 9, 1997 (inception) $ 9,000,000 $ 106,240 $ -- $ -- $ 106,240
Issuance of preferred stock
during private
placement offering
from November 1997 to
March 31, 1998 798,300 775,000 775,000
Issuance of preferred stock
for payment of
services provided
from inception to
March 31, 1998 54,655 53,060 53,060
Allocation of convertibility
feature of
preferred stocks issued
during private
placement offering (414,030) (414,030)
Net loss for the period from
October 9, 1997
(inception) to March 31, 1998 (292,273) (292,273)
--------- ------- ----------- ----------- --------- ----------- -----------
Balance at March 31, 1998 852,955 414,030 9,000,000 106,240 (292,273) 227,997
Issuance of common stock 26,521 504 504
Issuance of preferred stock
during private
placement offering from
April 1, 1998 to
May 21, 1998 418,250 390,500 390,500
Issuance of preferred stock
for payment of
services provided from
April 1, 1998 to
March 31, 1999 92,000 86,999 86,999
Allocation of convertibility
feature of preferred
stocks issued during
private placement offering (238,749) (238,749)
Capital contribution by Virtual
Wall Street Inc. 652,779 652,779
Net loss for the year ended
March 31, 1999 (555,910) (555,910)
--------- ------- ----------- ----------- --------- ----------- -----------
Balance at March 31, 1999 1,363,205 652,780 9,026,521 106,744 652,779 (848,183) 564,120
<FN>
See accompanying independent auditors' report and notes to consolidated financial statements.
</FN>
4
</TABLE>
<PAGE>
<TABLE>
ONLINE STOCK MARKET GROUP AND SUBSIDIARY
(A CALIFORNIA CORPORATION AND
A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE PERIOD FROM OCTOBER 9, 1997 (INCEPTION) TO MARCH 31, 2000
<CAPTION>
Additional Total
Preferred stock Common stock paid-in stockholders'
Shares Amount Shares Amount capital Deficit equity
--------- ----------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock in
exchange for services
rendered 5,000 12,500 12,500
Shares sold during private
placement 281,400 644,682 644,682
Preferred stock repurchase (25,000) (25,000) (25,000)
Net loss for the year ended
March 31, 2000 (609,809) (609,809)
--------- ----------- --------- ----------- ----------- ----------- -----------
Balance at March 31, 2000 1,338,205 $ 627,780 9,312,921 $ 763,926 $ 652,779 $(1,457,992) $ 586,493
========= =========== ========= =========== =========== =========== ===========
<FN>
See accompanying independent auditors' report and notes to consolidated financial statements.
</FN>
5
</TABLE>
<PAGE>
<TABLE>
ONLINE STOCK MARKET GROUP AND SUBSIDIARY
(A CALIFORNIA CORPORATION AND
A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the period from
October 9, 1997
Year ended Year ended (inception) to
March 31, 2000 March 31, 1999 March 31, 2000
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows provided by (used for) operating activities:
Net loss $ (609,809) $ (555,910) $(1,457,992)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization 33,031 32,668 73,755
Loss on disposal of assets 19,928 -- 19,928
Issuance of common stock for services rendered 12,500 86,999 152,559
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (2,530) -- (2,530)
Prepaid expenses 16,073 (13,985) (10,244)
Deposits (6,644) 4,458 (6,644)
Deferred offering costs (12,000) -- (12,000)
Increase (decrease) in liabilities -
accounts payable and accrued expenses (11,751) 16,332 9,500
----------- ----------- -----------
Total adjustments 48,607 126,472 224,324
----------- ----------- -----------
Net cash used for operating activities (561,202) (429,438) (1,233,668)
----------- ----------- -----------
Cash flows used for investing activities -
Payments to acquire property and equipment, net (37,473) (21,212) (98,994)
Investment in NASD warrants (3,300) -- (3,300)
Payments related to organization costs -- -- (27,458)
Payments to acquire trademark and license -- -- (60,000)
----------- ----------- -----------
Net cash used for investing activities (40,773) (21,212) (189,752)
----------- ----------- -----------
Cash flows provided by (used for) financing activities:
Proceeds from issuance of preferred stock units -- 390,500 1,165,500
Redemption of preferred stock units (25,000) -- (25,000)
Proceeds from issuance of common stock units, net 644,682 -- 744,682
Loans to officer-stockholder -- 650 --
Loans (to) from Virtual Wall Street, Inc. 244,931 (95,250) 144,681
----------- ----------- -----------
Net cash provided by financing activities 864,613 295,900 2,029,863
----------- ----------- -----------
Net increase (decrease) in cash 262,638 (154,750) 606,443
Cash, beginning of year 343,805 498,555 --
----------- ----------- -----------
Cash, end of year $ 606,443 $ 343,805 $ 606,443
=========== =========== ===========
Supplemental disclosure of cash flow information -
income taxes paid $ 1,600 $ 1,600 $ 3,200
=========== =========== ===========
Supplemental disclosure of non-cash investing and financing activities:
Issuance of preferred stock units in exchange for
services rendered $ -- $ 86,999 $ 140,059
=========== =========== ===========
Issuance of common stock for services rendered $ 12,500 $ -- $ 12,500
=========== =========== ===========
Capital contribution in exchange for elimination of
debt and for property and equipment, respectively $ -- $ 652,779 $ 659,019
=========== =========== ===========
Issuance of common stock in exchange for
note receivable $ -- $ 504 $ 504
=========== =========== ===========
<FN>
See accompanying independent auditors' report and notes to consolidated financial statements.
</FN>
6
</TABLE>
<PAGE>
ONLINE STOCK MARKET GROUP AND SUBSIDIARY
(A CALIFORNIA CORPORATION AND
A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM OCTOBER 9, 1997 (INCEPTION) TO
MARCH 31, 2000
(1) Basis of Preparation and Summary of Significant Accounting Policies:
General:
Online Stock Market Group, ("Parent"), formerly Virtual Stock
Market, Inc., a California corporation, was incorporated on
October 9, 1997, through a capital investment of $106,240 by
Virtual Wall Street, Inc. in exchange for 9,000,000 shares of
common stock. During September 1998, the Board of Directors
and shareholders of Virtual Wall Street, Inc. declared a
dividend and distributed approximately 8,505,000 of its shares
of Online Stock Market Group's common stock to the
shareholders of Virtual Wall Street, Inc. During May 1999, the
Company changed its name from Virtual Stock Market, Inc. to
Online Stock Market Group.
The Parent formed Online Stock Market, Inc., ("Subsidiary") a
California corporation through a capital investment of
$100,000 on February 17, 1998 in exchange for 100% of its
common stock.
Business Activity:
The Company has established traditional and online brokerage
services, and provides best efforts underwriting and
investment banking services for small and medium sized
businesses over the internet in exchange for fees or
commissions from customers.
Principles of Consolidation:
The accompanying consolidated financial statements include the
accounts of the Parent, and its Subsidiary (collectively, the
"Company") as of March 31, 2000 and for the years ended March
31, 2000 and 1999 and for the period from October 9, 1997
(date of inception) to March 31, 2000. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Fair Value:
Unless otherwise indicated, the fair value of all reported
assets and liabilities which represent financial instruments,
none of which are held for trading purposes, approximate
carrying values of such accounts.
See accompanying independent auditors' report.
7
<PAGE>
ONLINE STOCK MARKET GROUP AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM OCTOBER 9, 1997 (INCEPTION) TO
MARCH 31, 2000
(1) Basis of Preparation and Summary of Significant Accounting Policies,
Continued:
Cash and Cash Equivalents:
Concentration
The Company maintains its cash in bank deposit accounts which,
at times, may exceed federally insured limits. The Company has
not experienced any losses in such accounts.
Cash Equivalents
Cash includes time deposits, certificates of deposit, and all
highly liquid debt instruments with original maturities of
three months or less which are not securing any corporate
obligations.
Property and Equipment:
Property and equipment are valued at cost. Depreciation and
amortization are being provided by use of straight-line and
accelerated methods over the estimated useful lives of the
assets.
Income Taxes:
The Company accounts for taxes under SFAS No. 109, which
requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have
been included in financial statements or tax returns. Under
this method, deferred tax liabilities and assets are
determined based on the difference between the financial
statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the
differences are expected to reverse. The principal temporary
difference is the net operating loss carryforward of
approximately $1,400,000 at March 31, 2000. A deferred asset
has been provided and completely offset by a valuation
allowance, because its utilization does not appear to be
reasonably assured. The Company's operating results were
included in the consolidated income tax returns of Virtual
Wall Street, Inc., through September 1998. Accordingly there
are certain limitations on the utilization of this net
operating loss carryforward as a result of this change of
control. Federal net operating loss carryforward starts to
expire on March 31, 2018 and California state net operating
loss carryforward starts to expire on March 31, 2003.
The Company is liable for and has provided for corporate state
taxes.
Net Loss Per Share:
Net loss per share has been calculated based upon the weighted
average number of common shares outstanding during the period.
Common stock equivalents have been excluded because their
effect would reduce loss per share.
See accompanying independent auditors' report.
8
<PAGE>
ONLINE STOCK MARKET GROUP AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM OCTOBER 9, 1997 (INCEPTION) TO
MARCH 31, 2000
(2) Property and Equipment:
A summary is as follows:
Furniture, fixtures and equipment $102,213
Less accumulated depreciation 33,200
--------
$ 69,013
========
Depreciation expense amounted to $21,031 and $15,150 for the years
ended March 31, 2000 and 1999, respectively.
(3) Trademark and License Agreement:
The Company entered into an exclusive license agreement with Virtual
Wall Street, Inc. ("Licensor") to develop, enhance and utilize for
normal business purposes the concept, name recognition, tradename,
copyright and trade secrets of "Virtual Stock Market, Inc." Pursuant to
this agreement, no further royalties or fees are due to the Licensor in
the future. Trademark and license agreement is being amortized straight
line over a 60-month period.
A summary is as follows:
Trademark and License agreement $60,000
Less accumulated amortization 29,500
-------
$30,500
=======
Amortization expense amounted to $12,000 each for the years ended March
31, 2000 and 1999.
(4) Stockholders' Equity:
The Company commenced a private placement (the "Private Placement") of
600,000 units on November 3, 1997 at a purchase price of approximately
$2.00 per unit. Each unit consisted of two shares of the Company's
Series A Convertible, no par value, non-cumulative preferred stock, and
an exchange warrant to convert those two preferred shares to one share
of Virtual Wall Street, Inc.'s common stock. The exchange warrant is
convertible beginning December 31, 1999 and for a period of one year
thereafter. The Private Placement generated gross proceeds of
approximately $ 1,165,500. The Company allocated 50% to the
convertibility feature.
During the period from November 3, 1997 to March 31, 1998 and during
April 1998, the Company issued approximately 75,000 units to certain
key employees and consultants in exchange for services rendered until
March 31, 1999, of which, 50% of the capital was allocated to the
exchange warrant conversion feature.
See accompanying independent auditors' report.
9
<PAGE>
ONLINE STOCK MARKET GROUP AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM OCTOBER 9, 1997 (INCEPTION) TO
MARCH 31, 2000
(4) Stockholders' Equity, Continued:
In August of 1998, Virtual Wall Street, Inc. eliminated Online Stock
Market Group's obligations through a contribution to the capital of
Online Stock Market Group of $652,779.
During July 1999, the Company initiated a private placement offering
(the "July 1999 Private Placement") of 495,000 units of the Company's
common stock units at an offering price of $2.50 per unit. The Private
Placement was exempt from the registration provisions of the Securities
and Exchange Commission Act of 1933 and Rule 506 of Regulation D. Each
unit consists of one share of common stock and one warrant to purchase
one common stock at an exercise price of $3.75. Pursuant to the terms
of this offering, the Company and a selling shareholder agreed to sell
495,000 shares each for a total of 990,000 units (495,000 shares held
by the selling shareholder, 495,000 newly issued shares and 990,000
warrants). As of March 31, 2000, the Company has raised $644,682, net
of offering costs of $58,818.
(5) Stock Options:
The Company has adopted the 1998 Stock Option Plan (the "Plan"). The
Plan authorizes the issuance of 1,000,000 shares of the Company's
common stock pursuant to the exercise of options granted thereunder.
The Board of Directors administers the Plan, selects recipients to whom
options are granted and determines the number of shares to be awarded.
Options granted under the Plan are exercisable at a price determined by
the Compensation Committee at the time of grant, but in no event less
than fair market value. Options granted under the Plan that are not
exercised within three months after termination of employment revert
back to the Plan.
Under the Plan, the number and weighted average exercise prices of
options granted for the years ended March 31, 2000 and 1999 are as
follows:
March 31, March 31,
2000 1999
---- ----
Average Average
exercise exercise
Number Price Number Price
------ ----- ------ -----
Outstanding at the beginning of
the year 50,000 $1.00 100,000 $1.00
Outstanding at the end of the year 225,000 2.50 50,000 2.50
Exercisable at the end of the year 225,000 2.50 20,500 2.50
Granted during the year 225,000 2.50 -- 2.50
Exercised during the year -- -- -- --
Cancelled during the year 50,000 1.00 50,000 1.00
See accompanying independent auditors' report.
10
<PAGE>
ONLINE STOCK MARKET GROUP AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM OCTOBER 9, 1997 (INCEPTION) TO
MARCH 31, 2000
(5) Stock Options, Continued:
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because
the alternative fair value accounting provided for under FASB Statement
No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the fair market value of the
underlying stock on the date of grant, no compensation expense is
recognized.
Proforma information regarding net income and earnings per share under
the fair value method has not been presented as the amounts are
immaterial.
(6) Commitments and Other:
The Company entered into a three-year rental lease agreement for office
space in April 1999. The following is a schedule by years of future
minimum rental payments required under operating leases that have
noncancellable lease terms in excess of one year as of March 31, 2000:
Year ending March 31,
2001 $ 79,733
2002 79,733
---------
$ 159,466
=========
Rent expense amounted to $60,610 (net of rent income of $12,000 from
sublet of office space to affiliate) and $63,060 for the years ended
March 31, 2000 and 1999, respectively.
The Company has under management, investment assets of $8,735,000 at
fair value as of March 31, 2000.
(7) Related Party Transactions:
During the year ended March 31, 2000, the Company paid a
stockholder/related party through an affiliate approximately $24,000
for consulting services.
The obligation to Virtual Wall Street, Inc. is due on demand and arose
from collection of proceeds from a sale of stock held by Virtual Wall
Street, Inc. as selling shareholder.
See accompanying independent auditors' report.
11
<PAGE>
================================================================================
--------------------------------------------------------------------------------
No dealer, salesperson or any other person is authorized to give any information
or to make any representations in connection with this Prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by us. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any security other than the securities offered
by this Prospectus, or an offer to sell or solicitation of an offer to buy any
securities by anyone in any jurisdiction in which such offer or solicitation is
not authorized or is unlawful. The delivery of this Prospectus shall not, under
any circumstances, create any implication that the information herein is correct
as of any time subsequent to the date of the Prospectus.
--------------------------------------------------------------------------------
Until June 30, 2001 all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
TABLE OF CONTENTS
Summary ................................................................... 5
Our Company ............................................................... 5
Risk Factors .............................................................. 7
Use of Proceeds ........................................................... 19
Capitalization ............................................................ 20
Dilution .................................................................. 21
Business .................................................................. 22
Management Discussion of Analysis of Condition
and Results of Operations ................................................. 34
Principal Shareholders .................................................... 36
Management ................................................................ 37
Certain Transactions ...................................................... 42
Description of Securities ................................................. 42
Share~ Eligible for Future Sale ........................................... 44
Available Information ..................................................... 45
Dividend Policy ........................................................... 46
Stock Transfer Agent ...................................................... 46
Experts ................................................................... 47
Legal Matters ............................................................. 47
Index to Financial Statements ............................................. F-1
================================================================================
================================================================================
Online Stock Market
Group
1,000,000
SHARES COMMON STOCK
(no par value per share)
Online Stock Market Group
1875 Century Park East, Suite: 1880
Los Angeles, CA 90067
_____________,2000
================================================================================
<PAGE>
Part II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. Indemnification of Officers and Directors
The information required by this item is incorporated by reference to
"indemnification" in the prospectus herein.
At present we have not entered into individual indemnity agreements
with our Officers or Directors. However, our By-Laws and Certificate of
Incorporation provide a blanket indemnification that we shall indemnify, to the
fullest extent under California law, our directors and officers against certain
liabilities incurred with respect to their service in such capabilities. In
addition, the Certificate of Incorporation provides that the personal liability
of our directors and officers and our stockholders for monetary damages will be
limited.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933, as amended,
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by us of expenses incurred or
paid by a director, officer or controlling person 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, we will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and we will be governed by the final
adjudication of such case.
ITEM 25. Other Expenses of issuance and distribution
SEC Registration Fee $ 1,056.00
Blue Sky Fees and Expenses $ 10,000.00
Legal Fees and Expenses $ 18,000.00
Printing and Engraving Expenses $ 3,000.00
Accountant's Fees and Expenses $ 15,000.00
Postage & Mail $ 4,000.00
Escrow Fee $ 1,000.00
Advertising $ 348,000.00
--------------
$ 400,000.00
Total
The foregoing expenses, except for the SEC fees, are estimated.
ITEM 26. Recent Sales of Unregistered Securities.
(a) Unregistered Securities Sold within the past three years
We issued 9,000,000 shares of Common Stock to Virtual Wall Street, Inc.
in November 1997 in connection with our initial capitalization. The total price
paid by Virtual Wall Street for the shares was $106,140, or $0.012 per share.
We issued 1,227,450 shares of Series A Preferred Stock in a private
placement, conducted beginning on November 3, 1997 and concluding on May 22,
<PAGE>
1998. In the private placement, we offered units consisting of two shares of
Series A Preferred Stock and a warrant issued by Virtual Wall Street to acquire
one share of Common Stock of Virtual Wall Street, beginning on December 31,
1999, in exchange for 2 shares of Series A Preferred Stock of Virtual Stock
Market. The price per unit was $2.00. The total consideration received by us in
connection with this private placement was $1,180,500. The offer and sale of the
shares was conducted pursuant to Rule 506 of Regulation D of the Commission
without any general solicitation. There were 20 accredited and 35 nonaccredited
purchasers. The identities of the purchasers are filed as confidential
information pursuant to Rule 406.
We issued 401,750 shares of Common Stock and warrants in a private
placement, conducted beginning on July 1, 1999 and concluding on May 12, 2000.
In the private placement, we offered units consisting of one share of Common
Stock and a warrant to purchase one share of Common Stock at an exercise price
of $3.75 beginning on July 2, 2000. The price per unit was $2.50. The total
consideration received by us in connection with this private placement was
$1,004,375. The offer and sale of the shares was conducted pursuant to Rule 506
of Regulation D of the Commission without any general solicitation. There were
41 accredited and 28 non-accredited purchasers. The identities of the purchasers
are filed as confidential information pursuant to Rule 406.
<PAGE>
ITEM 27. - EXHIBITS
Index to Exhibits
--------------------------------------------------------------------------------
SEC REFERENCE TITLE OF DOCUMENT LOCATION
NUMBER
--------------------------------------------------------------------------------
1.1 Subscription Agreement This filing page
3.1 Articles of Incorporation This filing page
3.2 Name Change Certificate This filing page
3.3 Bylaws This filing page
3.4 Certificate of This filing page
Determination
5.1 Consent of Miles Garnett, Esq. To be filed
with amendment
10.1 Lease Agreement This filing page
10.2 Accrued Liability Agreement This filing page
with Online Stock Market, Inc.
10.3 License Agreement This filing page
with Virtual Wall Street, Inc.
10.4 Trademark Applications This filing page
10.5 Contract w/RND Resources, Inc. This filing page
10.6 Employment Agreement This filing page
10.7 Common Stock Exchange This filing page
Warrant Agreement
10.8 1998 Stock Option Plan This filing page
10.9 Incentive Stock Option Agreement This filing page
10.10 Non Statutory Stock Option Agreement This filing page
10.11 Fully Disclosed Clearing Agreement This filing page
10.12 User Agreement This filing page
23.1 Consent of Stonefield This filing page
Josephson, Inc., CPAs
27.1 Financial Data Schedule This filing page
<PAGE>
ITEM 28. Undertakings
The undersigned registrant undertakes:
(1) To file, during any period in which offer or sales are being made, a
post-effective amendment to this registration statement
To include any prospectus required by section I O(a)(3) of the
Securi- ties Act of 1933;
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) which, individually or in the
aggregate, represent a fundamental change in the information
in the registration statement;
To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to the information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of securities at that time shall be deemed to be the
initial bona fide offering.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission any supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred to that section.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the Registrant pursuant to our certificate of incorporation or provisions of
California law, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission the indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. If a
claim for indemnification against 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 a director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether the
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of the issue.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, this
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, in the City of Los
Angeles, State of California, on ,2000.
(Registrant) ONLINE STOCK MARKET GROUP
By ______________________________________
Michael B. Cratty, President and
Chairman of the Board of Directors
In accordance with the Securities Act of 1933 this registration was
signed by the following persons in the capacities and on the dates indicated.
(Signature) __________________________________________
Michael R. Hoepor
Director
(Date) __________________________________________
(Signature) __________________________________________
Linda Lee Schaitberger
Director
(Date) __________________________________________
(Signature) __________________________________________
David A. Berge
Chief Information Officer/Corporate
Secretary
(Date) __________________________________________
Who must sign: the small business issuer, its principal executive officer or
officers, its principal financial officer, its controller or principal
accounting officer and at least the majority of directors or persons performing
similar functions.
