-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UwjOZ+NHTC+Qz0aA2ttL5FkIRUWblioiSYK3RQMaR2mI+VpXp9eLpUo1DDKT2p4t 56KVw+xn3HWIRNdCfOujRg== 0000950131-96-003586.txt : 19960802 0000950131-96-003586.hdr.sgml : 19960802 ACCESSION NUMBER: 0000950131-96-003586 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19960801 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ONLINE SYSTEM SERVICES INC CENTRAL INDEX KEY: 0001011901 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 841293864 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-09389 FILM NUMBER: 96602550 BUSINESS ADDRESS: STREET 1: 1800 GLENARM PLACE STREET 2: SUITE 800 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3032969200 MAIL ADDRESS: STREET 1: 1800 GLENARM PL STREET 2: SUITE 800 CITY: DENVER STATE: CO ZIP: 80202 SB-2 1 FORM SB-2 As filed with the Securities and Exchange Commission on August 1, 1996 Registration No. ___________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ONLINE SYSTEM SERVICES, INC. (Exact name of issuer as specified in its charter) Colorado 7373 84-1293864 (State or other (Primary Standard Industrial (I.R.S. Employer jurisdiction of Classification Code Number) Identification No.) incorporation or organization) Online System Services, Inc. 1800 Glenarm Place, Suite 800 Denver, Colorado 80202 (303) 296-9200 (Name, address, including zip code and telephone number, including area code, of registrant's principal executive offices) R. Steven Adams Online System Services, Inc. 1800 Glenarm Place, Suite 800 Denver, Colorado 80202 (303) 296-9200 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copy to: Lindley S. Branson Bruce B. McPheeters Gray, Plant, Mooty, Mooty & Bennett, P.A. 33 South Sixth Street 3400 City Center Minneapolis, Minnesota 55402 (612) 343-2800 Approximate date of commencement of proposed sale to public: As soon as practicable after the registration statement becomes effective. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, check the following box: [_] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: [X]
CALCULATION OF REGISTRATION FEE Proposed Proposed Title of Each Class Amount Maximum Maximum Amount of of Securities to Be to be Offering Price Aggregate Registration Registered Registered Per Unit Offering Price Fee - --------------------- ----------- -------------- -------------- ------------ Common Stock 25,000 (1) $4.8125 $120,312.50(2) $41.49 (no par value)
(1) Plus such additional shares of Common Stock which may be issued from time to time pursuant to stock dividends, stock splits or other recapitalizations. (2) Pursuant to Rule 457(c), the amount is based on the average of the high bid ($4-3/8) and asked ($5-1/4) prices for such stock on the NASDAQ SmallCap Market System on July 30, 1996. 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. SUBJECT TO COMPLETION __________, 1996 ONLINE SYSTEM SERVICES, INC. 25,000 SHARES OF COMMON STOCK This Prospectus relates to the offering of up to 25,000 shares of Common Stock of Online System Services, Inc. (the "Shares"), a Colorado corporation (the "Company"), being offered by the Selling Shareholder named herein. See "Selling Shareholder." The Shares may be offered and sold only by the Selling Shareholder at his sole discretion in varying amounts from time to time at the then prevailing market prices on the Nasdaq SmallCap Market or in isolated transactions at negotiated prices. The Company will not receive any of the proceeds from the sale of Common Stock by the Selling Shareholder. Estimated offering expenses of $6,000 will be paid by the Company. See "Plan of Distribution." The Company's Common Stock is traded on the Nasdaq SmallCap Market under the symbol "WEBB." On July ____, 1996, the closing sale price of the Common Stock of the Company, as reported on the Nasdaq SmallCap Market System was $_____ per share. --------------- These securities are speculative and involve a high degree of risk and a likelihood of immediate dilution. See "Risk Factors" at Page 5. --------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any State. The date of this Prospectus is _______, 1996 1 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the detailed information and financial statements appearing elsewhere in this Prospectus. The securities offered hereby involve a high degree of risk. Potential investors should carefully review the information under the heading "Risk Factors." THE COMPANY Online System Services, Inc. (the "Company" or "OSS") develops, markets and supports sophisticated, high-end World Wide Web ("Web") sites, on the Internet or Intranet, to enable companies to enhance revenues, reduce costs, and improve customer service and communication. A growing number of businesses, associations and other organizations are establishing Web sites as a means to communicate internally with employees and externally with customers, prospective customers and other constituents. Many Web sites have been used initially only for one-way communication such as marketing or advertising through online product brochures. The Company differentiates itself by offering high quality, highly functional, sophisticated Web sites that allow for interactive communication and automated processing of information. Businesses can enhance revenues by using Web sites to conduct online commerce, such as interactive catalog sales. Businesses can also reduce costs by using Web-based technologies to automate help desk and other service functions that have historically been staffed with operators who require training and who may handle hundreds of calls each day. Interactive, sophisticated Web sites for employee and customer service functions can reduce staffing and training costs, and improve service by providing faster response time and more complete and current information. Businesses can also readily track usage of Web sites as a means to focus marketing efforts and improve service. The Company also develops and markets sophisticated Web sites that are targeted to specific industry segments. The first industry segment targeted by the Company is the health care industry, with an integrated network or "marketspace" of Web sites called "MD Gateway." This marketspace will integrate the professional and educational needs of physicians with the commercial interests of multimedia publishers, professional associations, managed care organizations, and pharmaceutical and medical device companies. Sales of educational products, accelerated learning seminars, Web site development and Internet access will be integrated with the marketing of MD Gateway. In addition, the Company has developed an Internet Service Provider ("ISP") package called "Community Access America" to offer a turnkey Internet "Point of Presence" to local cable, telephone and newspaper companies in non-urban markets with populations from 10,000 to 200,000. The package is designed to add a new layer of revenues for the local companies' existing subscriber base. Especially developed for non-urban areas, Community Access America provides the local community a link to the Internet and World Wide Web for local and international information, entertainment and news. The turnkey package includes the hardware, software, documentation, and marketing and technical assistance that an operator requires to become an ISP and Web developer. The Company intends to contract with ISP operators to provide the turnkey package and continued marketing and technical assistance in exchange for a fee and a share of the ISP's gross revenues. OSS would receive a greater share of the ISP's revenues if the equipment is owned and supplied by OSS. In March 1996, the Company entered into a non-exclusive value-added reseller agreement with Edify Corporation ("Edify"), which will allow the Company to use and sublicense Edify's "Electronic Workforce" software to OSS customers. Electronic Workforce incorporates intelligent software agents, which are independent software modules that allow a user on the Web to interact with a company's existing databases, and that allow interaction with Web browsers, telephones, facsimiles, e-mail and alphanumeric pagers. Electronic Workforce easily allows for the exchange of information from a variety of sources, including mainframes, client-server environments and relational databases. Since commencing operations in February 1995, the Company has built its expertise through the development of Web sites other companies, primarily in the Denver, Colorado area. The price for each of these Web sites ranged from approximately $1,500 to $50,000. The Company has sold three Community Access America packages as of May 15, 1996 and has developed two Internet training seminars used to establish business contacts 2 for other OSS products and services. The Company is also designing and developing "WebQuest,(TM)" an interactive Web site design method that will allow the Company to provide its customers a more effective and collaborative design process. For the year ended December 31, 1995 and the three months ended March 31, 1996, the Company had total net sales of $397,756 and $266,849, and net losses of $482,239 and $169,044, respectively. The Company generates net sales through the sale of software consulting services for Web site development, mark- ups on computer hardware and software sold to customers, maintenance fees charged to customers to maintain computer hardware and Web sites, license fees based on a percentage of revenues from the Community Access America program, training course fees, and monthly fees paid by customers for Internet access provided by the Company in the Denver market. The Company was incorporated under the laws of the State of Colorado on March 22, 1994, and maintains its executive offices at 1800 Glenarm Place, Suite 800, Denver, Colorado 80202. The Company's telephone number is (303) 296-9200. RISK FACTORS An investment in the securities offered hereby involves a high degree of risk. See "Risk Factors." THE OFFERING Common Stock Offered by the Selling Shareholder... Up to 25,000 shares of Common Stock. See "Description of Securities." Common Stock outstanding before and after offering(1)............... 3,072,245 Use of proceeds............ The Company will not receive any of the proceeds from the sale of Common Stock by the Selling Shareholder. Nasdaq Symbols: Common Stock............. WEBB Warrants................. WEBBW - --------------- (1) Does not include: (i) 736,508 shares of the Company's Common Stock issuable upon exercise of options and warrants, exercisable at prices ranging from $0.50 to $6.50 per share, with a weighted average exercise price of approximately $1.02 per share, (ii) 632,500 shares of the Company's Common Stock issuable upon exercise of warrants sold to the public in the Company's initial public offering in May and June 1996 (the "Initial Public Offering") at an exercise price of $9.00 per share, (iii) 110,000 shares of the Company's Common Stock issuable upon exercise of the representative's unit option at a purchase price of $10.80 per share, granted in connection with the Initial Public Offering (the "Representative's Unit Option"), (iv) 55,000 shares of the Company's Common Stock issuable upon exercise of the Warrants included in the Representative's Unit Option, at an exercise price of $9.00 per share or (v) 6,942 additional shares of the Company's Common Stock available for the grant of options under the Company's Stock Option Plan. See "Management-Stock Options." SUMMARY FINANCIAL DATA The following summary financial data was derived from the Company's financial statements included elsewhere herein and should be read in conjunction with such financial statements and the notes thereto. 3
YEAR ENDED THREE MONTHS DECEMBER 31, ENDED MARCH 31, 1995 1995 1996 ------------- ----------- ---------- STATEMENTS OF OPERATIONS DATA:(1) Net sales............................... $ 397,756 $ 51,429 $ 266,849 Gross profit............................ 96,980 9,843 104,551 Net income (loss)....................... (482,239) (6,920) (169,044) Net income (loss) per share of Common Stock.................................. (0.19) (0.00) (0.07) Shares of Common Stock and stock 2,550,695 2,550,695 2,550,695 equivalents outstanding(2)............. March 31, 1996(3) ---------------- BALANCE SHEET DATA: Total assets......................................... $ 673,282 Total liabilities.................................... 385,231 Deficit accumulated during the development stage..... (385,090) Shareholders' equity................................. 288,051 - ---------------
(1) No revenues were received and no expenses were incurred from March 22, 1994 (inception) through December 31, 1994. (2) Does not include: (i) 736,508 shares of the Company's Common Stock issuable upon exercise of options and warrants, exercisable at prices ranging from $0.50 to $6.50 per share, with an average exercise price of approximately $1.02 per share or (ii) 6,942 additional shares of the Company's Common Stock available for the grant of options under the Company's Stock Option Plan of 1995. See "Management-Stock Options." (3) Does not reflect the sale of 1,265,000 "Units" in the Company's Initial Public Offering in May and June 1996 at a price to public of $6.75 per Unit, the application of the net proceeds therefrom, or the losses incurred by the Company after March 31, 1996. Each Unit consists of one share of Common Stock and one "Warrant." Two Warrants included in the Units entitle the holder to purchase one share of Common Stock during the three-year period commencing May 23, 1996, at an exercise price of $9.00 per share. 4 RISK FACTORS The Common Stock offered hereby is highly speculative, involve a high degree of risk and a likelihood of immediate dilution, and should be purchased only by persons who can afford the loss of their entire investment. Prospective investors should carefully consider the following risks and speculative factors inherent in and affecting the business of the Company, as well as all of the other matters set forth elsewhere in the Prospectus, prior to the purchase of any of the securities offered hereby. RISKS RELATED TO THE COMPANY Limited Operating History; Accumulated Loss; Going Concern Qualification. The Company was founded in March 1994, commenced sales in February 1995 and was in the development stage through December 31, 1995. Accordingly, the Company has only a limited operating history upon which an evaluation of the Company and its prospects can be based. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets. To address these risks, the Company must, among other things, respond to competitive developments, continue to attract, retain and motivate qualified persons, and continue to upgrade and commercialize products and services. There can be no assurance that the Company will be successful in addressing such risks. The Company has incurred net losses since inception. As of March 31, 1996, the Company had an unaudited accumulated deficit of $385,090. This accumulated deficit does not include losses of $266,193 that were incurred by the Company from inception through September 26, 1995 because the Company was a Subchapter S corporation during that period. The Company's quarterly net sales increased from $71,720 for the third quarter of 1995 to $249,424 for the fourth quarter of 1995 and were $266,849 in the first quarter of 1996. This growth in net sales may not be sustainable and is not necessarily indicative of future operating results. There is no assurance that the Company will be able to continue to generate revenues or achieve or sustain profitability. The Company's independent auditors have included in their audit report an explanatory paragraph which states that the Company's net loss of $482,239 from inception through December 31, 1995 raises substantial doubt about its ability to continue as a going concern. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." New and Uncertain Markets. The market for Internet and Intranet products and services has only recently developed. Since this market is relatively new and because current and future competitors are likely to introduce competing Internet and Intranet products and services, it is difficult to predict the rate at which the market will grow or at which new or increased competition will result in market saturation. If the Internet and Intranet markets fail to grow, grow more slowly than anticipated or become saturated with competitors, the Company's business, operating results and financial condition will be materially adversely affected. Product Development; Technological Change. The Company's success depends upon its ability to develop new products and services that meet changing customer requirements. The market for the Company's products and services is characterized by rapidly changing technology, evolving industry standards, emerging competition and frequent new product and service introductions. There can be no assurance that the Company can successfully identify new product and service opportunities or develop and bring new products and services to market in a timely manner, or that products and services or technologies developed by others will not render the Company's products and services or technologies noncompetitive or obsolete. General Risks of Business. The Company has formulated its business plans and strategies based on the rapidly increasing size of the Internet and Intranet markets, the Company's anticipated participation in those markets, and the estimated sales cycle, price and acceptance of the Company's products and services. Although these assumptions are based on the best estimates of management, there can be no assurance that these assumptions will prove to be correct. No independent marketing studies have been conducted on behalf of or otherwise obtained by the Company, nor are any such studies planned. Any future success that the Company might enjoy will depend upon many factors including some beyond the control of the Company or that it cannot predict at this time. 5 Intense Competition. The market for Internet and Intranet products and services is highly competitive and the Company expects that this competition will intensify in the future. The Company's current and prospective competitors include many companies that have substantially greater financial, technical, marketing and other resources than the Company. Increased competition could result in price reductions and increased spending on marketing and product development. Any of these events could have a materially adverse effect on the Company's financial condition and operating results. Many nationally known companies and regional and local companies across the country are involved in Internet and Intranet applications, including the development and support of Web sites, and the number of competitors is growing. The Company will also compete with the internal information system departments of prospective customers who are choosing whether to outsource design and support or retain or develop that function in-house. Customers who desire to outsource these services may desire to work with companies larger than OSS. Since the Company's reseller arrangement with Edify is nonexclusive, customers may license the Edify products independent of the Company. The Company also expects that competition with its Community Access America program will grow as the larger urban markets for Internet access begin to mature and the large ISP's look to open smaller markets. Increased competition could result in significant price competition, which in turn could result in significant reductions in the average selling price of the Company's products and services. There is no assurance that the Company will be able to offset the effects of any such price reductions through an increase in the number of its customers, higher revenue from enhanced services, cost reductions or otherwise. Increased competition or price reductions, could adversely affect the Company's operating results. There is no assurance that the Company will have the financial resources, technical expertise or marketing and support capabilities to continue to compete successfully. See "Business-Competition." Limited Availability of Proprietary Protections. The Company has applied for federal registration of the mark "Community Access America" and plans to file federal registration applications for additional trademarks including "WebQuest" and "MD Gateway and "The Virtual Salesforce(TM)" The Company does not believe that its current products or services are patentable. The Company relies on a combination of copyright, trade secret and trademark laws, and nondisclosure and other contractual provisions to protect its proprietary rights. Notwithstanding these safeguards, it may be possible for competitors of the Company to imitate the Company's products and services or to develop independently competing products and services. See "Business-Trademarks and Proprietary Product Protection." Length of Sales Cycle. The development and implementation of interactive Web sites is often an enterprise-wide decision by prospective customers and may require the Company to engage in a lengthy sales cycle. The pursuit of sales leads typically involves an analysis of the prospective customer's needs, preparation of a written proposal, one or more presentations and contract negotiations. The Company often provides significant education to prospective customers regarding the use and benefits of Internet or Intranet technologies and products such as Edify's Electronic Workforce. Extensive Web site development or licensing of Electronic Workforce may also involve a substantial commitment of capital and the attendant delays frequently associated with approving large capital expenditures and reviewing new technologies that affect key operations. While the sales cycle varies from customer to customer, it typically has ranged from one to six months for Web site design and support, and from one to three months for Community Access America projects. The sales cycle may also be subject to a prospective customer's budgetary constraints and internal acceptance reviews, over which the Company has little or no control. Consequently, if sales forecasted from a specific customer for a particular quarter are not realized in that quarter, the Company is unlikely to be able to generate revenue from alternate sources in time to compensate for the shortfall. If a larger order is delayed or lost to a competitor, the Company's revenues for that quarter could be materially diminished. Moreover, to the extent that significant sales occur earlier than expected, operating results for subsequent quarters may be adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Agreement with Edify Corporation. In March 1996, the Company entered into a non-exclusive value-added reseller agreement with Edify, which will allow the Company to use and sublicense to OSS customers the Edify "Electronic Workforce" software. The agreement with Edify has an initial term of 15 months and may be renewed for 12 months if agreed to by Edify. Management believes that the agreement would be renewed by Edify if the Company has paid at least $1 million in product fees to Edify during the initial term, although Edify is not obligated to renew the agreement. If the agreement with Edify is not renewed, the Company would need to attempt 6 to locate an alternative software product suitable for its customers or arrange for its customers to obtain the Edify software through Edify or another reseller. Dependence on Key Personnel. The Company is highly dependent on the technical and management skills of its key employees, including in particular R. Steven Adams, the Company's founder, President and Chief Executive Officer. The Company has not purchased key person insurance for Mr. Adams or any other members of management. The loss of Mr. Adams' services could have a material adverse effect on the Company's business and operating results. The Company's future success also depends in part on its ability to identify, hire and retain additional personnel, including key product development, sales, marketing, financial and executive personnel. Competition for such personnel is intense and there is no assurance that the Company can identify or hire additional qualified personnel. Absence of Employment and Noncompetition Agreements. The Company has not entered into employment agreements with its President, R. Steven Adams, or any of its other officers or employees and has not purchased key person insurance for any members of management. The Company generally enters into with its officers and employees written nondisclosure and nonsolicitation agreements which restrict the use and disclosure of proprietary information and the solicitation of customers for the purpose of selling competing products or services. The Company has not entered into employment or noncompetition agreements with its officers or employees. Thus, if any of those persons left the Company they could compete with the Company, so long as they did not solicit the Company's customers, which could have a material adverse effect on the Company's business. Management of Growth. The Company expects to experience significant growth in the number of its employees, the scope of its operating and financial systems, and the geographic area of its operations. This growth will result in new and increased responsibilities for both existing and new management personnel. The Company's success highly depends on the ability of its managers to operate effectively, both independently and as a group. The Company's ability to effectively manage any such growth will require it to continue to implement and improve its operational, financial and management information systems and to train, motivate and manage its employees. This will require the addition of new management personnel and the development of additional expertise by existing management. There can be no assurance that the Company's management or other resources will be sufficient to manage any future growth in the Company's business or that the Company will be able to implement in whole or in part its expansion program, and any failure to do so could have a material adverse effect on the Company's operating results. Potential Fluctuations in Quarterly Results. As a result of the Company's limited operating history, the Company does not have historical financial data for a sufficient number of periods on which to base planned operating expenses. Accordingly, the Company's expense levels are based in part on its expectations as to future revenues and to a large extent are fixed. The Company typically operates with no backlog and the sales cycles for its products and services may vary significantly. As a result, quarterly sales and operating results generally depend on the volume and timing of and ability to close customer contracts within the quarter, which are difficult to forecast. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfalls. Accordingly, any significant shortfall of demand for the Company's products and services in relation to the Company's expectations would have an immediate adverse impact on the Company's business, operating results and financial condition. In addition, the Company plans to increase its operating expenses to fund product development and increase sales and marketing. To the extent that such expenses precede or are not subsequently followed by increased revenues, the Company's business, operating results and financial condition will be materially adversely affected. Government Regulation. The Company's products and services pertaining to Web site content and development are not currently subject to direct regulation by the Federal Communications Commission or any other federal or state agency, other than regulations applicable to businesses generally. Depending on the structure of the Company's Community Access America program, that program may be regulated under applicable laws and regulations pertaining to the offer and sale of franchises or business opportunities. Currently, about half of the states have laws and regulations concerning franchises or business opportunities. The Federal Trade Commission and states which have franchise laws impose disclosure and/or registration requirements. In addition, a number of 7 states have statutes which regulate substantive aspects of the franchisor- franchisee relationship such as termination, nonrenewal, transfer and competition with franchisees. The Company does not believe that compliance with applicable franchise and business opportunity laws and regulations for its Community Access America program will have a material adverse effect on the Company. Changes in the regulatory environment relating to the Internet content or connectivity industries, including regulatory changes that directly or indirectly affect telecommunication costs or increase the likelihood or scope of competition from regional telephone companies or others, could have a material adverse effect on the Company's business. The Company cannot predict the impact, if any, that future regulation or regulatory changes may have on its business. Business Interruptions. The Company's operations are dependent on its ability to protect its computer equipment against damage from fire, earthquakes, power loss, telecommunications failures and similar events. A significant portion of the Company's computer equipment, including virtually all of the Company's equipment devoted to its Internet services, is located at its headquarters facilities in Denver, Colorado. Any equipment damage or failure that causes interruptions in the Company's operations could have a material adverse effect on the Company's business. While the Company will be carrying property insurance covering equipment, such coverage may not be adequate to compensate the Company for all losses that may occur from business interruptions. Security Risks. The Company's software and equipment are vulnerable to computer viruses or similar disruptive problems caused by OSS customers or other Internet users. Computer viruses or problems caused by third parties could lead to interruptions, delays or cessation in service to the Company's customers. Furthermore, inappropriate use of the Internet by third parties could also potentially jeopardize the security of confidential information stored in the computer systems of the Company's customers. The Company does not have product liability or other insurance to protect against risks caused by computer viruses or other misuse of software or equipment by third parties. Although the Company attempts to limit its liability to customers for these types of risks through contractual provisions, there is no assurance that these limitations will be enforceable. Dependence on the Internet. Although a portion of the sales of the Company's products and services will depend upon growth of private Intranet networks, sales of the Company's Internet related products and services will depend in large part upon a robust industry and infrastructure for providing Internet access and carrying Internet traffic. The Internet may not prove to be a viable commercial marketplace because of inadequate development of the necessary infrastructure, such as a reliable network backbone or timely development of complementary products, such as high speed modems. Because global commerce and online exchange of information on the Internet and other similar open wide area networks are new and evolving, it is difficult to predict with any assurance whether the Internet will prove to be a viable commercial marketplace. There can be no assurance that the infrastructure or complementary products necessary to make the Internet a viable commercial marketplace will be developed, or, if developed, that the Internet will become a viable commercial marketplace. If the necessary infrastructure or complementary products are not developed, or if the Internet does not become a viable commercial marketplace, the Company's business, operating results and financial condition may be materially impaired. See "Business-The Internet and Intranet." Conflicts of Interest and Related Party Transactions. The Company has entered into certain transactions with its officers, directors and principal shareholders relating to the issuance of securities, the leasing of equipment, consulting services, an office lease and a line of credit. There are conflicts of interest from these transactions. The Board of Directors has determined that any future transactions with officers, directors or principal shareholders will be approved by the disinterested directors and will be on terms no less favorable than could be obtained from an unaffiliated third party. The Board of Directors will obtain independent counsel or other independent advice to assist in that determination. See "Certain Transactions." Limitation of Directors' Liability. The Company's Articles of Incorporation provide, as permitted by Colorado law, that its directors shall have no personal liability for certain breaches of their fiduciary duties to the Company. This provision may reduce the likelihood of derivative litigation against directors and may discourage shareholders from bringing a lawsuit against directors for a breach of their duty. In addition, the Company's Bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by Colorado law. See "Management-Indemnification and Limitation on Liability of Directors." 8 RISKS OF THE OFFERING Dilution. The net tangible book value per share of the Company's Common Stock as of March 31, 1996 was $0.15 per share, before giving effect to the Company's Initial Public Offering in May and June 1996 of 1,265,000 Units at a price to public of $6.75 per Unit. If the shares of Common Stock offered pursuant to this Prospectus are sold at prevailing market prices which are higher than the net tangible book value of the Company's Common Stock at the time of sale, the purchaser of such shares will incur immediate dilution to the extent of the difference in such amounts. See "Dilution." Limited Market for Securities; Arbitrary Determination of Prices. Trading for the Company's common Stock and Common Stock Purchase Warrants commenced on the Nasdaq SmallCap Market on May 23, 1996. There is no assurance that an active public market for the Company's Common Stock or Warrants will be sustained for the foreseeable future. Moreover, there can be no assurance that the market price of the Common Stock or Warrants will not decline, or that investors will be able to sell any of the shares of Common Stock purchased hereunder at a price equal to or greater than the prices paid therefor. Possible Volatility of Stock Prices; Penny Stock Rules. The over-the- counter markets for securities such as the Company's Common Stock and Warrants historically have experienced extreme price and volume fluctuations during certain periods. These broad market fluctuations and other factors, such as new product developments and trends in the Company's industry and the investment markets generally, as well as economic conditions and quarterly variations in the Company's results of operations, may adversely affect the market price of the Company's Common Stock. Although the Common Stock and Warrants have been approved for quotation on the Nasdaq Small Cap Market, there can be no assurance that they will remain eligible to be included on Nasdaq. In the event that the Company's Common Stock and Warrants were no longer eligible for quotation on Nasdaq, the Common Stock and Warrants could become subject to rules adopted by the Securities and Exchange Commission ("SEC") regulating broker-dealer practices in connection with transactions in "penny stocks." If the Company's Common Stock or Warrants became subject to the penny stock rules, many brokers may be unwilling to engage in transactions in the Company's securities because of the added disclosure requirements, thereby making it more difficult for purchasers of Common Stock in this offering to dispose of their securities. Control by Existing Management. The current executive officers and directors of the Company own beneficially 36.4% of the Company's outstanding Common Stock. Accordingly, it should be anticipated that the current executive officers and directors of the Company will continue to have the ability to significantly influence the outcome of elections of the Company's directors and other matters presented to a vote of shareholders. See "Principal Shareholders." Shares Eligible for Future Sale. 1,782,245 of the currently outstanding shares of the Company's Common Stock are "restricted securities," as defined under the Securities Act of 1933 ("Securities Act") and the rules and regulations thereunder. Restricted shares and shares of the Company's Common Stock owned by "affiliates" may be publicly sold only by complying with Rule 144 under the Securities Act unless further registered under the Securities Act, or some other exemption from further registration thereunder is available. Sales of substantial amounts of these shares, or even the potential for such sales, could have an adverse effect on any market price for shares of the Company's Common Stock or Warrants that could develop, and could impair the ability of purchasers of the securities covered hereby to resell them to recoup their investment or make a profit, and the Company's ability to raise capital through the sale of its equity securities. Rights to Acquire Shares. The following warrants and options were outstanding as of July 22, 1996: (i) 736,508 shares of the Company's Common Stock issuable upon exercise of options and warrants, exercisable at prices ranging from $0.50 to $6.50 per share, with a weighted average exercise price of approximately $1.02 per share, (ii) 632,500 shares of the Company's Common Stock issuable upon exercise of Warrants sold to the public in the Company's Initial Public Offering at an exercise price of $9.00 per share, (iii) 110,000 shares of the Company's Common Stock issuable upon exercise of the Representative's Unit Option at a purchase price of $10.80 per share, (iv) 55,000 shares of the Company's Common Stock issuable upon exercise of the Warrants included in the 9 Representative's Unit Option, at an exercise price of $9.00 per share or (v) 6,942 additional shares of the Company's Common Stock available for the grant of options under the Company's Stock Option Plan. During the terms of the outstanding options and warrants, the holders thereof will have the opportunity to profit from an increase in the market price of the Company's Common Stock with resulting dilution to the holders of Common Stock who purchased shares for a price higher than the respective exercise price. The existence of such stock options and warrants may adversely affect the terms on which the Company can obtain additional financing, and the holders of such options or warrants can be expected to exercise or convert those securities at a time when the Company, in all likelihood, would be able to obtain additional capital by offering shares of its Common Stock on terms more favorable to the Company than those provided by the exercise or conversion of such options or warrants. Ability to Issue Common Stock and Preferred Stock; Anti-Takeover Devices. The Company is authorized to issue up to 10,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by the Company's shareholders, and may include voting rights, preferences as to dividends and liquidation, conversion and redemptive rights and sinking fund provisions. Although the Company has no present plans to issue any shares of Preferred Stock, the issuance of Preferred Stock in the future could affect the rights of the holders of Common Stock and thereby reduce the value of Common Stock. In particular, specific rights granted to future holders of Preferred Stock could be used to restrict the Company's ability to merge with or sell its assets to a third party, or otherwise delay, discourage, or prevent a change in control of the Company. No Dividends. No cash dividends have been paid on the Common Stock of the Company. It is anticipated that profits, if any, received from operations will be devoted to the Company's future operations. The Company does not anticipate the payment of cash dividends on its Common Stock in the foreseeable future, and any decision to pay dividends will depend upon the Company's profitability at the time, cash available therefor, and other factors. See "Business" and "Description of Securities." USE OF PROCEEDS The company will not receive any of the proceeds form the sale of Common Stock by the Selling Shareholder. DILUTION The net tangible book value per share of the Company's Common Stock as of March 31, 1996 was $0.15 per share, before giving effect to the Company's Initial Public Offering in May and June 1996 of 1,265,000 Units at a price to public of $6.75 per Unit. If the shares of Common Stock offered pursuant to this Prospectus are sold at prevailing market prices which are higher than the net tangible book value of the Company's Common Stock at the time of sale, the purchaser of such shares will incur immediate dilution to the extent of the difference in such amounts. 10 CAPITALIZATION The following table sets forth the current liabilities and capitalization of the Company as of March 31, 1996, before giving effect to the sale of 1,265,000 Units in the Company's Initial Public Offering in May and June 1996 at a price to public of $6.75 per Unit and the application of the net proceeds therefrom:
March 31, 1996(1) ---------------- (unaudited) Current liabilities..................... $ 332,787 Long-term liabilities................... 52,444 Total liabilities..................... 385,231 Shareholders' equity: Common Stock, no par value, 10,000,000 shares authorized; 1,807,245 shares issued (2).......... 676,534 Preferred Stock, 5,000,000 shares authorized; none outstanding......... --- Stock subscriptions..................... (3,393) Deficit accumulated during the (385,090) development stage...................... --------- Shareholders' equity.................. 288,051 --------- Total capitalization and $ 673,282 liabilities....................... ========= - ---------------
(1) Does not reflect the sale of 1,265,000 Units in the Company's Initial Public Offering in May and June 1996 at a price to public of $6.75 per Unit, the application of the net proceeds therefrom, or the losses incurred by the Company after March 31, 1996 (2) Does not include shares issuable upon the exercise of outstanding options or warrants. DIVIDEND POLICY The Company has never paid any cash dividends on its Common Stock and does not anticipate that it will pay dividends in the foreseeable future. Instead, the Company intends to apply any earnings to the development and expansion of its business. SELECTED FINANCIAL DATA The selected financial data set forth below has been derived from the Company's financial statements included elsewhere in this Prospectus. This information should be read in connection with the financial statements and notes thereto included in this Prospectus and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" also included elsewhere herein.
For the From Three Months Ended Inception on For the March 31, March 22, 1994 to Year ended --------------------------- December 31, 1995 December 31, 1995 1995 1996 ----------------- ----------------- ---- ---- STATEMENTS OF OPERATIONS DATA:(1) Net sales: Service sales......................... $ 236,412 $ 236,412 $ 2,150 $ 243,336 Equipment sales....................... 161,344 161,344 49,279 23,513 ---------- ---------- ---------- ----------
11
Total net sales..................... 397,756 397,756 51,429 266,849 Cost of sales: Cost of services.......................... 166,224 166,224 1,994 141,027 Cost of equipment......................... 134,552 134,552 39,592 21,271 --------- ---------- ---------- ----------- Total cost of sales 300,776 300,776 41,586 162,298 --------- ---------- ---------- ----------- Gross profit................................. 96,980 96,980 9,843 104,551 Operating expenses: Marketing and sales expense............... 84,444 84,444 7,955 63,173 Product development expense............... 79,760 79,760 500 66,551 General and administrative expense........ 392,600 392,600 8,257 131,132 Depreciation and amortization expense..... 20,936 20,936 51 10,044 --------- ---------- ---------- ----------- Total operating expenses............ 577,740 577,740 16,763 270,900 ---------- ---------- ---------- ----------- Income (loss) from operations................ (480,760) (480,760) (6,920) (166,349) ---------- ---------- ---------- ----------- Other income (expense)....................... (1,479) (1,479) --- (2,695) ---------- ---------- ---------- ----------- Income (loss) before provision for income taxes............................. (482,239) (482,239) (6,920) (169,044) Provision for income taxes................... --- --- --- --- ---------- ---------- ---------- ----------- Net income (loss)............................ $ (482,239) $ (482,239) $ (6,920) $ (169,044) ========== ========== ========== =========== Net income (loss) per share of Common Stock.................................... $ (0.19) $ (0.19) $ (0.00) $ (0.07) ========== ========== ========== =========== Shares of Common Stock and stock equivalents outstanding.................. 2,550,695 2,550,695 2,550,695 2,550,695 ========== ========== ========== =========== December 31, 1995 March 31, 1996 ----------------- -------------- Balance Sheet Data: Working capital (deficit).............................................. $ $ 108,852 Total assets........................................................... 227,732 673,282 Total liabilities...................................................... 228,183 385,231 Deficit accumulated during the development stage....................... (216,046) (385,090) Shareholders' equity (deficit)......................................... (451) 288,051 - ---------------
(1) No revenues were received and no expenses were incurred from March 22, 1994 (inception) through December 31, 1994. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company was formed in March 1994, commenced sales in February 1995 and was in the development stage through December 31, 1995. By May 1995, the Company had begun marketing its Internet access services, Web services and Internet training seminars. Monthly net sales from Web site development services increased each month for the remainder of the year, and for the month of December 1995 were $43,875. During July and August 1995, the Company began to employ sales personnel and target market its services. In the fourth quarter of 1995, OSS developed and began marketing its Community Access America program and sold its first two programs in December 1995. During the first quarter of 1996, the Company continued its growth in Web site development services. In March 1996, the Company entered into a non-exclusive value added reseller agreement with Edify Corporation, which will allow the Company to use and sublicense to OSS customers the Edify Electronic Workforce software. 12 Also during the first quarter of 1996, the Company began development of a medical "marketspace" on the Internet called "MD Gateway" and its Web Page development tool called "WebQuest." RESULTS OF OPERATIONS The Company generates net sales through the sale of software consulting services for Web site development, mark-ups on computer hardware and software sold to customers, maintenance fees charged to customers to maintain computer hardware and Web sites, license fees based on a percentage of revenues from the Community Access America program, training course fees, and monthly fees paid by customers for Internet access provided by the Company in the Denver market. Through March 31, 1996, the Company continued to market its Community Access America program and Web site development services, entered into a reseller agreement with Edify Corporation and began development of the MD Gateway marketspace and WebQuest. Since the Company is continuing to develop and market its products and services, the Company's results of operations for the fiscal year ended December 31, 1995 and the three months ended March 31, 1996 are not necessarily indicative of future operating results. Intense competition in the future, especially for Internet access, could adversely affect the Company's liquidity, cash flow and results of operations. See "Risk Factors." For the three months ended March 31, 1996 and the year ended December 31, 1995, the Company had net sales of $266,849 and $397,756, respectively. As of March 31, 1996, the Company had an unaudited accumulated deficit of $385,090. This accumulated deficit does not include losses of $266,193 that were incurred by the Company from inception until September 26, 1995 because the Company was a Subchapter S Corporation during that period. During 1995 and the first quarter of 1996, expenses exceeded net sales as the Company developed identifying time spent initial products and services, instituted its marketing and sales programs and began implementation of the operational and administrative support structure necessary to support its business. OSS expects to experience increased operating expenses and capital investments during 1996 as it continues to develop the infrastructure required to support its anticipated growth. See "Use of Proceeds." Initially, these increased expenses are expected to be greater than increases in net sales and more likely than not will result in substantial operating losses in the second, third and fourth quarters of 1996. The Company expects to report an operating loss for the full year ending December 31, 1996. The following table sets forth for the periods indicated the percentage of net sales by items in the statements of operations data.
For the For the Three Months Ended Year ended March 31, ---------------------------------- December 31, 1995 1995 1996 ------------------- ----- ---- STATEMENTS OF OPERATIONS DATA:(1) Net sales: Service sales............................... 59.4% 4.2% 91.2% Equipment sales............................. 40.6 95.8 8.8 ------- ------ ------ Total net sales.......................... 100.0 100.0 100.0 Cost of sales: Cost of services............................ 70.3 92.7 58.0 Cost of equipment........................... 83.4 80.3 90.5 ------- ------ ------ Total cost of sales...................... 75.6 80.9 60.8 Gross profit.................................. 24.4 19.1 39.2 ------- ------ ------ Operating expenses: Marketing and sales expense................. 21.2 15.5 20.6 Product development expense................. 20.1 1.0 21.7 General and administrative expense.......... 98.7 16.1 42.7 Depreciation and amortization expense....... 5.3 0.1 3.3 ------- ------ ------
13
Total operating expenses............................ 45.2 32.6 88.3 Income (loss) from operations............................ (120.9)% (13.5)% (63.3)% ======== ======= ======= - ---------------
(1) No revenues were received and no expenses were incurred from March 22, 1994 (inception) through December 31, 1994. Three Months Ended March 31, 1996 and 1995 (Unaudited) For the three months ended March 31, 1996, the Company had net sales of $266,849, cost of sales of $162,298 and operating expenses of $270,900, resulting in a loss from operations of $166,349. The Company commenced business operations in February 1995. For the three months ended March 31, 1995, the Company had net sales of $51,429, cost of sales of $41,586 and operating expenses of $16,763, resulting in a loss from operations of $6,920. Net sales for the three months ended March 31, 1996 totaled $266,849, including $243,336 for service sales and $23,513 for equipment sales. Net sales for this period included $50,000 from the sale of Web development services for one customer. Net sales for the three months ended March 31, 1995 were from one customer and totaled $51,429, including $2,150 for service sales and $49,279 for equipment sales. The Company does not believe that its net sales are substantially dependent on any one customer. Service sales generally include the Company's services for Web site development, Internet access and training. Cost of sales as a percentage of net sales was 60.8% for the three months ended March 31, 1996 and 80.9% for three months ended March 31, 1995. The Company's gross profit margin on its services is generally higher than its gross profit margin on equipment sales. Service sales are a greater percentage of net sales in the three months ended March 31, 1996 than in the prior year period, resulting in the improved gross profit margin of 39.2% for the three months ended March 31, 1996. Marketing and sales expenses were $63,173 and $7,955 for the three months ended March 31, 1996 and 1995, respectively. This increase was primarily because of an increase in the number of sales and marketing personnel. During the three months ended March 31, 1996, the Company hired five additional salespeople and commenced training to sell Edify Electronic Workforce products. Sales and marketing expenses are expected to continue to increase significantly during the remainder of 1996 as the Company adds sales and marketing personnel and begins to sell Edify products and the MD Gateway marketspace. Because of the potentially long sales cycle for the sale of the Company's products and services, sales and marketing expenses may increase at a faster rate than net sales during 1996. See "Risk Factors." Product development expenses were $66,551 and $500 for the three months ended March 31, 1996 and 1995, respectively. This increase reflects the continued development of the Company's products and services since commencement of business in February 1995. Product development expenses during the three months ended March 31, 1996 include enhancements to the Community Access America products and initial development work on WebQuest and MD Gateway. Product development expenses are expected to continue to increase significantly during the remainder of 1996 as the Company develops the WebQuest and MD Gateway products. See "Use of Proceeds" and "Business." General and administrative expenses were $131,132 and $8,257 for the three months ended March 31, 1996 and 1995, respectively. This increase reflects the continued development of the Company's infrastructure since commencement of business in February 1995. The Company expects these expenses to continue to increase during the remainder of 1996 as it continues to develop the infrastructure and personnel needed to support a higher level of operations. 14 Fiscal 1995 No revenues were received and no expenses were incurred from March 22, 1994 (inception) through December 31, 1994. During 1995, the Company had net sales of $397,756, cost of sales of $300,776 and operating expenses of $577,740 resulting in a loss from operations of $480,760. For the year ended December 31, 1995, the Company had net sales of $397,756, including $236,412 for service sales and $161,344 for equipment sales. Of the total 1995 net sales, $249,424 (63%) was generated during the fourth quarter. Net sales for 1995 included $157,421 from one customer for hardware, Internet access and software services; $38,148 from two Community Access America customers and $22,450 from a Web content services customer. Other net sales for 1995 were derived from Web content services, Internet access and training. Cost of sales for 1995 was $300,776, including $166,224 cost of service sales and $134,552 cost of equipment sales. The gross profit margin overall was 24.4%. The gross profit margin for service sales and equipment sales was 29.7% and 16.6%, respectively. Marketing and sales expenses were $84,444 for 1995. The Company hired identifying time spent first salespeople during 1995. Product development expenses for 1995 were $79,760. These expenses included salaries as well as certain office, travel, legal and accounting expenses relating to the development of the Company's initial products and services, primarily the Community Access America program and two Internet training courses now offered by the Company as a marketing tool. General and administrative expenses for 1995 were $392,600. During 1995 and the first two months of 1996, certain officers, directors, employees and consultants of the Company received no cash compensation or reduced cash compensation. The Company has recorded a compensation expense of $170,707 to reflect the market value of these services. These persons who are employees or consultants of the Company began to receive a monthly salary in March 1996 that was based on the market value of their services. See "Management-Executive Compensation" and "Certain Transactions." LIQUIDITY AND CAPITAL RESOURCES During 1995, the Company financed its operations and capital equipment expenditures through a combination of private sales of Common Stock, issuing Common Stock for services, lease financing, short-term loans and the utilization of trade payables. In March and May 1995, the Company issued an aggregate of 495,000 shares of Common Stock to certain officers, directors, employees and consultants of the Company for services valued at $0.05 and $0.10 per share, respectively, which was determined by the Board of Directors to be the respective fair market value of the Common Stock at the time of issuance. The Common Stock issued for $0.10 per share was revalued for accounting purposes to $0.56 per share to reflect the market value of these services. As of March 31, 1996, the Company issued Common Stock valued at $942,727 for cash and services, incurred notes payable and capital lease obligations of $93,128 and a note payable to a related party of $12,707. During 1995, the Company's investing activities consisted of the purchase of $92,760 of fixed assets. During the three months ended March 31, 1996, the Company purchased an additional $94,392 of fixed assets. These amounts are primarily comprised of computer equipment, communications equipment and software necessary to provide Internet access and training, to host Web sites and to develop Web sites for customers. In anticipation of future growth, the Company expects to invest in additional computer equipment, software and office equipment during the remainder of 1996 using a portion of the net proceeds from the Company's Initial Public Offering. See "Use of Proceeds." The trade payables as of March 31, 1996 include $101,975 that the Company has agreed to pay to Edify Corporation as a software license fee under the Company's reseller agreement for Edify Electronic Workforce software. The $101,975 software license fee, of which $30,000 was paid before completion of the Company's 15 Initial Public Offering, is included as a short-term asset on the unaudited balance sheet at March 31, 1996 because the Company has not sublicensed the Edify software to any customers. The Company intends to seek customers who would sublicense this software from the Company during 1996. There can be no assurance that the Company can locate customers for this software or sublicense the software for an amount which exceeds the license fees paid to Edify. As of March 31, 1996, the Company had the following commitments which the Company plans to fund out of the net proceeds from the Company's Initial Public Offering: (i) approximately $72,000 to be paid to Edify Corporation, including the $30,000 balance of the $100,000 start up fee and approximately $42,000 of license fees for Edify software which the Company intends to sublicense in the future to its customers (which is included in the $101,975 prepaid software license referred to above), (ii) $33,700 for the software and equipment purchased by the Company in February 1996 (as referred to in note 8 to the Financial Statements) and (iii) a consulting fee of $4,000 per month payable to Creative Business Strategies, Inc. for 12 months. The Company has agreed to pay the consulting fees for three years and plans to pay the remaining consulting fees out of operations. See "Use of Proceeds." As of March 31, 1996, the Company had cash and cash equivalents of $236,331 and net working capital of $108,852. The Company expects to experience increased operating expenses and capital investments during 1996 as it continues to develop the infrastructure required to support its anticipated growth. Initially, these increased expenses are expected to be greater than increases in net sales and more likely than not will result in substantial operating losses in the second, third and fourth quarters of 1996. The Company expects to report an operating loss for the full year ending December 31, 1996. In May and June 1996, the Company sold 1,265,000 Units at a price to public of $6.75 per Unit and received the net proceeds thereform after payment of commissions and offering expenses. The Company's ability to continue operations beyond a period of twelve months from the completion of the Company's Initial Public Offering will depend upon its ability to generate cash flow from operations. If sufficient cash flow is not being generated at the end of this twelve-month period, the Company will be required to seek additional funds through equity, debt or other external financing. There is no assurance that any additional capital resources, which the Company may need, will be available if and when required, and on terms that will be acceptable to the Company. If additional financing is needed, the Company may be required to dilute the equity interests of existing shareholders. See "Risk Factors." LONG SALES CYCLES The Company does not believe its business is subject to seasonal fluctuations or inflationary pressures which, if any, cannot be passed on to its customers in its pricing policies. However, pursuit of a sales lead typically involves an analysis of the customer's needs, preparation of a written proposal, one or more presentations and contract negotiations. While the sales cycle varies from customer to customer, it typically has ranged from one to six months for Web site design and support, and from one to three months for Community Access America. The potential delay in several sales at any one time, may cause adverse variations in the Company's operating results. BUSINESS GENERAL The Company develops, markets and supports sophisticated, high-end Web sites, on the Internet or Intranets, to enable companies to enhance revenues, reduce costs, and improve customer service and communication. A growing number of businesses, associations and other organizations are establishing Web sites as a means to communicate internally with employees and externally with customers, prospective customers and other constituents. Many Web sites have been used initially only for one-way communication such as marketing or advertising through online product brochures. The Company differentiates itself by offering high quality, highly functional, sophisticated Web sites that allow for interactive communication and automated processing of 16 information. Businesses can enhance revenues by using Web sites to conduct online commerce, such as interactive catalog sales. Businesses can also reduce costs by using Web-based technologies to automate help desk and other service functions that have historically been staffed with operators who require training and who may handle hundreds of calls each day. Interactive, sophisticated Web sites for employee and customer service functions can reduce staffing and training costs, and improve service by providing faster response time and more complete and current information. Businesses can also readily track usage of Web sites as a means to focus marketing efforts and improve service. The Company also develops and markets sophisticated Web sites that are targeted to specific industry segments. The first industry segment targeted by the Company is the health care industry, with an integrated network or "marketspace" of Web sites called "MD Gateway." In addition, the Company markets and supports "Community Access America," a turnkey package of hardware, software, documentation, and marketing and technical assistance that enables a local cable company, telephone company, newspaper or other entity to provide Internet access and Web site development to smaller non-urban communities. Since commencing operations in February 1995, the Company has built its expertise through the development of Web sites for companies, primarily in the Denver, Colorado area. The price for each of these Web sites ranged from approximately $1,500 to $50,000. The Company has sold three Community Access America packages as of March 31, 1996 and has developed two Internet training seminars used to establish business contacts for other OSS products and services. The Company is also designing and developing WebQuest, an interactive Web site design method that will allow the Company to provide its customers a more effective and collaborative design process. THE INTERNET AND INTRANET The Internet is a global web of computer networks. Developed over 25 years ago, this "network of networks" allows any computer attached to the Internet to talk to any other using Internet protocols. Individuals connect directly to the Internet through Internet Service Providers ("ISPs"). According to the 1995 CommerceNet/Nielsen Internet Demographic Survey, approximately 24 million persons aged 16 and above in the United States and Canada had used the Internet during the three month period before the survey. The rapid growth in popularity of the Internet is in large part due to the increasing availability of user- friendly navigational and utility tools designed to enable easier access to the Internet; continued penetration of computers and modems into U.S. households; the growth of Internet applications and the awareness of those applications; and the emergence of the World Wide Web. The World Wide Web ("Web") is the term commonly used to describe the network of services and information available on the Internet. This technology uses Web browser software that allows non-technical users to exploit the capabilities of the Internet. The Web enables users to find, retrieve and link information on the Internet with easy to use graphical interfaces. The term "Web site" is commonly used to describe the computer screen layouts and the file server computer that are accessible by users of the Web. A Web site typically has a collection of "Web pages" which may contain text, graphics, pictures, sound, animation, video or other multi-media content. The Intranet is a term used to describe the implementation of Internet technologies within a corporation or business organization, rather than for external connection to the global Internet. The Intranet infrastructure similarly enables employees using personal computers and Web browser software to access and interact with a broad range of information sources within their company, independent of physical location and underlying computer design. WEB SITE DEVELOPMENT AND MAINTENANCE The set up and operation of a Web site requires a computer file server, software resident on that file server and dedicated telephone communication access to the file server. The file server is given an Internet or Intranet address for each of the Web sites located on that server. When an Internet or Intranet user enters that address, they 17 are then connected to that customer's file server where the resident Web pages are located. Once connected, the user can view and interact with the information and content of the customer's Web pages. Most of the Company's customers elect to have the file server for their Web site located at the Company's facilities. A customer may elect to purchase their own file server and software, either directly or through the Company, or use one of the Company's file servers. If a file server for a customer is located at the Company's facilities, the Company will, as a part of its maintenance services, correct problems and make periodic updates to the Customer's Web pages. The Company generates net sales through the sale of software consulting services for Web site development, mark-ups on computer hardware and software sold to customers and maintenance fees charged to customers to maintain computer hardware and Web sites. The Company provides prospective customers a quote which includes the applicable equipment, software and communication access pricing, and the price for the Web site development and maintenance services desired by the prospective customer. Criteria for pricing these services include the number of Web pages, and their complexity, the amount of custom programming to be done by the Company, an estimate of the time to be incurred and competitive conditions in the customer's industry. As a marketing strategy and way to enhance revenues, the Company intends to negotiate cost savings arrangements with selected customers. Under these arrangements, the Company would receive as part of its pricing a percentage of the customer's cost savings derived from its Web site. Web sites vary significantly in their complexity and interactivity. A simple Web site may have only text in outline form. More complex sites may have colored text, graphics, pictures, sound, animation, video or other multi-media content. A limiting factor on the content for a site is that as sites get more complex, significantly more data must be transmitted, making transmission speed an issue. The speed at which a user can access a Web site will vary based on the user's modem speed or type of connection to the Internet or Intranet. As the availability of increased transmission speeds grows, more complex presentations of information will become practical at Web sites. Web sites may also vary in their level of interactivity with the user. Many Web sites are for inquiry only while others allow the user to interact with, enter and process information. A properly designed Web site shares many attributes of the telephone, namely, widespread connectivity, widespread access to services, and a simple, easy-to- use interface. However, because of the computer keyboard and screen, a Web site has the added capabilities of communicating text, graphics, pictures, animation, video or other multi-media content. The Company designs and implements Web sites ranging from basic inquiry- only sites to complex, interactive sites capable of providing online commerce, database integration and manipulation, sophisticated graphics, animation and other multi-media content. The Company also serves as a value-added reseller of software capable of allowing the Internet or Intranet user to use self-service applications such as the online purchase of products or services, product warranty and support, employee benefit enrollments and other applications. The Company demonstrates to a potential client how a Web site can increase sales by providing a cost effective way to market its products to consumers; or decrease costs by providing a more efficient way of processing information. The Company can offer such companies a pricing structure that minimizes up front costs and allows the Company to share in a percentage of the customers' increased revenues or cost savings. Internet and Intranet technologies are well- suited for tracking the number of Web site transactions as a means to determine added revenues and savings. The Company has developed a structured process for the design of Web sites. During the initial phase of a design, the Company's Web developers meet with representatives of the business customer to discuss the current methods for serving employees, suppliers, customers or other targeted constituents. The Company designs sites and Web page layouts as a logical extension of the customer's current business methods for serving targeted constituents. When appropriate, the Company uses its specialized designers who are experienced in Web graphics, animation and other multi-media content applications. Prices for low-end Web site designs, without added software, currently range from $5,000 to $50,000, depending on the complexity of the design and implementation of the site. The Company plans to focus on high-end Web site development that uses leading edge software. Prices for high-end Web sites range from $100,000 to $500,000 or more. WebQuest. The Company is developing an interactive design process called WebQuest to expedite the design of Web sites and to allow customer representatives to participate in the design at the Company's facility and 18 by remote computer access. Using WebQuest, the Company's designers and customer representatives would work together on computerized sketches of each Web page. The WebQuest concept will allow large-screen viewing and simultaneous design and editing of the Web site by local participants and up to 32 remote participants. At the end of a design session using WebQuest, the customer's participants will receive a printed "storyboard," which shows the design and content of the Web pages. The storyboard will include the concept sketches made by OSS' design artists using WebQuest. The WebQuest system should significantly increase the quality and efficiency of Web site development. Value Added Resale of Leading Edge Web Site Software. The Company plans to incorporate leading edge software in its Web site development. In March 1996, the Company entered into a non-exclusive value-added reseller agreement with Edify, which will allow the Company to use and sublicense to OSS customers the Edify "Electronic Workforce" software. Electronic Workforce incorporates intelligent software agents, which are independent software modules that allow a user on the Web to interact with a company's existing databases and that allow interaction with Web browsers, telephones, facsimiles, e-mail and alphanumeric pagers. Electronic Workforce easily allows for the exchange of information from a variety of sources including mainframes, client-server environments and relational databases. Electronic Workforce currently runs with the IBM OS/2 operating system. Electronic Workforce operates on a stand alone file server, using the IBM OS/2 operating system, that can easily be connected to other hardware platforms and operating systems. Thus, the IBM OS/2 operating system is not a significant limiting factor. According to Edify, use of Electronic Workforce with the Windows NT operating system is currently under development by Edify. Electronic Workforce includes a visual, object oriented environment that enables rapid development of business applications. The initial types of cross- industry business applications targeted by the Company for Web site development using Edify's Electronic Workforce include the online purchase of products or services, customer service applications and human resource functions. Edify Corporation is based in Santa Clara, California. Edify was established in 1989 to develop, market and support software that enables organizations to provide automated services accessed by consumers, employees and business partners. According to Edify, it has more than 400 customers for telephone and electronic mail applications and in 1995 had total revenues of $16 million. Edify began shipping a Web-enabled version of its Electronic Workforce software in the fourth quarter of 1995. The Company believes that Edify has the technical and financial ability to support the Electronic Workforce software. The Company believes that it is one of Edify's first value-added resellers to receive training and begin to actively market the Web-enabled versions of Edify's Electronic Workforce product. When the Company designs and implements an Internet or Intranet business solution using Edify's Electronic Workforce, the Company will obtain the software from Edify and pay Edify a license fee within 30 days after delivery of the software by Edify. The Company will sublicense the Edify software to OSS customers for a sublicense fee determined by the Company. The sublicense fee will include the Company's markup and may vary depending on the size of the project and the number of software modules. Customers who sublicense Edify software from the Company will also pay the Company fees for ongoing software maintenance and support services. The sublicense agreement between the Company and its customers must contain required terms that protect Edify's proprietary interests in the software. The Company will pay Edify a quarterly maintenance and support fee based on a percentage of the cumulative product fees paid to Edify. Edify will provide software updates and support to the Company, but Edify is not responsible to provide updates or support directly to the Company's customers. Since the Company's agreement with Edify is nonexclusive, Edify and other Edify resellers can compete with the Company for Web site development projects. The Company believes it is one of the first Edify software resellers that has the combined experience, training, knowledge and marketing experience to implement complex Edify software based solutions on the World Wide Web. The agreement with Edify requires payment of a one time nonrefundable fee of $100,000. The $100,000 one time fee includes the purchase of $60,000 of Edify products to be resold to OSS customers. The agreement has an initial term of 15 months which may be renewed for 12 months if agreed to by Edify. As of April 30, 1996, the Company had purchased $101,975 of Edify products, which includes the $60,000 balance of the one time fee. Management believes that the agreement would be renewed by Edify if the Company has paid at least $1 million in product fees to Edify during the initial term, although Edify is not obligated to renew the agreement. The Company plans to use other software products and solutions in the future to support its Web site design and development services. 19 Customers. As of March 31, 1996, the Company had designed Web sites for 38 customers that are maintained at its Denver facility. Four of the Company's larger Web site customers include Invesco Funds Group, Inc., a national mutual fund company; Echostar Communications Corp., a direct broadcast satellite company; Ciba-Geigy, Ltd., a multinational chemical, pharmaceutical and agriculture company; and KCNC News4 Television, a CBS station, in Denver Colorado. The Web site for KCNC News4 Television uses sophisticated features including video from the station's "City Cam" network and real time weather maps. Internet Access Through OSS in the Denver Metropolitan Area. In March 1996, the Company had approximately 300 subscribers for Internet access in the Denver Metropolitan area through the Company as their ISP. KCNC News4 Television, Microsoft and the Company are negotiating a joint marketing arrangement to market and sell Internet access in the Denver Metropolitan area. Under this arrangement, Microsoft would make its Web browser software available to KCNC News4 viewers free of charge and include with the software a screen layout which refers to KCNC News4's and OSS' Web sites. KCNC News4 Television would market Microsoft's Web browser and Internet access through OSS in return for a portion of the Internet access fees paid by customers. The specific terms and conditions of this proposed joint marketing arrangements have not been finalized. Web Site Maintenance. If a customer chooses to locate its Web site on one of the Company's computer file servers, the Company will maintain the file server and make periodic updates to the customer's Web pages for a monthly fee. The monthly fees currently range from $100 to $750 or more, depending on the amount of storage used on the file server and the complexity of the Web page updates. Training. The Company currently offers two Internet training seminars at the training facility located at its principal offices. The Internet Game-The Adventure begins is an introductory four-hour hands-on training seminar that uses computers for the participants and incorporates interactive learning techniques. This course is designed to teach people about the Internet, how to connect to it, and how to use basic e-mail and Web browsers. This course was designed by Creative Learning International ("CLI") and the Company pays CLI a royalty of 5% of the revenues derived from the fees for this course. As of March 31, 1996, the Company had paid CLI $1,341 in royalties. The Business Person's Guide to the Internet is a four-hour seminar that focuses on how the Internet is used to conduct various business activities. The Company also provides custom corporate Internet and Intranet training. MD Gateway. The Company is developing a medical "marketspace" on the Internet called "MD Gateway." This marketspace will integrate the professional and educational needs of physicians with the commercial interests of multi-media publishers, professional associations, managed care organizations, and pharmaceutical and medical device companies. Sales of educational products, accelerated learning seminars, Web site development and Internet access would be integrated with the marketing of MD Gateway. The Company is pursuing a joint development and marketing arrangement with Charles Spickert and Medical Education Collaborative ("MEC") for the MD Gateway project. MEC is a nonprofit medical education firm founded by Mr. Spickert in 1988 and is a nationally accredited provider of continuing medical education credits for physicians. Mr. Spickert has worked in continuing medical education for over 15 years. Under this arrangement, Mr. Spickert and MEC would generally receive, as management fees and commissions, a percentage of advertising revenues, Web site sales and profits derived from the sale of products, services or training using MD Gateway, and a customary markup for the sale of MEC training materials. The Company has also granted to Mr. Spickert options for the purchase of 50,000 shares of Common Stock with an exercise price of $0.50 per share. MEC routinely receives grants from private industry, including grants from medical device and pharmaceutical companies for medical education services performed by MEC. MEC plans to use Web-based technologies for some of these services. MEC may subcontract with the Company for Web site development services that are to be performed under one or more grants. As part of the joint development and marketing arrangement with MEC and Mr. Spickert, the Company has agreed to perform Web site development services as a vendor to MEC and MEC will markup the project cost by 15% as payment for its involvement. The grant provider will agree in advance to this payment arrangement. 20 Many online and Internet-based systems exist or are under development by different companies to serve the needs of the health care industry. Intense competition could jeopardize the success of the MD Gateway development project. MD Gateway's planned competitive advantage will be its combination of online training, to allow physicians to obtain continuing medical education credits, and easy search and fax retrieval of health care industry articles and information. The Company anticipates that the health care industry articles and information will be from public domain sources or sources that are made available through the MD Gateway sponsors. It is possible that the Company might have to pay royalties for access to some of this information, but that has not been determined. COMMUNITY ACCESS AMERICA The market for providing Internet access services has been growing rapidly, with many competing ISPs in urban markets. The Company believes that currently only a few of the ISPs operate in non-urban markets with populations from 10,000 to 200,000 within a local calling area. If a person in that market desires to purchase Internet access but there is no ISP in that person's local calling area, that person generally would incur long distance charges when obtaining Internet access unless access could be purchased on a competitive basis from a long distance carrier such as AT&T Corp. ("AT&T"). The Company believes there is currently an opportunity for providing ISP services in non- urban markets, which will allow consumers in those markets to purchase Internet access without incurring long distance charges. OSS believes there is an additional opportunity in non-urban markets for ISPs to set up local Web sites with content and advertising space sold to local businesses in those markets. The Company has not obtained or conducted any primary market research to estimate the market for Internet access in non-urban areas, and does not plan to expend resources to obtain or develop that information. In 1994 and early 1995, and prior to joining the Company, Paul H. Spieker traveled throughout many non-urban areas of the Eastern Rocky Mountain Region, working on telecommunications matters that were before the Colorado Public Utilities Commission. That work included issues involving Internet access in non-urban areas. Based on his experience and the Company's belief that Internet interest in non-urban markets is a logical extension of Internet growth in urban markets, the Company has elected to develop and market the Community Access America program. The Company has developed an Internet Service Provider package called "Community Access America" to offer a turnkey Internet "Point of Presence" to local cable, telephone and newspaper companies in non-urban markets with populations from 10,000 to 200,000. The Company has sold three Community Access America packages as of May 15, 1996. The package is designed to add a new layer of revenues for the local companies' existing subscriber base. Especially developed for non-urban areas, Community Access America provides the local community a link to the Internet and World Wide Web for local and international information, entertainment and news. The turnkey package includes the hardware, software, documentation, and marketing and technical assistance that an operator requires to become an ISP and Web developer. The Company will assist with initial installation and setup of the system for a fixed fee, and plans to sell or lease the required equipment to the ISP operator. The ISP will solicit subscribers and pay for Internet access in its local calling area under a contract between the ISP and MCI, Sprint or other provider of Internet backbone services. The ISP's customers would use their computer modem to dial a local number to connect to the ISP's equipment that has a digital access line serving as the link to the Internet. The Company intends to contract with ISP operators to provide the turnkey package, for a price which includes the Company's margin, and to provide continued marketing and technical assistance in exchange for a service fee and a share of the ISP's gross revenues. OSS would receive a greater share of the ISP's revenues if the equipment is owned and supplied by OSS. A customer could also purchase the equipment directly or through the Company. A portion of the net proceeds from the Company's Initial Public Offering will be used to finance equipment to be supplied to local ISP operators. The Company believes that the Community Access America program offers a local ISP the benefit of a turn key package that can be readily geared to advertising by local businesses. The Community Access America program also includes the Company's proprietary software for use with billing Internet access. The Company is targeting local cable companies, telephone companies and newspapers as prospective ISP's. These types of businesses already have an existing base of consumer and advertising customers but often do not have experience 21 with the Internet or Web based technologies. The Company's turnkey package provides the necessary hardware, software, training and support required for providing quality Internet access services and local Web site development. The Company believes that the end users of Internet access will have an interest in the Community Access America program because it eliminates long distance toll charges for Internet access, supports the local community and is a source for local information and advertising. The initial capital investment for an ISP operator purchasing the Community Access America package ranges from approximately $23,000 to $50,000 or more, depending on the size of the equipment. The equipment is sized based on the number of anticipated subscribers. The ISP operator determines the fees payable by a subscriber. Those fees can range from approximately $10 per month for a few hours of Internet access to several hundred dollars per month for high speed access by a frequent user. In addition to providing Internet access, Community Access America provides the local ISP training and software to assist the ISP operator with the design and implementation of Web sites for the local ISP area. The Company is developing an interactive Web site to be available to all ISP operators participating in Community Access America to provide them with continued assistance and support. This Web site will allow ISP operators to share among themselves Web-based production ideas and sales concepts. See "Use of Proceeds." POSSIBLE FUTURE ACQUISITIONS Management believes that the net proceeds from the Company's Initial Public Offering will enhance the Company's ability to increase the scope of its business more rapidly by taking advantage of opportunities to acquire additional product offerings, or even complementary businesses, on a favorable basis. Although the Company is not currently a party to any agreement or understanding with respect to any prospective acquisition, it has explored and continues to evaluate possible opportunities to purchase, license or otherwise acquire the right to market products and services that complement the Company's business. Acquired products or businesses could include, for example, advanced multimedia and other software technologies for use with Web sites and companies with an established Web site development and maintenance business. Criteria for possible acquisitions would include expertise in multimedia and other software technologies, customer installation base for Web sites, presence in Internet marketspaces not served by the Company, management expertise and return on investment. TRADEMARKS AND PROPRIETARY PROTECTION The Company has applied for federal registration of the mark "Community Access America" and plans to file federal registration applications for additional trademarks including "WebQuest" and "MD Gateway" and "The Virtual Salesforce." The Company does not believe that its current products or services are patentable. The Company plans to rely on a combination of copyright, trade secret, trademark laws, and nondisclosure and other contractual provisions to protect its proprietary rights. As a part of its confidentiality procedures, the Company generally enters into with its officers and employees written nondisclosure and nonsolicitation agreements which restrict the use and disclosure of proprietary information and the solicitation of customers for the purpose of selling competing products or services. The Company has not entered into noncompetition agreements with its officers, directors or employees. Because the policing of proprietary rights may be difficult and the ideas and other aspects underlying the Company's products and services may not in all cases be protectable under intellectual property laws, there can be no assurance that the Company can prevent competitors from marketing the same or similar products and services. In addition, competitors may independently develop products and services that compete with the Company. COMPETITION The market for Internet and Intranet products and services is highly competitive and the Company expects that this competition will intensify in the future. The Company's current and prospective competitors include many companies that have substantially greater financial, technical, marketing, and other resources than the Company. Increased competition could result in price reductions and increased spending on marketing and product development. Any of these events could have a material adverse effect on the Company's financial condition and 22 operating results. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not materially adversely affect its business, financial condition, and results of operations. Individuals and businesses connect directly to the Internet through Internet Service Providers, including MCI Telecommunications Corporation ("MCI"), AT&T, Sprint Corp. ("Sprint"), Microsoft, NETCOM On-Line Communications Services, Inc. ("NETCOM"), Performance Systems International, Inc. ("PSINet"), UUNET Technologies, Inc. ("UUNET"), Bolt Beranek & Newman Inc. ("BBN") and others. There are also many local ISPs providing Internet access principally in urban markets. These companies are competitors to OSS, which provides Internet access services in the Denver Metropolitan area market. Internet access services are growing nationwide as easy-to-use software packages make accessing the Internet as easy as getting to the popular online services. To compete with these direct Internet access providers, consumer online services including America OnLine, Inc. ("AOL"), CompuServe, Inc. ("CompuServe"), and Prodigy Services Co. ("Prodigy"), have Internet access gateways for their existing subscribers. With these gateways, the online services effectively become large Internet "on-ramps" bringing large numbers of subscribers onto the Internet. In the Denver market, the Company competes with nationally known and local ISPs for Internet access, including MCI, AT&T, Microsoft, NETCOM, PSINet, UUNET, as well as Rocky Mountain Internet and SuperNet Inc. Ameritech has partnered with Concentric Networks Corporation to sell, primarily to independent telephone companies, Internet access in non-urban markets. Management believes that the Community Access America pricing structure is currently more advantageous to potential ISP's than the Ameritech program. The Company expects that competition with its Community Access America program will grow as the large urban markets for Internet access begin to mature and the large ISPs look to open smaller markets. There are many nationally known companies and regional and local companies across the country that are involved in Internet and Intranet applications, including the development and support of Web sites, and the number of competitors is growing. Andersen Consulting LLP and Electronic Data Systems Corporation are large customer software developers, integrators and resellers whose services include a broad range of Internet and Intranet applications. In addition, many of the Internet access providers also provide Web site development services. The Company believes that in most urban markets there are growing numbers of software and consulting firms that provide a wide range of Web site design and support services. The Company will also compete with the internal information system departments of prospective customers who are choosing whether to outsource design and support or retain or develop that function in-house. In the market for Internet and Intranet business solutions that use self-service applications such as Edify's Electronic Workforce, competitors include systems integrators and potential customers' internal information system departments. Since the Company's reseller agreement with Edify is nonexclusive, the Company will compete with Edify and other resellers of Edify products. In the future, the Company expects competition from Netscape Communications Corporation, Microsoft and others to increase. The Company also expects database vendors such as Oracle Systems Corporation, Sybase, Inc. and Informix Corporation to provide many of the capabilities needed in the development of the Internet and Intranet self-service applications. Where appropriate, the Company plans to serve as a value-added reseller of other software products that are complementary or alternatives to the Edify products. GOVERNMENT REGULATION The Company's products and services pertaining to Web site content and development are not currently subject to direct regulation by the Federal Communications Commission or any other federal or state agency, other than regulations applicable to businesses generally. Depending on the structure of the Company's Community Access America program, that program may be regulated under applicable laws and regulations pertaining to the offer and sale of franchises or business opportunities. Currently, about half of the states have laws and regulations concerning franchises or business opportunities. The Federal Trade Commission and states which have franchise laws impose disclosure and/or registration requirements. In addition, a number of states have statutes which regulate substantive aspects of the franchisor-franchisee relationship such as termination, nonrenewal, transfer and 23 competition with franchisees. As part of its Community Access America program, if the Company elects to license its trademarks to local ISP operators, provide ongoing services or share in ongoing revenues, the Company may be subject to applicable pre-sale franchise registration and/or disclosure requirements for franchisors. The Company does not believe that compliance with applicable franchise and business opportunity laws and regulations for its Community Access America program will have a material adverse effect on the Company. Changes in the regulatory environment relating to the Internet content or connectivity industries, including regulatory changes that directly or indirectly affect telecommunication costs or increase the likelihood or scope of competition from regional telephone companies or others, could have a material adverse effect on the Company's business. The Company cannot predict the impact, if any, that future regulation or regulatory changes may have on its business. EMPLOYEES At July 30, 1996, the Company had 32 full time employees. In addition to these Company personnel, OSS contracts with other creative and production resources, as required for peak load situations, to create Web pages. None of the Company's employees are represented by a labor union and the Company considers its employee relations to be good. FACILITIES The Company's principal offices are located in approximately 9,200 square feet of space in Denver, Colorado, leased on a month-to-month basis. The current base monthly rental is $3,000, which the Company believes is a favorable rate. The monthly rental is scheduled to increase to $9,000 per month in October 1996, which the Company believes more closely reflects current market rates. R. Steven Adams's spouse is an officer of the firm which manages the building where the Company's principal offices are located. See "Certain Transactions." MANAGEMENT DIRECTORS AND OFFICERS The directors and executive officers of the Company, and their ages as of July 22, 1996, are as follows:
Name Age Position - ---- --- -------- R. Steven Adams............ 43 President, Chief Executive Officer and a Director Robert M. Geller........... 43 Vice President-Chief Financial Officer and a Director Paul H. Spieker............ 52 Vice President-Technical Operations and a Director Mitchell B. Campbell....... 31 Vice President-Sales and a Director D. Kent McBride............ 43 Vice President-Learning and Performance William Eager.............. 38 Vice President-Web Services Robert J. Lewis............ 65 Director
R. STEVEN ADAMS, founder of OSS, has served as President, Chief Executive Officer and a director since the Company's incorporation in March 1994. From 1985 TO 1994, Mr. Adams was President-Sheridan Hotel Management, a full service hotel management company. Mr. Adams was the creator and founder of HotelNet, which was an online information system for the hospitality industry. Mr. Adams' experience includes software development, personal computer manufacturing and management of online information systems. ROBERT M. GELLER, has served as Vice President-Chief Financial Officer of the Company since March 1995. Mr. Geller currently provides services to the Company on a one-half time basis. From 1986 to the present, Mr. Geller has been President of The Growth Strategies Group, a consulting company specializing in board and executive services for emerging growth companies. Mr. Geller is a director of Integral Peripherals, Inc., a privately held manufacturer of computer disk drives; Requisite, Inc., a privately held software development company; 24 Renaissance Entertainment Corporation, a publicly held owner and operator of renaissance fairs; and Armanino Foods of Distinction, Inc., a publicly held producer of Italian foods. PAUL H. SPIEKER, has been Vice President-Technical Operations of the Company since February 1995. From 1992 to 1994 Mr. Spieker was President of Business Regulatory Coalition-Colorado, a public affairs company responsible for policy formulation and activities primarily dealing with regulatory matters representing companies before the Colorado Public Utilities Commission. From 1991 to 1994, he was a private consultant primarily for businesses in voice and data communications. From 1990 to 1991, Mr. Spieker was President of Developers Cable Construction, a startup company providing contract construction services for residential developers and local telephone and cable companies. From 1987 to 1990, Mr. Spieker was employed by Volt Information Sciences, Inc., a New York based telecommunications company. Mr. Spieker was employed by U S WEST Communications, Inc. and its predecessor from 1966 to 1987 and served in several senior management capacities, including the head of the strategic business unit which served large telephone customers in a seven state territory. MITCHELL B. CAMPBELL, has been Vice President-Sales of the Company since July, 1995. From 1989 to 1995, Mr. Campbell was Vice President-National Sales Manager of Bank of America. D. KENT MCBRIDE, has been Vice President-Learning and Performance of the Company since December 1995 and served as Vice President of Business Development from May 1995 to December 1995. From May 1994 to May 1995, Mr. McBride was an independent consultant and developed and delivered accelerated learning classes for clients ranging from nuclear power plants to the U.S. Air Force and the Colorado Department of Revenue. From January 1993 To May 1994, he was employed by the Boulder Center of Accelerated Learning, a training firm based in Boulder, Colorado. From October 1992 to January 1993, he was a software and training consultant. Mr. McBride served as customer service manager for the Association of Brewers, a publisher for the home and micro brewing industries, from May 1992 to October 1992. From March 1991 to May 1992, he was a consultant to industry for team building and personal leadership. WILLIAM EAGER, has been Vice President-Web Services of the Company since March 1995. From 1990 to 1995, Mr. Eager was an author publishing for Prentice Hall Publishing and Que Corporation. During that time Mr. Eager wrote seven books on the Internet and electronic communications. Mr. Eager is the author of the book "Using the World Wide Web," published in 1994 by QUE Corporation. From 1987 TO 1990, he was Director-Corporate Communications for BASF Corporation, an electronic media company. Mr. Eager provides his full time services to the Company and without restriction from any publisher. If Mr. Eager elects to author additional books, he would do so on his own time. The Company believes it benefits from Mr. Eager's reputation as an author in the Internet and technology application fields. ROBERT J. LEWIS, has been a director of the Company since February, 1995. Mr. Lewis retired in October 1995 after having spent 37 years in the cable television industry as an owner and developer of cable systems and senior executive with several cable television companies. From 1987 until his retirement, Mr. Lewis was employed by TCI Telecommunications, Inc. ("TCI"), one of the largest cable television companies in the United States. Mr. Lewis served as a Senior Vice President of TCI from 1991 to 1993 and as a Senior Advisor to TCI from 1993 until his retirement. Mr. Geller currently provides services to the Company on a one-half time basis. All of the other officers of the Company are full time employees of the Company. The Company has utilized the part time services of Mr. Geller to limit administrative costs during its development stage. Because Mr. Geller is not available to join the Company full time, the Board of Directors intends to hire an experienced full time chief financial officer as soon as reasonably practicable. Until that time, Mr. Geller will continue to provide part time services to the Company on an as needed basis. There are no family relationships among any of the directors or executive officers of the Company. The Company's directors who are employees do not receive additional compensation for their services as a director. In January 1996, the Company granted Mr. Lewis options for the purchase of 25,000 shares of Common Stock with an exercise price of $1.25 per share in consideration of his serving as a director and providing consulting services to 25 the Company. Mr. Lewis also receives consulting fees of $50 per hour for those services. The Company intends that non-employee directors will receive stock options for service as a director. The Company's Board of Directors has established no committees. It is anticipated that a Compensation Committee, an Option Committee and an Audit Committee will be established during 1996. The Compensation Committee will establish salaries, incentives and other forms of compensation for directors, officers and other employees of the Company, and establish and administer the Company's benefit plans and recommend policies relating to such plans. The Option Committee will develop and administer the Company's Stock Option Plan of 1995. The Audit Committee will review the Company's accounting practices, internal accounting controls and financial results and oversee the engagement of the Company's independent auditors. EXECUTIVE COMPENSATION The following table summarizes the annual and long-term compensation paid by the Company during fiscal years ended December 31, 1994 and 1995 to R. Steven Adams, the Chief Executive Officer of the Company as of December 31, 1995. No other executive officer of the Company was paid $100,000 or more during those periods.
Summary Compensation Table Awards ---------------------- Restricted Payouts ----------------------- Annual Compensation Stock LTIP ----------------------- Salary Bonus Other Awards Options Payouts All Other Name and Principal Position Year $ $ $ $ # $ Compensation - ----------------------------- ---- ------- ----- ----- ---------- ------- ------- ------------ R. Steven Adams 1994 -- -- -- -- -- -- -- President, Chief Executive 1995 $69,000 -- (1) -- -- -- -- Officer and Director - ---------------
(1) On January 1, 1995, the Company issued 480,000 shares of Common Stock issued to Mr. Adams, as the founder and promoter of the Company, for a nominal value ($100). Mr. Adams has also purchased other Common Stock from the Company at fair market value as determined by the Board of Directors. Mr. Adams has not been granted any options or warrants to purchase Common Stock. See "Certain Transactions." The Board of Directors increased Mr. Adams' salary to $10,000 per month commencing March 1, 1996. No other executive officers of the Company currently receive an annual salary in excess of $100,000. The Board of Directors may, at its discretion, award discretionary bonuses. It is anticipated that a Compensation Committee will be established during 1996. The Compensation Committee will establish salaries, incentives and other forms of compensation for directors, officers and other employees of the Company, and establish and administer the Company's benefit plans and recommend policies relating to such plans. STOCK OPTIONS On March 17, 1995, the Board of Directors of the Company adopted the Online System Services, Inc. Stock Option Plan of 1995 (the "1995 Plan"), which was approved by the shareholders on that date. The 1995 Plan terminates March 17, 2005, unless sooner terminated by action of the Board. The 1995 Plan provides for the grant of options to purchase up to 700,000 shares of the Company's Common Stock to officers, directors, employees and consultants. Options granted under the 1995 Plan may have a term of up to ten years. Options which expire, are canceled or are terminated without having been exercised, may be regranted to participants under the 1995 Plan. Options granted under the 1995 Plan may be either "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or options that do not qualify for special tax treatment. No incentive stock options may be granted with a per share exercise price less than the fair market value per share at the date of grant (or 110% of fair market value in the case of optionees who hold 10% or more of the Company's outstanding Common Stock). Under the 1995 Plan, the exercise price of nonqualified stock options may not be less 26 than 85% of the fair market value of the Common Stock on the date of grant. The Board of Directors has adopted a policy of not granting nonqualified stock options with an exercise price less than the fair market value of the Common Stock on the date of grant. Not more than $100,000 in value of incentive stock options under all plans of the Company may vest in any calendar year for any option holder and no incentive stock option may be exercised more than ten years after the date of grant. The 1995 Plan is administered by the Board of Directors and options may be granted at such time and in such amounts as the Board of Directors, in its discretion, determines. Options for the purchase of an aggregate of 693,058 shares of Common Stock are currently outstanding under the 1995 Plan, held by 34 persons, with per share exercise prices of $0.50, $1.25, $2.25, $4.25, $5.75 and $6.50 and a weighted average exercise price of approximately $1.00 per share. A total of 6,942 additional options may be granted under the 1995 Plan. All of the outstanding options currently held by employees under the 1995 Plan are incentive stock options. The remaining options granted under the 1995 Plan and held by non-employee directors and consultants are nonqualfied and have an exercise price equal to the fair market value of the Common Stock on the date of grant. The Company's officers and directors have been granted the following options under the 1995 Plan, each of which has a term of five years unless earlier terminated as provided in the 1995 Plan. See "Principal Shareholders."
Name Date of Grant Number of Options Exercise Price ---- ------------- ----------------- -------------- Robert M. Geller........ June 13, 1995 25,000 $0.50 Dec. 8, 1995 15,000 $0.50 Feb. 21, 1996 5,000 $2.25 Paul H. Spieker......... June 13, 1995 25,000 $0.50 Dec. 8, 1995 20,000 $0.50 Mitchell B. Campbell.... July 7, 1995 75,000 $0.50 Dec. 8, 1995 10,000 $0.50 D. Kent McBride......... June 13, 1995 25,000 $0.50 William Eager........... June 13, 1995 25,000 $0.50 Dec. 8, 1995 5,000 $0.50 Robert J. Lewis......... Jan. 24, 1996 25,000 $1.25 Mark D. Rothschild (1).. June 13, 1995 10,000 $0.50
(1) Mr. Rothschild resigned as a director of the Company effective July 10, 1996. INDEMNIFICATION AND LIMITATION ON LIABILITY OF DIRECTORS The Company's Articles of Incorporation provide that the Company shall indemnify, to the full extent permitted by Colorado law, any director, officer, employee or agent of the corporation made or threatened to be made a party to a proceeding, by reason of the former or present official of the person, against judgments, penalties, fines, settlements and reasonable expenses incurred by the person in connection with the proceeding if certain standards are met. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent of the Company where indemnification will be required or permitted. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. 27 The Company's Articles of Incorporation limit the liability of its directors to the fullest extent permitted by the Colorado Business Corporation Act. Specifically, directors of the Company will not be personally liable for monetary damages for breach of fiduciary duty as directors, except for (i) any breach of the duty of loyalty to the Company or its shareholders, (ii) acts or omissions not in good faith or that involved intentional misconduct or a knowing violation of law, (iii) dividends or other distributions of corporate assets that are in contravention of certain statutory or contractual restrictions, (iv) violations of certain laws, or (v) any transaction from which the director derives an improper personal benefit. Liability under federal securities law is not limited by the Articles. CERTAIN TRANSACTIONS Since inception, the Company has issued the following shares of Common Stock to its officers and directors:
Number of Number of Shares Shares Number of Issued to Issued for Shares Recipient Founder(1) Services(2) Purchased(3) --------- -------------- --------------- ------------ R. Steven Adams............ 480,000 --- 20,000 Robert M. Geller........... --- 100,000 50,000 Paul H. Spieker............ --- 50,000 100,000 Mitchell B. Campbell....... --- --- 100,000 D. Kent McBride............ --- 50,000 5,000 William Eager.............. --- 50,000 10,000 Mark D. Rothschild(4)...... --- 20,000 30,000 - ---------------
(1) On January 1, 1995, the Company issued 480,000 shares of Common Stock issued to Mr. Adams, as the founder and promoter of the Company, for a nominal value ($100). (2) In May 1995, the Company issued an aggregate of 270,000 shares of Common Stock to the respective officers and directors identified in the table for services valued at $0.10 per share, which was determined by the Board of Directors to be the fair market value of the Common Stock at the time of issuance. The valuation for these services has been increased to $0.56 per share to reflect compensation expense which has been recognized in the financial statements as an expense for the relevant periods. (3) From June through December 1995, the officers and directors identified in the table purchased an aggregate of 315,000 shares of Common Stock for cash at a price of $0.50 per share, which was determined by the Board of Directors to be the fair market value of the Common Stock at the time of purchase. (4) Mr. Rothschild resigned as a director of the Company effective July 10, 1996. During the period from June 1995 through May 22, 1996, options representing the right to acquire an aggregate of 693,058 shares of the Company's Common Stock were granted to 34 employees, directors and/or consultants of the Company under the Stock Option Plan of 1995 at option exercise prices ranging from $.50 per share to $6.50 per share. Of these options, options for the purchase of 265,000 shares of Common Stock were granted to the Company's officers and directors. An additional 7,700 warrants have been granted to two directors, one of whom is an officer, at exercise prices of $0.50 and $2.25 per share. See "Management-Stock Options." During 1995, the Company leased $50,000 of equipment (the "Equipment Lease") from a partnership whose partners include Robert M. Geller, an officer and director of the Company. The three year capital lease has an effective annual interest rate of 14.9%. The Company granted Mr. Geller a five-year warrant to purchase 5,000 shares of Common Stock at an exercise price of $0.50 per share in connection with the Equipment Lease. In September 1995, the Company entered into a consulting agreement with Creative Business Strategies, Inc. ("CBS"), a principal shareholder of the Company. During 1995, CBS was granted an option to purchase 100,000 shares of the Company's Common Stock at $0.50 per share and was paid $10,000 for services. During 1995, CBS also purchased 114,000 shares of the Company's Common Stock for $0.50 per share. The agreement 28 with CBS was replaced with a new agreement during the first quarter of 1996, under which CBS is to be paid $2,500 for services rendered in January 1996 and $4,000 per month for 36 months commencing February 1, 1996. CBS is a partner of the lessor under the Equipment Lease and was granted a five-year warrant to purchase 5,000 shares of Common Stock at an exercise price of $0.50 per share in connection with the Equipment Lease. The Company's principal offices are located in a building managed by Sheridan Management Company and owned by one of its affiliates. R. Steven Adams' spouse is a vice president of Sheridan Management Company. The current base monthly rental is $3,000, which the Company believes is below market rate. The monthly rental is scheduled to increase to $9,000 per month in October 1996, which the Company believes more closely reflects current market rates. Shortly before completion of the Company's Initial Public Offering, offering, seven shareholders of the Company agreed to provide the Company an interim line of credit ("Line of Credit")of up to $100,000 to be used for payment of short-term obligations, including short-term debt, trade payables and payroll. Messrs. Geller, Spieker, Campbell, Rothschild and Lewis were the officers or directors who are included in the group of seven shareholders. The Line of Credit was payable on demand and accrued interest at the then current prime rate as determined by Norwest Bank and was secured by substantially all of the Company's assets. All advances under the Line of Credit were paid upon completion of the Company's Initial Public Offering and the Line of Credit has been terminated. The Company believes that the Equipment Lease is on terms no less favorable than could be obtained from unaffiliated third parties. The Board of Directors has determined that any future transactions with officers, directors or principal shareholders will be approved by the disinterested directors and will be on terms no less favorable than could be obtained from an unaffiliated third party. The Board of Directors will obtain independent counsel or other independent advice to assist in that determination. 29 PRINCIPAL SHAREHOLDERS Set forth below is certain information with respect to the beneficial ownership of the Company's Common Stock as of July 30, 1996, by all directors, by all directors and officers as a group, and by all persons owning 5% or more of the outstanding shares. Except as otherwise indicated, each person and group identified below possesses all the voting and investment discretion with respect to the shares listed for them.
Name and Address of Common Stock Beneficial Owner Beneficially - ---------------- Owned(1) Percentage R. Steven Adams......................... 500,000 16.3% 1800 Glenarm Place Suite 800 Denver, CO 80202 Robert M. Geller........................ 175,000(2) 5.7 1800 Glenarm Place Suite 800 Denver, CO 80202 Paul H. Spieker......................... 170,000(3) 5.5 1800 Glenarm Place Suite 800 Denver, CO 80202 Mitchell B. Campbell.................... 160,000(4) 5.1 1800 Glenarm Place Suite 800 Denver, CO 80202 Creative Business Strategies, Inc....... 119,000(5) 3.9 5353 Manhattan Circle Suite 201 Boulder, CO 80303 Robert J. Lewis......................... 37,703(6) 1.2 7002 Revere Parkway Suite 90 Englewood, CO 80111 All Officers and Directors as a Group 1,162,703(7) 36.4 (7 persons)............................ - ---------------
(1) In calculating percentage ownership, all shares of Common Stock which a named shareholder has the right to acquire within 60 days from the date of this Prospectus upon exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage of Common stock owned by that shareholder, but are not deemed to be outstanding for the purpose of computing the percentage of Common Stock owned by any other shareholders. (2) Includes options and warrants for the purchase of 20,000 and 5,000 shares of Common Stock, respectively, but excludes options for the purchase of 25,000 shares of Common Stock that are not exercisable during the next 60 days. 30 (3) Includes options for the purchase of 20,000 shares of Common Stock, but excludes options for the purchase of 25,000 shares of Common Stock that are not exercisable during the next 60 days. (4) Includes options for the purchase of 60,000 shares of Common Stock, but excludes options for the purchase of 25,000 shares of Common Stock that are not exercisable during the next 60 days. (5) Includes warrants for the purchase of 5,000 shares of Common Stock but excludes options for the purchase of 100,000 shares of Common Stock that are not exercisable during the next 60 days. Allen Goldstone and Sanford Schwartz are the beneficial owners of Creative Business Strategies, Inc. (6) Includes options and warrants for the purchase of 8,333 and 2,700 shares of Common Stock, respectively, but excludes options for the purchase of 16,667 shares of Common Stock that are not exercisable during the next 60 days. (7) Includes options and warrants for the purchase of 113,333 and 7,700 shares of Common Stock, respectively, but excludes options for the purchase of 151,667 shares of Common Stock that are not exercisable during the next 60 days. DESCRIPTION OF SECURITIES GENERAL The Company is authorized to issue 15,000,000 shares of capital stock, including 10,000,000 shares of Common Stock, no par value, and 5,000,000 shares of Preferred Stock, with such par value as the Board of Directors may designate. As of June 30, 1996, there were 3,072 ,245 shares of Common Stock outstanding, held of record by 29 shareholders, and no shares of Preferred Stock outstanding. COMMON STOCK No share of Common Stock is entitled to preference over any other share of Common Stock, and each share of Common Stock is equal to every other share of Common Stock in all respects. Holders are entitled to one vote for each share of Common Stock held of record at each meeting of the shareholders, and to receive dividends when and as declared by the Board of Directors. To date, the Company has not paid cash dividends. There is no cumulative voting for the election of directors. Accordingly, the owners of a majority of the shares of Common Stock outstanding may elect all of the directors to be elected by the holders of the Common Stock, if they choose to do so, and the owners of the balance of such shares would not be able to elect any directors. The holders of Common Stock do not have preemptive rights. The shares of Common Stock offered hereby will be, upon issuance, fully paid and non-assessable. PREFERRED STOCK The Board of Directors is authorized to issue up to 5,000,000 shares of Preferred Stock, in any one or more classes or series, to fix the dividend, redemption, liquidation, retirement, conversion, voting and other preference rights for such shares, and to issue options and warrants for the purchase of such shares, on such terms and for such consideration as the Board may deem appropriate without further shareholder action. Such additional shares may have disproportionately higher voting rights or class voting rights, may be convertible into shares of Common Stock, and may rank prior to the Common Stock as to payment of dividends or the distribution of assets upon liquidation or dissolution. The Board of Directors, without shareholder approval can issue shares of Preferred Stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. Currently, no shares of Preferred Stock are outstanding and the Company does not have plans to issue any Preferred Stock. TRANSFER AGENT AND REGISTRAR Corporate Stock Transfer, Denver, Colorado, has been appointed as the Transfer Agent and Registrar for the Common Stock and the Warrants. 31 SELLING SHAREHOLDER The following table sets forth the number of shares of the Company's Common Stock to be offered by the Selling Shareholder named herein, and, as of July 30, 1996, the number and percentage of shares beneficially owned prior to and following completion of the offering made hereby.
Shares Offered Pursuant to this Name Prior to Offering Prospectus After Offering ---- ----------------- ---------------- -------------- Number Percentage Number Percentage -------------------- -------------------- Craig Snapp 75,000 2.4% 25,000 50,000 1.6%
PLAN OF DISTRIBUTION The Shares offered by the Selling Shareholder may be sold from time to time by the Selling Shareholder, or by pledgees, donees, transferees or other successors in interest of the Selling Shareholder, at his sole discretion. Such sales may be made on the NASDAQ SmallCap Market System or otherwise at prices and on terms then prevailing or at prices related to the then current market price, or in negotiated transactions. The Shares offered by the Selling Shareholder are not being underwritten. In general, the Shares may be sold by one or more of the following means: (a) a block trade in which the broker or dealer so engaged will attempt to sell the securities as agent but may position and resell a portion of the block as principal to facilitate the transaction; (b) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus; (c) an exchange distribution in accordance with the rules of such exchange (if the securities are then listed on an exchange); (d) ordinary brokerage transactions and transactions in which the broker solicits purchasers; or (e) other securities transactions. In effecting sales, brokers or dealers engaged by the Selling Shareholder may arrange for other brokers or dealers to participate. Brokers or dealers will receive commissions or discounts from the Selling Shareholder in amounts to be negotiated immediately prior to the sale. No commissions or other fees shall be payable by the Company to any broker or dealer in connection with this offering. Such brokers or dealers and any other participating brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, as amended, in connection with such sales. None of the Shares covered by this Prospectus currently qualify for sale pursuant to Rule 144. The Company will pay the expenses of this offering, estimated at $6,000. LEGAL MATTERS Certain legal matters with respect to the legality of the issuance of the shares of Common Stock and Warrants offered hereby will be passed upon for the Company by Gray, Plant, Mooty, Mooty & Bennett, P.A., Minneapolis, Minnesota. A principal of Gray, Plant, Mooty, Mooty & Bennett, P.A. is the beneficial owner of 40,000 shares of the Common Stock of the Company. EXPERTS The financial statements of the Company at December 31, 1995 and for the periods ended December 31, 1995, appearing in this Prospectus have been audited by Jones, Jensen & Company, independent auditors, as set forth in their reports appearing elsewhere in this Prospectus and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. 32 ADDITIONAL INFORMATION The Company's Common Stock and Common Stock Purchase Warrants are traded on the NASDAQ SmallCap Market System ("NASDAQ") under the symbol WEBB and WEBBW. The Company is subject to the information requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files reports, proxy or information statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices located at 500 West Madison, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can also be obtained at prescribed rates from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Additional information regarding the Company and the Shares offered hereby is contained in the Registration statement and the exhibits thereto filed with the Commission under the Securities Act of 1933, as amended. For further information pertaining to the Company and the Shares, reference is made to the Registration Statement and the exhibits thereto, which may be inspected without charge at, and copies thereof may be obtained at prescribed rates from, the office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. 33 ONLINE SYSTEM SERVICES, INC. INDEX TO FINANCIAL STATEMENTS Page ---- Independent Auditor's Report............................................... F-2 Balance Sheets as of December 31, 1995 and March 31, 1996.................. F-3 Statements of Operations from March 22, 1994 (date of inception) to December 31, 1995, for the year ended December 31, 1995 and for the three months ended March 31, 1995 and 1996................. F-4 Statements of Stockholders' Equity (Deficit) from March 22, 1994 (date of inception) to March 31, 1996.................................. F-5 Statements of Cash Flows from March 22, 1994 (date of inception) to December 31, 1995, for the year ended December 31, 1995 and for the three months ended March 31, 1995 and 1996................. F-6 Notes to Financial Statements.............................................. F-7 F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors Online System Services, Inc. (A Development Stage Company) Denver, Colorado We have audited the accompanying balance sheet of Online System Services, Inc. (a development stage company) as of December 31, 1995, and the related statements of operations, stockholders' equity (deficit), and cash flows for the year ended December 31, 1995 and from inception on March 22, 1994 through December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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 financial statements referred to above present fairly, in all material respects, the financial position of Online System Services, Inc. (a development stage company) as of December 31, 1995, and the results of its operations and its cash flows for the year ended December 31, 1995, and from inception on March 22, 1994 through December 31, 1995 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 8 to the financial statements, the Company is a development stage company with a net loss of $482,239 from inception through December 31, 1995 which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to this matter, as described in Note 8, include raising additional capital through a public offering. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Jones, Jensen & Company February 9, 1996 F-2 ONLINE SYSTEM SERVICES, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS
December 31, March 31, 1995 1996 ------------- ----------- (unaudited) ASSETS - ------ Current assets: Cash and cash equivalents............. $ 25,241 $ 236,331 Accounts receivable, net (Note 1)..... 98,282 97,839 Prepaid software inventory............ --- 101,975 Prepaid expense....................... 5,000 5,494 --------- --------- Total current assets.............. 128,523 441,639 --------- --------- Equipment, net (Note 2)................. 97,215 213,003 --------- --------- Other assets: Deposits.............................. 956 1,106 Intangibles, net of accumulated amortization of $233 and $275 (Note 1)............................ 1,038 996 Deferred offering costs............... --- 16,538 --------- --------- Total other assets................ 1,994 18,640 --------- --------- Total assets...................... $ 227,732 $ 673,282 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable...................... $ 74,990 $ 213,174 Accrued expenses...................... 11,020 6,156 Accrued salaries and taxes payable.... 19,403 60,066 Short-term notes payable (Note 5)..... 50,814 9,000 Current portion of capital lease and note payable (Note 7)............... 17,017 31,684 Note payable-related party (Note 4)... 12,707 12,707 --------- --------- Total current liabilities......... 185,951 332,787 --------- --------- Long-term liabilities: Note and capital leases payable (Note 4 and 7)............................. 42,232 52,444 --------- --------- Total long-term liabilities....... 42,232 52,444 --------- --------- Total liabilities............. 228,183 385,231 --------- --------- Stockholders' equity (deficit): Preferred stock, no par value 5,000,000 shares authorized no shares outstanding.................. Common stock, no par value 10,000,000 shares authorized 1,625,000 and 1,807,245 shares issued and outstanding respectively............ $ 272,864 676,534 Stock subscriptions (Note 10)......... (57,269) (3,393) Deficit accumulated during the development stage................... (216,046) (385,090) --------- --------- Total stockholders' equity (deficit)....................... (451) 288,051 --------- --------- Total liabilities and stockholders' equity (deficit)................... $ 227,732 $ 673,282
========= ========= F-3 The accompanying notes are an integral part of these financial statements ONLINE SYSTEM SERVICES, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
From Inception For the Three Months on March 22, For the Ended 1994 to Year Ended March 31, December 31, December 31, ---------------------------- 1995 1995 1995 1996 -------------- ------------ ----------- ---------- (unaudited) Net sales: Service sales.......................... $ 236,412 $ 236,412 $ 2,150 $ 243,336 Equipment sales........................ 161,344 161,344 49,279 23,513 ---------- ---------- ---------- ---------- Total net sales...................... 397,756 397,756 51,429 266,849 Cost of sales: Cost of services....................... 166,224 166,224 1,994 141,027 Cost of equipment...................... 134,552 134,552 39,592 21,271 ---------- ---------- ---------- ---------- Cost of sales........................ 300,776 300,776 41,586 162,298 ---------- ---------- ---------- ---------- Gross Profit........................... 96,980 96,980 9,843 104,551 ---------- ---------- ---------- ---------- Operating expenses: Sales and marketing expense............ 84,444 84,444 7,955 63,173 Product development expense............ 79,760 79,760 500 66,551 General and administrative expense...... 392,600 392,600 8,257 131,132 Depreciation and amortization........... 20,936 20,936 51 10,044 ---------- ---------- ---------- ---------- Total operating expenses............. 577,740 577,740 16,763 270,900 ---------- ---------- ---------- ---------- Income (loss) from operations........... (480,760) (480,760) (6,920) (166,349) Other income and (expense): Interest expense....................... (1,635) (1,635) --- (2,695) Other income........................... 156 156 --- --- ---------- ---------- ---------- ---------- Total other income and (expense)........ (1,479) (1,479) --- (2,695) ---------- ---------- ---------- ---------- Income (loss) before provision for income taxes........................... (482,239) (482,239) (6,920) (169,044) Provision for income taxes.............. --- --- --- --- ---------- ---------- ---------- ---------- Net income (loss)....................... $ (482,239) $ (482,239) $ (6,920) $ (169,044) ========== ========== ========== ========== Net income (loss) per share............. $ (0.19) $ (0.19) $ (0.00) $ (0.07) ========== ========== ========== ========== Common shares and equivalents outstanding............................ 2,550,695 2,550,695 2,550,695 2,550,695 ========== ========== ========== ==========
F-4 The accompanying notes are an integral part of these financial statements ONLINE SYSTEM SERVICES, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Deficit Accumulated During the Stock Development Shares Amount Subscriptions Stage --------- --------- -------------- ----------- Balance, March 22, 1994................. --- $ --- $ --- $ --- Net loss for the period ended December 31, 1994............................... --- --- --- --- --------- --------- -------------- --------- Balance, December 31, 1994.............. --- --- --- --- Issuance of common stock to founder for cash at an average price of $0.0002 per share.............................. 480,000 100 --- --- Common stock to founders for services rendered at $0.05 per share............ 125,000 6,250 --- --- Common stock issued for services rendered at $0.56 per share............ 370,000 207,707 --- --- Stock subscriptions receivable (Note 10) --- --- (57,269) --- Issuance of common stock for cash at $0.50 per share........................ 650,000 325,000 --- --- Net loss for the year ended December 31, 1995............................... --- --- --- (482,239) Subchapter S corporation losses allocated to individual shareholders... --- (266,193) --- 266,193 --------- --------- -------- --------- Balance, December 31, 1995.............. 1,625,000 272,864 (57,269) (216,046) Issuance of common stock for cash at $2.25 per share (unaudited)............ 182,245 410,000 --- --- Less offering costs (unaudited)......... --- (6,330) --- --- Stock subscriptions receivable (Note 10) (unaudited)............................ --- --- 53,876 --- Net loss for the three months ended March 31, 1996 (unaudited)............. --- --- --- (169,044) --------- --------- -------- --------- Balance, March 31, 1996 (unaudited)..... 1,807,245 $ 676,534 $ (3,393) $(385,090) ========= ========= ======== =========
F-5 The accompanying notes are an integral part of these financial statements ONLINE SYSTEM SERVICES, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS
From Inception For the on March 22, For the Three Months Ended 1994 to Year Ended March 31, December 31, December 31, -------------------- 1995 1995 1995 1996 ------------- ------------ --------- --------- (unaudited) Cash flows from operating activities Net profit (loss)....................... $(482,239) $(482,239) $(6,920) $(169,044) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization......... 20,936 20,936 51 10,044 Stock issued for services............. 176,688 176,688 6,250 33,876 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable........................... (98,282) (98,282) (1,075) 443 Decrease (increase) in prepaid software inventory................... --- --- --- (101,975) Decrease (increase) in prepaid --- --- --- (495) expense.............................. Decrease (increase) in deferred offering costs....................... --- --- --- (16,538) Decrease (increase) in deposits....... (956) (956) --- (150) Increase (decrease) in accounts payable.............................. 74,990 74,990 7,598 138,184 Increase (decrease) in accrued expenses............................. 30,423 30,423 --- 35,799 Increase (decrease) in short-term notes payable........................ 50,814 50,814 --- (41,814) ---------- --------- ------- --------- Net cash (used) by operating activities........................... (227,626) (227,626) (5,904) (111,670) --------- --------- ------- --------- Cash flows from investing activities Purchase of fixed assets................ (92,760) (92,760) (3,042) (94,392) ------- --------- ------- --------- Net cash (used) by investing activities........................... (92,760) (92,760) (3,042) (94,392) ------- --------- ------- --------- Cash flows from financing activities Proceeds from refinancing equipment..... 45,000 45,000 --- --- Payments on capital lease and note payable................................ (4,473) (4,473) --- (6,518) Issuance of common stock................ 305,100 305,100 100 423,670 -------- --------- ------- --------- Net cash provided by financing activities........................... 345,627 345,627 100 417,152 -------- --------- ------- --------- Net increase in cash.................. 25,241 25,241 2,962 211,090 Cash at beginning of period.............. --- --- --- 25,241 --------- --------- ------- --------- Cash at end of period.................... $ 25,241 $ 25,241 $ 2,962 $ 236,331 ========= ========= ======= ========= Supplemental Cash Flow Information Cash paid for Interest.............................. $ 1,635 $ 1,635 $ --- $ 2,468 Income taxes.......................... --- --- --- --- Non Cash Financing Activities Stock issued for services............. $ 176,688 $ 176,688 $ 6,250 $ 33,876 Fixed assets acquired from related parties.............................. 75,051 75,051 --- --- Capital lease for equipment........... 10,500 10,500 --- --- Note payable for related party for fixed assets purchased............... 15,929 15,929 --- --- Intangibles acquired from related parties.............................. 1,271 1,271 --- --- Prepaid lease payment................. 5,000 5,000 --- 30,323
F-6 The accompanying notes are an integral part of these financial statements ONLINE SYSTEM SERVICES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND MARCH 31, 1996 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements presented are those of Online System Services, Inc. (a development stage company). The Company was incorporated on March 22, 1994 under the state laws of Colorado, however, principal operations did not begin until 1995. The Company develops, markets and supports World Wide Web ("Web") sites, on the Internet or Intranets. The Company designs and implements Web sites ranging from basic inquiry-only sites to complex, interactive sites capable of providing online commerce, database integration and manipulation, sophisticated graphics, animation and other multi-media content. The Company plans to utilize leading edge software in its Web site development. The Company also serves as a value-added reseller of software capable of allowing the Internet or Intranet user to use self-service applications such as the online purchase of products or services, product warranty and support, employee benefit enrollments and other applications. The Company also markets and supports "Community Access America," a turnkey package of hardware, software, documentation, and marketing and technical assistance that enables a local cable company, telephone company, newspaper or other entity to provide Internet access and Web site development to small non-urban communities. The Company generates net sales through the sale of software consulting services for Web site development, mark-ups on computer hardware and software sold to customers, maintenance fees charged to customers to maintain computer hardware and Web sites, license fees based on a percentage of revenues from the Community Access America program, training course fees, and monthly fees paid by customers for Internet access provided by the Company in the Denver market. Prior to December 31, 1995 planned principal operations had commenced, but no significant revenues had been generated and the Company was considered a development stage enterprise. Beginning January 1, 1996 the Company is no longer in the development stage. The financial statements reflect development stage accounting pursuant to SFAS 7 through December 31, 1995. a. Accounting Method The Company's financial statements are prepared using the accrual method of accounting. Equipment sales revenue is recognized when the equipment is delivered and the Company has no further material obligations. Service sales revenue is recognized when services are performed. Expenses are recognized when incurred. b. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. c. Accounts Receivable Accounts receivable are shown net of the allowance for doubtful accounts. The allowance was $5,173 and $22,272 at December 31, 1995 and March 31, 1996, respectively. F-7 ONLINE SYSTEM SERVICES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND MARCH 31, 1996--(CONTINUED) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) d. Equipment Equipment is recorded at cost. Major additions and improvements are capitalized. The cost and related accumulated depreciation of equipment retired or sold are removed from the accounts and any differences between the undepreciated amount and the proceeds from the sale are recorded as gain or loss on sale of equipment. e. Depreciation Depreciation is computed using the straight line method over the estimated useful lives of the assets of five years. f. Intangibles Intangibles are recorded at cost and are amortized using the straight-line method over the estimated useful life of five years. Amortization expense for the year ended December 31, 1995 and the three months ended March 31, 1996 was $233 and $42, respectively. g. Concentrations of Credit The Company sells computer equipment and related services from its Denver offices to the surrounding states. The Company extends credit to its customers. Credit losses, if any, have been provided for in the financial statements and are based on management's expectations. The Company's accounts receivable are subject to potential concentrations of credit risk. The Company does not believe that it is subject to any unusual risks or significant risks in the normal course of its business. h. Income Taxes The Company has operating loss carryforwards of $385,000 at March 31, 1996, available to reduce future federal taxable income. Until September 26, 1995, the Company operated as a Sub chapter S corporation whereby all tax benefits were passed through to the individual shareholders. Accordingly, the losses were offset to common stock until the Sub chapter S election was involuntarily revoked when a corporation became a shareholder of the Company. The tax benefit of the operating loss carryforwards at December 31, 1995 is offset by a valuation of the same amount. i. Unaudited Financial Statements In the opinion of management, the accompanying unaudited statements of operations, stockholders' equity (deficit) and cash flows for the three months ended March 31, 1995 and 1996 include all of the adjustments necessary for a fair statement of results. All such adjustments are of a normal recurring nature. F-8 ONLINE SYSTEM SERVICES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND MARCH 31, 1996--(CONTINUED) NOTE 2--EQUIPMENT A portion of the equipment that was purchased during 1995 was acquired from related parties. This equipment purchased was recorded at its original cost plus accumulated depreciation that had been taken to the point of purchase which totaled $60,393. Equipment consists of the following:
December 31, March 31, 1995 1996 ------------- ------------ (unaudited) Capital lease equipment... $ 60,500 $ 60,500 Computer equipment........ 79,464 141,148 Office equipment.......... 26,408 31,820 Software.................. 11,939 69,558 -------- -------- 178,311 303,026 Accumulated depreciation.. (81,096) (90,023) -------- -------- Net Equipment............. $ 97,215 $213,003 ======== ========
Depreciation expense for the year ended December 31, 1995 and for the three months ended March 31, 1996 was $20,703 and $8,927, respectively. NOTE 3--COMMITMENTS AND CONTINGENCIES The Company entered into five operating lease agreements for office furniture during 1995. All of the leases expire in 1997. The monthly rental payments total $1,488. Total lease payments are as follows: 1996....................................... $17,856 1997....................................... 12,607
The total lease expense for the year ended December 31, 1995 and the three months ended March 31, 1996 was $6,942 and $9,000, respectively. The Company has entered into a month to month lease for office space commencing July 1995 at $3,000 per month. It is anticipated that the monthly rent will increase to $9,000 beginning October 1996. On March 1, 1996, the Company entered into a non-exclusive value-added reseller agreement with Edify Corporation (Edify), which will allow the Company to use and sublicense the Edify Electronic Workforce software to the Company's customers. The initial term will continue for fifteen months commencing March 1, 1996. A subsequent twelve month term may be extended by Edify, at its discretion, provided the Company has met all obligations under the agreement. The agreement requires the Company to purchase a solutions provider start-up package for $100,000, of which $40,000 has already been paid. F-9 ONLINE SYSTEM SERVICES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND MARCH 31, 1996--(CONTINUED) NOTE 3--COMMITMENTS AND CONTINGENCIES--(CONTINUED) The Company entered into a business relationship among Charlie Spickert, Medical Education Collaborative (MEC) and the Company. Mr. Spickert and MEC will provide the knowledge and reputation to penetrate the medical training and services market. The Company will provide the needed resources and expertise in Internet services. In addition to receiving a percentage of revenues from the results of the joint efforts of the parties, Mr. Spickert was granted 50,000 common stock options exercisable at $0.50 per share, that will expire after 5 years. The stock options will vest at 25,000 increments on a pro-rata basis. The first increment will vest when Mr. Spickert has devoted over 400 hours have been devoted to this business relationship. The remaining 25,000 shares will be vested on a pro-rata basis over the first $20,000 of compensation due MEC in connection with the relationship. As part of the joint development and marketing arrangement with MEC and Mr. Spickert, the Company has agreed to perform Web site development services as a vendor to MEC and MEC will markup the project cost by 15% as payment for its involvement. On September 1, 1995, the Company entered into a consulting agreement with Creative Business Strategies, Inc. (CBS) pursuant to which CBS was to assist the Company in developing its business plan, advise the Company regarding business opportunities and financings and promote the Company and its services. For these services, CBS was to be paid a fee of $2,500 per month, was granted a stock option to purchase 100,000 shares of the Company's common stock at $.50 per share, such option to vest over a period of eighteen months, and was to be paid a transaction-based fee for business combinations or certain other transactions completed by the Company which were initiated by CBS. The options have not been exercised. Between September and December 1995, CBS purchased 114,000 shares of the Company's common stock at $.50 per share. Effective February 1, 1996, the agreement with CBS was amended to provide for a monthly fee of $4,000 for a period of 36 months and to eliminate any transaction-based compensation. NOTE 4--RELATED PARTY TRANSACTIONS a. Note Payable Related Party The Company has recorded a note payable to a former officer and shareholder of the Company of $12,707 at December 31, 1995. The note is unsecured, noninterest bearing and is due October 30, 1996. No interest has been imputed on the note because it is not material to the financial statements. b. Capital Lease Related Party To provide working capital for the Company, shareholders of the Company formed a partnership that purchased the equipment from the Company for cash and then leased the equipment back through a capital lease (See Note 7). c. Month to Month Lease The Company's principal offices are located in a building managed by an affiliate. An officer of the Company is related to the vice president of the management company. The Company was in need of expanding its office space and due to several vacant floors in the building, the management company agreed to rent an additional floor to the Company and its current office space at a total monthly rate of $3,000. F-10 ONLINE SYSTEM SERVICES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND MARCH 31, 1996--(CONTINUED) NOTE 5--SHORT-TERM NOTES PAYABLE The Company negotiated two short-term notes of $24,000 and $32,814 for services provided by a vendor and equipment purchased. The balance due on both notes as of December 31, 1995 and March 31, 1996 was $50,814 and $9,000, respectively. The payment terms require two payments of $19,407 through February 1996 and $3,000 per month from March through June 1996. The notes are non- interest bearing and unsecured. No interest has been imputed on the notes because it is not material to the financial statements. NOTE 6--STOCK OPTIONS, WARRANTS AND RIGHTS a. Stock options During 1995, the Board of Directors approved a stock option plan for the Company's employees, officers and consultants. The Company has made available 350,000 shares for the plan adopted March 17, 1995. The plan was amended increasing the authorized shares to 600,000 on December 8, 1995 and to 700,000 on January 24, 1996. As of May 15, 1996 a total of 678,508 options were outstanding under the plan, with option prices ranging from $0.50 to $5.75. The plan shall be in effect for ten years from the adoption date. b. Warrants In connection with the acquisition of the equipment under the capital lease described in Note 7, the Company issued warrants to purchase 25,000 shares of common stock at $0.50 per share. The Company issued an additional 18,450 warrants in conjunction with its private placement, with an exercise price of $2.25 per share. The warrants are granted at the fair market value of the common stock at the time of issuance. Accordingly, no discount was recorded. The warrants expire in the year 2000 and 2001, respectively. NOTE 7--NOTE AND CAPITAL LEASE PAYABLE The Company entered into a capital lease for office equipment as follows.
December 31, 1995 March 31, 1996 ----------------- -------------- (unaudited) Capital lease payable in monthly principal and interest payments of $1,733, for thirty-six months beginning January 15, 1996, effective interest rate of 14.9%, secured by office equipment....................... $ 50,000 $ 46,490 Capital lease payable in monthly principal and interest payments of $471, for thirty-six months beginning July 28, 1995, effective interest rate of 35.8%, secured by a phone system.... 9,249 8,646 Note payable for purchase of fixed assets, monthly principal payments of $1,588 beginning March 1996 for twelve months and then payment changes to $625 for the remaining twenty-four months, effective interest rate of 9.0% and unsecured..................... --- 28,992 -------- -------- 59,249 84,128 Less current portion (17,017) (31,684) -------- -------- $ 42,232 $ 52,444 ======== ========
F-11 ONLINE SYSTEM SERVICES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND MARCH 31, 1996--(CONTINUED) NOTE 7--NOTE AND CAPITAL LEASE PAYABLE--(CONTINUED) The following is a schedule of future minimum lease payments.
December 31, March 31, 1995 1996 (unaudited) 1996 $ 26,448 $ 44,211 1997 26,448 33,948 1998 23,622 23,885 Total minimum lease payments 76,518 102,044 Less amount representing interest (17,269) (17,916) -------- -------- Present value of minimum lease payments $ 59,249 $ 84,128 ======== ========
NOTE 8--GOING CONCERN The Company's financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has incurred a loss from its inception through March 31, 1996. It has not established revenues sufficient to cover its operating costs and to allow it to continue as a going concern. Management believes that the $410,000 raised from its private placement, cash generated through operations and a public offering of its common stock will generate the required working capital necessary to continue as a going concern. NOTE 9--ROYALTY AGREEMENT An agreement was entered into by the Company with Creative Learning International (CLI) for a 5% royalty on all participants in the Internet game, "The Adventure Begins." The agreement includes revenues generated from all public seminars, corporate training, special events and any licensing or franchise agreements. A royalty of 3% will be paid to CLI for any other products that use the design concept created for the Internet game. As of March 31, 1996, the Company had paid CLI $1,341 in royalties. This royalty agreement will be in effect as long as the training program is used by the Company or by any other entity the program is licensed to by the Company. NOTE 10--STOCK SUBSCRIPTIONS RECEIVABLE The Company entered into two stock subscription agreements. The first agreement stipulates that shares will be paid through services rendered to the Company. The $3,393 of required services will be completed prior to September of 1996. The second agreement required the payment of $20,000 cash on or before January 31, 1996. The payment was received prior to the expiration date. NOTE 11--MAJOR CUSTOMERS The Company had one major customer during 1995 that accounted for 40% of the Company's sales. The service agreement between the Company and this customer will terminate May 1996. The Company had one major customer for the first quarter of 1996. This one customer\accounted for 19% of the first quarter sales. F-12 ONLINE SYSTEM SERVICES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND MARCH 31, 1996--(CONTINUED) NOTE 12--PREPAID SOFTWARE INVENTORY-SUBSEQUENT EVENT In conjunction with the agreement signed with Edify, the Company has prepaid $101,975 of software licenses. $60,000 is required under the terms of the contract and $41,975 is in anticipation of future orders. The prepaid software inventory is comprised of software licenses which the Company has purchased for the purpose of sublicensing the software to its customers in 1996 in the ordinary course of the Company's business. NOTE 13--INITIAL PUBLIC OFFERING-SUBSEQUENT EVENT In May and June 1996, the Company completed an initial public offering of 1,265,000 Units at a price to public of $6.75 per Unit, before deduction of commissions and offering expenses. Each Unit consists of one share of Common Stock and one Warrant. Two Warrants included in the Units entitle the holder to purchase one share of Common Stock during the three-year period commencing May 23, 1996, at an exercise price of $9.00 per share. F-13 =============================================================================== No dealer, salesman or any other person has been authorized to give any information or to make any representations other than those contained in this Prospectus in connection with the offer made by this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company. This Prospectus does not constitute an offer to sell or the solicitation of any offer to buy any security other than the shares of the Common Stock and Warrants offered by this Prospectus, nor does it constitute an offer to sell or a solicitation of any offer to buy the shares of Common Stock or Warrants by anyone in any jurisdiction in which such offer or solicitation is not authorized, or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that information contained herein is correct as of any time subsequent to the date hereof. _______________ TABLE OF CONTENTS Page ---- Prospectus Summary..........................................................2 Risk Factors................................................................5 Use of Proceeds............................................................10 Dilution...................................................................10 Capitalization.............................................................11 Dividend Policy............................................................11 Selected Financial Data....................................................11 Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................................12 Business...................................................................16 Management.................................................................24 Certain Transactions.......................................................28 Principal Shareholders.....................................................30 Description of Securities..................................................31 Plan of Distribution.......................................................31 Selling Shareholder........................................................32 Legal Matters..............................................................32 Experts....................................................................32 Additional Information.....................................................33 Index to Financial Statements.............................................F-1 _______________ =============================================================================== =============================================================================== 25,000 Shares ONLINE SYSTEM SERVICES, INC. ---------- PROSPECTUS ---------- ________, 1996 =============================================================================== PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article IX of the Company's Articles of Incorporation provides that the Company shall indemnify any director, officer, employee or agent of the corporation made or threatened to be made a party to a proceeding, by reason of the former or present official act of the person, against judgments, penalties, fines, settlements and reasonable expenses incurred by the person in connection with the proceeding if certain standards are met. Article X of the Company's Articles of Incorporation eliminates certain personal liability of the director of the Company for monetary damages for certain breaches of directors' fiduciary duties. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. SEC registration fee.................... $ 41.49 NASD fee................................ 512.03 Blue Sky filing fees, legal fees and expenses............................... 500.00 Printing and EDGAR expenses............. 750.00 Fees and expenses of counsel for the Company................................ 3,500.00 Fees and expenses of accountants for the Company............................ 500.00 Miscellaneous........................... 196.48 ========= Total......................... $ 6000.00 ========= All of the above expenses, other than the SEC and NASD fees, are estimated. ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. 1. During January 1995, 480,000 shares of the Company's Common Stock (adjusted to reflect a 10-for-1 stock split and subsequent contributions to capital of the Company) were issued to the founder of the Company for a nominal value ($100) in connection with the formation of the Company. The securities were offered privately and without general solicitation. The securities, which were taken for investment and were subject to appropriate transfer restrictions, were not registered under the Securities Act of 1933, as amended (the "Act") in reliance upon Section 4(2) thereof. 2. During March 1995, an aggregate of 125,000 shares of the Company's Common Stock (adjusted to reflect the stock split and subsequent contributions to capital of the Company) were issued to 2 individuals for services rendered and valued at $0.05 per share, which was determined by the Board of Directors to be the fair market value of the Common Stock at the time of issuance. One of the persons was an attorney who rendered legal services to the Company and the other person was a software developer who rendered Web-based technology development services. These services were rendered in connection with the founding of the Company and were completed before May 1995. The securities were offered privately and without general solicitation. The securities, which were taken for investment and were subject to appropriate transfer restrictions, were not registered under the Act in reliance upon Section 4(2) thereof. 3. During May 1995, an aggregate of 370,000 shares of the Company's Common Stock were issued to 7 persons in consideration for services rendered and valued at $0.10 per share, which was determined by the Board of Directors to be the fair market value of the Common Stock at the time of issuance. At the time of the issuance of these securities, all 7 persons were officers or directors and therefore accredited investors. The securities were offered privately and without general solicitation. The securities, which were taken for investment II-1 and were subject to appropriate transfer restrictions, were not registered under the Act in reliance upon Section 4(2) thereof. 4. During the period from June 1995 through December 1995, an aggregate of 650,000 shares of the Company's Common Stock were issued to 19 investors, including 5 nonaccredited investors and 14 accredited investors (including 8 officers and directors of the Company), in consideration for the cash payment of $.50 per share, which was determined by the Board of Directors to be the fair market value of the Common Stock at the time of issuance. The securities were offered privately and without general solicitation. The securities, which were taken for investment and were subject to appropriate transfer restrictions, were not registered under the Act in reliance upon Section 4(2) thereof and Regulation D promulgated thereunder. 5. During December 1995, a warrant representing the right to acquire 25,000 shares of the Company's Common Stock at $.50 per share was issued to a partnership in connection with the sale and leaseback of certain equipment by the Company. The partnership consisted of 6 individuals who are accredited investors, including an officer and director of the Company. The securities, which were taken for investment and were subject to appropriate transfer restrictions, were not registered under the Act in reliance upon Section 4(2) thereof. 6. During the period from January 31 through March 8, 1996, an aggregate of 182,245 shares of the Company's Common Stock and warrants representing the right to acquire 18,450 shares at $2.25 per share were issued to five accredited investors in consideration for the cash payment of $2.25 per share, which was determined by the Board of Directors to be the fair market value of the Common Stock at the time of issuance. Each of the investors provided the Company with a subscription agreement to confirm their knowledge and suitability as an investor and their ability to bear the economic risk of an investment in the securities. The securities were offered privately and without general solicitation. The securities, which were taken for investment and were subject to appropriate transfer restrictions, were not registered under the Act in reliance upon Rule 504 of Regulation D under the Act and Section 4(2) of the Act. 7. During the period from June 1995 through May 22, 1996, options representing the right to acquire an aggregate of 693,058 shares of the Company's Common Stock were granted to 34 employees, directors and/or consultants of the Company under the Stock Option Plan of 1995 at option exercise prices ranging from $.50 per share to $6.50 per share. The securities, which were taken for investment and were subject to appropriate transfer restrictions, were not registered under the Act in reliance upon Section 4(2) thereof. ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits 3.1 Articles of Incorporation, as amended, of the Company(1) 3.2 Bylaws of the Company(1) 4.1 Specimen form of the Company's Common Stock certificate(2) 4.2 Form of Warrant Agreement dated May 23, 1996 between Corporate Stock Transfer and the Company, including form of Warrant(2) 4.3 Stock Option Plan of 1995(1) 4.4 Form of Incentive Stock Option Agreement for Stock Option Plan of 1995(1) 4.5 Form of Nonstatutory Stock Option Agreement for Stock Option Plan of 1995(1) 4.6 Nonstatutory Stock Option Agreement for options issued to Creative Business Strategies, Inc.(2) 4.7 Form of Warrant issued in connection with Sale-Leaseback of Equipment(1) 4.8 Form of Warrant issued to private investors(1) 4.11 Specimen of Warrant Certificate--See Exhibit A filed with Exhibit 4.2 5.1 Opinion of Gray, Plant, Mooty, Mooty & Bennett, P.A.* 10.1 Certified Solutions Provider Agreement dated March 1, 1996 between Edify Corporation and the Company(1) II-2 10.1(a) Exhibits E and F to the Certified Solutions Provider Agreement between Edify Corporation and the Company and filed as Exhibit 10.1(2) 10.2 Joint Marketing and Development Arrangement among the Company, Charlie Spickert and Medical Education Collaborative(2) 10.3 Consulting Agreement between the Company and Creative Business Strategies, Inc.(2) 10.4 Equipment Lease Agreement dated December 15, 1995 between the Company and OSS Equipment Leasing General Partnership(1) 10.5 Financial Advisory Agreement dated February 23, 1996 between the Company and the Representative(1) 10.6 Purchase Agreement dated February 7, 1996 between the Company and WEBAD, Inc.(2) 10.7 Letter agreement pertaining to $100,000 Line of Credit arrangement between the Company and certain of its shareholders, including certain officers and directors(3) 10.8 Community Access America Agreements dated March 25, 1996 between the Company and ETA, Inc., Waco, Texas(2) 10.9 Community Access America Agreements dated April 8, 1996 between the Company and Sterling Online Systems, Sterling, Colorado(2) 10.10 Community Access America Agreements dated March 29, 1996 between the Company and Eagle Communications of Heys, Kansas(2) 10.11 Letter of Intent with MicroSoft regarding proposed joint marketing arrangement(2) 10.12 Form of Nondisclosure and Nonsolicitation Agreement between the Company and its employees(2) 10.13 Office Lease for the Company's principal offices(2) 10.14 Revised Contract between Creative Learning International and the Company(2) 23.1 Consent of Jones, Jensen & Company* 23.2 Consent of Gray, Plant, Mooty, Mooty & Bennett, P.A.-- See Exhibit 5.1 24.1 Power of Attorney (included on signature page of initial Registration Statement) __________ * Filed herewith. (1) Filed as the same Exhibit number with the initial Registration Statement on Form SB-2, filed April 5, 1996 as Commission File No. 333-3282-D. (2) Filed as the same Exhibit number with Amendment No. 1 to the Registration Statement on Form SB-2, filed May 3,1996 as Commission File No. 333-3282-D. (3) Filed as the same Exhibit number with Amendment No. 2 to the Registration Statement on Form SB-2, filed May 16,1996 as Commission File No. 333-3282-D. (4) Filed as the same Exhibit number with Amendment No. 3 to the Registration Statement on Form SB-2, filed May 22,1996 as Commission File No. 333-3282-D. ITEM 28. UNDERTAKINGS. (a)(1) File during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by section 10(a)(3) of the Securities Act; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the II-3 maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. (e) Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (f)(1) For determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the small business issuer under Rule 424(b)(1), or (4) or 497(11) under the Securities Act as part of this registration statement as of the time the Commission declared it effective. (2) For determining any liability under the Securities Act, treat the information omitted from the form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. II-4 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Denver, State of Colorado, on July 31, 1996. ONLINE SYSTEM SERVICES, INC. By: /s/ R. STEVEN ADAMS ----------------------- R. Steven Adams, President KNOW BY ALL THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints R. Steven Adams and Robert M. Geller, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full powers and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this Registration Statement was signed by the following persons in the capacities and on the dates stated: /s/ R. STEVEN ADAMS President and Director July 31, 1996 - ------------------------------ R. Steven Adams (Principal Executive Officer) /s/ ROBERT M. GELLER Vice President--Chief July 31, 1996 - ------------------------------ Robert M. Geller Financial Officer (Principal Financial Officer and Principal Accounting Officer) /s/ MITCHELL B. CAMPBELL Director July 31, 1996 - ------------------------------ Mitchell B. Campbell /s/ ROBERT J. LEWIS Director July 31, 1996 - ------------------------------ Robert J. Lewis /s/ PAUL H. SPIEKER Director July 31, 1996 - ------------------------------ Paul H. Spieker II-5 EX-5.1 2 OPINION OF GRAY, PLANT, MOOTY ETAL [Letterhead] BRUCE B. MCPHEETERS 612 343-2866 July 31, 1996 EXHIBIT 5.1 ----------- Securities and Exchange Commission 450 5th Street, N.W. Washington, D. C. 20549 RE: ONLINE SYSTEM SERVICES, INC. REGISTRATION STATEMENT ON FORM SB-2 OUR FILE NO. 329568/66398 Dear Sir or Madam: We are securities counsel for Online System Services, Inc., a Colorado corporation (the "Company") in connection with the filing with the Commission of a Registration Statement on Form SB-2 (the "Registration Statement") for the registration of 25,000 shares of the previously issued common stock of the Company, without par value ("Common Stock"). We are admitted to practice only in the State of Minnesota and have examined and are familiar with such documents and corporate records of the Company as we have deemed necessary and appropriate for the purpose of rendering the following opinion. Based on the foregoing, we are of the opinion that the 25,000 shares of Common Stock will, when sold, be validly issued, fully paid and nonassessable. We hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the caption "Legal Matters" in the Registration Statement and Prospectus. Very truly yours, GRAY, PLANT, MOOTY, MOOTY & BENNETT, PA By /s/ Bruce B. McPheeters ------------------------ Bruce B. McPheeters EX-23.1 3 CONSENT OF INDEPENDENT AUDITORS Exhibit 23.1 [Letterhead] CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS --------------------------------------------------- July 30, 1996 Online System Services, Inc. Denver, Colorado Dear Sirs: We hereby consent to the use of our audit report dated February 9, 1996 in the form SB-2 registration statement of Online System Services, Inc. /s/ Jones, Jensen & Company Jones, Jensen & Company -----END PRIVACY-ENHANCED MESSAGE-----