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As filed with the Securities & Exchange Commission on December 22, 1998
Registration No. ________________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_________________________
ONLINE SYSTEM SERVICES, INC.
(Exact name of issuer as specified in its charter)
Colorado 84-1293864
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1800 GLENARM PLACE, SUITE 700
DENVER, COLORADO 80202
(303) 296-9200
(Address and telephone number of principal executive offices)
_________________________
R. Steven Adams
Online System Services, Inc.
1800 Glenarm Place, Suite 700
Denver, Colorado 80202
(303) 296-9200
(Name, address and telephone number of agent for service)
Copy to:
Lindley S. Branson
Gray, Plant, Mooty, Mooty & Bennett, P.A.
33 South Sixth Street
3400 City Center
Minneapolis, Minnesota 55402
(612) 343-2800
_________________________
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. / /
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of earlier effective registration
statement for same offering. / / ___________________
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If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for same offering. / / _______________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of securities Amount to be Proposed maximum Proposed maximum aggregate Amount of
to be registered registered offering price (1) offering price (1) registration fee
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par 24,000 $ 12.00 $ 288,000 $ 84.96
value (2)
Common Stock, no par 58,240 $ 12.00 $ 698,880 $ 206.17
value (3)
Common Stock, no par 369,000 $ 12.00 $ 4,428,000 $1,306.26
value (4)
Common Stock, no par 250,000 $ 12.00 $ 3,000,000 $ 885.00
value (5
Common Stock, no par 293,500 $ 12.00 $ 3,522,000 $1,038.99
value (6)
Total 994,740 $ 12.00 $11,936,880 $3,521.38
</TABLE>
_______________________________
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of Regulation C as of the close of the market on
December 16, 1998.
(2) Common stock issued by OSS in connection with consulting services rendered
to OSS.
(3) Common stock issued by OSS upon conversion of OSS' issued and outstanding
10% Preferred Stock.
(4) Common stock issuable by OSS upon conversion of OSS' issued and outstanding
10% Preferred Stock. An indeterminate number of additional shares of common
stock are registered hereunder that may be issued by reason of any stock
split, stock dividend or similar transaction involving the common stock, in
order to prevent dilution, in accordance with Rule 416 under the Securities
Act of 1933, as amended.
(5) Common stock issuable by OSS upon conversion of OSS' issued and outstanding
Series A Preferred Stock. An indeterminate number of additional shares of
common stock are registered hereunder that may be issued by reason of any
stock split, stock dividend or similar transaction involving the common
stock, in order to prevent dilution, in accordance with Rule 416 under the
Securities Act of 1933, as amended.
(6) Common stock issuable by OSS upon exercise of issued and outstanding
transferable warrants of OSS. An indeterminate number of additional shares
of common stock are registered hereunder in accordance with Rule 416 under
the Securities Act of 1933, as amended, that may be issued as provided in
such warrants in the event that the provisions against dilution in such
warrants become operative.
_______________________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer of sale is not permitted.
SUBJECT TO COMPLETION, DATED DECEMBER 22, 1998
PROSPECTUS
ONLINE SYSTEM SERVICES, INC.
This is a public offering of a minimum of 861,923 and a maximum of
994,740 shares of common stock of Online System Services, Inc. The selling
shareholders identified in this prospectus are offering all of the shares to be
sold. OSS will not receive any of the proceeds from the offer and sale of the
shares, however certain shares offered by this prospectus are issuable upon
the exercise of issued and outstanding transferable warrants of OSS. If these
warrants are excerised in full and the exercise price is paid in cash rather
than by a surrender of a portion of the warrants being exercised (a cashless
exercise), OSS will receive proceeds of $3,234,900.
The shares to be sold by the selling shareholders consist of 78,240
issued and outstanding shares of common stock and shares of common stock
issuable to them upon:
- Their conversion of OSS' 10% Preferred Stock;
- Their conversion of OSS' Series A Preferred Stock;
- Their exercise of issued and outstanding transferable warrants of
OSS exercisable at a price per share of $15.00;
- Their exercise of issued and outstanding transferable warrants of
OSS exercisable at a price per share of $16.33; or
- Their exercise of issued and outstanding transferable warrants of
OSS exercisable at a price per share of $5.71.
The Nasdaq SmallCap Market lists the common stock under the symbol
"WEBB".
INVESTING IN THE COMMON STOCK INCLUDES CERTAIN RISKS. YOU SHOULD NOT
PURCHASE THE COMMON STOCK UNLESS YOU CAN AFFORD TO LOSE YOUR ENTIRE INVESTMENT.
SEE "RISK FACTORS" BEGINNING ON PAGE 3 OF THIS PROSPECTUS.
The shares may be offered and sold at various times by the selling
shareholders identified in this prospectus pursuant to rules promulgated by the
Securities and Exchange Commission. The selling shareholders will offer and sell
the shares at market prices prevailing at the time of sale or at negotiated
prices and may sell the shares to or through brokers or dealers. Because the
selling shareholders will offer and sell the shares at various times, OSS has
not included in this prospectus information about the price to the public of the
shares or the proceeds to the selling shareholders.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OR PASSED ON THE
ADEQUACY OF THE DISCLOSURES IN THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is ___________________, 1998.
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THE COMPANY
Online System Services, Inc. develops, markets and supports products
and services that enable individuals to create and manage their own Internet
Web presence, create public or private online communities and manager their own
interactions. Our i2u foundation software provides users with the ability
to create their own home pages using simple, on-screen templates, as well as
integrated online communications, commerce and publishing tools. We have
targeted the following market opportunities:
- i2u Community - Customized community and communication portals
or start pages for broadband (high bandwidth or high data
transmission capabilities) operators who provide Internet
access.
- i2u Enterprise - Internet and Extranet services for
businesses, associations and government institutions.
- i2u Education - Classroom applications for elementary and
secondary schools, including parent/teacher communications,
virtual campuses for colleges and universities and online
classrooms for corporate training.
- i2u Financial Services - Online banking services for banks,
credit unions and other financial institutions.
Our integrated i2u software permits the generation of Internet Web site
content by individual users, Internet service providers ("ISPs"), local merchant
and others. Personal user home pages, enhanced business Web pages, business
directories, community events, online discussion groups and forums and
programming guides can all be developed and updated by users. The i2u software
includes personal communication tools which facilitate user interaction and
community "groupware" which enables any group to create a public or private
community for personal interaction and information exchange.
In order to gain market share and to create a foundation for future
content revenues, we have developed a suite of products, marketed under the i2u
brand, which provides broadband operators with our proprietary software, as well
as the equipment, training, systems and services required for the broadband
operator to become fully operational Internet service provider. These products
and services are provided at minimal or no initial cost to the operator in
in exchange for which we share in the revenues from Internet advertising and
commerce and, if the operator utilizes our access products and services,
Internet access.
We have utilized the i2u foundation software to develop an online
product designed for elementary and secondary schools which facilitates
communications and information exchange among teachers, administrators, parents
and students. We have also developed "RE/MAX Mainstreet," a system designed to
be RE/MAX International, Inc.'s primary communcation tool linking its real
estate agents, management and approved suppliers worldwide and a
state-of-the-art system for providing online banking services for Rockwell
Federal Credit Union.
As part of our product enhancement efforts, we have agreed to acquire
Durand Communications, Inc. ("DCI"), a developer and marketer of Internet
"community" building tools and services which allow users to set up their own
password-protected virtual communities. DCI's CommunityWare product is being
integrated into the i2u suite of products and services. DCI has provided the
information regarding DCI included in this prospectus. See "Recent
Developments--DCI Acquisition."
Our strategies to achieve our growth objective include:
- Gaining early market share by offering the i2u Community
products and services to broadband operators at minimal or no
initial cost in exchange for a larger share of the revenues
from Internet commerce and access;
- Continuing to expand the i2u suite of products and services;
- Leveraging the i2u platform software to develop products for
the development of online communities for specific industries
and markets;
- Aggregating subscribers of multiple online communities to
develop unique channels of distribution for Internet products,
advertising and services; and
- Acquisitions; and
- Developing strategic alliances.
OSS was incorporated under the laws of the State of Colorado on
March 22, 1994. Our executive offices are located at 1800 Glenarm Place, Suite
700, Denver, Colorado 80202, telephone number (303) 296-9200.
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RISK FACTORS
The common stock offered by this prospectus is highly speculative and
involves a high degree of risk. Before you purchase any common stock you should
carefully read this entire prospectus, and you should consider the following
risks and speculative factors. You should purchase common stock only if you can
afford the loss of your entire investment in the common stock.. You should also
be aware that certain statements set forth below are "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995.
Please refer to the "Special Note Regarding Forward-Looking Statements" on page
11 of this prospectus for more information.
RISKS RELATED TO BUSINESS OF OSS
LIMITED OPERATING HISTORY; ACCUMULATED LOSSES. OSS was founded in March
1994, commenced sales in February 1995 and was in the development stage through
December 31, 1995. DCI was founded in 1993. Accordingly, we have only a limited
operating history upon which you can base your evaluation of our prospects, DCI
and us. In conducting your evaluation, you should consider our prospects,
including the prospects of DCI, in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets such as the Internet
market. These risks include our ability to respond to competitive developments,
our ability to continue to attract, retain and motivate qualified persons, and
our ability to continue to upgrade and commercialize our products and services.
There is no assurance that we will be successful in addressing these and other
risks. Economic and market conditions over which we have no control may also
significantly affect our business. We have incurred net losses since inception
totaling $13,158,897 through September 30, 1998. DCI has incurred net losses
since its formation totaling $8,061,004 through September 30, 1998.
ADDITIONAL ANTICIPATED LOSSES. We currently intend to increase our
capital expenditures and operating expenses in order to expand the functionality
and performance of our i2u products and services, support additional subscribers
of our ISP customers in future markets, and market and provide our products and
services. In addition, we adopted a new pricing structure in the second quarter
of 1998 which will provide our i2u Community products and services to broadband
operators, including the equipment required for the operator to provide high-
speed Internet access to its subscribers, at little or no initial charge to the
operator in return for a percentage of the operator's future Internet access and
e-commerce transaction fees. This new pricing structure will increase our costs
and lower our revenues at the time that we sell our i2u products and services to
broadband operators. As a result of our increased capital expenditures and
operating expenses and our new pricing structure, we expect to incur additional
substantial operating and net losses for the balance of fiscal 1998 and for one
or more fiscal years thereafter.
Furthermore, if we complete the DCI acquisition, we will incur
additional losses for the fiscal year in which the acquisition occurs (currently
anticipated to be in the first quarter of fiscal 1999). These losses will occur
because accounting rules require us to recognize as a loss in the fiscal period
in which the acquisition is consummated that portion of the purchase price for
DCI which we allocate to in-process research and development. We expect to
allocate approximately $500,000 to in-process research and development. In
addition, if the DCI acquisition is completed, we will record goodwill and other
intangible assets estimated to be approximately $12.5 million which we will
amortize over their estimated useful life of three years. There can be no
assurance that the acquisition of DCI will ever make a positive contribution to
our results of operations. The final determination of the value of consideration
issued by OSS and the liabilities assumed will be made at the effective time of
the DCI Merger. Accordingly, the determination of the total purchase price,
liabilities assumed and the allocations may change significantly from the
amounts reflected above. If we do not complete the DCI Merger, it is likely that
we would have to write-off the note receivable of $805,320 at September 30,
1998, which would increase our losses.
INCREASED NEED FOR WORKING CAPITAL; ABILITY TO CONTINUE AS GOING
CONCERN. We believe that our present cash and cash equivalents and working
capital will be adequate to sustain operations only through the balance of
fiscal 1998. In addition, we expect the acquisition of DCI to increase our
monthly working capital needs by approximately $130,000 for at least the next
six months. We estimate that we will need to raise at least $8 million through
equity, debt or other external financing to fund proposed operations for fiscal
1999 and to pay DCI indebtedness which would be assumed as part of the DCI
Merger. Our estimate of our working capital needs may change due to factors some
of which are outside of our control. As of the date of this prospectus, we have
entered into a letter of intent for the issuance of convertible preferred stock
which would raise approximately $4,5000,000 of additional net capital. However,
there is no assurance that we will be able to raise funds in amounts required or
upon acceptable terms. If we cannot raise funds when needed, we may be required
to curtail or scale back our operations. These actions could have a material
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adverse effect on our business, financial condition, or results of operations.
In its report accompanying the audited financial statements for the years ended
December 31, 1997 and 1996, our auditor, Arthur Andersen LLP, expressed
substantial doubt about our ability to continue as a going concern.
UNCERTAINTY OF FUTURE PROFITABILITY. Our ability to become profitable
in the future depends on the success of our i2u products and services in
generating revenues. This success will depend upon, among other things, the
willingness of subscribers of our broadband customers to pay the installation
costs of Internet service and monthly Internet access fees, both of which will
be set by our broadband customers. Furthermore, since we expect a significant
portion of our future revenues to be based on advertising and e-commerce
transactions conducted through our i2u products, this success will also depend
upon the extent to which consumers and businesses use our i2u products and
conduct e-commerce transactions and advertising utilizing our products. Our
pricing model assumes that our broadband customers will share with us a
percentage of their revenues generated by installation and Internet access fees
(if we provide the access capability) and a percentage of their revenues
generated by advertising and e-commerce conducted through our i2u products.
Because of the new and evolving nature of the Internet, we cannot predict
whether our pricing model will prove to be viable, whether demand for our
products and services will materialize at the prices we expect to be charged,
or whether current or future pricing levels will be sustainable. Our ability to
generate future sales will be dependent on a number of factors, many of which
are beyond our control, including, among others, the success of broadband
operators in marketing Internet services to subscribers in their local areas,
the extent that users utilize our i2u products and conduct online e-commerce
transactions and the prices that the broadband operators set for Internet
services. Because of the foregoing factors, among others, we are unable to
forecast our revenues with any degree of accuracy. We may never become or remain
profitable.
CABLE SYSTEM OPERATORS AFFILIATION WITH NATIONAL PROVIDERS. @Home
Corporation and RoadRunner (the "National Providers") offer high-speed Internet
access and related services to cable system operators. The National Providers
historically have focused their activities on larger markets because they
generally require cable system systems with two-way high speed data transmission
to fully implement their high-speed Internet access programs. Approximately 70%
of all cable system operators are currently affiliated with one of the National
Providers and this percentage could increase as a result of consolidations
within the cable industry. The terms of the agreements between the National
Providers and their affiliated cable operators prevent affiliated cable
operators from working with any person other than the National Providers to
provide high-speed Internet access. Although we have designed our i2u products
and services to be complementary to that of the National Providers, we have no
assurance from the National Providers that they will permit their affiliated
cable companies from working with us to provide high-speed Internet access in
markets in which the National Providers are not currently providing high speed
Internet access. If the National Providers prohibit us from providing high-speed
Internet access to these affiliated cable system providers, we would be able to
provide the high-speed Internet access portion of our i2u product and service
offering to only those broadband operators who are not affiliated with the
National Providers. This would significantly reduce the size of the domestic
market for our Internet access products and services. We do not believe that the
affiliation agreements between the affiliated cable system operators and the
National Providers limit our ability to partner with the affiliated cable system
operators to provide the local content portion of our i2u Community product and
services.
NEW AND UNCERTAIN MARKETS. The market for Internet products and
services has only recently developed. Since this market is relatively new and
because current and future competitors are likely to introduce competing
Internet products and services, and because both DCI and we have only limited
market experience for our respective products and services, we cannot predict
the rate at which the market for our products and services or for DCI's products
and services will grow or at which new or increased competition will result in
market saturation. If the Internet markets or the markets for our products and
services or DCI's products and services fail to grow, grow more slowly than we
anticipate or become saturated with competitors, our business, including the
businesses of DCI if the DCI Merger is completed, operating results and
financial condition will be materially adversely affected.
DEPENDENCE ON BROADBAND OPERATORS. Certain of our services are
dependent on the quality of the cable system infrastructure. Cable system
operators have announced and have begun to implement major infrastructure
upgrades in order to increase the capacity of their networks and to deploy two-
way capability. These upgrades have placed a significant strain on the
financial, managerial, operating and other resources of cable system operators,
most of which are already significantly leveraged. Further, cable system
operators must periodically renew their franchises with city, county, or state
governments and, as a condition of obtaining such renewal, may have to meet
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certain conditions imposed by the issuing jurisdiction. These conditions may
have the effect of causing the cable system operator to delay such upgrades.
Although we provide Internet access services to cable system operators
irrespective of their two-way capabilities, to the extent we provide Internet
access services over cable systems to the home with a telephone line return path
for data from the home, our services may not provide the high speed, quality of
experience, and availability of certain applications, such as video
conferencing, necessary to attract and retain subscribers to our Internet
services. In addition, cable system operators are primarily concerned with
increasing television programming capacity to compete with other modes of
multichannel entertainment delivery systems such as DBS and may, therefore,
choose to roll-out set-top boxes that are incompatible with and do not support
high-speed Internet access services, rather than to upgrade their network
infrastructures as described above. The failure of cable system operators to
complete these upgrades in a timely and satisfactory manner, or at all, would
adversely affect the market for our products and services.
We expect our contracts with cable system operators for our i2u
Community products and services to have terms of up to five years. There can be
no assurance that we will be able to renew any such contracts. Moreover, even if
cable system operators renew these contracts, there can be no assurance that
such renewals will be on terms satisfactory to the Company.
Because users of our i2u Community products and services generally are
expected to subscribe through a broadband operator, the broadband operator (and
not us) will substantially control the customer relationship with the users.
Therefore, in addition to our business being subject to general economic and
market conditions and factors relating to ISPs and online services specifically,
the success and future growth of our business may also be subject to economic
and other factors affecting broadband operators.
PRODUCT DEVELOPMENT; TECHNOLOGICAL CHANGE. Our future success will
depend upon our ability to develop new products and services that meet changing
customer requirements. The markets for our, and DCI's, products and services are
characterized by rapidly changing technology, evolving industry standards,
emerging competition and frequent new product and service introductions. We may
not be able to successfully identify new product and service opportunities or
develop and bring new products and services to market in a timely manner. Even
if we are able to successfully identify, develop and introduce new products and
services there is no assurance that a market for these products will
materialize. Furthermore, products and services or technologies developed by
others may render ours, and DCI's, products, services, and technologies
noncompetitive or obsolete.
GENERAL RISKS OF BUSINESS. We have formulated our business plans and
strategies based on the rapidly increasing size of the Internet markets, our
anticipated participation in those markets, and the estimated sales cycle, price
and acceptance of our products and services. Although these assumptions are
based on our best estimates, there is no assurance that our assumptions will
prove to be correct. We have not commissioned or obtained any independent
marketing studies, either with respect to our current business, or the business,
products and technologies of DCI, nor are any such studies planned. Any future
success that we might enjoy will depend upon many factors including some beyond
our control or that we cannot predict at this time.
SIGNIFICANT CONCENTRATION OF CUSTOMERS. Our customer base is highly
concentrated among a limited number of customers, seven as of November 30, 1998,
primarily due to the fact that the cable television and telecommunications
industries in the United States are dominated by a limited number of large
companies and to the relatively short time that we have been offering our
current products and services. Except for geographically contiguous systems, our
customers do not experience significant economies of scale by purchasing
additional systems from us. There is no assurance that we will be able to
attract or retain major customers. The loss of, or reduction in demand for
products or related services from, any of our major customers could have a
material adverse effect on our business, operating results, cashflows and
financial condition.
INTENSE COMPETITION. The market for Internet products and services is
highly competitive, and we expect this competition to intensify in the future.
Many nationally known companies and regional and local companies across the
country are involved in Internet applications and the number of competitors is
growing. We also compete with broadband companies who are developing their own
Internet access and content and with the internal departments of prospective
customers who are retaining Internet-related activities in-house. Even if a
prospective customer chooses to outsource its Internet-related activities, that
customer may choose to outsource these activities to a company other than us.
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DCI's and our current and prospective competitors include many
companies whose financial, technical, marketing and other resources are
substantially greater than ours. Increased competition could result in
significant price competition, which in turn could result in significant
reductions in the average selling price of our products and services. In
addition, increased competition could cause us to increase our spending on
marketing, sales and product development. There is no assurance that we will be
able to offset the effects of any such price reductions or increases in spending
through an increase in the number of our customers, higher sales from enhanced
services, cost reductions or otherwise. Therefore, any of these events could
have a materially adverse effect on our financial condition and operating
results. There is no assurance that we will have the financial resources,
technical expertise or marketing, sales and support capabilities to compete
successfully.
LIMITED AVAILABILITY OF PROPRIETARY PROTECTION. We do not believe that
our current products or services, or the products or services of DCI, are
patentable. We rely on a combination of copyright, trade secret and trademark
laws, and nondisclosure and other contractual provisions to protect our
proprietary rights. Policing unauthorized use of proprietary systems and
products is difficult and, while we are unable to determine the extent to which
piracy of our software exists, we expect software piracy to be a persistent
problem. In addition, the laws of some foreign countries do not protect software
to the same extent as do the laws of the United States. There is no assurance
that the steps we take to protect our proprietary rights will be adequate to
prevent the imitation or unauthorized use of our proprietary rights. Even if the
steps we take to protect our proprietary rights prove to be adequate, our
competitors may develop products or technologies that are both non-infringing
and substantially equivalent or superior to our products or technologies.
LENGTH OF SALES CYCLE. The decision to enter the Internet services
provisioning business is often an enterprise-wide decision by prospective
customers and may require us to engage in lengthy sales cycles. Our pursuit of
sales leads typically involves an analysis of our prospective customer's needs,
preparation of a written proposal, one or more presentations and contract
negotiations. We often provide significant education to prospective customers
regarding the use and benefits of Internet technologies and products. While our
sales cycle varies from customer to customer, it typically has ranged from one
to six months for i2u projects. Our sales cycle may also be subject to a
prospective customer's budgetary constraints and internal acceptance reviews,
over which we have little or no control. A significant portion of our revenues
are expected to come from Internet access fees paid by subscribers of our
broadband operator customers, advertising revenues and in connection with
e-commerce transactions conducted using our products. We expect that it may take
broadband operators several months or more to market and sell high-speed
Internet access to their subscribers, to establish a significant enough user
base to attract advertisers and for users to conduct significant e-commerce
transactions. For these reasons, we do not expect to realize significant
revenues, if at all, from these activities until a significant time after we
have licensed our i2u products and services.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. As a result of our limited
operating history and the recent increased focus on our i2u products and
services, we do not have historical financial data for a sufficient number of
periods on which to base planned operating expenses. Therefore, our expense
levels are based in part on our expectations as to future sales and to a large
extent are fixed. We typically operate with little backlog and the sales cycles
for our products and services may vary significantly. As a result, our quarterly
sales and operating results generally depend on the volume and timing of and the
ability to close customer contracts within the quarter, which are difficult to
forecast. We may be unable to adjust spending in a timely manner to compensate
for any unexpected sales shortfalls. If we were unable to so adjust, any
significant shortfall of demand for our products and services in relation to our
expectations would have an immediate adverse effect on our business, operating
results and financial condition. Further, we currently intend to increase our
capital expenditures and operating expenses in order to fund product development
and increase sales and marketing efforts. To the extent that such expenses
precede or are not subsequently followed by increased sales, our business,
operating results and financial condition will be materially adversely affected.
DEPENDENCE ON KEY PERSONNEL; ABSENCE OF EMPLOYMENT AND NONCOMPETITION
AGREEMENTS. We are highly dependent on the technical and management skills of
our key employees, including in particular R. Steven Adams, our founder,
President and Chief Executive Officer. The loss of Mr. Adams' services could
have a material adverse effect on our business and operating results. We have
not entered into employment agreements with Mr. Adams, or any of our other
officers or employees. We do not maintain key person insurance for Mr. Adams or
any other member of management. We generally enter into written nondisclosure
and nonsolicitation agreements with our officers and employees which restrict
the use and disclosure of proprietary information and the solicitation of
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customers for the purpose of selling competing products or services. Thus, if
any of these officers or key employees left OSS, they could compete with us, so
long as they did not solicit our customers. Any such competition could have a
material adverse effect on our business.
Our future success also depends in part on our ability to identify,
hire and retain additional personnel, including key product development, sales,
marketing, financial and executive personnel. Competition for such personnel is
intense and there is no assurance that we can identify or hire additional
qualified personnel. In addition, the success of the DCI Merger is highly
dependent on the technical and management skills of Andre Durand, the founder,
President and Chief Executive Officer of DCI. The loss of Mr. Durand's services
could have a material adverse affect on the value of the DCI Merger. The DCI
Merger is contingent on Mr. Durand entering into a three-year non-compete
agreement with OSS.
MANAGEMENT OF EXPECTED GROWTH. We expect to experience significant
growth in the number of our employees, the scope of our operating and financial
systems, and the geographic area of our operations, including the expansion of
our international operations. In addition, as we expand our i2u products and
services, we will need to hire additional employees who will be located at many
widely separated offices, including international offices. Our ability to
successfully manage any such growth will require us to continue to implement and
improve our operational, financial and management information systems. In
addition, this growth will result in new and increased responsibilities for
existing management personnel and will require us to hire and train new
management personnel. There can be no assurance that our management or other
resources will be sufficient to manage any future growth in our business or that
we will be able to implement in whole or in part our growth strategy and any
failure to do so could have a material adverse effect on our operating results
and financial condition.
SECURITY RISKS. Our software and equipment may be vulnerable to
computer viruses or similar disruptive problems caused by our customers or other
Internet users. Computer viruses or problems caused by third parties could lead
to interruptions, delays or cessation in service to our customers. In addition,
while our i2u software integrates software designed to provide a secure
environment for e-commerce, these safeguards may prove to be inadequate. We have
information technology insurance which provides limited coverage for losses
caused by computer viruses, however, certain losses resulting from misuse of
software or equipment by third parties or losses from computer viruses which
exceed the liability limits under such insurance may not be protected. Although
we attempt to limit our liability to customers for these types of risks through
contractual provisions, there is no assurance that these limitations will be
enforceable.
DEPENDENCE ON THE INTERNET. The success of our business depends in
large part upon a robust industry and infrastructure for providing Internet
access and carrying Internet traffic and upon the widespread acceptance and use
of electronic commerce over the Internet. Because global commerce and online
exchange of information on the Internet and other similar open wide area
networks are new and evolving, it is difficult to predict with any assurance the
extent to which the Internet will prove to be a significant commercial
marketplace. If the Internet does not become a significant commercial
marketplace, our business, operating results and financial condition could be
materially impaired.
RISKS ASSOCIATED WITH INTERNATIONAL SALES. We have and are currently
pursuing marketing opportunities in international markets. International sales
are subject to a variety of risks, including difficulties in establishing and
managing international distribution channels, obtaining export licensing,
servicing and supporting overseas products and in translating the products'
graphical user interfaces into foreign languages. International operations are
subject to difficulties in collecting accounts receivable, staffing and managing
personnel and enforcing intellectual property rights. Other factors that can
also adversely affect international operations include fluctuations in the value
of foreign currencies and currency exchange rates, changes in import/export
duties and quotas, introduction of tariff or non-tariff barriers and regulatory,
economic or political changes in international markets.
GOVERNMENT REGULATION. We are not currently subject to direct
regulation by any government agency, other than regulations applicable to
businesses generally, and there are currently few laws or regulations directly
applicable to access to or commerce on the Internet. However, due to the
increasing popularity and use of the Internet, a number of legislative and
regulatory proposals are under consideration by federal, state, local and
foreign governmental organizations, and it is possible that a number of laws or
regulations may be adopted with respect to the Internet relating to such issues
as user privacy, user screening to prevent inappropriate uses of the Internet
by, for example, minors or convicted criminals, taxation, infringement, pricing,
content regulation, quality of products
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and services and intellectual property ownership and infringement. The adoption
of any such laws or regulations may decrease the growth in the use of the
Internet, which could in turn decrease the demand for our products and services,
increase our cost of doing business, or otherwise have a material adverse effect
on our business, results of operations and financial condition. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, copyright, trademark, trade secret, obscenity, libel and personal
privacy is uncertain and developing. Our business, results of operations and
financial condition could be materially adversely effected by any new
legislation or regulation, or application or interpretation of existing laws to
the Internet.
YEAR 2000. The Year 2000 issue involves the potential for system and
processing failures of date-related data resulting from computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that contain time-sensitive software may recognize a
date using two digits of "00" as the year 1900 rather than the year 2000. This
could result in system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar ordinary business activities.
We believe that our internal software and hardware systems will
function properly with respect to dates in the year 2000 and thereafter and we
have completed our internal IT and non-IT assessment. We expect to incur no
significant costs in the future for Year 2000 problems. Nonetheless, there is no
assurance in this regard until such systems are operational in the Year 2000. We
are in the process of contacting all of our significant suppliers to determine
the extent to which our systems are vulnerable to those third parties' failure
to make their own systems Year 2000 compliant. We expect to have completed this
review by the second quarter of fiscal 1999. In the event any of our suppliers
or vendors prove not to be Year 2000 compliant, we believe that we could find a
replacement vendor or supplier which is Year 2000 compliant without significant
delay or expense. However, if substantially all of our suppliers and vendors
prove not to be Year 2000 compliant and if we experience difficulties in finding
replacement vendors, then, as a result, our business could be materially
adversely affected. The failure to correct material Year 2000 problems by our
suppliers and vendors could result in an interruption in, or a failure of,
certain of our normal business activities or operations. Such failures could
materially and adversely affect our results of operations, liquidity and
financial condition. Due to the general uncertainty inherent in the Year 2000
problem, resulting from the uncertainty of the Year 2000 readiness of
third-party suppliers and vendors and of our customers, we are unable to
determine at this time whether the consequences of Year 2000 failures will have
a material impact on our results of operations, liquidity or financial
condition.
LIMITATION OF DIRECTORS' LIABILITY. Our Articles of Incorporation
provide, as permitted by Colorado law, that our directors shall have no personal
liability for certain breaches of their fiduciary duties to us. In addition, our
Bylaws provide for mandatory indemnification of directors and officers to the
fullest extent permitted by Colorado law. These provisions may reduce the
likelihood of derivative litigation against directors and may discourage
shareholders from bringing a lawsuit against directors for a breach of their
duty.
RISKS RELATED TO THE OFFERING
PENDING ACQUISITION OF DCI; POSSIBLE DILUTION TO OSS SHAREHOLDERS
CAUSED BY THE ACQUISITION. On March 19, 1998, we executed an Agreement and Plan
of Merger pursuant to which we agreed to acquire DCI. We have filed a Proxy
Statement/Prospectus with the Securities and Exchange Commission relating to
this acquisition, and we expect that the acquisition will be completed in the
first quarter of fiscal 1999. The acquisition is subject to, among other things,
approval by our shareholders and the shareholders of DCI. In the event that the
DCI acquisition is not completed as proposed, DCI has agreed to license its
CommunityWare product to us on at least as favorable terms as it licenses such
product to others. As of the date of this prospectus, we have loaned DCI
approximately $1,288,000 to maintain its operations pending completion of the
acquisition and have paid DCI, by reducing the balance of the note receivable,
approximately $490,000 for services rendered in connection with the integration
of CommunityWare with our i2u products and services. If the DCI acquisition is
not completed, DCI would not have the ability to repay our advances without
obtaining significant additional working capital through the sale of its
securities. There is no assurance that DCI would be able to raise working
capital in the amounts required.
If the DCI acquisition is consummated, it will result in an increase in
our outstanding shares of common stock by 955,649 (approximately 23%). On a
pro forma basis, we estimate that the issuance of such shares would have
resulted in an increase to our net book value per share as of September 30, 1998
from $0.76 (actual) to $2.83 (pro forma) and $2.82 (pro forma adjusted to
reflect the subsequent conversions of 10% Preferred Stock and 5% Preferred Stock
and the subsequent issuance of Series A Preferred Stock). In addition to issuing
the shares of common stock, we will reserve approximately 240,000 shares of our
common stock for issuance upon exercise of outstanding options and warrants
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of OSS that will be issued in connection with the acquisition, and we will
reserve approximately 40,000 shares of our common stock for issuance upon
conversion of convertible securities of DCI that will be assumed by OSS in
connection with the DCI Merger. There is no assurance that our results of
operations will improve enough, if at all, as a result of the DCI acquisition,
to offset possible future dilution which could occur to our shareholders as a
result of the DCI acquisition if our operations achieve profitability.
POSSIBLE VOLATILITY OF STOCK PRICES; PENNY STOCK RULES. The over-the-
counter markets for securities such as our common stock historically have
experienced extreme price and volume fluctuations during certain periods. These
broad market fluctuations and other factors, such as new product developments
and trends in our industry and the investment markets generally, as well as
economic conditions and quarterly variations in our results of operations, may
adversely affect the market price of our shares. Although our shares are listed
on The Nasdaq SmallCap Market ("Nasdaq"), there can be no assurance that they
will remain eligible to be included on Nasdaq. If our common stock was no longer
eligible for quotation on Nasdaq, it could become subject to rules adopted by
the Securities and Exchange Commission regulating broker-dealer practices in
connection with transactions in "penny stocks." If the common stock became
subject to the penny stock rules, many brokers may be unwilling to engage in
transactions in the common stock because of the added regulation, thereby making
it more difficult for purchasers of our common stock to dispose of their shares.
RIGHTS TO ACQUIRE SHARES; POTENTIAL SUBSTANTIAL DILUTION. As of
November 30, 1998, we had issued the following warrants and options to acquire
shares of common stock:
- Options and warrants to purchase 1,651,614 shares of common
stock upon exercise of such options and warrants, exercisable
at prices ranging from $0.50 to $8.50 per share, with a
weighted average exercise price of approximately $5.65 per
share.
- Warrants issued in connection with our initial public offering
on May 23, 1996 (the "IPO Warrants") to purchase 634,150
shares upon exercise of the IPO Warrants at an exercise price
of $9.00 per share.
- Options issued to EBI Securities Corporation, the
representative of the underwriters involved in such initial
public offering (the "Representative's Option"), to purchase
106,700 shares upon exercise of the Representative's Option at
a purchase price of $8.10 per share.
- the Representative's Option to purchase 106,700 IPO Warrants
issuable upon exercise of the Representative's Option at a
purchase price of $.001 per IPO Warrant. These IPO Warrants
entitle the holder thereof to purchase up to 53,350 shares
upon exercise of such IPO Warrants at an exercise price of
$9.00 per share.
- Warrants issued in connection with the issuance of the 10%
Preferred Stock to purchase 53,500 shares of common stock upon
exercise of such warrants, exercisable at $15.00 per share.
- Warrants issued in connection with the issuance of the 5%
Preferred Stock to purchase 100,000 shares of common stock
upon exercise of such warrants, exercisable at $16.33 per
share.
- Warrants issued in connection with the issuance of the Series
A Preferred Stock to purchase 140,000 shares of common stock
upon exercise of such warrants, exercisable at $5.71 per
share.
In addition to these warrants and options, we have reserved an indeterminate
number of shares of common stock for issuance upon conversion of outstanding
shares of our 10% and Series A Preferred Stock, we will issue 955,649 shares of
our common stock upon the completion of the DCI Merger, we will reserve
approximately 240,000 shares for issuance upon exercise of options and warrants
to be issued in connection with the DCI acquisition, and we will reserve
approximately 40,000 shares of our common stock for issuance upon conversion of
convertible securities of DCI that will be assumed by OSS in connection with the
DCI Merger. The 10% Preferred Stock is convertible into shares of common stock
at the lesser of $10 or 80% of the market value (as defined) of the common stock
at the time of the conversion of such 10% Preferred Stock. The Series A
Preferred Stock is convertible into shares of common stock at the lesser of
$5.71 or 80% of the market value (as defined) of the common stock at the time of
the conversion of such Series A Preferred Stock. Based on the market value for
the common stock as of November 30, 1998, the 10% Preferred Stock is convertible
into approximately 367,228 shares of common stock and the Series A Preferred
Stock is convertible into approximately 339,137 shares of common stock. The
number of shares of common stock issuable upon conversion of the 10% Preferred
Stock and the Series A Preferred Stock could increase significantly
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in the event that the market value for the common stock decreases in the future.
During the terms of the outstanding options, warrants and convertible
securities, the holders thereof will have the opportunity to profit from an
increase in the market price of the Common Stock with resulting dilution to the
holders of shares who purchased shares for a price higher than the respective
exercise or conversion price. The existence of such stock options, warrants and
convertible securities may adversely affect the terms on which we can obtain
additional financing, and you should expect the holders of such options or
warrants to exercise or convert those securities at a time when we, in all
likelihood, would be able to obtain additional capital by offering securities on
terms more favorable to us than those provided by the exercise or conversion of
such options or warrants.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of common
stock in the public market, or even the potential for such sales, could have an
adverse effect on the market price for shares of our common stock, and could
impair the ability of purchasers of our common stock recoup their investment or
make a profit. Furthermore, such sales could affect our ability to raise capital
through the sale of equity securities. As of November 30, 1998 approximately
1,130,000 of our currently outstanding shares of common stock are
"restricted shares." Restricted shares and shares of the common stock owned by
our affiliates (officers, directors and holders of 10% of our outstanding common
stock) may be publicly sold only by complying with Rule 144 under the Securities
Act unless further registered under the Securities Act, or some other exemption
from further registration thereunder is available. While the shares of the
common stock to be issued to the shareholders of DCI in connection with the
acquisition of DCI will be subject to certain contractual limitations on the
transfer of such shares prior to September 30, 1999, such shares or a portion
thereof could be sold prior to September 30, 1999.
ABILITY TO ISSUE COMMON STOCK AND PREFERRED STOCK; ANTI-TAKEOVER
DEVICES. Our Articles of Incorporation authorize our Board of Directors to issue
up to 20,000,000 shares of common stock and 5,000,000 shares of preferred stock
in one or more series, the terms of which may be determined at the time of
issuance by the Board of Directors, without further action by our shareholders.
Preferred stock authorized by the Board of Directors may include voting rights,
preferences as to dividends and liquidation, conversion and redemptive rights
and sinking fund provisions. As of November 30, 1998, our Board of Directors has
authorized the issuance of up to (i) 500,000 shares of 10% Preferred Stock (the
"10% Preferred Stock"), of which 245,000 shares were outstanding, (ii) 3,000
shares of 5% Preferred Stock, of which no shares were outstanding, and (iii)
1,400 shares of Series A Preferred Stock, of which 1,400 shares were
outstanding. Although our Board of Directors has no present plans to issue any
other shares of preferred stock, if the Board of Directors authorizes the
issuance of preferred stock in the future, such authorization could affect the
rights of the holders of common stock, thereby reducing the value of the common
stock, and could make it more difficult for a third party to acquire OSS, even
if a majority of the holders of common stock approved of such acquisition.
AFFECT OF ISSUANCE OF 10%, 5% AND SERIES A PREFERRED STOCK ON NET LOSS.
Based on current accounting standards, we estimate that we will be required to
record a non-operating expense of approximately $4,100,000 for the fiscal year
ending December 31, 1998 as a result of the issuance of the 10%, 5% and Series A
Preferred Stock. While these charges will not affect our operating loss or
working capital during such period, they are expected to result in an increase
of approximately $4,100,000 in the Company's net loss available to our holders
of common stock for the fiscal year ending December 31, 1998.
NO DIVIDENDS. We have never paid dividends on our common stock and do
not intend to pay any dividends on our common stock in the foreseeable future.
Any decision by us to pay dividends will depend upon our profitability at the
time, cash available therefor, and other factors. We anticipate that we will
devote profits, if any, to our future operations. Except as otherwise required
by law, we are required to pay a quarterly cumulative noncompounded dividend on
the 10% Preferred Stock of 10% per annum based on the stated value of $10.00 per
share of 10% Preferred Stock, and we are required to pay all accrued but
undeclared dividends on the Series A Preferred Stock on the earlier of (1) the
redemption or conversion of the Series A Preferred Stock, or (2) the liquidation
of the Company.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made in this prospectus and the documents
incorporated by reference in this prospectus under the captions "The Company",
"Risk Factors," "Recent Developments" and elsewhere in this prospectus
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995
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(the "Reform Act"). These statements are subject to the safe harbor provisions
of the Reform Act. Forward-looking statements may be identified by the use of
the terminology such as "may," "will," "expect," "anticipate," "intend,"
"believe," "estimate," "should," or "continue" or the negatives thereof or other
variations thereon or comparable terminology. To the extent that this prospectus
contains forward-looking statements regarding the financial condition, operating
results, business prospects or any other aspect of OSS or DCI, you should be
aware that OSS's and DCI's actual financial condition, operating results and
business performance may differ materially from that projected or estimated by
OSS or DCI in the forward- looking statements. OSS and DCI have attempted to
identify, in context, certain of the factors that they currently believe may
cause actual future experience and results to differ from their current
expectations. These differences may be caused by a variety of factors, including
but not limited to adverse economic conditions, intense competition, including
entry of new competitors, ability to obtain sufficient financing to support OSS'
and DCI's operations, progress in research and development activities,
variations in costs that are beyond OSS' and DCI's control, changes in capital
expenditure budgets for cable companies, adverse federal, state and local
government regulation, inadequate capital, unexpected costs, lower sales and net
income (or higher net losses) than forecasted, price increases for equipment,
inability to raise prices, failure to obtain new customers, the possible
fluctuation and volatility of OSS' and DCI's operating results and financial
condition, inability to carry out marketing and sales plans, loss of key
executives, and other specific risks that may be alluded to in this prospectus.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares offered by
this prospectus, however, certain shares offered by this prospectus are issuable
only upon the exercise of issued and outstanding transferable warrants of OSS.
If these warrants are exercised in full and the exercise price is paid in cash
rather than by a surrender of a portion of the warrants being exercised (a
cashless exercise), we will receive proceeds of $3,234,9000. We will use such
proceeds, if any, for general working capital purposes.
RECENT DEVELOPMENTS
DCI ACQUISITION
On March 19, 1998 we executed an Agreement and Plan of Merger (the "DCI
Merger Agreement") pursuant to which we agreed to acquire Durand Communications,
Inc., a California corporation ("DCI"), via a merger of our wholly owned
subsidiary, Durand Acquisition Corporation, with DCI (the "DCI Merger"). As
consideration for the DCI Merger, we will issue 955,649 shares of our common
stock in exchange for 100% of the outstanding shares of common stock, no par
value, of DCI. In connection with the DCI Merger, we will also issue options and
warrants for approximately 240,000 shares of our common stock at exercise prices
ranging from $4.31 to $20.33 in replacement of similar securities of DCI. We
expect DCI to have liabilities of approximately $1,200,000 (including
approximatley $381,000 of convertible securities which will be converted into
similar convertible securities of OSS) at the time of the DCI Merger, which
will become the liabilities of the consolidated entities upon consummation
of the DCI Merger. We will reserve approximately 40,000 shares of our common
stock to be issued upon the conversion of these convertible securities. Under
the rules of The Nasdaq SmallCap Market ("Nasdaq") our issuance of our common
stock as consideration for the DCI Merger requires the approval of our
shareholders. Approval by our shareholders is a condition precedent to our
obligation to consummate the DCI Merger. If our issuance of shares of common
stock is not approved by our shareholders, it is unlikely that we will
consummate the DCI Merger. We anticipate that the meeting at which our
shareholders will consider the issuance of such common stock will occur in
the first quarter of 1999.
We anticipate that the DCI Merger, for federal income tax purposes,
will be treated as a reorganization within the meaning of Section 368 of the
Internal Revenue Code (the "Code") and that each of OSS, DCI and Durand
Acquisition Corporation will be a party to the reorganization within the meaning
of Section 368(b) of the Code. Based on the facts, representations, warranties
and agreements set forth in the DCI Merger Agreement, we believe that the DCI
Merger will so qualify. However, we have not requested a ruling from the
Internal Revenue Service (the "IRS") with respect to these matters. Therefore,
the IRS may determine that the DCI Merger does not qualify to be treated as a
reorganization within the meaning of Section 368 of the Code.
A significant element of OSS' strategy to achieve its growth objective
is to seek acquisitions that add immediate revenue, provide product or
technology enhancements in one or more of our targeted markets or provide an
existing customer base to increase advertising or e-commerce opportunities. Our
acquisition of DCI will provide us with DCI's technology, including both
completed technology and technology in development and product development
expertise.
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Our product development strategy is based upon our belief that the Web
is evolving from an information access and delivery tool to a system that
supports communication and community interactivity. We believe that DCI's
CommunityWare technology, which enables users to organize themselves on the
Internet in a matter of minutes, and to thereafter manage and expand their own
public and private online community to facilitate and promote communications,
information sharing and commerce among the users that comprise the various
constituent communities, is particularly well suited for providing the
communications component for OSS' i2u software. Since the execution of the DCI
Merger Agreement, representatives of DCI and OSS have worked together to
incorporate the CommunityWare technology into our i2u software. We recently
introduced a version of the i2u product which incorporates elements of the
CommunityWare technology. Following the DCI Merger, we intend to integrate DCI's
product development efforts with our own. In addition, we expect to fully
integrate DCI's products with our i2u products and to market them as part of our
product offerings and not on a stand-alone basis.
We believe that the primary value of DCI to OSS is (i) DCI's
proprietary technology, particularly DCI's CommunityWare technology, (ii) DCI's
software development capabilities which our management believes is important to
our ability to continue to develop state-of-the-art proprietary software
products required to maintain long-term relationships with our customers, and
(iii) the ability the DCI acquisition will give us to greatly reduce the time it
will take us to introduce new proprietary software products. Our management
believes DCI's technology can be quickly integrated with our i2u products to
expand the breadth and functionality of its product offerings. Andre Durand,
Chief Executive Officer of DCI, has been elected Senior Vice President-Product
Development of OSS and will be responsible for our product development efforts.
A condition to the DCI Merger is that Mr. Durand enter into a three-year
noncompete agreement with OSS. We intend to continue to employ most of DCI's
product development personnel following the DCI Merger.
We also believe that DCI's Electronic University Network ("EUN")
business, which offers accredited online courses for colleges, universities and
corporations, represents a valuable business opportunity. We expect to continue
to develop this business both as a separate product offering and as an adjunct
to our product offerings for broadband operators.
We did not seek an opinion from an independent financial advisor as to
the value of the DCI transaction, as management and the Board of Directors
determined that management of OSS was best able to determine the value of the
acquisition since its value was primarily based on the capabilities and
prospects for DCI's technology, the compatibility of DCI's and OSS' technologies
and the ability to quickly integrate the two technologies in order to
significantly reduce OSS' time to develop and introduce new products and to
increase the value of OSS' product offerings. In connection with the
negotiations with DCI, we also considered the fact that DCI had sold shares of
its common stock at prices, based on the conversion ratio of DCI common stock
into OSS common stock in connection with the DCI Merger, from $8.11 to $18.94
per share since December 31, 1996. Based on these factors, the OSS Board of
Directors determined that the proposed purchase price for DCI was reasonable and
fair to OSS and its shareholders.
The acquisition of DCI will increase the outstanding number of shares
of our common stock by 955,649 shares (approximately 23%) (excluding shares
issuable upon the exercise of options and warrants or the conversion of
convertible securities issued in connection with the DCI Merger), will increase
our liabilities, on a consolidated basis, by approximately $1,200,000 and is
expected to increase our operating net loss by approximately $130,000 per month
for at least the next six months. The acquisition of DCI will also increase our
working capital requirements. Although we have entered into a letter of intent
pursuant to which we would obtain approximately $4,500,000 of additional net
capital, there is no assurance that we will be successful in obtaining
additional working capital or, if successful, that the cost of such capital will
be acceptable.
The DCI Merger Agreement contemplates that we will acquire 100% of the
outstanding common stock of DCI. Based on the average closing price of our
common stock for the two days before and the two days after March 19, 1998, the
day that the transaction was announced, the total purchase price is estimated to
be approximately $13,100,000, consisting of (i) 955,649 shares of our common
stock to be issued to the stockholders of DCI, (ii) approximately 240,000 shares
of our common stock to be reserved for issuance upon the exercise of options and
warrants of DCI to be exchanged for similar securities of OSS; and (iii)
approximately $400,000 of expenses to be incurred. In addition, DCI will have
approximately $1,200,000 of liabilities (including approximately $381,000 of
convertible securities which will be converted into similar convertible
securities of OSS) at the time of the DCI Merger, which will become the
liabilities of the consolidated entities upon consummation of the DCI Merger. We
will reserve approximately 40,000 shares of our common stock to be issued upon
the conversion of these convertible securities.
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The DCI Merger will be accounted for under the purchase method of
accounting, with the purchase price allocated to the fair value of assets
acquired. A significant portion of such amount and liabilities assumed on a
consolidated basis has been identified as intangible assets, including
approximately $500,000 of research and development in process. The portion
of the purchase price and liabilities assumed on a consolidated basis which is
allocated to in-process research and development will be recognized as expense
in the period the DCI Merger is consummated (currently expected to be the first
quarter of fiscal 1999).
DCI completed the acquisition of CompuLearning Systems, d/b/a
Electronic University Network ("EUN") during January 1998. Based on financial
information provided by DCI and EUN, the combined revenues for DCI and EUN for
the year ended December 31, 1997 totaled $740,739 and their combined loss for
the same period equaled ($2,867,973). For the nine months ended September 30,
1998, revenues for DCI were $545,353, including $290,251 of services provided to
OSS. In addition, DCI's accumulated deficit at September 30, 1998 was
$(8,061,004) and DCI's shareholders' deficit at September 30, 1998 was
$(1,219,356). We estimate that, on a pro forma basis, the acquisition of DCI
would have resulted in a decrease to the net book value of our shares of common
stock as of September 30, 1998 from $0.76 (actual) to $2.83 (pro forma) and
$2.82 (pro forma adjusted to reflect the subsequent conversions of 10% Preferred
Stock and 5% Preferred Stock and the subsequent issuance of Series A Preferred
Stock).
The final determination of the value of consideration issued by OSS and
the liabilities assumed will be made at the effective time of the DCI Merger.
Accordingly, the determination of the total purchase price, liabilities assumed
and the allocations may change significantly from the amounts stated in this
prospectus.
SELLING SHAREHOLDERS
The following table sets forth, as of November 30, 1998, the name of
each of the Selling Shareholders, certain beneficial ownership information with
respect to each of the Selling Shareholders, and the number and percentage of
securities offered by this prospectus that may be sold from time to time by the
Selling Shareholders pursuant to this prospectus. Unless otherwise indicated,
the number of shares of common stock set forth in the following table that is
being offered by the Selling Shareholders who will receive their shares of
common stock upon the conversion of the 10% Preferred Stock or the conversion of
the Series A Preferred Stock represents an estimate of the number of shares of
common stock that such Selling Shareholder will offer. The actual number of
shares of our common stock that we may issue to such Selling Shareholders upon
conversion of the 10% Preferred Stock or the Series A Preferred Stock is
indeterminate, is subject to adjustment, and could be materially less or more
than such estimated number depending on factors that we cannot predict at this
time, including, among other factors, the future market price of our common
stock. The actual number of shares of common stock offered by this prospectus,
and included in the Registration Statement of which this prospectus is a part,
includes such additional number of shares of common stock that we may be
required to issue upon conversion of the 10% Preferred Stock or the Series A
Preferred Stock by reason of the floating rate conversion price mechanism or the
other adjustment mechanisms described in this prospectus, or by reason of any
stock split, stock dividend or similar transaction involving our common stock,
in order to prevent dilution, in accordance with Rule 416 under the Securities
Act of 1933, as amended. There is no assurance that the Selling Shareholders
will sell the shares offered by this prospectus.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Percentage of
Shares of Common Shares of Common Common Stock
Stock Owned Stock Owned Owned Beneficially
Name of Selling Beneficially Before Shares of Common Beneficially After Before Offering/After
Shareholder Offering Stock Offered Hereby Offering Offering (1)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William R. Cullen 34,000 (2) 24,000 10,000 *
Arrow Investors LLC 50,000 (3) (4) 50,000 0 (4) *
West End Capital LLC 50,000 (5) (6) 50,000 0 (6) *
Archer Investors LLC _______ (7) (8) _______ 0 (8) *
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Susan M. Duncan 19,485 (9)(10) 16,985 _______ (10) *
Susan M. Duncan Irrevocable 38,171 (11)(12) 33,971 _______ (12)
Gift Trust
William D. Brennick, DDS PC _______ (9) 16,985 _______ *
Profit Sharing Plan
Lee E. Schlessman _______ (13)(14) 135,886 _______ (14)
Lee E. Schlessman, as power of _______ (9)(15) 16,985 _______ (15) *
attorney for Sandra Garnett
(24)
Lee E. Schlessman, as power of _______ (9)(16) 16,985 _______ (16) *
attorney for Cheryl Bennett
Lee E. Schlessman, as power of _______ (9)(17) 16,985 _______ (17) *
attorney for Gary Schlessman
The Schlessman Family _______ (9)(18) 16,985 _______ (18) *
Foundation
Southwest Contracting, Inc. _______ (9) 16,985 _______ *
Cal J. and Amanda Rae Rickel _______ (9) 16,985 _______ *
Bushrod Burns Hanifen Imhoff, 81,585 (9)(19) 16,985 _______ *
Inc. Custodian IRA
Stephen P. Clifford _______ (20) 25,797 _______ *
Charles E. Wynot, DMD _______ (21) 31,321 _______ *
Robert H. Stange _______ (22) 8,492 _______ *
Larry B. and Deanna D. Fulton _______ (22) 8,492 _______ *
C. Wayne and Sheila Clayton _______ (9) 16,985 _______ *
Mercer
Brian W. and Rachel T. Brazell _______ (22) 8,492 _______ *
Carl M. Williams Revocable _______ (9) 16,985 _______ *
Trust
Schield Management Cormpany 10,475 (23) 8,385 _______ *
I. Joseph Shyne Trust 6,247 (24) 5,622 _______ *
Arab Commerce Bank Ltd. 19,271 (25) 16,771 _______ *
Dwayne E. and Sarah H. Thomas _______ (23) 8,385 _______ *
</TABLE>
- ----------------------
* Less than 1% of shares outstanding.
(1) In calculating percentage ownership, all shares of common stock which the
Selling Shareholder has the right to acquire within 60 days from the date
of this Prospectus upon the exercise of options, warrants, or convertible
securities are deemed to be outstanding for the purpose of calculating the
percentage of common stock owned by the Selling Shareholder.
14
<PAGE>
(2) Includes options for the purchase of 10,000 shares, but excludes options
for the purchase 120,000 shares that are not exercisable during the next 60
days.
(3) Represents 50,000 shares issuable upon the exercise of a warrant to
purchase shares at a per share exercise price of $16.33.
(4) Excludes shares of common stock beneficially owned by its affiliates, West
End Capital LLC and Archer Investors LLC.
(5) Represents 50,000 shares issuable upon the exercise of a warrant to
purchase shares at a per share exercise price of $16.33.
(6) Excludes shares of common stock beneficially owned by its affiliates, Arrow
Investors LLC and Archer Investors LLC.
(7) Represents shares issuable (after taking into account the terms of the
Series A Preferred Stock which provide that at no time shall Archer
Investors LLC, together with its affiliates, among whom are West End
Capital LLC and Arrow Investors LLC, convert the Series A Preferred Stock
to result in Archer Investors LLC, together with its affiliates,
beneficially owning, after such conversion, a number of shares exceeding
9.9% of OSS' then outstanding common stock) upon the conversion of the
Series A Preferred Stock if such conversion occurred as of the close of
business on November 30, 1998 plus the 140,000 shares issuable to Archer
Investors LLC upon the exercise of a warrant to purchase shares at a per
share exercise price of $5.71. If the limitation on beneficial ownership
described above was not taken into account, the number of shares issuable
upon the conversion of the Series A Preferred Stock held by Archer
Investors LLC if such conversion occurred as of the close of business on
November 30, 1998 plus the 140,000 shares issuable upon the exercise of the
warrant would be __________ shares. Upon the actual conversion of the
Series A Preferred Stock, the number of shares into which the Series A
Preferred Stock is convertible may be more or less than __________ shares,
but in no event will be more than __________ shares or less than 245,183
shares. Pursuant to the terms of the Series A Preferred Stock, on November
30, 1998 the conversion price was approximately $_____.
(8) Excludes shares of common stock beneficially owned by its affiliates, Arrow
Investors LLC and West End Capital LLC.
(9) Includes 14,985 shares issuable upon the conversion of shares of 10%
Preferred Stock, including accrued but unpaid dividends thereon, if such
conversion occurred as of the close of business on November 30, 1998 plus
2,000 shares issuable upon the exercise of a warrant to purchase shares at
a per share exercise price of $15.00. Upon the actual conversion of the
10% Preferred Stock, the number of shares into which the 10% Preferred
Stock is convertible may be more or less than 14,985 shares, but in no
event will be less than 10,000 shares. Pursuant to the terms of the 10%
Preferred Stock, on November 30, 1998 the conversion price was
approximately $7.16.
(10) Excludes shares of common stock beneficially owned by the Susan M. Duncan
Irrevocable Gift Trust.
(11) Includes 29,971 shares issuable upon the conversion of shares 10% Preferred
Stock, including accrued but unpaid dividends thereon, if such conversion
occurred as of the close of business on November 30, 1998 plus 4,000 shares
issuable upon the exercise of a warrant to purchase shares of common stock
at a per share exercise price of $15.00. Upon the actual conversion of the
10% Preferred Stock, the number of shares into which the 10% Preferred
Stock is convertible may be more or less than 29,971 shares, but in no
event will be less than 20,000 shares. Pursuant to the terms of the 10%
Preferred Stock, on November 30, 1998 the conversion price was
approximately $7.16.
(12) Excludes shares of common stock beneficially owned by Susan M. Duncan.
(13) Includes 119,886 shares issuable upon the conversion of shares of 10%
Preferred Stock, including accrued but unpaid dividends thereon, if such
conversion occurred as of the close of business on November 30, 1998 plus
16,000 shares of common stock issuable to the Selling Shareholder upon the
exercise of a warrant to purchase shares of common stock at a per share
exercise price of $15.00. Upon the actual conversion of the 10% Preferred
Stock, the number of shares into which the 10% Preferred Stock is
convertible may be more or less than 119,886 shares, but in no event will
be less than 80,000 shares. Pursuant to the terms of the 10% Preferred
Stock, on November 30, 1998 the conversion price was approximately $7.16.
(14) Excludes shares of common stock beneficially owned by (1) Lee E. Schlessman
as power of attorney for Sandra Garnett, (2) Lee E. Schlessman as power of
attorney for Cheryl Bennett, (3) Lee E. Schlessman as power of attorney for
Gary Schlessman, or (4) The Schlessman Family Foundation.
(15) Excludes shares of common stock beneficially owned by (1) Lee E.
Schlessman, (2) Lee E. Schlessman as power of attorney for Cheryl Bennett,
(3) Lee E. Schlessman as power of attorney for Gary Schlessman, or (4) The
Schlessman Family Foundation.
15
<PAGE>
(16) Excludes shares of common stock beneficially owned by (1) Lee E.
Schlessman, (2) Lee E. Schlessman as power of attorney for Sandra Garnett,
(3) Lee E. Schlessman as power of attorney for Gary Schlessman, or (4) The
Schlessman Family Foundation.
(17) Excludes shares of common stock beneficially owned by (1) Lee E.
Schlessman, (2) Lee E. Schlessman as power of attorney for Sandra Garnett,
(3) Lee E. Schlessman as power of attorney for Cheryl Bennett, or (4) The
Schlessman Family Foundation.
(18) Excludes shares of common stock beneficially owned by (1) Lee E.
Schlessman, (2) Lee E. Schlessman as power of attorney for Sandra Garnett,
(3) Lee E. Schlessman as power of attorney for Cheryl Bennett, or (4) Lee
E. Schlessman as power of attorney for Gary Schlessman.
(19) Includes shares of common stock beneficially owned by Bushrod Burns and by
BushDoll Family Ltd. Partnership.
(20) Includes 23,797 shares issued upon conversion of shares of 10% Preferred
Stock, including accrued but unpaid dividends thereon, on November 10, 1998
at a per share conversion price of $4.49 plus 2,000 shares of common stock
issuable to the Selling Shareholder upon the exercise of a warrant to
purchase shares of common stock at a per share exercise price of $15.00.
(21) Includes 29,321 shares issued upon conversion of shares of 10% Preferred
Stock, including accrued but unpaid dividends thereon, on November 4, 1998
at a per share conversion price of $3.64 plus 2,000 shares of common stock
issuable to the Selling Shareholder upon the exercise of a warrant to
purchase shares of common stock at a per share exercise price of $15.00.
(22) Includes 7,492 shares issuable upon the conversion of shares of 10%
Preferred Stock, including accrued but unpaid dividends thereon, if such
conversion occurred as of the close of business on November 30, 1998 plus
1,000 shares issuable to the Selling Shareholder upon the exercise of a
warrant to purchase shares of common stock at a per share exercise price of
$15.00. Upon the actual conversion of the 10% Preferred Stock, the number
of shares of common stock into which the 10% Preferred Stock is convertible
may be more or less than 7,492 shares, but in no event will be less than
5,000 shares. Pursuant to the terms of the 10% Preferred Stock, on
November 30, 1998 the conversion price was approximately $7.16.
(23) Includes 7,385 shares issuable upon the conversion of shares of 10%
Preferred Stock, including accrued but unpaid dividends thereon, if such
conversion occurred as of the close of business on November 30, 1998 plus
1,000 shares issuable to the Selling Shareholder upon the exercise of a
warrant to purchase shares of common stock at a per share exercise price of
$15.00. Upon the actual conversion of the 10% Preferred Stock, the number
of shares of common stock into which the 10% Preferred Stock is convertible
may be more or less than 7,385 shares, but in no event will be less than
5,000 shares. Pursuant to the terms of the 10% Preferred Stock, on
November 30, 1998 the conversion price was approximately $7.16.
(24) Includes 5,122 shares issued upon conversion of shares of 10% Preferred
Stock, including accrued but unpaid dividends thereon, on November 11, 1998
at a per share conversion price of $5.14 plus 500 shares of common stock
issuable to the Selling Shareholder upon the exercise of a warrant to
purchase shares of common stock at a per share exercise price of $15.00.
(25) Includes 14,771 shares issuable upon the conversion of shares of 10%
Preferred Stock, including accrued but unpaid dividends thereon, if such
conversion occurred as of the close of business on November 30, 1998 plus
2,000 shares issuable to the Selling Shareholder upon the exercise of a
warrant to purchase shares of common stock at a per share exercise price of
$15.00. Upon the actual conversion of the 10% Preferred Stock, the number
of shares of common stock into which the 10% Preferred Stock is convertible
may be more or less than 14,771 shares, but in no event will be less than
10,000 shares. Pursuant to the terms of the 10% Preferred Stock, on
November 30, 1998 the conversion price was approximately $7.16.
PLAN OF DISTRIBUTION
We have been advised that the shares offered by this Prospectus may be
sold from time to time by the Selling Shareholders or by pledgees, donees,
transferees or other successors in interest. Such sales may be made in the
Nasdaq SmallCap Market or such other over-the-counter market or otherwise at
prices and at terms then prevailing or at prices related to the then current
market price or in negotiated transactions. Such shares may be sold by one or
more of the following:
- A block trade in which the broker or dealer so engaged will
attempt to sell shares as agent but may position and resell a
portion of the block as principal to facilitate the
transaction.
- Purchases by a broker or dealer as principal and resale by
such broker or dealer for its account pursuant to this
prospectus.
- Ordinary brokerage transactions and transactions in which the
broker solicits purchasers.
16
<PAGE>
- In privately negotiated transactions not involving a broker or
dealer.
In effecting sales, brokers or dealers engaged to sell the shares may
arrange for other brokers or dealers to participate. Brokers or dealers engaged
to sell the shares will receive compensation in the form of commissions or
discounts in amounts to be negotiated immediately prior to each sale. Such
brokers or dealers and any other participating brokers or dealers may be deemed
to be "underwriters" within the meaning of the Securities Act of 1933, as
amended, in connection with such sales. OSS will receive no proceeds from any
resales of the shares offered by this prospectus, and we anticipate that the
brokers or dealers, if any, participating in the sales of such shares will
receive the usual and customary selling commissions.
To comply with the securities laws of certain states, if applicable,
the shares will be sold therein only through brokers or dealers. In addition, in
certain states, the shares may not be sold unless they have been registered or
qualified for sale in such states or an exemption from registration or
qualification is available and is complied with.
DESCRIPTION OF SECURITIES
GENERAL
Our Articles of Incorporation authorize our Board of Directors to issue
25,000,000 shares of capital stock, including 20,000,000 shares of common stock,
no par value, and 5,000,000 shares of preferred stock, with such par value and
such rights, preferences and privileges as are determined by the Board of
Directors.
COMMON STOCK
As of November 30, 1998, 4,225,088 shares of our common stock were
outstanding. Holders of common stock are entitled to dividends when, as and if
declared by the Board of Directors out of funds available therefor, subject to
loan agreement limitations and priority as to dividends for preferred stock that
may be outstanding. Holders of common stock are entitled to cast one vote for
each share held at all stockholder meetings for all purposes, including the
election of directors. The holders of more than 50% of the voting power of the
common stock issued and outstanding and entitled to vote, present in person or
by proxy, (together with any preferred stock issued and outstanding and entitled
to vote, present in person or by proxy) constitute a quorum at all meetings of
our shareholders. The vote of the holders of a majority of common stock present
at such a meeting (together with any preferred stock present and entitled to
vote at such meeting) will decide any question brought before such meeting,
except when Colorado law, our Articles of Incorporation, or our Bylaws require a
greater vote and except when Colorado law requires a vote of any preferred stock
issued and outstanding, voting as a separate class, to approve a question
brought before such meeting. If we liquidate or dissolve, the holders of each
outstanding share of common stock will be entitled to share equally in our
assets legally available for distribution to such shareholder after payment of
all liabilities and after distributions to holders of preferred stock legally
entitled to such distributions. Holders of common stock do not have any
preemptive, subscription or redemption rights. Holders of common stock do not
have cumulative voting for the election of directors. All outstanding shares of
common stock are fully paid and nonassessable and the shares of common stock
offered by this prospectus will be, upon issuance, fully paid and nonassessable.
The holders of the common stock do not have any registration rights with respect
to the common stock.
10% PREFERRED STOCK
As of November 30, 1998, 245,000 shares of our 10% Preferred Stock were
outstanding. The following is a summary of the rights, privileges and
preferences of the 10% Preferred Stock. This summary is qualified in its
entirety by reference to the terms of the 10% Preferred Stock incorporated by
reference as an exhibit to the registration statement of which this prospectus
is a part.
VOTING. Each share of 10% Preferred Stock entitles the holder to one
vote per share. The holders of the common stock and the 10% Preferred Stock vote
as a single class on all matters on which our shareholders vote, except where
otherwise required by law. The holders of the 10% Preferred Stock do not have
cumulative voting for the election of directors.
17
<PAGE>
DIVIDENDS. The cumulative noncompounded dividend on the 10% Preferred
Stock is 10% per annum based on the stated value of $10.00 per share, payable
quarterly as permitted by law, or upon the redemption or conversion of the 10%
Preferred Stock into common stock. We may not declare or pay any dividends on
the common stock unless we first declare and pay all unpaid dividends on the 10%
Preferred Stock.
REDEMPTION AND CONVERSION. We may redeem the 10% Preferred Stock at any
time for $10.00 per share. Each share of the outstanding 10% Preferred Stock is
convertible, at the election of the holder thereof, into the number of shares of
our common stock equal to $10.00 divided by the lesser of (i) $10.00 or (ii) 80%
of the average per share closing bid price of the our common stock for the five
trading days immediately preceding the election by the holder thereof (as
calculated, the "Average Per Share Closing Bid Price"). If we elect to redeem
the 10% Preferred Stock, then we must give not more than 60 days and not less
than 30 days notice to the holders of the 10% Preferred Stock of our intent to
redeem the 10% Preferred Stock. This notice must provide the holders of the 10%
Preferred Stock the option to have their 10% Preferred Stock either (1) redeemed
by us or (2) converted into shares of our common stock pursuant to the formula
set forth in (i) and (ii) above except that for the purposes of calculating the
conversion rate the Average Per Share Closing Bid Price shall be defined as the
average per share closing bid price of our common stock for the five trading
days immediately preceding that date on which we first give such notice to the
holders of the 10% Preferred Stock. At any time while any shares of the 10%
Preferred Stock are outstanding, we may not incur any obligations (other than
trade payables and other short-term indebtedness issued in the ordinary course
of business) that are senior to the 10% Preferred Stock in any respect,
including liquidation. Upon any redemption or conversion of the 10% Preferred
Stock, we will have the option to pay the accrued but unpaid cumulative
dividends on the 10% Preferred Stock either (i) in cash, or (ii) by issuing
additional shares of common stock utilizing a price per share equal to the
lesser of (a) $10.00 or (b) if a redemption or a conversion occurring in
connection with the receipt of a notice of redemption, the average per share
closing bid price for the five trading days immediately preceding the date on
which we first give notice of such redemption to the holders of the 10%
Preferred Stock, or, if a conversion occurring without connection to the receipt
of a notice of redemption, the average per share closing bid price of our common
stock for the five trading days immediately preceding the election to convert by
the holder of the 10% Preferred Stock.
PREEMPTIVE RIGHTS. The holders of the 10% Preferred Stock do not have
preemptive rights to subscribe for any additional shares of any class of our
capital stock or for any issue of bonds, notes or other securities convertible
into any class of our capital stock.
LIQUIDATION PREFERENCE. If we liquidate, dissolve or wind-up our
business, whether voluntary or otherwise, after we pay our debts and other
liabilities, the holders of the 10% Preferred Stock will be entitled to receive
from our remaining net assets, before any distribution to the holders of our
common stock, the amount of $10.00 per share of 10% Preferred Stock in cash plus
payment of all accrued but unpaid cumulative dividends. Holders of the 10%
Preferred Stock will not be entitled to receive any other payments if we
liquidate, dissolve or wind-up our business.
SERIES A PREFERRED STOCK
As of November 30, 1998, 1,400 shares of our Series A Preferred Stock
were outstanding. The following is a summary of the rights, privileges and
preferences of the Series A Preferred Stock. This summary is qualified in its
entirety by reference to the terms of the Series A Preferred Stock incorporated
by reference as an exhibit to the Registration Statement of which the prospectus
is a part.
VOTING. Each share of Series A Preferred Stock entitles the holder to
cast the number of votes equal to the number of whole shares of common stock
into which the Series A Preferred Stock held by such holder are convertible
immediately after the close of business on the record date fixed for meeting at
which the vote is to be taken. The holders of the Series A Preferred Stock do
not have cumulative voting for the election of directors.
DIVIDENDS. The cumulative noncompounded dividend on the Series A
Preferred Stock is 5% per annum based on the stated value of $1,000 per share,
payable as permitted by law, at our option, in cash or in common stock upon the
earlier of (1) the redemption or conversion of the Series A Preferred Stock or
(2) the liquidation of OSS. We may not declare and pay any dividends on the
common stock unless all we first declare and pay all unpaid dividends on the
Series A Preferred Stock. Dividends on the Series A Preferred Stock are equal in
preference to any dividends declared on the 10% Preferred Stock.
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<PAGE>
REDEMPTION AND CONVERSION. We may redeem the Series A Preferred Stock,
in whole or in part, at any time on or prior to February 7, 1999 for a price per
share equal to $1,000 plus any accrued but unpaid dividends. The redemption
price per share will increase to $1,150 plus any accrued but unpaid dividends if
the registration statement to be filed with the Securities and Exchange
Commission to register the shares of common stock issuable upon the conversion
of the Series A Preferred Stock and the shares of common stock issuable upon the
exercise of certain warrants issued in connection with the issuance of the
Series A Preferred Stock has not been declared effective and remains effective
on the date that we give notice of redemption of the Series A Preferred Stock.
Each share of the outstanding Series A Preferred Stock is convertible, subject
to the limitation described below, at any time at the election of the holder
thereof, into the number of shares of common stock equal to $1,000 divided by
the lower of (1) $5.71 or (2) 80% of the average per share closing bid price of
the common stock for any five consecutive trading days during the twenty trading
days immediately preceding the date on which the holder thereof elects to
convert such Series A Preferred Stock (the "Conversion Price"). If we elect to
redeem the Series A Preferred Stock, we must give at least thirty days notice to
the holders of the Series A Preferred Stock of our intent to redeem the Series A
Preferred Stock. During this thirty day notice period, the holders, the holders
of the Series A Preferred Stock are entitled to convert their shares of Series A
Preferred Stock into common stock at the Conversion Price applicable on the day
such holder elects to convert such Series A Preferred Stock. After such thirty
day period, the holders of the Series A Preferred Stock may not thereafter
convert the Series A Preferred Stock into shares of common stock. Upon any
conversion of the Series A Preferred Stock we have the option to pay the accrued
but unpaid cumulative dividend on the Series A Preferred Stock either (1) in
cash or (2) by issuing additional shares of common stock calculated by adding
the amount of the accrued but unpaid dividend into the $1,000 stated value set
forth in the formula above.
PREEMPTIVE RIGHTS. The holders of the Series A Preferred Stock have no
preemptive rights to subscribe for any additional shares of any class of our
capital stock or for any issue of bonds, notes or other securities convertible
into any class of our capital stock.
LIQUIDATION PREFERENCE. If we liquidate, dissolve or wind-up our
business, whether voluntary or otherwise, after we pay our debts and other
liabilities, the holders of the Series A Preferred Stock will be entitled to
receive from our remaining net assets, before any distribution to the holders of
our common stock, the amount of $1,000 per share of Series A Preferred Stock in
cash plus payment of all accrued but unpaid dividends. The liquidation
preference on the Series A Preferred Stock is equal in preference to the
liquidation preference on the 10% Preferred Stock. Thereafter, holders of the
Series A Preferred Stock shall be entitled to share in any distributions made to
the holders of our common stock as if each share of Series A Preferred Stock was
converted (pursuant to the formula set forth above) into the number of shares of
common stock into which it is convertible immediately prior to the close of
business on the business day fixed for such distribution.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document we file with
the SEC at the SEC's public reference room located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's public reference rooms located at it's
regional offices in New York, New York and Chicago, Illinois. Please call the
SEC at 1-800-SEC-0300 (1-800-732-0300) for further information on the operation
of public reference rooms. You can also obtain copies of this material from the
SEC's Internet web site located at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be a part of this prospectus, and information that we file later
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings we
will make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 (file no. 0-28462):
(a) Our Annual Report on Form 10-KSB, as amended, for the year
ended December 31, 1997.
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(b) Our Quarterly Reports on Form 10-QSB for the quarters
ended March 31, 1998, June, 30, 1998 and September 30, 1998.
(c) The description of our common stock contained in our
Registration Statement on Form 8-A, as amended, filed with the SEC on
May 22, 1996.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address and telephone number:
Shareholder Services
Attn: Kim Castillo
Online System Services, Inc.
1800 Glenarm Place
Suite 700
Denver, Colorado 80202
(303) 296-9200
This prospectus is part of a registration statement we filed with the
SEC. You should rely only on the information or representations provided in this
prospectus. We have authorized no one to provide you with different information.
The Selling Shareholders will not make an offer of these shares in any state
where the offer is not permitted. You should not assume that the information in
this prospectus is accurate as of any date other than the date on the front page
of this prospectus.
LEGAL MATTERS
Our legal counsel, Gray, Plant, Mooty, Mooty & Bennett, P.A.,
Minneapolis, Minnesota, will issue an opinion about the legality of the shares
registered by this prospectus.
EXPERTS
The financial statements incorporated by reference in this prospectus
and elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports. You should refer to
such report, which includes an explanatory paragraph that discusses substantial
doubt about our ability to continue as a going concern.
INDEMNIFICATION
Our Articles of Incorporation provide that we shall indemnify, to the
full extent permitted by Colorado law, any of our directors, officers, employees
or agents who are made, or threatened to be made, a party to a proceeding by
reason of the fact that such person is or was one of our directors, officers,
employees or agents against judgments, penalties, fines, settlements and
reasonable expenses incurred by the person in connection with the proceeding if
certain standards are met. Insofar as indemnification for liabilities arising
under the Securities Act of 1933 (the "Act") may be permitted to our directors,
officers and controlling persons pursuant to these provisions, or otherwise, we
have been advised that, in the opinion of the SEC, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
Our Articles of Incorporation also limit the liability of our directors
to the fullest extent permitted by the Colorado law. Specifically, our Articles
of Incorporation provide that our directors will not be personally liable for
monetary damages for breach of fiduciary duty as directors, except for (i) any
breach of the duty of loyalty to OSS or its shareholders, (ii) acts or omissions
not in good faith or that involved intentional misconduct or a knowing violation
of law, (iii) dividends or other distributions of corporate assets that are in
contravention of certain statutory
20
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or contractual restrictions, (iv) violations of certain laws, or (v) any
transaction from which the director derives an improper personal benefit.
Liability under federal securities law is not limited by our Articles of
Incorporation.
21
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================================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to sell
or the solicitation of any offer to buy any security other than the securities
offered by this Prospectus, nor does it constitute an offer to sell or a
solicitation of any offer to buy the securities offered hereby by anyone in any
jurisdiction in which such offer or solicitation is not authorized, or in which
the person making such offer or solicitation is not qualified to do so, or to
any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that information contained herein is
correct as of any time subsequent to the date hereof.
_______________
TABLE OF CONTENTS
Page
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The Company.......................................................... 2
Risk Factors......................................................... 3
Special Note Regarding Forward-Looking Statements.................... 11
Use of Proceeds...................................................... 11
Recent Developments.................................................. 11
Selling Shareholders................................................. 13
Plan of Distribution................................................. 17
Description of Securities............................................ 17
Where You Can Find More Information.................................. 20
Legal Matters........................................................ 20
Experts.............................................................. 20
Indemnification...................................................... 21
================================================================================
================================================================================
ONLINE SYSTEM
SERVICES, INC.
_______________
PROSPECTUS
_______________
_____________, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED TO BE IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses of the Company in
connection with the sale and distribution of the Shares being registered
pursuant to this Form S-3 Registration Statement. All of the amounts shown are
estimates, except for the Securities and Exchange Commission registration fee
and the Nasdaq listing fee. All of such expenses will be paid by the Company.
Securities and Exchange Commission fee $ 3,521.38
Accounting fees and expenses $ 1,500.00
Legal fees and expenses $ 5,000.00
Printing, Mailing $ 1,000.00
Transfer Agent fees $ 500.00
Miscellaneous $ 478.62
----------
TOTAL $12,000.00
==========
ITEM 15. INDEMNIFICATION OF OFFICERS AND 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 Company made or threatened to be made a party to a
proceeding, by reason of the fact that such person is or was a director,
officer, employee or agent of the Company against judgments, penalties, fines,
settlements and reasonable expenses incurred by the person in connection with
the proceeding if certain standards are met. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 (the "Act") may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
The Company's Articles of Incorporation limit the liability of its
directors to the fullest extent permitted by Colorado law. Specifically, the
Articles of Incorporation provide that 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.
ITEM 16. EXHIBITS
3.1 Articles of Incorporation, as amended, of the Company*
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 Specimen of Warrant Certificate--See Exhibit A filed with Exhibit 4.2
4.4 Form of Warrant issued to holders of 10% Preferred Stock (3)
4.5 Form of Warrant issued in connection with issuance of 5% Preferred
Stock*
4.6 Form of Warrant issued to holders of Series A Preferred Stock*
5.1 Opinion of Counsel*
23.1 Consent of Arthur Andersen LLP*
- ------------
* Filed herewith
II-1
<PAGE>
(1) Filed with the initial Registration Statement on Form SB-2, filed April 5,
1996, Commission File No. 333-3282-D.
(2) Filed with Amendment No. 1 to the Registration Statement on Form SB-2,
filed May 3,1996, Commission File No. 333-3282-D.
(3) Filed with Form 10-KSB for the year ended December 31, 1997, Commisssion
File No. 0-28462.
ITEM 17. UNDERTAKINGS
A. The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement
to:
(a) include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933,
(b) to reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or together,
represent a fundamental change in the information in
the registration statement, and
(c) to include any additional or changed material
information on the plan of distribution;
(2) to treat, for determining liability under the Securities
Act of 1933, each such post-effective amendment as a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) to remove from registration by means of a post-effective
amendment any of the securities being registered that remain unsold at
the termination of the offering.
B. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the registrant as discussed above, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Denver, State of Colorado, on December 21, 1998.
ONLINE SYSTEM SERVICES, INC.
By /s/ R. Steven Adams
---------------------------------
R. Steven Adams, President and
Chief Executive Officer
KNOW ALL BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints R. Steven Adams and Thomas S. Plunkett,
and each of them, his/her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution for him/her and in his/her 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 things requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he/she might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents or their or his/her substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below on the ___ day of December, 1998,
by the following persons in the capacities indicated:
/s/ R. Steven Adams
- -----------------------------
R. Steven Adams,
(President, Chief Executive Officer and a Director)
/s/ Thomas S. Plunkett
- -----------------------------
Thomas Plunkett
(Vice President and Chief Financial Officer)
/s/ Stuart J. Lucko
- -----------------------------
Stuart J. Lucko
(Controller)
/s/ Paul H. Spieker
- -----------------------------
Paul H. Spieker
(Director)
/s/ Robert J. Lewis
- -----------------------------
Robert J. Lewis
(Director)
/s/ Richard C. Jennewine
- -----------------------------
Richard C. Jennewine
(Director)
/s/ William R. Cullen
- -----------------------------
William R. Cullen
(Director)
II-3
<PAGE>
ONLINE SYSTEM SERVICES, INC.
FORM S-3
INDEX TO EXHIBITS
3.1 Articles of Incorporation, as amended, of the Company*
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 Specimen of Warrant Certificate--See Exhibit A filed with Exhibit 4.2
4.4 Form of Warrant issued to holders of 10% Preferred Stock (3)
4.5 Form of Warrant issued in connection with issuance of 5% Preferred
Stock*
4.6 Form of Warrant issued to holders of Series A Preferred Stock*
5.1 Opinion of Counsel*
23.1 Consent of Arthur Andersen LLP*
- ------------
* Filed herewith
(1) Filed with the initial Registration Statement on Form SB-2, filed April 5,
1996, Commission File No. 333-3282-D.
(2) Filed with Amendment No. 1 to the Registration Statement on Form SB-2,
filed May 3,1996, Commission File No. 333-3282-D.
(3) Filed with Form 10-KSB for the year ended December 31, 1997, Commission
File No. 0-28462.
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
-------------------------
OF
--
ONLINE SYSTEM SERVICES, INC.
----------------------------
The undersigned incorporator, being a natural person of the age of eighteen
years or more hereby establishes a corporation pursuant to the statutes of the
State of Colorado and adopts the following Articles of Incorporation:
ARTICLE I
---------
NAME
----
The name of the corporation shall be Online System Services, Inc.
ARTICLE II
----------
PERIOD OF DURATION
------------------
This Corporation shall exist in perpetuity, from and after the date of
filing these Articles of Incorporation with the Secretary of State of the State
of Colorado unless dissolved according to law.
ARTICLE III
-----------
PURPOSES
--------
The purpose for which this corporation is organized is to engage in any
lawful act or activity for which corporations may be organized under the laws of
the State of Colorado.
In furtherance of the foregoing purposes, the Corporation shall have and
may exercise all of the rights, powers and privileges now or hereafter conferred
upon corporations organized under the laws of the State of Colorado. In
addition, it may do `everything necessary, suitable or proper for the
accomplishment of any of its corporate purposes.
ARTICLE IV
----------
CAPITAL
-------
1. Authorized Shares. The aggregate number of shares which this
corporation shall have authority to issue is 10,000 shares, all of one class,
Common Stock, having no par value.
2. Restrictions. The Corporation shall have the right to impose
restrictions on the transfer of shares of the Corporation.
<PAGE>
3. Dividends. The Board of Directors may from time to time distribute to
shareholders in partial liquidation, or out of stated capital or capital surplus
of the Corporation, a portion of its assets, in cash or property, subject to the
limitations contained within the statutes of the State of Colorado.
4. Distribution in Liquidation. Upon any liquidation, dissolution or
winding up of the Corporation, and after paying or adequately providing for the
payment of all its obligations, the remainder of the assets of the Corporation
shall be distributed, either in cash or in kind, pro rata to the holders of the
Common Stock.
ARTICLE V
---------
VOTING BY SHAREHOLDERS
----------------------
1. Voting Rights; No Cumulative Voting. Each outstanding share of Common
Stock is entitled to the vote and each fractional share of Common Stock is
entitled to a corresponding fractional vote on each matter submitted to a vote
of shareholders. Cumulative voting shall not be allowed in the election of
directors of the Corporation and every shareholder entitled to vote at such
election shall have the right to vote the number of shares owned by him for as
many persons as there are directors to be elected, and for whose election he has
a right to vote.
2. Denial of Preemptive Rights. No shareholder of the Corporation,
whether now or hereafter authorized, shall have any preemptive or similar right
to acquire any additional unissued or treasury shares of stock or securities of
any class or rights, warrants or options to purchase stock or scrip or
securities in any kind, including shares or securities convertible into shares
or carrying stock purchase warrants or privileges.
3. Majority Vote. A quorum for the purpose of stockholder meetings will
consist of a majority of the shares issued and outstanding and entitled to vote
at the meeting.
When a quorum is present, and when the statute requires a vote of two-
thirds of the shares entitled to vote to take action, the affirmative vote of a
majority of the shares issued and outstanding and entitled to vote on the
subject matter shall be the act of the stockholders.
2
<PAGE>
ARTICLE VI
----------
BOARD OF DIRECTORS
------------------
The initial Board of Directors shall consist of three (3) directors, and
the names and addresses of the persons who shall serve as directors until the
first annual meeting of the shareholders or until their successors are elected
and shall qualify are:
NAME MAILING ADDRESS
- ---- ---------------
R. Steven Adams 1800 Glenarm Place, Suite 700
Denver, Colorado 80202
Craig A. Snapp 9063 S. Bermuda Run Circle
Highlands Ranch, CO 80126
Thomas D. Smart 1700 Broadway, Suite 1800
Denver, CO 80290
The number of directors shall be prescribed by the Bylaws except that there
need be only as many directors as there are shareholders in the event that the
outstanding shares are held of record by fewer than two persons.
ARTICLE VII
-----------
RIGHT OF DIRECTORS TO CONTRACT WITH CORPORATION
-----------------------------------------------
The following provisions are inserted for the management of the business
and for the conduct of the affairs of the Corporation, and the same are in
furtherance of and not in limitation of the powers conferred by law.
1. No contract or other transaction between this Corporation and one or
more of its directors or any other corporation, firm, association, or entity in
which one or more of its directors are directors or officers or are financially
interested shall be either void or voidable solely because of such relationship
or interest or solely because such directors are present at the meeting of the
Board of Directors or a committee thereof which authorizes, approves, or
ratifies such contract or transaction or solely because their votes are counted
for such purpose if:
(a) The material facts as to such relationship or interest and as to the
contract or transaction are disclosed or are otherwise known to the Board of
Directors or committee and the board or committee authorizes, approves, or
ratifies such contract or transaction by the affirmative vote of a majority of
the disinterested directors, even though the directors are less than a quorum;
or
3
<PAGE>
(b) The material facts of such relationship or interest and as to the
contract of transaction are disclosed or otherwise known to the shareholders
entitled to vote thereon and they authorize, approve, or ratify such contract or
transaction by vote or written consent; or
(c) The contract or transaction is fair and reasonable to the Corporation.
2. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or a committee
thereof which authorizes, approves or ratifies such contract or transaction.
ARTICLE VIII
------------
CORPORATE OPPORTUNITY
---------------------
The officers, directors and other members of management of this Corporation
shall be subject to the doctrine of "corporate opportunities" only insofar as it
applies to business opportunities in which this Corporation has expressed an
interest as determined from time to time by this Corporation's Board of
Directors as evidenced by resolutions appearing in the Corporation's minutes.
Once such areas of interest are delineated, all such business opportunities
within such areas of interest which come to the attention of the officers,
directors, and other members of management of this Corporation shall be offered
first to the Corporation. In the event the Corporation declines to pursue any
or all such business opportunities, the officers, directors and other members.
of management of this Corporation shall be free to engage in such areas of
interest on their own and this doctrine shall not limit the right of any
officer, director or other member of management of this Corporation (other than
an officer, director, or member of management) from any duties which he may have
to this Corporation.
ARTICLE IX
----------
INDEMNIFICATION OF OFFICERS,
----------------------------
DIRECTORS AND OTHERS
--------------------
1. To the full extent permitted by the Colorado Corporation Code, the
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative and whether
formal or informal (other than an action by or in the right of the Corporation)
by reason of the fact that he is or was a Director, Officer, employee, fiduciary
or agent of the Corporation, or is or was serving at the request of the
Corporation as a Director, Officer, employee, fiduciary or agent of another
corporation,
4
<PAGE>
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he conducted himself in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, or conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
2. The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a Director, Officer, employee, fiduciary or
agent of the Corporation, or is or was serving at the request of the Corporation
as a Director, Officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable for negligence or misconduct in the performance of
his duty to the Corporation unless and only to the extent that the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses which such court shall deem proper.
3. To the extent that a Director, Officer, employee, fiduciary or agent of
the Corporation has been wholly successful on the merits or otherwise in defense
of any action, suit or proceeding referred to in paragraphs 1 and 2 of this
Article, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
5
<PAGE>
4. Any indemnification under paragraphs 1 and 2 of this Article (unless
ordered by a court) shall be made by the Corporation only as authorized in the
specific case upon a determination that indemnification of the Director,
Officer, employee, fiduciary or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in paragraphs 1 and 2.
Such determination shall be made (1) by the Board of Directors by a majority
vote of a quorum consisting of Directors who were not parties to such action,
suit or pending, or (2) if such a quorum is not attainable, or, even if
obtainable a quorum of disinterested Directors so directs, by independent legal
counsel in a written opinion, or (3) by the stockholders.
5. Expenses (including attorneys' fees) incurred in defending a civil or
criminal action, suit or pending may be paid by the Corporation in advance of
the final disposition of such action, suit or proceeding as authorized in the
manner provided in paragraph 4 of this Article upon receipt of an undertaking by
or on behalf of the Director, Officer, employee, fiduciary or agent to repay
such amount unless it shall ultimately be determined that he is entitled to be
indemnified by the Corporation as authorized in this section.
6. The Corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a Director, Officer, employee, fiduciary or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise against any
liability asserted against him and incurred by him in any such capacity or
arising out of his status as such, whether or not the Corporation would have the
power to indemnify him against such liability under the provisions of this
section.
7. In addition to the foregoing, the Corporation shall have the power to
indemnify current or former directors, officers, employees and agents to the
fullest extent provided by the laws of the State of Colorado.
ARTICLE X
---------
DIRECTOR LIABILITY
------------------
To the fullest extent permitted by the Colorado Corporation Code, as the
same exists or may hereafter be amended, a director of this Corporation shall
not be liable to the Corporation or its shareholders for monetary damages for
breach of fiduciary duty as a director.
6
<PAGE>
ARTICLE XI
----------
REGISTERED OFFICE AND REGISTERED AGENT
--------------------------------------
The address of the initial registered office of the Corporation is 1800
Glenarm Place, Suite 700, Denver, Colorado 80202 and the name of the initial
registered agent at such address is R. Steven Adams. Either the registered
office or the registered agent may be changed in the manner permitted by law.
ARTICLE XII
-----------
INCORPORATOR
------------
The name and address of the incorporator is as follows:
NAME MAILING ADDRESS
- ---- ---------------
Kim P. Castillo 1800 Glenarm Place, Suite 700
Denver, Colorado 80202
IN WITNESS WHEREOF, the above-named incorporator has signed these Articles
of Incorporation this 22nd day of March 1994.
/s/ Kim P. Castillo
--------------------------------------
Kim P. Castillo
STATE OF COLORADO )
ss.
COUNTY OF DENVER )
I, the undersigned, a Notary Public, hereby certify that on the 22nd
day of March 1994, personally appeared before me, Kim P. Castillo, who being by
me first duly sworn, severally declared that she is the person who signed the
foregoing document as incorporator, and the statements therein contained are
true.
WITNESS my hand and official seal
[SEAL]
/s/ Colleen K. Overocker
--------------------------------------
Notary Public
My Commission Expires: May 17, 1995
-------------
7
<PAGE>
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
ONLINE SYSTEM SERVICES, INC.
The undersigned, R. Steven Adams, President of Online System Services,
Inc., a Colorado corporation (the "Corporation"), DOES HEREBY CERTIFY that the
number of votes cast for the following amendment by each voting group entitled
to vote separately on the amendment was sufficient for approval by that group,
in that the sole shareholder of the Corporation approved and adopted the
amendment in all respects:
ARTICLE IV of the Articles of Incorporation of the Corporation is amended
and replaced in its entirety to read as follows:
ARTICLE IV
----------
CAPITAL
-------
1. Authorized Shares. The aggregate number of shares that the
Corporation has authority to issue is 15,000,000. The shares are classified in
two classes, consisting of 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 of the Corporation may designate. The Board of Directors of the
Corporation is authorized to establish one or more series of Preferred Stock,
setting forth the designation of each such series, and fixing the preferences,
limitations and relative rights of each such series of Preferred Stock.
2. Transfer Restrictions. The Corporation shall have the right to impose
restrictions on the transfer of shares of the Corporation.
3. Dividends. The Board of Directors of the Corporation may from time to
time distribute to shareholders in partial liquidation, or out of stated capital
or capital surplus of the Corporation, a portion of its assets, in cash or
property, subject to the limitations contained within the statutes of the State
of Colorado.
4. Distributions in Liquidation. Upon any liquidation, dissolution or
winding up of the Corporation, and after paying or adequately providing for the
payment of all its obligations, the remainder of the assets of the Corporation
shall be distributed, either in cash or in kind, and subject to any preferences
of any series of Preferred Stock, to the shareholders of the Corporation.
I FURTHER CERTIFY that the foregoing amendment was approved and adopted by
the Corporation's sole shareholder effective as of the 17th day of March, 1995.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment this 31st day of July, 1995.
/s/ R. Steven Adams
--------------------------
R. Steven Adams, President
8
<PAGE>
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
ONLINE SYSTEM SERVICES, INC.
The undersigned, Thomas S. Plunkett, Chief Financial Officer of Online
System Services, Inc., a Colorado corporation (the "Corporation"), DOES HEREBY
CERTIFY that pursuant to actions taken by the Board of Directors on December 16,
1997 in accordance with Sections 7-106-101, 7-106-102 and 7-110-102 of the
Colorado Business Corporation Act, the following amendment was duly adopted by
the Board of Directors without shareholder approval as permitted by Section 7-
106-102(4) of the Colorado Business Corporation Act:
ARTICLE IV of the Articles of Incorporation of the Corporation, as amended,
is further amended by adding a new Section 5, the text of which is set forth on
Exhibit A attached hereto.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment this 30th day of December, 1997.
/s/ Thomas S. Plunkett
-------------------------
Thomas S. Plunkett, Chief
Financial Officer
9
<PAGE>
Exhibit A
5. Designation of 10% Preferred Stock. The Corporation shall establish
and reserve for issuance from its 5,000,000 authorized shares of Preferred Stock
a class of preferred stock consisting of 500,000 shares to be known as the 10%
Preferred Stock (the "10% Preferred Stock"). The 10% Preferred Stock shall have
a stated value of $10.00 per share. The preferences, limitations and relative
rights of the 10% Preferred Stock shall be as provided in this Section 5.
A. Voting Rights.
(1) Each outstanding share of the 10% Preferred Stock is
entitled to one vote on each matter submitted to a vote of
shareholders. The holders of the 10% Preferred Stock shall be entitled
to vote on all matters voted upon by the holders of the Corporation's
Common Stock. Unless otherwise required by law, the holders of the
Common Stock and the holders of the 10% Preferred Stock shall vote as a
single class on all matters submitted to a vote of shareholders.
(2) The holders of the 10% Preferred Stock shall not be
entitled to any rights of cumulative voting with respect to their
shares.
B. Preemptive Rights. No holder of the 10% Preferred Stock shall have
any preemptive or similar right to acquire any additional unissued or treasury
shares of stock or securities of any class or rights, warrants or options to
purchase stock or scrip or securities in any kind, including shares or
securities convertible into shares or carrying stock purchase warrants or
privileges.
C. Dividends.
(1) Dividends shall accrue on the 10% Preferred Stock at the
rate of ten percent (10%) per annum on the stated value of the 10%
Preferred Stock and shall be paid quarterly on the first of each
January, April, July and October, beginning July 1, 1998, to the record
holder thereof on the 15th of the previous month, subject to the
limitations contained within the statutes of the State of Colorado.
Dividends not paid in any quarter shall accumulate until paid, with
interest on the unpaid balance, if any, accruing simple interest at the
rate stated above. Subject to the foregoing limitations, dividends may
be paid out of any funds legally available for such purpose.
(2) Dividends on the 10% Preferred Stock shall be declared and
paid before dividends of any kind may be declared and paid on the
Common Stock or any inferior class or series of stock and before
distribution or any liquidation or distribution of any kind may be made
upon the issued and outstanding Common Stock or any inferior class of
stock.
(3) Upon any redemption or conversion of the 10% Preferred
Stock pursuant to paragraphs G and H below, the Corporation shall pay
all accrued but unpaid dividends on the 10% Preferred Stock called for
redemption or converted, as the case may be. The Corporation may pay
such accrued but unpaid dividends either (i) in cash or (ii) by issuing
shares of Common Stock at a price per share equal to the lesser of (a)
$10.00 or (b) if a redemption or a conversion occurring with respect to
shares of the 10% Preferred Stock for which the Corporation has given a
Notice of Redemption (as that term is defined in subparagraph G(2),
below), the Average Per Share Closing Bid Price (as defined below) for
the five trading days immediately preceding the date on which the
Notice of Redemption was first given to the holders of the 10%
Preferred Stock called for redemption, or, if a conversion occurring
with respect to shares of the 10% Preferred Stock for which the
Corporation has not given a Notice of Redemption, the Average Per Share
Closing Bid Price for the five trading days immediately preceding the
date on
10
<PAGE>
which the Conversion Notice (as that term is defined in subparagraph
H(3), below) was first given to the Corporation.
(4) Upon payment by the Corporation of dividends on the basis
described in subparagraphs C(1)-C(3), the holders of the 10% Preferred
Stock shall have no further right to dividends and shall not
participate in any manner in dividends declared and paid or other
distributions on the Common Stock or any inferior class or series of
stock.
D. Liquidation Preference. In the event of the liquidation, dissolution
or winding up of the affairs of the Corporation, whether voluntary or
involuntary, the holders of the 10% Preferred Stock shall be entitled to
receive, after payment by the Corporation of its debts and liabilities, the
stated value of all shares of the 10% Preferred Stock in cash plus any all
accrued but unpaid dividends out of the assets of the Corporation before any
payment shall be made or any assets distributed to the holders of the Common
Stock or any other inferior class or series of stock. If sufficient assets are
not available to pay all holders of the 10% Preferred Stock in full, the
available assets shall be distributed to the holders of the 10% Preferred Stock
on a pro rata basis. Except as provided in this paragraph D, the holders of the
10% Preferred Stock shall not be entitled to receive any other payments from the
Corporation in the event of the liquidation, dissolution or winding up of the
affairs of the Corporation.
E. Other Securities, Obligations.
(1) Subject to any limitations contained in these Articles of
Incorporation, the Board of Directors of the Corporation reserves the
right to establish additional classes and/or series of capital stock of
the Corporation and to designate the preferences, limitations and
relative rights of any such classes and/or series; provided, however,
that no such class and/or series may have preferences, limitations and
relative rights which are superior to or senior to the preferences,
limitations and relative rights granted to the holders of the 10%
Preferred Stock.
(2) At any time during which any shares of the 10% Preferred
Stock are outstanding, the Corporation shall not incur any obligation
or liability other than trade payables and other short-term
indebtedness incurred in the ordinary course of business that is
superior to or senior to the 10% Preferred Stock in any respects,
including liquidation preferences.
F. Capital Reorganization. If the Corporation shall at any time
hereafter subdivide or combine its outstanding shares of Common Stock, declare a
dividend payable in Common Stock, or in case of any capital reorganization or
reclassification of the shares of Common Stock of the Corporation, the number of
shares and stated value of the 10% Preferred Stock shall be adjusted
appropriately to allow the holders of the 10% Preferred Stock, as nearly as
reasonably possible, to maintain (i) the aggregate stated value of their 10%
Preferred Stock and (ii) their pro rata interest in the Corporation and in the
Common Stock upon conversion of the 10% Preferred Stock, that they had prior to
any such subdivision, combination, stock dividend, reorganization or
reclassification.
G. Redemption.
(1) The 10% Preferred Stock may be redeemed by the
Corporation, in whole or in part, at any time for $10.00 per share (the
"Redemption Price"). It is the Corporation's intent to use its best
efforts to raise sufficient capital to both fund its operations and to
permit it to redeem the 10% Preferred Stock as soon as is reasonably
possible. In addition, if the Corporation completes a public offering
of its securities that raises net proceeds of at least $5,000,000 (the
"Public Offering") within nine months from the date on which the
initial closing of the offering of the 10% Preferred Stock occurs (the
"Closing Date"), then the Corporation shall redeem all of the
outstanding 10% Preferred Stock.
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(2) The Corporation shall give not more than sixty (60) nor
less than thirty (30) days notice (the "Notice of Redemption") of the
date fixed for any redemption (as fixed, the "Redemption Date") of the
10% Preferred Stock by mailing the Notice of Redemption to the record
holders of the 10% Preferred Stock to such holder's address as it
appears on the records of the Corporation; provided, however, that the
Corporation shall not be required to give notice of any redemption of
the 10% Preferred Stock that occurs within nine months from the Closing
Date. In the case of a partial redemption of the 10% Preferred Stock,
the shares to be redeemed shall be selected in any manner the
Corporation may determine. The Notice of Redemption shall be deemed
given when it is deposited in the United States mail with sufficient
postage affixed or when it is delivered to the record holder at such
holder's address as it appears on the records of the Corporation.
(3) On the Redemption Date, all rights of the holders of the
10% Preferred Stock called for redemption shall cease and terminate
with respect to such shares except (i) the right to receive the
Redemption Price upon surrender of the certificates representing the
shares of the 10% Preferred Stock called for redemption and (ii) the
right to receive payment of all dividends with respect to the shares of
10% Preferred Stock called for redemption which are accrued but unpaid
on the Redemption Date.
H. Conversion.
(1) If the 10% Preferred Stock is not redeemed within nine
months from the Closing Date, each share of the outstanding 10%
Preferred Stock shall become convertible, at the election of the holder
thereof (the "Conversion Right"), into the number of shares of Common
Stock of the Corporation equal to $10.00 divided by the lesser of (i)
$10.00 or (ii) 80% of the Average Per Share Closing Bid Price of the
Corporation's Common Stock as calculated pursuant to the next sentence
The "Average Per Share Closing Bid Price" shall be (a) if the
conversion occurs with respect to shares of the 10% Preferred Stock for
which the Corporation has given a Notice of Redemption, the average per
share closing bid price for the Corporation's Common Stock for the five
trading days immediately preceding the date on which the Notice of
Redemption was first given to the holders of the 10% Preferred Stock
called for redemption or (b) if the conversion occurs with respect to
shares of the 10% Preferred Stock for which the Corporation has not
given a Notice of Redemption, the average closing bid price for the
five trading days immediately preceding the date on which the holder
gives the Conversion Notice (as that term is defined in subparagraph
H(3), below) to the Corporation. The Closing Bid Price for the Common
Stock at any date shall be (i) the Closing Bid Price of the Common
Stock as reported in The Wall Street Journal (or, if not so reported,
as otherwise reported by The Nasdaq Stock Market or, (ii) in the event
that the Common Stock is listed on a stock exchange or on the Nasdaq
National Market (or other national market), the Closing Bid Price shall
be the closing price on the exchange or the Nasdaq National Market (or
other national market), as the case may be, as reported in The Wall
Street Journal (or, if not so reported, as otherwise reported by the
stock exchange, Nasdaq or other national market). In the event that
there is no reported Closing Bid Price or sale price, as the case may
be, for a given day, the Closing Bid Price or sale price, as the case
may be, for that day shall be deemed to be the Closing Bid Price or
sale price, as the case may be, for the first day preceding such day
for which there was a reported Closing Bid Price or sale price, as the
case may be.
(2) The Conversion Right shall expire and terminate five (5)
days prior to the Redemption Date. In the case of a partial redemption
of the 10% Preferred Stock, the Conversion Right shall so expire and
terminate only with respect to the shares of the 10% Preferred Stock
called for redemption.
(3) In order to exercise the Conversion Right, the holder of
the 10% Preferred Stock to be converted shall give written notice (the
"Conversion Notice") to the
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Corporation at its principal office or, at the option of the
Corporation, at the offices of a conversion agent which the Corporation
may designate from time to time by giving written notice of such
designation to the holders of the 10% Preferred Stock, that the holder
elects to convert such shares. The Conversion Notice shall be
accompanied by the certificate or certificates representing the shares
of the 10% Preferred Stock to be converted, duly endorsed to the
Corporation. The Conversion Notice shall be deemed given when it is
deposited in the United States mail with sufficient postage affixed or
when it is delivered to the Corporation at its principal office (or to
the offices of such conversion agent, if one be designated).
(4) As soon as practicable after the receipt of the Conversion
Notice and the certificates representing the shares of the 10%
Preferred Stock to be converted, the Corporation shall issue and shall
deliver to the record holder of the shares so surrendered for
conversion by mail to the address of such record holder as it appears
on the records of the Corporation, a certificate or certificates for
the number of shares of Common Stock issuable upon conversion of the
shares of the 10% Preferred Stock and a residual certificate for shares
of the 10% Preferred Stock, if any, not converted. Such conversion
shall be deemed to have been effected on the date on which the
Corporation (or the conversion agent, if one be designated), shall have
received the Conversion Notice and the certificate or certificates
representing shares of the 10% Preferred Stock to be converted, and the
record holder shall be deemed to have become on such date the holder of
record of the shares of Common Stock to be received upon conversion;
provided, however, that any such surrender on any date when the stock
transfer books of the Corporation shall be closed in accordance with
the bylaws of the Corporation shall not be deemed to constitute the
record holder as the holder of shares of Common Stock to be received
upon conversion for any purpose until the close of business on the day
succeeding the day on which such stock transfer books shall become
open.
(5) The Corporation shall not be required to issue fractional
shares of Common Stock upon conversion of shares of the 10% Preferred
Stock. If any fractional interest in a share of Common Stock would be
deliverable upon conversion of any shares of the 10% Preferred Stock,
the Corporation shall make an adjustment therefor in cash at the
current market value thereof, computed on the basis determined by the
Corporation in its sole discretion.
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ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
ONLINE SYSTEM SERVICES, INC.
The undersigned, Thomas S. Plunkett, Chief Financial Officer of Online
System Services, Inc., a Colorado corporation (the "Corporation"), DOES HEREBY
CERTIFY that pursuant to actions taken by the Board of Directors on May 7, 1998
in accordance with Sections 7-106-101, 7-106-102 and 7-110-102 of the Colorado
Business Corporation Act, the following amendment was duly adopted by the Board
of Directors without shareholder approval as permitted by Section 7-106-102(4)
of the Colorado Business Corporation Act:
ARTICLE IV of the Articles of Incorporation of the Corporation, as amended,
is further amended by adding a new Section 6, the text of which is set forth on
Exhibit A attached hereto.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment this 22nd day of May, 1998.
/s/ Thomas S. Plunkett
-----------------------
Thomas S. Plunkett
Chief Financial Officer
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<PAGE>
EXHIBIT A
6. Designation of Preferred Stock. The Corporation shall establish and
reserve for issuance from its 5,000,000 authorized shares of Preferred Stock a
class of convertible preferred stock consisting of 3,000 shares to be designated
as the 5% Preferred Stock (the "5% Preferred Stock"). The 5% Preferred Stock
shall have a stated value of the Liquidation Preference (as hereinafter
defined). Except as otherwise expressly stated in this Section 6, all shares of
the 5% Preferred Stock shall be identical to the shares of 10% Preferred Stock,
and the holders of 5% Preferred Stock shall be entitled to the same preferences,
limitations and relative rights as the holders of 10% Preferred Stock.
A. Dividends.
(1) Holders of the 5% Preferred Stock shall be entitled to
receive, out of funds legally available therefor, dividends at a rate
equal to 5% (the "Dividend Rate") of the Liquidation Preference per
share per annum (subject to appropriate adjustments in the event of any
stock dividend, stock split, combination or other similar
recapitalization affecting such shares), and no more, payable in
accordance with the provisions of this Section 6. Notwithstanding the
foregoing sentence of this Subsection A(1), in the event the
Registration Statement (as hereinafter defined) is not declared
effective by the Securities and Exchange Commission (the "Commission")
within 90 days following the Initial Closing Date (as defined in that
certain Securities Purchase Agreement (the "Securities Purchase
Agreement"), dated as of May 22, 1998, among the Corporation, the
purchasers named therein and West End Capital LLC), then the Dividend
Rate shall increase to 18% until the Registration Statement is declared
effective; provided, however, that if the Commission conducts a review
of the Registration Statement, the Dividend Rate shall not increase
unless it is not declared effective by the Commission within 120 days
following the Initial Closing Date, at which time the Dividend Rate
shall increase to 18% until the Registration Statement is declared
effective.
(2) At the election of the Corporation, each dividend on 5%
Preferred Stock shall be paid either in shares of Common Stock or in
cash on the Delivery Date (as defined in Subsection H(2)(a) of this
Section 6) with respect to any shares of 5% Preferred Stock which are
the subject of a Notice of Conversion (as defined in Subsection H(2)(a)
of this Section 6). Dividends paid in shares of Common Stock shall be
paid (based on an assumed value of $1,000 per share) in full shares
only, with a cash payment equal to the value of any fractional shares.
Each dividend paid in cash shall be mailed to the holders of record of
the 5% Preferred Stock as their names and addresses appear on the share
register of the Corporation or at the office of the transfer agent on
the corresponding dividend payment date. Holders of 5% Preferred Stock
will receive written notification from the Corporation or the transfer
agent if a dividend is paid in kind, which notification will specify
the number of shares of Common Stock paid as a dividend and the
recipient's aggregate holdings of Common Stock as of that dividend
payment date and after giving effect to the dividend. All holders of
shares of Common Stock issued as dividends shall be entitled to all of
the rights and benefits relating to shares of Common Stock as set forth
in the Corporation's Articles of Incorporation, as amended, and
By-laws.
(3) Holders of the 5% Preferred Stock shall be entitled to
payment of any dividends in preference and priority to any payment of
any cash dividend on Common Stock or any other class or series of
capital stock of the Corporation other than any other class or series
of stock ranking senior ("Senior Preferred Stock") to the 5% Preferred
Stock in respect of dividends, when and as declared by the Board of
Directors of the Corporation. The rights of the holders of 5% Preferred
Stock and 10% Preferred Stock to receive any dividends shall be equal
in preference and priority. Dividends on the 5% Preferred Stock shall
accrue with respect to each share of the 5% Preferred Stock from the
date on which such share is issued and outstanding and thereafter shall
be deemed to accrue from day to day whether or not earned or declared
and whether or not there exists
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<PAGE>
profits, surplus or other funds legally available for the payment of
dividends, and shall be cumulative so that if such dividends on the 5%
Preferred Stock shall not have been paid, or declared and set apart for
payment, the deficiency shall be fully paid or declared and set apart
for payment before any dividend shall be paid or declared or set apart
for any Common Stock or other class or series of capital stock ranking
junior to the 5% Preferred Stock (such stock being collectively
referred to herein as the "Junior Stock") and before any purchase or
acquisition of any Junior Stock is made by the Corporation, except the
repurchase of Junior Stock from employees of the Corporation upon
termination of employment. At the earlier of: (1) the redemption or
conversion of the 5% Preferred Stock or (2) the liquidation of the
Corporation, any accrued but undeclared dividends shall be paid to the
holders of record of outstanding shares of the 5% Preferred Stock in
accordance with the provisions of this Section 6. No accumulation of
dividends on the 5% Preferred Stock shall bear interest.
B. Liquidation, Dissolution or Winding Up.
(1) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of
the 5% Preferred Stock then outstanding shall be entitled to be paid
out of the assets of the Corporation available for distribution to its
stockholders, after and subject to the payment in full of all amounts
required to be distributed to the holders of any Senior Preferred Stock
ranking on liquidation prior and in preference to the Preferred Stock,
but before any payment shall be made to the holders of Junior Stock by
reason of their ownership thereof, an amount equal to $1,000 per share
of 5% Preferred Stock (the "Liquidation Preference") plus any accrued
but unpaid dividends (whether or not declared). The rights of the
holders of 5% Preferred Stock and 10% Preferred Stock to receive any
such distributions shall be equal in preference and priority. If upon
any such liquidation, dissolution or winding up of the Corporation the
remaining assets of the Corporation available for distribution to its
shareholders shall be insufficient to pay the holders of shares of the
5% Preferred Stock the full amount to which they shall be entitled, the
holders of shares of the 5% Preferred Stock shall share ratably in any
distribution of the remaining assets and funds of the Corporation in
proportion to the respective amounts which would otherwise be payable
in respect of the shares held by them upon such distribution if all
amounts payable on or with respect to such shares were paid in full.
(2) After the payment of all preferential amounts required to
be paid to the holders of the 5% Preferred Stock and the 10% Preferred
Stock upon the dissolution, liquidation, or winding up of the
Corporation, all of the remaining assets and funds of the Corporation
available for distribution to its shareholders shall be distributed
ratably among the holders of the 5% Preferred Stock and the Junior
Stock, with each share of 5% Preferred Stock being deemed, for such
purpose, to be equal to the number of shares of Common Stock, including
fractions of a share, into which such share of 5% Preferred Stock is
convertible immediately prior to the close of business on the business
day fixed for such distribution.
C. Voting.
(1) Each holder of outstanding shares of 5% Preferred Stock
shall be entitled, at each meeting of shareholders of the Corporation
(and with respect to written consents of shareholders in lieu of
meetings) with respect to any and all matters presented to the
shareholders of the Corporation for their action or consideration, to
the number of votes equal to the number of whole shares of Common Stock
into which the shares of 5% Preferred Stock held by such holder are
convertible (as adjusted from time to time pursuant to Subsection H
hereof) immediately after the close of business on the record date
fixed for such meeting or the effective date of such written consent.
Except as provided by law, by the provisions of Section J below, or by
the provisions
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<PAGE>
establishing any other series of preferred stock, holders of 5%
Preferred Stock shall vote together with the holders Common Stock as a
single class.
(2) The holders of the 5% Preferred Stock shall not be
entitled to any rights of cumulative voting with respect to their
shares.
D. Preemptive Rights. No holder of Preferred Stock shall have any
preemptive or similar right to acquire any additional unissued or treasury
shares of stock or securities of any class or rights, warrants or options to
purchase stock or scrip or securities in any kind, including shares or
securities convertible into shares or carrying stock purchase warrants or
privileges.
E. Other Securities. Subject to any limitations contained in these
Articles of Incorporation, the Board of Directors of the Corporation reserves
the right to establish additional classes and/or series of capital stock of the
Corporation and to designate the preferences, limitations and relative rights of
any such classes and/or series; provided, however, that no such class and/or
series may have preferences, limitations and relative rights which are superior
to or senior to the preferences, limitations and relative rights granted to the
holders of the 5% Preferred Stock.
F. Capital Reorganization. If the Corporation shall at any time
hereafter subdivide or combine its outstanding shares of Common Stock, declare a
dividend payable in Common Stock, or in case of any capital reorganization or
reclassification of the shares of Common Stock of the Corporation, the number of
shares of the 5% Preferred Stock and the stated value of the 5% Preferred Stock
shall be adjusted appropriately to allow the holders of the 5% Preferred Stock,
as nearly as reasonably possible, to maintain (i) the aggregate stated value of
the 5% Preferred Stock and (ii) their pro rata interest in the Corporation and
in the Common Stock upon conversion of the 5% Preferred Stock, that each holder
had prior to any such subdivision, combination, stock dividend, reorganization
or reclassification.
G. Optional Redemption
(1) At any time within the 120 days following the Initial
Closing Date, the Corporation may, at its option, redeem all or any
portion of the shares of 5% Preferred Stock then outstanding upon not
less than ten (10) days' notice at a redemption price per share equal
to (A) the quotient of (i) the Liquidation Preference per share of 5%
Preferred Stock plus all accrued but unpaid dividends on such shares of
5% Preferred Stock and (ii) the Conversion Price as if the 5% Preferred
Stock has been converted on the 5% Preferred Stock Redemption Date (as
hereinafter defined) multiplied by (B) the average Closing Bid Price
(as hereinafter defined) of shares of Common Stock for the five (5)
trading days immediately preceding the 5% Preferred Stock Redemption
Date. Notwithstanding the foregoing, a redemption shall not occur
pursuant to this Subsection G(1) with respect to any 5% Preferred Stock
for which a holder has previously submitted a Notice of Conversion
pursuant to Subsection H of this Section 6. For purposes of this
Section 6, the term "Closing Bid Price" means, for any security as of
any date, the closing bid price on the principal securities exchange or
trading market where the Common Stock is listed or traded as reported
by Bloomberg, L.P. ("Bloomberg") or, if applicable, the closing bid
price of the Common Stock in the over-the- counter market on the
electronic bulletin board for such security as reported by Bloomberg,
or, if no closing bid price is reported for the Common Stock by
Bloomberg, then the average of the bid prices of any market makers for
such security as reported in the "pink sheets" by the National
Quotation Bureau, Inc. If the Closing Bid Price of the Common Stock
cannot be calculated on such date on any of the foregoing bases, the
Closing Bid Price of the Common Stock on such date shall be the fair
market value as mutually determined by the Corporation and holders of a
majority of the outstanding shares of 5% Preferred Stock being
converted for which the calculation of the Closing Bid Price is
required in order to determine the Conversion Price of such shares.
"Trading day" shall mean any day on which the Corporation's Common
Stock is traded for any period on the principal
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<PAGE>
securities exchange or other securities market on which the Common
Stock is then being traded.
(2) Upon receipt of a notice given pursuant to Subsection
G(1), each holder of 5% Preferred Stock shall accept its ratable
portion (based on its holdings of 5% Preferred Stock as compared to the
aggregate number of shares of 5% Preferred Stock then outstanding) of
such offer by tendering such holder's shares to the Corporation for
redemption, at an address to be set forth in such notice, at any time
prior to 5:00 p.m. New York time on the 11th day following the mailing
of such notice (the "5% Preferred Stock Redemption Date"). Upon receipt
of a notice given pursuant to Subsection G(1) of this Section 6, the 5%
Preferred Stock which is the subject of such notice may not thereafter
be converted in accordance with Subsection H(1)(a) of this Section 6,
unless a Notice of Conversion relating to such 5% Preferred Stock had
previously been submitted. Within three (3) business days after the 5%
Preferred Stock Redemption Date, the Corporation shall remit the
applicable redemption price, calculated pursuant to Subsection G(1) of
this Section 6, by wire transfer to each holder of the 5% Preferred
Stock to the most recent address of each holder as set forth on the
records of the Corporation or its transfer agent.
(3) Any shares of 5% Preferred Stock redeemed pursuant to this
Subsection G or otherwise acquired by the Corporation in any manner
whatsoever shall be canceled and shall not under any circumstances be
reissued. The Corporation may from time to time take such appropriate
corporate action as may be necessary to reduce accordingly the number
of authorized shares of the Corporation's capital stock.
H. Conversion.
(1) Subject to Subsection G(2) of this Section 6, the holders
of the 5% Preferred Stock shall have conversion rights as follows (the
"5% Preferred Stock Conversion Rights"):
(a) Each share of 5% Preferred Stock shall be
convertible, at the option of the holder thereof, at any time
and from time to time, into such number of fully paid and
nonassessable shares of Common Stock as is determined by
dividing $1,000, plus the amount of any accrued and unpaid
dividends the Corporation elects to pay in Common Stock, by
the Conversion Price in effect at the time of conversion. The
Conversion Price at which shares of Common Stock shall be
deliverable upon conversion of 5% Preferred Stock without the
payment of additional consideration by the holder thereof (the
"Conversion Price") shall be the lower of (i) $16.33 or (ii)
86% of the average Closing Bid Price of the shares of Common
Stock for the five (5) trading days immediately preceding the
5% Preferred Stock Conversion Date (as hereinafter defined).
(b) At any time that the number of shares of Common
Stock issued (A) upon conversion of the 5% Preferred Stock and
(B) in lieu of dividend payments on the 5% Preferred Stock,
shall equal 574,281 (a "Common Stock Redemption Event"), the
Corporation shall (x) redeem, at a price determined in
accordance with Subsection G(1) of this Section 6, all of the
outstanding 5% Preferred Stock in accordance with the
provisions of Subsection G(2) or (y) call a special meeting of
its shareholders for the purpose of approving the transactions
contemplated by the Securities Purchase Agreement, including
the issuance of the 5% Preferred Stock on the terms set forth
therein, together with any other approvals that shall be
required so as to cause the transactions contemplated by the
Securities Purchase Agreement to remain in compliance with the
Rules and Regulations of The Nasdaq Stock Market (including
Rule 4320 of Nasdaq's Non-Qualitative Designation Criteria in
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<PAGE>
connection with conversions of 5% Preferred Stock; such
approvals are referred to herein as the "Required Approvals").
The Corporation shall determine within five (5) business days
following the receipt of a Notice of Conversion which of such
actions it shall take, and shall promptly furnish notice to
each of the holders of 5% Preferred Stock as to such
determination, including, if applicable, a notice of
redemption. In no event shall the Corporation issue shares of
Common Stock upon conversion of, or in lieu of interest
payments on, the 5% Preferred Stock, after the occurrence of a
Common Stock Redemption Event until the Required Approvals, if
any, are obtained.
(c) If the Corporation elects to call a special
meeting of its shareholders pursuant to Subsection H(1)(b) of
this Section 6 to obtain the Required Approvals, the
Corporation shall use its best efforts to obtain such Required
Approvals within one hundred twenty (120) days of the Initial
Closing Date (such one hundred twenty (120) day period is
referred to herein as an "Approval Period"). If the
Corporation does not obtain the Required Approvals within the
Approval Period and the Corporation receives a Notice of
Conversion after the termination of the Approval Period, the
Corporation must redeem, in accordance with this Subsection H
of this Section 6, any shares of 5% Preferred Stock
outstanding after the Corporation has issued in excess of
574,281 shares of Common Stock in connection with conversions
of the 5% Preferred Stock.
(d) If the Corporation elects, pursuant to this
Subsection H, to redeem the 5% Preferred Stock on the
occurrence of a Common Stock Redemption Event, it shall redeem
such 5% Preferred Stock at the price determined in accordance
with Subsection G(1) of this Section 6. If the Corporation
shall have elected, pursuant to this Subsection H(1), to
obtain the Required Approvals but shall not have done so by
the later of the occurrence of the Common Stock Redemption
Event or the expiration of the Approval Period, it shall
furnish a redemption notice to the Purchasers within three (3)
business days after the expiration of the Approval Period.
(2) The 5% Preferred Stock Conversion Rights shall be
exercised as follows:
(a) The Corporation will permit each holder of 5%
Preferred Stock to exercise its right to convert the 5%
Preferred Stock by faxing an executed and completed notice of
conversion (the "Notice of Conversion") to the Corporation,
and delivering within three (3) business days thereafter, the
original Notice of Conversion (and the certificates
representing the related shares of 5% Preferred Stock) to the
Corporation by hand delivery or by express courier, duly
endorsed. Each date on which a Notice of Conversion is faxed
to and received in accordance with the provisions hereof shall
be deemed a "5% Preferred Stock Conversion Date." The
Corporation will transmit the certificates representing the
Common Stock issuable upon conversion of the 5% Preferred
Stock (together with certificates representing the related
shares of 5% Preferred Stock not so converted and, if
applicable, a check representing any fraction of a share not
converted) to such holder via express courier as soon as
practicable, but in all events no later than the later to
occur of (the "Delivery Date") (i) three (3) business days
after the 5% Preferred Stock Conversion Date, or (ii) three
(3) business days after receipt by the Corporation of the
original Notice of Conversion (and the certificates
representing the related shares of 5% Preferred Stock). For
purposes of this Section 6, such conversion of the 5%
Preferred Stock shall be deemed to have been made immediately
prior to the close of business on the 5% Preferred Stock
Conversion Date.
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(b) In lieu of delivering physical certificates
representing the Common Stock issuable upon the conversion of
the 5% Preferred Stock, provided that the Corporation's
transfer agent is participating in the Depository Trust
Corporation ("DTC") Fast Automated Securities Transfer
program, on the written request of a holder of 5% Preferred
Stock who shall have previously instructed such holder's prime
broker to confirm such request to the Corporation's transfer
agent, the Corporation shall use commercially reasonable
efforts to cause its transfer agent to electronically transmit
such Common Stock to such holder by crediting the account of
the holder's prime broker with DTC through its Deposit
Withdrawal Agent Commission system no later than the
applicable Delivery Date.
(c) The Corporation will at all times have authorized
and reserved for the purpose of issuance a sufficient number
of shares of Common Stock to provide for the conversion of the
5% Preferred Stock. The Corporation will use its best efforts
at all times to maintain a number of shares of Common Stock so
reserved for issuance that is no less than one and one-half
(1.5) times the number that is then actually issuable upon the
conversion of the 5% Preferred Stock, the exercise of the
Warrants issued pursuant to the Securities Purchase Agreement
and the maximum number of shares of Additional Common Stock
(as defined in the Securities Purchase Agreement) which may be
issued in accordance with the Securities Purchase Agreement.
Before taking any action which would cause an adjustment
reducing the Conversion Price below the established par value
of the shares of Common Stock issuable upon conversion of the
5% Preferred Stock, the Corporation will take any corporate
action which may, in the opinion of its counsel, be necessary
in order that the Corporation may validly and legally issue
fully paid and nonassessable shares of Common Stock at such
adjusted Conversion Price.
(d) All shares of 5% Preferred Stock, which shall
have been surrendered for conversion as herein provided shall
no longer be deemed to be outstanding, and all rights with
respect to such shares, including the rights, if any, to
receive dividends, notices and to vote, shall immediately
cease and terminate on the 5% Preferred Stock Conversion Date,
except only the right of the holders thereof to receive shares
of Common Stock in exchange therefor. Any shares of 5%
Preferred Stock so converted shall be retired and canceled and
shall not be reissued, and the Corporation may from time to
time take such appropriate action as may be necessary to
reduce the number of shares of authorized 5% Preferred Stock
accordingly.
(3) In the event of a liquidation of the Corporation, the 5%
Preferred Stock Conversion Rights shall terminate at the close of
business on the first full day preceding the date fixed for the payment
of any amounts distributable on liquidation to the holders of the 5%
Preferred Stock.
(4) If the conversion is in connection with an underwritten
offer of securities registered pursuant to the Securities Act of 1933,
as amended, the conversion may, at the option of any holder tendering
5% Preferred Stock for conversion, be conditioned upon the closing with
the underwriter of the sale of securities pursuant to such offering, in
which event the person(s) entitled to receive the Common Stock issuable
upon such conversion of the 5% Preferred Stock shall not be deemed to
have converted such 5% Preferred Stock until immediately prior to the
closing of the sale of securities.
(5) At no time shall any holder of the 5% Preferred Stock
convert such amount of 5% Preferred Stock as shall result in such
Purchaser's ownership, after such conversion, exceeding 9.9% of the
Corporation's outstanding Common Stock.
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(6) No fractional shares of Common Stock shall be issued upon
conversion of the Preferred Stock. In lieu of fractional shares, the
Corporation shall pay cash equal to such fraction multiplied by the
then effective and applicable Conversion Price.
(7) The Corporation will not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed under this
Subsection H by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Subsection H
and in the taking of all such action as may be necessary or appropriate
in order to protect the 5% Preferred Stock Conversion Rights of the
holders of the 5% Preferred Stock against impairment.
(8) In the event (a) that the Corporation declares a dividend
(or any other distribution) on its Common Stock payable in Common Stock
or other securities of the Corporation, (b) that the Corporation
subdivides or combines its outstanding shares of Common Stock, (c) of
any reclassification of the Common Stock of the Corporation (other than
a subdivision or combination of its outstanding shares of Common Stock
or a stock dividend or stock distribution thereon), (d) of any
consolidation or merger of the Corporation into or with another
corporation, (e) of the sale of all or substantially all of the assets
of the Corporation, or (f) of the involuntary or voluntary dissolution,
liquidation or winding up of the Corporation, then the Corporation
shall cause to be filed at its principal office or at the office of the
transfer agent of the Preferred Stock, and shall cause to be mailed to
each holder of the Preferred Stock at their last address as shown on
the records of the Corporation or such transfer agent, at least ten
(10) days prior to the record date specified in (i) below or twenty
(20) days before the date specified in (ii) below, a notice stating
(i) the record date of such dividend, distribution,
subdivision or combination, or, if a record is not to be
taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution,
subdivision or combination are to be determined, or
(ii) the date on which such reclassification,
consolidation, merger, sale, dissolution, liquidation or
winding up is expected to become effective, and the date as of
which it is expected that holders of Common Stock of record
shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such
reclassification, consolidation, merger, sale, dissolution or
winding up.
I. Sinking Fund. There shall be no sinking fund for the payment of
dividends, or liquidation preferences on the 5% Preferred Stock or the
redemption of any shares thereof.
J. Amendment. This Section 6 constitutes an agreement between the
Corporation and the holders of the 5% Preferred Stock. The Corporation shall not
amend this Section 6 or alter or repeal the preferences, rights, powers or other
terms of the 5% Preferred Stock so as to affect adversely the 5% Preferred
Stock, without the written consent or affirmative vote of the holders of at
least sixty-six and two-thirds percent (662/3%) of the then outstanding shares
of 5% Preferred Stock, given in writing or by vote at a meeting, consenting or
voting (as the case may be) separately as a class.
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ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
ONLINE SYSTEM SERVICES, INC.
The undersigned, Thomas S. Plunkett, Chief Financial Officer of Online
System Services, Inc., a Colorado corporation (the "Corporation"), DOES HEREBY
CERTIFY that pursuant to actions taken in accordance with Section 7-110-103 of
the Colorado Business Corporation Act, the amendment set forth below was duly
adopted by the shareholders of the Corporation on July 30, 1998. The
undersigned further certifies that the number of votes cast for the amendment by
each voting group entitled to vote separately on the amendment was sufficient
for approval by that voting group.
ARTICLE IV, Section 1 of the Articles of Incorporation of the Corporation
is amended and replaced in its entirety to read as follows:
1. Authorized Shares. The aggregate number of shares that the
Corporation has authority to issue is 25,000,000. The shares are
classified in two classes, consisting of 20,000,000 shares of Common Stock,
no par value, and 5,000,000 shares of Preferred Stock, with such par value
as the Board of Directors of the Corporation may designate. The Board of
Directors of the Corporation is authorized to establish one or more series
of Preferred Stock, setting forth the designation of each such series, and
fixing the preferences, limitations and relative rights of each such series
of Preferred Stock.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment this 19th day of August, 1998.
/s/ Thomas S. Plunkett
-----------------------
Thomas S. Plunkett
Chief Financial Officer
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ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
ONLINE SYSTEM SERVICES, INC.
The undersigned, Thomas S. Plunkett, Chief Financial Officer of Online
System Services, Inc., a Colorado corporation (the "Corporation"), DOES HEREBY
CERTIFY that pursuant to actions taken by the Board of Directors on November 9,
1998 in accordance with Sections 7-106-101, 7-106-102 and 7-110-102 of the
Colorado Business Corporation Act, the following amendment was duly adopted by
the Board of Directors without shareholder approval as permitted by Section 7-
106-102(4) of the Colorado Business Corporation Act:
ARTICLE IV of the Articles of Incorporation of the Corporation, as amended,
is further amended by adding a new Section 7, the text of which is set forth on
Exhibit A attached hereto.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment this 10th day of November, 1998.
/s/ Thomas S. Plunkett
-----------------------
Thomas S. Plunkett
Chief Financial Officer
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EXHIBIT A
7. Designation of Preferred Stock. The Corporation shall establish and
reserve for issuance from its 5,000,000 authorized shares of Preferred Stock a
class of convertible preferred stock consisting of 1,400 shares to be designated
as the Series A Preferred Stock (the "Series A Preferred Stock"). The Series A
Preferred Stock shall have a stated value of the Liquidation Preference (as
hereinafter defined). Except as otherwise expressly stated in this Section 7,
all shares of the Series A Preferred Stock shall be identical to the shares of
5% Preferred Stock and 10% Preferred Stock, and the holders of Series A
Preferred Stock shall be entitled to the same preferences, limitations and
relative rights as the holders of 5% Preferred Stock and 10% Preferred Stock.
A. Dividends.
(1) Holders of the Series A Preferred Stock shall be entitled
to receive, out of funds legally available therefor, dividends at a
rate equal to 5% (the "Dividend Rate") of the Liquidation Preference
per share per annum (subject to appropriate adjustments in the event of
any stock dividend, stock split, combination or other similar
recapitalization affecting such shares), and no more, payable in
accordance with the provisions of this Section 7.
(2) At the election of the Corporation, each dividend on
Series A Preferred Stock shall be paid either in shares of Common Stock
or in cash on the Delivery Date (as defined in Subsection H(2)(a) of
this Section 7) with respect to any shares of Series A Preferred Stock
which are the subject of a Notice of Conversion (as defined in
Subsection H(2) of this Section 7). Dividends paid in shares of Common
Stock shall be paid (based on an assumed value of $1,000 per share) in
full shares only, with a cash payment equal to the value of any
fractional shares. Each dividend paid in cash shall be mailed to the
holders of record of the Series A Preferred Stock as their names and
addresses appear on the share register of the Corporation or at the
office of the transfer agent on the corresponding dividend payment
date. Holders of Series A Preferred Stock will receive written
notification from the Corporation or the transfer agent if a dividend
is paid in kind, which notification will specify the number of shares
of Common Stock paid as a dividend and the recipient's aggregate
holdings of Common Stock as of that dividend payment date and after
giving effect to the dividend. All holders of shares of Common Stock
issued as dividends shall be entitled to all of the rights and benefits
relating to shares of Common Stock as set forth in the Corporation's
Articles of Incorporation, as amended, and By-laws.
(3) Holders of the Series A Preferred Stock shall be entitled
to payment of any dividends in preference and priority to any payment
of any cash dividend on Common Stock or any other class or series of
capital stock of the Corporation other than any other class or series
of stock ranking senior ("Senior Preferred Stock") to the Series A
Preferred Stock in respect of dividends, when and as declared by the
Board of Directors of the Corporation. The rights of the holders of
Series A Preferred Stock, 5% Preferred Stock and 10% Preferred Stock to
receive any dividends shall be equal in preference and priority.
Dividends on the Series A Preferred Stock shall accrue with respect to
each share of the Series A Preferred Stock from the date on which such
share is issued and outstanding and thereafter shall be deemed to
accrue from day to day whether or not earned or declared and whether or
not there exists profits, surplus or other funds legally available for
the payment of dividends, and shall be cumulative so that if such
dividends on the Series A Preferred Stock shall not have been paid, or
declared and set apart for payment, the deficiency shall be fully paid
or declared and set apart for payment before any dividend shall be paid
or declared or set apart for any Common Stock or other class or series
of capital stock ranking junior to the Series A Preferred Stock (such
stock being collectively referred to herein as the "Junior Stock") and
before any purchase or acquisition of any Junior Stock is made by the
Corporation, except the repurchase of Junior Stock from employees of
the Corporation upon termination of employment. At
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the earlier of: (1) the redemption or conversion of the Series A
Preferred Stock or (2) the liquidation of the Corporation, any accrued
but undeclared dividends shall be paid to the holders of record of
outstanding shares of the Series A Preferred Stock in accordance with
the provisions of this Section 7. No accumulation of dividends on the
Series A Preferred Stock shall bear interest.
B. Liquidation, Dissolution or Winding Up.
(1) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of
the Series A Preferred Stock then outstanding shall be entitled to be
paid out of the assets of the Corporation available for distribution to
its stockholders, after and subject to the payment in full of all
amounts required to be distributed to the holders of any Senior
Preferred Stock ranking on liquidation prior and in preference to the
Preferred Stock, but before any payment shall be made to the holders of
Junior Stock by reason of their ownership thereof, an amount equal to
$1,000 per share of Series A Preferred Stock (the "Liquidation
Preference") plus any accrued but unpaid dividends (whether or not
declared). The rights of the holders of Series A Preferred Stock, 5%
Preferred Stock and 10% Preferred Stock to receive any such
distributions shall be equal in preference and priority. If upon any
such liquidation, dissolution or winding up of the Corporation the
remaining assets of the Corporation available for distribution to its
shareholders shall be insufficient to pay the holders of shares of the
Series A Preferred Stock the full amount to which they shall be
entitled, the holders of shares of the Series A Preferred Stock shall
share ratably in any distribution of the remaining assets and funds of
the Corporation in proportion to the respective amounts which would
otherwise be payable in respect of the shares held by them upon such
distribution if all amounts payable on or with respect to such shares
were paid in full.
(2) After the payment of all preferential amounts required to
be paid to the holders of the Series A Preferred Stock, 5% Preferred
Stock and the 10% Preferred Stock upon the dissolution, liquidation, or
winding up of the Corporation, all of the remaining assets and funds of
the Corporation available for distribution to its shareholders shall be
distributed ratably among the holders of the Series A Preferred Stock,
5% Preferred Stock and the Junior Stock, with each share of Series A
Preferred Stock being deemed, for such purpose, to be equal to the
number of shares of Common Stock, including fractions of a share, into
which such share of Series A Preferred Stock and 5% Preferred Stock are
convertible immediately prior to the close of business on the business
day fixed for such distribution.
C. Voting.
(1) Each holder of outstanding shares of Series A Preferred
Stock shall be entitled, at each meeting of shareholders of the
Corporation (and with respect to written consents of shareholders in
lieu of meetings) with respect to any and all matters presented to the
shareholders of the Corporation for their action or consideration, to
the number of votes equal to the number of whole shares of Common Stock
into which the shares of Series A Preferred Stock held by such holder
are convertible (as adjusted from time to time pursuant to Subsection H
hereof) immediately after the close of business on the record date
fixed for such meeting or the effective date of such written consent.
Except as provided by law, by the provisions of Section J below, or by
the provisions establishing any other series of preferred stock,
holders of Series A Preferred Stock shall vote together with the
holders Common Stock as a single class.
(2) The holders of the Series A Preferred Stock shall not be
entitled to any rights of cumulative voting with respect to their
shares.
D. Preemptive Rights. No holder of Preferred Stock shall have any
preemptive or similar right to acquire any additional unissued or treasury
shares of stock or securities of any
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<PAGE>
class or rights, warrants or options to purchase stock or scrip or securities in
any kind, including shares or securities convertible into shares or carrying
stock purchase warrants or privileges.
E. Other Securities. Subject to any limitations contained in these
Articles of Incorporation, the Board of Directors of the Corporation reserves
the right to establish additional classes and/or series of capital stock of the
Corporation and to designate the preferences, limitations and relative rights of
any such classes and/or series; provided, however, that no such class and/or
series may have preferences, limitations and relative rights which are superior
to or senior to the preferences, limitations and relative rights granted to the
holders of the Series A Preferred Stock.
F. Capital Reorganization. If the Corporation shall at any time
hereafter subdivide or combine its outstanding shares of Common Stock, declare a
dividend payable in Common Stock, or in case of any capital reorganization or
reclassification of the shares of Common Stock of the Corporation, the number of
shares of the Series A Preferred Stock and the stated value of the Series A
Preferred Stock shall be adjusted appropriately to allow the holders of the
Series A Preferred Stock, as nearly as reasonably possible, to maintain (i) the
aggregate stated value of the Series A Preferred Stock and (ii) their pro rata
interest in the Corporation and in the Common Stock upon conversion of the
Series A Preferred Stock, that each holder had prior to any such subdivision,
combination, stock dividend, reorganization or reclassification.
G. Optional Redemption
(1) At any time within the 90 days following November 9, 1998,
the Corporation may, at its option, redeem all or any portion of the
shares of Series A Preferred Stock then outstanding upon not less than
thirty (30) days' written notice at a redemption price per share equal
to the Liquidation Preference of the Series A Preferred Stock plus any
accrued but unpaid dividends (whether or not declared); provided, that
if at the time of the notice of any such redemption, the Registration
Statement to be filed by the Corporation pursuant to Section 2(a) of
that certain Registration Rights Agreement dated November 9, 1998,
between the Corporation and Archer Investors LLC has not been declared
effective by the Securities and Exchange Commission and remains
effective until the Series A Preferred Stock Redemption Date, the
redemption price per share shall be equal to 115% of the Liquidation
Preference of the Series A Preferred Stock plus any accrued but unpaid
dividends (whether or not declared). Notwithstanding the foregoing, a
redemption shall not occur pursuant to this Subsection G(1) with
respect to any Series A Preferred Stock for which a holder has
previously submitted a Notice of Conversion pursuant to Subsection H of
this Section 7. For purposes of these Articles of Amendment, the term
"Closing Bid Price" means, for any security as of any date, the closing
bid price on the principal securities exchange or trading market where
the Common Stock is listed or traded as reported by Bloomberg, L.P.
("Bloomberg") or, if applicable, the closing bid price of the Common
Stock in the over-the-counter market on the electronic bulletin board
for such security as reported by Bloomberg, or, if no closing bid price
is reported for the Common Stock by Bloomberg, then the average of the
bid prices of any market makers for such security as reported in the
"pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid
Price of the Common Stock can not be calculated on such date on any of
the foregoing bases, the Closing Bid Price of the Common Stock on such
date shall be the fair market value as mutually determined by the
Corporation and the holders of a majority of the outstanding shares of
Series A Preferred Stock being converted for which the calculation of
the Closing Bid Price is required in order to determine the Conversion
Price of such shares. "Trading day" shall mean any day on which the
Corporation's Common Stock is traded for any period on the principal
securities exchange or other securities market on which the Common
Stock is then being traded.
(2) Upon receipt of a notice given pursuant to Subsection
G(1), each holder of Series A Preferred Stock shall have thirty days to
decide whether to accept its ratable portion (based on its holdings of
Series A Preferred Stock as compared to the
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<PAGE>
aggregate number of shares of Series A Preferred Stock then
outstanding) of such offer by tendering such holder's shares to the
Corporation for redemption, at an address to be set forth in such
notice, at any time prior to 5:00 p.m. New York time on the 30th day
following the mailing of such notice (the "Series A Preferred Stock
Redemption Date") or to convert all or a portion of the Series A
Preferred Stock. Notwithstanding the foregoing, nothing herein shall
limit the rights of the holders of the Series A Preferred Stock to
convert the Series A Preferred Stock in whole or in part, prior to the
Series A Preferred Stock Redemption Date. Within three (3) business
days after the Series A Preferred Stock Redemption Date, the
Corporation shall remit the applicable redemption price, calculated
pursuant to Subsection G(1) of this Section 7, by wire transfer to each
holder of the Series A Preferred Stock to the most recent address of
each holder as set forth on the records of the Corporation or its
transfer agent.
(3) Any shares of Series A Preferred Stock redeemed pursuant
to this Subsection G or otherwise acquired by the Corporation in any
manner whatsoever shall be canceled and shall not under any
circumstances be reissued. The Corporation may from time to time take
such appropriate corporate action as may be necessary to reduce
accordingly the number of authorized shares of the Corporation's
capital stock.
H. Conversion.
(1) Subject to Subsection G(2) of this Section 7, the holders
of the Series A Preferred Stock shall have conversion rights as follows
(the "Series A Preferred Stock Conversion Rights"):
(a) Each share of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time
and from time to time, into such number of fully paid and
nonassessable shares of Common Stock as is determined by
dividing $1,000, plus the amount of any accrued and unpaid
dividends the Corporation elects to pay in Common Stock, by
the Conversion Price in effect at the time of conversion. The
Conversion Price at which shares of Common Stock shall be
deliverable upon conversion of Series A Preferred Stock
without the payment of additional consideration by the holder
thereof (the "Conversion Price") shall be the lower of (i)
105% of the average Closing Bid Price of the shares of Common
Stock for the five (5) trading days between November 2 through
November 6 ($5.71) or (ii) 80% of the average Closing Bid
Price of the shares of Common Stock for any five (5)
consecutive trading days during the twenty (20) consecutive
trading days immediately preceding the Series A Preferred
Stock Conversion Date (as hereinafter defined).
(b) At any time that the number of shares of Common
Stock issued (A) upon conversion of the Series A Preferred
Stock and (B) in lieu of dividend payments on the Series A
Preferred Stock, shall equal 630,000 (a "Common Stock
Redemption Event"), the Corporation shall (x) redeem, at a
price determined in accordance with Subsection G(1) of this
Section 7, all of the outstanding Series A Preferred Stock in
accordance with the provisions of Subsection G(2) or (y) call
a special meeting of its shareholders for the purpose of
approving the transactions contemplated by the Securities
Purchase Agreement, including the issuance of the Series A
Preferred Stock on the terms set forth therein, together with
any other approvals that shall be required so as to cause the
transactions contemplated by the Securities Purchase Agreement
to remain in compliance with the Rules and Regulations of The
Nasdaq Stock Market (including Rule 4320 of Nasdaq's Non-
Qualitative Designation Criteria in connection with
conversions of Series A Preferred Stock; such approvals are
referred to herein as the "Required Approvals"). The
Corporation shall determine within five (5) business days
following the receipt of a Notice of Conversion which of such
actions it shall take, and shall promptly furnish notice
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<PAGE>
to each of the holders of Series A Preferred Stock as to such
determination, including, if applicable, a notice of
redemption. In no event shall the Corporation issue shares of
Common Stock upon conversion of, or in lieu of interest
payments on, the Series A Preferred Stock, after the
occurrence of a Common Stock Redemption Event until the
Required Approvals, if any, are obtained.
(c) If the Corporation elects to call a special
meeting of its shareholders pursuant to Subsection H(1)(b) of
this Section 7 to obtain the Required Approvals, the
Corporation shall use its best efforts to obtain such Required
Approvals within thirty (30) days of the Common Stock
Redemption Event (such thirty (30) day period is referred to
herein as an "Approval Period"). If the Corporation does not
obtain the Required Approvals within the Approval Period and
the Corporation receives a Notice of Conversion after the
termination of the Approval Period, the Corporation must
redeem, in accordance with this Subsection H of this Section
7, any shares of Series A Preferred Stock outstanding after
the Corporation has issued in excess of 630,000 shares of
Common Stock in connection with conversions of the Series A
Preferred Stock.
(d) If the Corporation elects, pursuant to this
Subsection H, to redeem the Series A Preferred Stock on the
occurrence of a Common Stock Redemption Event, it shall redeem
such Series A Preferred Stock at the price determined in
accordance with Subsection G(1) of this Section 7. If the
Corporation shall have elected, pursuant to this Subsection
H(1), to obtain the Required Approvals but shall not have done
so by the later of the occurrence of the Common Stock
Redemption Event or the expiration of the Approval Period, it
shall furnish a redemption notice to the Purchasers within
three (3) business days after the expiration of the Approval
Period.
(2) The Series A Preferred Stock Conversion Rights shall be
exercised as follows:
(a) The Corporation will permit each holder of Series
A Preferred Stock to exercise its right to convert the Series
A Preferred Stock by faxing an executed and completed notice
of conversion (the "Notice of Conversion") to the Corporation,
and delivering within three (3) business days thereafter, the
original Notice of Conversion (and the certificates
representing the related shares of Series A Preferred Stock)
to the Corporation by hand delivery or by express courier,
duly endorsed. Each date on which a Notice of Conversion is
faxed to and received in accordance with the provisions hereof
shall be deemed a "Series A Preferred Stock Conversion Date."
The Corporation will transmit the certificates representing
the Common Stock issuable upon conversion of the Series A
Preferred Stock (together with certificates representing the
related shares of Series A Preferred Stock not so converted
and, if applicable, a check representing any fraction of a
share not converted) to such holder via express courier as
soon as practicable, but in all events no later than the later
to occur of (the "Delivery Date") (i) three (3) business days
after the Series A Preferred Stock Conversion Date, or (ii)
three (3) business days after receipt by the Corporation of
the original Notice of Conversion (and the certificates
representing the related shares of Series A Preferred Stock).
For purposes of this Section 7, such conversion of the Series
A Preferred Stock shall be deemed to have been made
immediately prior to the close of business on the Series A
Preferred Stock Conversion Date.
(b) In lieu of delivering physical certificates
representing the Common Stock issuable upon the conversion of
the Series A Preferred Stock, provided that the Corporation's
transfer agent is participating in the Depository
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Trust Corporation ("DTC") Fast Automated Securities Transfer
program, on the written request of a holder of Series A
Preferred Stock who shall have previously instructed such
holder's prime broker to confirm such request to the
Corporation's transfer agent, the Corporation shall use
commercially reasonable efforts to cause its transfer agent to
electronically transmit such Common Stock to such holder by
crediting the account of the holder's prime broker with DTC
through its Deposit Withdrawal Agent Commission system no
later than the applicable Delivery Date.
(c) The Corporation will at all times have authorized
and reserved for the purpose of issuance a sufficient number
of shares of Common Stock to provide for the conversion of the
Series A Preferred Stock. The Corporation will use its best
efforts at all times to maintain a number of shares of Common
Stock so reserved for issuance that is no less than one and
one-half (1.5) times the number that is then actually issuable
upon the conversion of the Series A Preferred Stock and the
exercise of the Warrants issued pursuant to that certain
Securities Purchase Agreement (the "Securities Purchase
Agreement") dates as of November 9, 1998, between the
Corporation and the purchasers named therein. Before taking
any action which would cause an adjustment reducing the
Conversion Price below the established par value of the shares
of Common Stock issuable upon conversion of the Series A
Preferred Stock, the Corporation will take any corporate
action which may, in the opinion of its counsel, be necessary
in order that the Corporation may validly and legally issue
fully paid and nonassessable shares of Common Stock at such
adjusted Conversion Price.
(d) All shares of Series A Preferred Stock, which
shall have been surrendered for conversion as herein provided
shall no longer be deemed to be outstanding, and all rights
with respect to such shares, including the rights, if any, to
receive dividends, notices and to vote, shall immediately
cease and terminate on the Series A Preferred Stock Conversion
Date, except only the right of the holders thereof to receive
shares of Common Stock in exchange therefor. Any shares of
Series A Preferred Stock so converted shall be retired and
canceled and shall not be reissued, and the Corporation may
from time to time take such appropriate action as may be
necessary to reduce the number of shares of authorized Series
A Preferred Stock accordingly.
(3) In the event of a liquidation of the Corporation, the
Series A Preferred Stock Conversion Rights shall terminate at the close
of business on the first full day preceding the date fixed for the
payment of any amounts distributable on liquidation to the holders of
the Series A Preferred Stock.
(4) If the conversion is in connection with an underwritten
offer of securities registered pursuant to the Securities Act of 1933,
as amended, the conversion may, at the option of any holder tendering
Series A Preferred Stock for conversion, be conditioned upon the
closing with the underwriter of the sale of securities pursuant to such
offering, in which event the person(s) entitled to receive the Common
Stock issuable upon such conversion of the Series A Preferred Stock
shall not be deemed to have converted such Series A Preferred Stock
until immediately prior to the closing of the sale of securities.
(5) At no time shall any holder (including any of its
affiliates) of the Series A Preferred Stock convert such amount of
Series A Preferred Stock as shall result in such Purchaser's (together
with its affiliate's) ownership, after such conversion, exceeding 9.9%
of the Corporation's outstanding Common Stock.
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(6) No fractional shares of Common Stock shall be issued upon
conversion of the Preferred Stock. In lieu of fractional shares, the
Corporation shall pay cash equal to such fraction multiplied by the
then effective and applicable Conversion Price.
(7) The Corporation will not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed under this
Subsection H by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Subsection H
and in the taking of all such action as may be necessary or appropriate
in order to protect the Series A Preferred Stock Conversion Rights of
the holders of the Series A Preferred Stock against impairment.
(8) In the event (a) that the Corporation declares a dividend
(or any other distribution) on its Common Stock payable in Common Stock
or other securities of the Corporation, (b) that the Corporation
subdivides or combines its outstanding shares of Common Stock, (c) of
any reclassification of the Common Stock of the Corporation (other than
a subdivision or combination of its outstanding shares of Common Stock
or a stock dividend or stock distribution thereon), (d) of any
consolidation or merger of the Corporation into or with another
corporation, (e) of the sale of all or substantially all of the assets
of the Corporation, or (f) of the involuntary or voluntary dissolution,
liquidation or winding up of the Corporation, then the Corporation
shall cause to be filed at its principal office or at the office of the
transfer agent of the Preferred Stock, and shall cause to be mailed to
each holder of the Preferred Stock at their last address as shown on
the records of the Corporation or such transfer agent, at least ten
(10) days prior to the record date specified in (i) below or twenty
(20) days before the date specified in (ii) below, a notice stating
(i) the record date of such dividend, distribution,
subdivision or combination, or, if a record is not to be
taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution,
subdivision or combination are to be determined, or
(ii) the date on which such reclassification,
consolidation, merger, sale, dissolution, liquidation or
winding up is expected to become effective, and the date as of
which it is expected that holders of Common Stock of record
shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such
reclassification, consolidation, merger, sale, dissolution or
winding up.
I. Sinking Fund. There shall be no sinking fund for the payment of
dividends, or liquidation preferences on the Series A Preferred Stock or the
redemption of any shares thereof.
J. Amendment. This Section 7 constitutes an agreement between the
Corporation and the holders of the Series A Preferred Stock. The Corporation
shall not amend this Section 7 or alter or repeal the preferences, rights,
powers or other terms of the Series A Preferred Stock so as to affect adversely
the Series A Preferred Stock, without the written consent or affirmative vote of
the holders of at least sixty-six and two- thirds percent (662/3%) of the then
outstanding shares of Series A Preferred Stock, given in writing or by vote at a
meeting, consenting or voting (as the case may be) separately as a class.
30
<PAGE>
EXHIBIT 4.5
THE `WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON
EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE II SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT", AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE,
PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY OF THE HOLDER TO
THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE
COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
ONLINE SYSTEM SERVICES, INC.
WARRANT TO PURCHASE COMMON STOCK
THE TRANSFERABILITY OF THIS WARRANT IS
RESTRICTED AS PROVIDED IN SECTION 2.
Void after May 21, 2001 Right to Purchase 50,000 Shares of Common Stock
(subject to adjustment)
No. 1
PREAMBLE
Online System Services, Inc. ("OSSI" or the "Company"), a Colorado
corporation, hereby certifies that, for value received, ___________________,
whose address is ______________________, or its registered assigns (hereinafter,
the "Registered Holder"), is entitled, subject to the terms set forth below, to
purchase from the Company at any time or .from time to time before 5: 00 P.M.
New York time, on May 21, 2001 (such time, the "Expiration Time"), 50,000 of the
Company's fully paid and nonassessable shares of common stock, no par value (the
"Common Stock"), of the Company, at the purchase price per share (the "Purchase
Price") of $16.33 (115% of the average closing bid price for five (5) trading
days prior to the Closing Date) (the "Initial Purchase Price"). The number and
character of such Common Stock and the Purchase Price are subject to adjustment
as provided herein.
This Warrant is one of the Warrants to Purchase Common Stock (the
"Warrants"), evidencing the right to purchase Common Stock of the Company,
issued pursuant to a Securities Purchase Agreement (the "Securities Purchase
Agreement"), dated May 21, 1998, between the Company and the Purchasers
identified therein. The Securities Purchase Agreement contains certain
additional terms that are binding upon the Company and each Registered Holder of
the Warrants. A copy of the Securities Purchase Agreement may be obtained by any
Registered Holder of the Warrants from the Company upon written request.
Capitalized terms used but not -defined herein shall have the meanings set forth
in the Securities Purchase Agreement.
As used herein the following terms, unless the context otherwise requires,
have the following respective meanings:
(a) The term "Company" includes any corporation which shall succeed to
or assume the obligations of the Company hereunder.
(b) The term "Common Stock" includes all shares of any class or classes
(however designated) of the Company, authorized on or after the date hereof,
the holders of which shall have the right, without limitation as to amount,
either to all or to a share of the balance of current
<PAGE>
dividends and liquidating dividends after the payment of dividends and
distributions on any shares entitled to preference, and the holders of which
shall ordinarily be entitled to vote for the election of directors of the
Company (even though the right so to vote has been suspended by the
happening of a contingency).
(c) The term "Other Securities" refers to any class of shares (other
than Common Stock) and other securities of the Company or any other person
(corporate or otherwise) which the holders of the Warrants at any time shall
be entitled to receive, or shall have received, upon the exercise of the
Warrants, in lieu of or in addition to Common Stock, or which at any time
shall be issuable or shall have been issued in exchange for or in
replacement of Common Stock or Other Securities pursuant to Section 6 or
otherwise.
(d) The term "Shares" means the Common Stock issued or issuable upon
exercise of the Warrants.
1. REGISTRATION RIGHTS.
The rights of the holders of Warrants to register Warrants or Shares shall
be as stated in the Registration Rights Agreement of even date herewith.
2. RESTRICTED STOCK.
2.1. If, at the time of any transfer or exchange (other than a transfer or
exchange not involving a change in the beneficial ownership of such Warrant or
Shares) of a Warrant or Shares, such Warrant or Shares shall not be registered
under the Securities Act, the Company's obligation to transfer such Warrant or
Shares shall be subject to the provisions of Section 5 of the Securities
Purchase Agreement.
3. EXERCISE OF WARRANT.
3.1. EXERCISE IN FULL. The holder of this Warrant may exercise it in full
prior to the Expiration Time by surrendering this Warrant, with the form of
Election to Purchase at the end hereof duly executed by such holder, to the
Company in the manner set forth in Section 5 of the Securities Purchase
Agreement. The surrendered Warrant shall be accompanied by payment, in cash or
by certified or official bank check payable to the order of the Company, in the
amount obtained by multiplying the number of Shares of Common Stock called for
on the face of this Warrant (without giving effect to any adjustment therein) by
the Initial Purchase Price.
3.2. PARTIAL EXERCISE. This Warrant may be exercised in part by surrender of
this Warrant in the manner provided in Subsection 3.1, except that the exercise
price shall be calculated by multiplying (a) the number of shares of Common
Stock as shall be designated by he holder in the subscription at the end hereof
by (b).the Initial Purchase Price. On any such partial exercise, subject to the
provisions of Section 2 hereof, the Company, at its expense will forthwith issue
and deliver to or upon the order of the Registered Holder hereof a new Warrant
or Warrants of like tenor, in the name of the Registered Holder hereof or as
such Registered Holder may request, calling in the aggregate on the face or
faces thereof for the number of shares of Common Stock (without giving effect to
any adjustment therein) equal to the number of such shares called for on the
face of this Warrant minus the number of such shares designated by the
Registered Holder in the applicable Election to Purchase.
3.3. COMPANY ACKNOWLEDGMENT. The Company will, at the time of the exercise,
exchange or transfer of this Warrant, upon the request of the Registered Holder
hereof, acknowledge in writing its continuing obligation to afford to such
Registered Holder or transferee any rights (including, without limitation, any
right to registration of the Company's shares of Common Stock) to which such
Registered Holder or transferee shall continue to be entitled after such
exercise, exchange or transfer in accordance with the provisions of this
Warrant, provided that if the Registered Holder of this Warrant shall fail to
make any such request, such failure shall not affect the continuing obligation
of the Company to afford to such Registered Holder or transferee any such
rights.
<PAGE>
4. DELIVERY OF SHARE CERTIFICATES UPON EXERCISE. Following the exercise of this
Warrant in full or in part, within the time periods and in the manner provided
by Section 5(b) of the Securities Purchase Agreement, the Company, at its
expense (including the payment by it of any applicable issue taxes), will cause
to be issued in the name of and delivered to the Registered Holder hereof, or as
such Registered Holder (upon payment by such Registered Holder of any applicable
transfer taxes) may direct, a certificate or certificates for the number of
fully paid and nonassessable shares of Common Stock to which such Registered
Holder shall be entitled on such exercise, plus, in lieu of any fractional share
to which such Registered Holder would otherwise be entitled, cash equal to such
fraction multiplied by the then current market value of one full share of Common
Stock (as computed in accordance with Subsection 5.1(d) hereof).
5. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES OF COMMON STOCK.
5.1. The Purchase Price hereof shall be subject to adjustment from time to
time as follows:
(a) In case the Company shall (i) pay a dividend on its shares of Common
Stock in Common Stock, (ii) subdivide its outstanding shares of Common Stock
or (iii) combine its-outstanding shares of Common Stock into a smaller
number of shares, then, in such an event, the Purchase Price in effect
immediately prior thereto shall be adjusted proportionately so that the
adjusted Purchase Price will bear the same relation to the Purchase Price in
effect immediately prior to any such event as the total number of shares of
Common Stock outstanding immediately prior any such event shall bear to the
total number of shares of Common Stock outstanding immediately after to such
event. An adjustment made pursuant to this Section 5.1(a) shall, (i) become
effective retroactively immediately after the record date in the case of a
dividend and shall (ii) become effective immediately-after the effective
date in the case of a subdivision or combination. The Purchase Price, as so
adjusted, shall be readjusted in the same manner upon the happening of any
successive event or events described herein.
(b) In case the Company shall distribute to all holders of its shares of
Common Stock, Other Securities, evidences of its indebtedness or assets
(excluding cash dividends or distributions) or purchase rights, options or
warrants to subscribe for or purchase Other Securities, then in each such
case, the Purchase Price in effect thereafter shall be determined by
multiplying the Purchase Price in effect immediately prior thereto by a
fraction, of which the numerator shall be the total number of outstanding
shares of Common Stock multiplied by the current market price per share of
Common Stock (as determined in accordance with the provisions of subdivision
(c) below) on the record date mentioned below, less the fair market value as
determined by the Board of Directors (whose determination shall be
conclusive) of the Other Securities, assets or evidences of indebtedness so
distributed or of such rights or warrants, and of which the denominator
shall be the total number 2f outstanding shares of Common Stock multiplied
by such current market price per share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become
effective retroactively immediately after the record date for the
determination of shareholders entitled to receive such distribution.
(c) For the purpose of any computation under subdivision (b) above, the
current market price per share of Common Stock shall be deemed to be the
closing price of the Company's shares of Common Stock on the date that the
computation is made.
(d) No adjustment of the Purchase Price shall be made if the amount of
such adjustment shall be less than $.02 per share, but in such case, any
adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time of and together with the next
subsequent adjustment, which, together with any adjustment so carried
forward, shall amount to not less than $.02 per share. In case the Company
shall at any time issue shares of Common Stock by way of dividend on any
class of stock of the Company or subdivide or combine the outstanding shares
of Common Stock, said amount of $.02 per share (as theretofore increased or
decreased, if the same amount shall have been adjusted in accordance with
the
<PAGE>
provisions of this subparagraph) shall forthwith be proportionately
increased in the case of a combination or decreased in the case of such a
subdivision or stock dividend so as to appropriately reflect the same.
5.2. Upon each adjustment of the Purchase Price pursuant to subdivisions (a)
and (b) of Section 5.1, the number of shares of Common Stock purchasable upon
exercise of this Warrant-shall be adjusted to the number of shares of Common
Stock, calculated to the nearest one hundredth of a share, obtained by
multiplying the number of shares of Common Stock purchasable immediately prior
to such adjustment upon the exercise of this Warrant Certificate by the Purchase
Price in effect prior to such adjustment and dividing the product so obtained by
the new Purchase Price.
5.3. In the event of any capital reorganization of the Company, or of any
reclassification of the shares of Common Stock, this Warrant shall be
exercisable after such capital reorganization or reclassification upon the terms
and conditions specified in this Warrant, for the number of shares of stock or
other securities which the shares of Common Stock issuable (at the time of such
capital reorganization or reclassification) upon exercise of this Warrant would
have been entitled to receive upon such capital reorganization or
reclassification if such exercise had taken place immediately prior to such
action. The subdivision or combination of shares of Common Stock at any time
outstanding into a greater or lesser number of shares of Common Stock shall not
be deemed to be a reclassification of the shares of Common Stock of the Company
for the purposes of this Subsection 5.3.
5.4. Whenever the Purchase Price is adjusted as herein provided, the Company
shall compute the adjusted Purchase Price in accordance with Subsection 5.1 and
shall prepare a certificate signed by its Chief Financial Officer and any other
executive officer setting forth the adjusted Purchase Price, and showing in
reasonable detail the method of such adjustment and the fact requiring the
adjustment and upon which such calculation is based and such certificate shall
forthwith be forwarded to the Registered Holder.
5.5. The form of this Warrant need not be changed because of any change in
the Purchase Price pursuant to this Section 5 and any Warrant issued after such
change may state the same Purchase Price and the same number of shares of Common
Stock as are stated in this Warrant as initially issued.
6. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC.
6.1. MERGER, ETC. In case at any time or from time to time after the date of
issuance of this Warrant, the Company shall (a) effect a reorganization, (b)
consolidate with or merge into any other person or (c) transfer all or
substantially all of its properties or assets to any other person under any plan
or arrangement contemplating the dissolution of the Company within three (3)
years from the date of such transfer (any such transaction being hereinafter
sometimes referred to as a "Reorganization"), then, in each such case, the
Registered Holder of this Warrant, upon the exercise hereof as provided in
Section 3 at any time after the consummation or effective date of such
Reorganization (the "Effective Date"), shall receive, in lieu of the shares of
Common Stock issuable on such exercise prior to such consummation or such
Effective Date, the stock and other securities and property (including cash) to
which such Registered Holder would have been entitled upon such consummation or
in connection with such dissolution, as the case may be, if such Registered
Holder had so exercised this Warrant, immediately prior thereto (all subject to
further adjustment thereafter as provided in Section 5). The Company shall not
effect a transaction of the type described in clause (b) or (c) above unless
upon or prior to the consummation thereof, the Company's successor corporation,
or if the Company shall be the "surviving company in any such Reorganization but
is not the issuer of the shares of stock, securities or other property to be
delivered to the holders of the Company's outstanding shares of Common Stock at
the effective time thereof, then such issuer, shall assume in writing the
obligation hereunder to deliver to the Registered Holder of this Warrant such
shares of stock, securities, cash or other property as such holder shall be
entitled to purchase in accordance with the provisions hereof
6.2. DISSOLUTION. Except as otherwise expressly provided in Subsection 6.1,
in the event of any dissolution of the Company following the transfer of all or
substantially all of its properties or assets, the Company, prior to such
dissolution, shall at its expense deliver or cause to be delivered the stock and
other securities and property (including cash, where applicable) receivable by
the holders of the Warrants after the effective date of such
<PAGE>
dissolution pursuant to this Section 6 to a bank or trust company having its
principal office in New York City, as trustee for the holder or holders of the
Warrants.
6.3. CONTINUATION OF TERMS. Except as otherwise expressly provided in
Subsection 6.1, upon any reorganization, consolidation, merger or transfer (and
any dissolution following any transfer) referred to in this Section 6, this
Warrant shall continue in full force and effect and the terms hereof shall be
applicable to the shares of stock and other securities and property receivable
on the exercise of this Warrant after the consummation of such reorganization,
consolidation or merger or the effective date of dissolution following any such
transfer, as the case may be, and shall be binding upon the issuer of any such
stock or other securities, including, in the case of any such transfer, the
person acquiring all or substantially all of the properties or assets of the
Company, whether or not such person shall have expressly assumed the terms of
this Warrant.
7. NO DILUTION OR IMPAIRMENT. The Company will not, by amendment of its
Certificate of Incorporation or By-laws, or through any reorganization, transfer
of assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of the Warrants, but will at all times in ..good faith
assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
holders of the Warrants, as specified herein and in the Securities Purchase
Agreement, against dilution (to the extent specifically provided herein) or
other impairment. Without limiting the generality of the foregoing, the Company
(a) will not increase the par value of any shares of stock receivable on the
exercise of the Warrants above the amount payable therefor on such exercise, and
(b) will not effect a subdivision or split up of shares or similar transaction
with respect to any class of the Common Stock without effecting an equivalent
transaction with respect to all other classes of Common Stock.
8. ACCOUNTANT'S CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment or
readjustment in the Common Stock issuable on the exercise of the Warrants, the
Company. At its expense, will promptly cause the independent certified public
accountants of the Company to compute such adjustment or readjustment in
accordance with the terms of the Warrants and prepared certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based, including a statement of (a) the
consideration received or receivable by the Company for any additional shares of
Common Stock (or Other Securities) issued or sold or deemed to have been issued
or sold, (b) the number of shares of Common Stock (or Other Securities)
outstanding or deemed to be outstanding, and (c) the Purchase Price in effect
and number and type of Shares for which the Warrants were exercisable
immediately prior to such issue or sale and as each is adjusted and readjusted
on account thereof The Company will forthwith .mail a copy of each such
certificate to each holder of a Warrant, and will, on the written request at any
time of any holder of a Warrant, furnish to such holder a like certificate
setting forth the Purchase Price and the number and type of Shares at the time
in effect and showing how it was calculated.
9. NOTICE OF RECORD DATE. In case of
(a) any taking by the Company of a record of the holders of any class of
its securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer of all
or substantially all the assets of the Company to or consolidation or merger
of the Company with or any voluntary or involuntary dissolution, liquidation
or winding up of the Company, or
(c) events shall have occurred resulting in the voluntary or involuntary
dissolution, liquidation or winding up of the Company
<PAGE>
then and in each such event the Company will mail or cause to be mailed to
each holder of a Warrant a notice specifying (i) the date on which any
record is to be taken for the purpose of any such dividend, distribution or
right, and stating the amount and character of such dividend, distribution
or right, (ii) the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation
or winding up is to take place, and the time, if any is to be fixed, as of
which the holders of record of Common Stock (or Other Securities) shall be
entitled to exchange their Common Stock (or Other Securities) for securities
or other property deliverable on such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation
or winding up, and (iii) the amount and character of any stock or other
securities, or rights or options with respect thereto, proposed to be issued
or granted, the date of such proposed issue or grant and the persons or
class of persons to whom such proposed issue or grant is to be offered or
made. Such notice shall be mailed at least thirty (30) days prior to the
date specified in such notice on which any such action is to be taken.
10. EXCHANGE OF WARRANTS. On surrender for exchange of any Warrant, properly
endorsed, to the Company, the Company, at its expense, will issue and deliver to
or (subject to Section 2) on the order of the holder thereof a new Warrant or
Warrants of like tenor, in the name of such holder or as such holder (on payment
by such holder or any applicable transfer taxes) may direct, calling in the
aggregate on the face or faces thereof for the number of shares of Common Stock
called for on the face or faces of the Warrant or Warrants so surrendered.
11. REPLACEMENT OF WARRANTS. On receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of any Warrant and, in
the case of any such loss, theft or destruction of any Warrant, on delivery of
an indemnity agreement or security reasonably satisfactory in form and amount to
the Company or, in the case of any such mutilation, on surrender and
cancellation of such Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
12. WARRANT AGENT. The Company may, by written notice to each holder of a
Warrant, appoint an agent having an office in New York, New York, for the
purpose of issuing shares of Common Stock on the exercise of the Warrants
pursuant to Section 3, exchanging Warrants pursuant to Section 10, and replacing
Warrants pursuant to Section 11, or any of the foregoing, and thereafter any
such issuance, exchange or replacement, as the case may be, shall be made at
such office by such agent.
13. REMEDIES. The Company stipulates that the remedies at law of the holder of
this Warrant in the event of any default or threatened default by the Company in
the performance of or compliance with any of the terms of this Warrant are not
and will not be adequate, and that such terms may be specifically enforced by a
decree for the specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or otherwise.
14. NEGOTIABILITY, ETC. This Warrant is issued upon the following terms, to all
of which each Registered Holder or owner hereof by the taking hereof consents
and agrees:
(a) subject to the terms of Section 4 of the Securities Purchase
Agreement, title to this Warrant may be transferred by endorsement (by the
Registered Holder hereof executing the form of assignment at the end hereof)
and delivery in the same manner as in the case of a negotiable instrument
transferable by endorsement and delivery;
(b) any person in possession of this Warrant properly endorsed is
authorized to represent himself as absolute owner hereof and is empowered to
transfer absolute title hereto by endorsement and delivery hereof to a bona
fide purchaser hereof for value; each prior taker or owner waives and
renounces all of his equities or rights in this Warrant in favor of each
such bona fide purchaser, and each such bona fide purchaser shall acquire
absolute title hereto and to all rights represented hereby; and
(c) until this Warrant is transferred on the books of the Company, the
Company may treat the Registered Holder hereof as the absolute owner hereof
for all purposes, notwithstanding any notice to the contrary.
<PAGE>
15. NOTICES. All notices and other communications from the Company to the
Registered Holder of this Warrant shall be given in writing (unless otherwise
specified herein) and shall be effective upon personal delivery, via facsimile
(upon receipt of confirmation of error-free transmission) or two business days
following deposit of such notice with an internationally recognized courier
service, with postage prepaid and addressed, to such address as may have been
furnished to the Company in writing by such Registered Holder or, until any such
Registered Holder-furnishes to the Company an address, then to, and at the
address of, the last Registered Holder of this Warrant who has so furnished an
address to the Company.
16. MISCELLANEOUS. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Warrant is being delivered in the State of New York and, except for
provisions with respect to internal corporate matters of the Company which shall
be governed by the corporate laws of the State of Colorado, shall be construed
and enforced in accordance with and governed by the laws of the State of New
York, without regard to principles of conflict of laws. The headings in this
Warrant are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof All nouns and pronouns used herein shall be
deemed to refer to the masculine, feminine or neuter, as the identity of the
person or persons to whom reference is made herein may require.
17. EXPIRATION. The right to exercise this Warrant shall expire at 5:00 p.m.,
New York time, on May 21, 2001.
IN WITNESS WHEREOF, the undersigned has executed this Warrant as of May 21,
1998.
ONLINE SYSTEM SERVICES, INC.
By:
------------------------------
Name:
Title:
Attest:
By:
------------------------------
Name:
Title:
<PAGE>
ANNEX A
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right, represented
by this Warrant, to purchase ____________ shares of Common Stock and herewith
tenders in payment for such securities a certified or official bank check
payable in New York Clearing House Funds to the order of ONLINE SYSTEM SERVICES,
INC., in the amount of $__________, all in accordance with the terms hereof The
undersigned requests that a certificate for such shares of Common Stock be
registered in the name of _____________, whose address is
______________________________________________ and that such Certificate be
delivered to whose address is _______________________________________.
Dated:
Name:
-------------------------------------
Signature:
----------------------------------
(Signature must conform in all respects to the name of the
Registered Holder, as specified on the face of the Warrant.)
---------------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
ANNEX B
FORM OF ASSIGNMENT-
(TO BE EXECUTED BY THE REGISTERED HOLDER IF SUCH HOLDER DESIRES TO TRANSFER THE
WARRANT.)
FOR VALUE RECEIVED, ___________
hereby sells, assigns and transfers unto
- ---------------------------------------------
(Please print name and address of transferee)
this Warrant, together with all right, title and interest therein, and does so
hereby irrevocably constitute and appoint _______________________ Attorney, to
transfer the within Warrant on the books of the within-named Company, with full
power of substitution.
Dated:
Name:
-------------------------------------
Signature:
----------------------------------
(Signature must conform in all respects to the name of the
Registered Holder, as specified on the face of the Warrant.)
---------------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
EXHIBIT 4.6
THE `WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON
EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE II SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT", AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE,
PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY OF THE HOLDER TO
THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE
COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
ONLINE SYSTEM SERVICES, INC.
WARRANT TO PURCHASE COMMON STOCK
THE TRANSFERABILITY OF THIS WARRANT IS
RESTRICTED AS PROVIDED IN SECTION 2.
Void after November 9, 2003 Right to Purchase 140,000 Shares of Common Stock
(subject to adjustment)
No. 1
PREAMBLE
Online System Services, Inc. ("OSSI" or the "Company"), a Colorado
corporation, hereby certifies that, for value received, Archer Investors LLC
whose address is One Word Trade Center, Suite 4563, New York, New York 10048, or
its registered assigns (hereinafter, the "Registered Holder"), is entitled,
subject to the terms set forth below, to purchase from the Company at any time
or .from time to time before 5: 00 P.M. New York time, on November 9, 2003 (such
time, the "Expiration Time"), 140,000 of the Company's fully paid and
nonassessable shares of common stock, no par value (the "Common Stock"), of the
Company, at the purchase price per share (the "Purchase Price") of $5.71. The
number and character of such Common Stock and the Purchase Price are subject to
adjustment as provided herein.
This Warrant is one of the Warrants to Purchase Common Stock (the
"Warrants"), evidencing the right to purchase Common Stock of the Company,
issued pursuant to a Securities Purchase Agreement (the "Securities Purchase
Agreement"), dated November 9, 1998, between the Company and the Purchasers
identified therein. The Securities Purchase Agreement contains certain
additional terms that are binding upon the Company and each Registered Holder of
the Warrants. A copy of the Securities Purchase Agreement may be obtained by any
Registered Holder of the Warrants from the Company upon written request.
Capitalized terms used but not -defined herein shall have the meanings set forth
in the Securities Purchase Agreement.
As used herein the following terms, unless the context otherwise requires,
have the following respective meanings:
(a) The term "Company" includes any corporation which shall succeed to
or assume the obligations of the Company hereunder.
(b) The term "Common Stock" includes all shares of any class or classes
(however designated) of the Company, authorized on or after the date hereof,
the holders of which shall have the right, without limitation as to amount,
either to all or to a share of the balance of current
<PAGE>
dividends and liquidating dividends after the payment of dividends and
distributions on any shares entitled to preference, and the holders of which
shall ordinarily be entitled to vote for the election of directors of the
Company (even though the right so to vote has been suspended by the
happening of a contingency).
(c) The term "Other Securities" refers to any class of shares (other
than Common Stock) and other securities of the Company or any other person
(corporate or otherwise) which the holders of the Warrants at any time shall
be entitled to receive, or shall have received, upon the exercise of the
Warrants, in lieu of or in addition to Common Stock, or which at any time
shall be issuable or shall have been issued in exchange for or in
replacement of Common Stock or Other Securities pursuant to Section 6 or
otherwise.
(d) The term "Shares" means the Common Stock issued or issuable upon
exercise of the Warrants.
1. REGISTRATION RIGHTS.
The rights of the holders of Warrants to register Warrants or Shares shall
be as stated in the Registration Rights Agreement of even date herewith.
2. RESTRICTED STOCK.
2.1. If, at the time of any transfer or exchange (other than a transfer or
exchange not involving a change in the beneficial ownership of such Warrant or
Shares) of a Warrant or Shares, such Warrant or Shares shall not be registered
under the Securities Act, the Company's obligation to transfer such Warrant or
Shares shall be subject to the provisions of Section 5 of the Securities
Purchase Agreement.
3. EXERCISE OF WARRANT.
3.1. EXERCISE IN FULL. The holder of this Warrant may exercise it in full
prior to the Expiration Time by surrendering this Warrant, with the form of
Election to Purchase at the end hereof duly executed by such holder, to the
Company in the manner set forth in Section 5 of the Securities Purchase
Agreement. The surrendered Warrant shall be accompanied by payment, in cash or
by certified or official bank check payable to the order of the Company, in the
amount obtained by multiplying the number of Shares of Common Stock called for
on the face of this Warrant (without giving effect to any adjustment therein) by
the Initial Purchase Price.
3.2. PARTIAL EXERCISE. This Warrant may be exercised in part by surrender of
this Warrant in the manner provided in Subsection 3.1, except that the exercise
price shall be calculated by multiplying (a) the number of shares of Common
Stock as shall be designated by he holder in the subscription at the end hereof
by (b).the Initial Purchase Price. On any such partial exercise, subject to the
provisions of Section 2 hereof, the Company, at its expense will forthwith issue
and deliver to or upon the order of the Registered Holder hereof a new Warrant
or Warrants of like tenor, in the name of the Registered Holder hereof or as
such Registered Holder may request, calling in the aggregate on the face or
faces thereof for the number of shares of Common Stock (without giving effect to
any adjustment therein) equal to the number of such shares called for on the
face of this Warrant minus the number of such shares designated by the
Registered Holder in the applicable Election to Purchase.
3.3. COMPANY ACKNOWLEDGMENT. The Company will, at the time of the exercise,
exchange or transfer of this Warrant, upon the request of the Registered Holder
hereof, acknowledge in writing its continuing obligation to afford to such
Registered Holder or transferee any rights (including, without limitation, any
right to registration of the Company's shares of Common Stock) to which such
Registered Holder or transferee shall continue to be entitled after such
exercise, exchange or transfer in accordance with the provisions of this
Warrant, provided that if the Registered Holder of this Warrant shall fail to
make any such request, such failure shall not affect the continuing obligation
of the Company to afford to such Registered Holder or transferee any such
rights.
<PAGE>
4. DELIVERY OF SHARE CERTIFICATES UPON EXERCISE. Following the exercise of this
Warrant in full or in part, within the time periods and in the manner provided
by Section 5(b) of the Securities Purchase Agreement, the Company, at its
expense (including the payment by it of any applicable issue taxes), will cause
to be issued in the name of and delivered to the Registered Holder hereof, or as
such Registered Holder (upon payment by such Registered Holder of any applicable
transfer taxes) may direct, a certificate or certificates for the number of
fully paid and nonassessable shares of Common Stock to which such Registered
Holder shall be entitled on such exercise, plus, in lieu of any fractional share
to which such Registered Holder would otherwise be entitled, cash equal to such
fraction multiplied by the then current market value of one full share of Common
Stock (as computed in accordance with Subsection 5.1(d) hereof).
5. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES OF COMMON STOCK.
5.1. The Purchase Price hereof shall be subject to adjustment from time to
time as follows:
(a) In case the Company shall (i) pay a dividend on its shares of Common
Stock in Common Stock, (ii) subdivide its outstanding shares of Common Stock
or (iii) combine its-outstanding shares of Common Stock into a smaller
number of shares, then, in such an event, the Purchase Price in effect
immediately prior thereto shall be adjusted proportionately so that the
adjusted Purchase Price will bear the same relation to the Purchase Price in
effect immediately prior to any such event as the total number of shares of
Common Stock outstanding immediately prior any such event shall bear to the
total number of shares of Common Stock outstanding immediately after to such
event. An adjustment made pursuant to this Section 5.1(a) shall, (i) become
effective retroactively immediately after the record date in the case of a
dividend and shall (ii) become effective immediately-after the effective
date in the case of a subdivision or combination. The Purchase Price, as so
adjusted, shall be readjusted in the same manner upon the happening of any
successive event or events described herein.
(b) In case the Company shall distribute to all holders of its shares of
Common Stock, Other Securities, evidences of its indebtedness or assets
(excluding cash dividends or distributions) or purchase rights, options or
warrants to subscribe for or purchase Other Securities, then in each such
case, the Purchase Price in effect thereafter shall be determined by
multiplying the Purchase Price in effect immediately prior thereto by a
fraction, of which the numerator shall be the total number of outstanding
shares of Common Stock multiplied by the current market price per share of
Common Stock (as determined in accordance with the provisions of subdivision
(c) below) on the record date mentioned below, less the fair market value as
determined by the Board of Directors (whose determination shall be
conclusive) of the Other Securities, assets or evidences of indebtedness so
distributed or of such rights or warrants, and of which the denominator
shall be the total number 2f outstanding shares of Common Stock multiplied
by such current market price per share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become
effective retroactively immediately after the record date for the
determination of shareholders entitled to receive such distribution.
(c) For the purpose of any computation under subdivision (b) above, the
current market price per share of Common Stock shall be deemed to be the
closing price of the Company's shares of Common Stock on the date that the
computation is made.
(d) No adjustment of the Purchase Price shall be made if the amount of
such adjustment shall be less than $.02 per share, but in such case, any
adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time of and together with the next
subsequent adjustment, which, together with any adjustment so carried
forward, shall amount to not less than $.02 per share. In case the Company
shall at any time issue shares of Common Stock by way of dividend on any
class of stock of the Company or subdivide or combine the outstanding shares
of Common Stock, said amount of $.02 per share (as theretofore increased or
decreased, if the same amount shall have been adjusted in accordance with
the
<PAGE>
provisions of this subparagraph) shall forthwith be proportionately
increased in the case of a combination or decreased in the case of such a
subdivision or stock dividend so as to appropriately reflect the same.
5.2. Upon each adjustment of the Purchase Price pursuant to subdivisions (a)
and (b) of Section 5.1, the number of shares of Common Stock purchasable upon
exercise of this Warrant-shall be adjusted to the number of shares of Common
Stock, calculated to the nearest one hundredth of a share, obtained by
multiplying the number of shares of Common Stock purchasable immediately prior
to such adjustment upon the exercise of this Warrant Certificate by the Purchase
Price in effect prior to such adjustment and dividing the product so obtained by
the new Purchase Price.
5.3. In the event of any capital reorganization of the Company, or of any
reclassification of the shares of Common Stock, this Warrant shall be
exercisable after such capital reorganization or reclassification upon the terms
and conditions specified in this Warrant, for the number of shares of stock or
other securities which the shares of Common Stock issuable (at the time of such
capital reorganization or reclassification) upon exercise of this Warrant would
have been entitled to receive upon such capital reorganization or
reclassification if such exercise had taken place immediately prior to such
action. The subdivision or combination of shares of Common Stock at any time
outstanding into a greater or lesser number of shares of Common Stock shall not
be deemed to be a reclassification of the shares of Common Stock of the Company
for the purposes of this Subsection 5.3.
5.4. Whenever the Purchase Price is adjusted as herein provided, the Company
shall compute the adjusted Purchase Price in accordance with Subsection 5.1 and
shall prepare a certificate signed by its Chief Financial Officer and any other
executive officer setting forth the adjusted Purchase Price, and showing in
reasonable detail the method of such adjustment and the fact requiring the
adjustment and upon which such calculation is based and such certificate shall
forthwith be forwarded to the Registered Holder.
5.5. The form of this Warrant need not be changed because of any change in
the Purchase Price pursuant to this Section 5 and any Warrant issued after such
change may state the same Purchase Price and the same number of shares of Common
Stock as are stated in this Warrant as initially issued.
6. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC.
6.1. MERGER, ETC. In case at any time or from time to time after the date of
issuance of this Warrant, the Company shall (a) effect a reorganization, (b)
consolidate with or merge into any other person or (c) transfer all or
substantially all of its properties or assets to any other person under any plan
or arrangement contemplating the dissolution of the Company within three (3)
years from the date of such transfer (any such transaction being hereinafter
sometimes referred to as a "Reorganization"), then, in each such case, the
Registered Holder of this Warrant, upon the exercise hereof as provided in
Section 3 at any time after the consummation or effective date of such
Reorganization (the "Effective Date"), shall receive, in lieu of the shares of
Common Stock issuable on such exercise prior to such consummation or such
Effective Date, the stock and other securities and property (including cash) to
which such Registered Holder would have been entitled upon such consummation or
in connection with such dissolution, as the case may be, if such Registered
Holder had so exercised this Warrant, immediately prior thereto (all subject to
further adjustment thereafter as provided in Section 5). The Company shall not
effect a transaction of the type described in clause (b) or (c) above unless
upon or prior to the consummation thereof, the Company's successor corporation,
or if the Company shall be the "surviving company in any such Reorganization but
is not the issuer of the shares of stock, securities or other property to be
delivered to the holders of the Company's outstanding shares of Common Stock at
the effective time thereof, then such issuer, shall assume in writing the
obligation hereunder to deliver to the Registered Holder of this Warrant such
shares of stock, securities, cash or other property as such holder shall be
entitled to purchase in accordance with the provisions hereof
6.2. DISSOLUTION. Except as otherwise expressly provided in Subsection 6.1,
in the event of any dissolution of the Company following the transfer of all or
substantially all of its properties or assets, the Company, prior to such
dissolution, shall at its expense deliver or cause to be delivered the stock and
other securities and property (including cash, where applicable) receivable by
the holders of the Warrants after the effective date of such
<PAGE>
dissolution pursuant to this Section 6 to a bank or trust company having its
principal office in New York City, as trustee for the holder or holders of the
Warrants.
6.3. CONTINUATION OF TERMS. Except as otherwise expressly provided in
Subsection 6.1, upon any reorganization, consolidation, merger or transfer (and
any dissolution following any transfer) referred to in this Section 6, this
Warrant shall continue in full force and effect and the terms hereof shall be
applicable to the shares of stock and other securities and property receivable
on the exercise of this Warrant after the consummation of such reorganization,
consolidation or merger or the effective date of dissolution following any such
transfer, as the case may be, and shall be binding upon the issuer of any such
stock or other securities, including, in the case of any such transfer, the
person acquiring all or substantially all of the properties or assets of the
Company, whether or not such person shall have expressly assumed the terms of
this Warrant.
7. NO DILUTION OR IMPAIRMENT. The Company will not, by amendment of its
Certificate of Incorporation or By-laws, or through any reorganization, transfer
of assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of the Warrants, but will at all times in ..good faith
assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
holders of the Warrants, as specified herein and in the Securities Purchase
Agreement, against dilution (to the extent specifically provided herein) or
other impairment. Without limiting the generality of the foregoing, the Company
(a) will not increase the par value of any shares of stock receivable on the
exercise of the Warrants above the amount payable therefor on such exercise, and
(b) will not effect a subdivision or split up of shares or similar transaction
with respect to any class of the Common Stock without effecting an equivalent
transaction with respect to all other classes of Common Stock.
8. ACCOUNTANT'S CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment or
readjustment in the Common Stock issuable on the exercise of the Warrants, the
Company. At its expense, will promptly cause the independent certified public
accountants of the Company to compute such adjustment or readjustment in
accordance with the terms of the Warrants and prepared certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based, including a statement of (a) the
consideration received or receivable by the Company for any additional shares of
Common Stock (or Other Securities) issued or sold or deemed to have been issued
or sold, (b) the number of shares of Common Stock (or Other Securities)
outstanding or deemed to be outstanding, and (c) the Purchase Price in effect
and number and type of Shares for which the Warrants were exercisable
immediately prior to such issue or sale and as each is adjusted and readjusted
on account thereof The Company will forthwith .mail a copy of each such
certificate to each holder of a Warrant, and will, on the written request at any
time of any holder of a Warrant, furnish to such holder a like certificate
setting forth the Purchase Price and the number and type of Shares at the time
in effect and showing how it was calculated.
9. NOTICE OF RECORD DATE. In case of
(a) any taking by the Company of a record of the holders of any class of
its securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer of all
or substantially all the assets of the Company to or consolidation or merger
of the Company with or any voluntary or involuntary dissolution, liquidation
or winding up of the Company, or
(c) events shall have occurred resulting in the voluntary or involuntary
dissolution, liquidation or winding up of the Company
<PAGE>
then and in each such event the Company will mail or cause to be mailed to each
holder of a Warrant a notice specifying (i) the date on which any record is to
be taken for the purpose of any such dividend, distribution or right, and
stating the amount and character of such dividend, distribution or right, (ii)
the date on which any such reorganization, reclassification, recapitalization,
transfer, consolidation, merger, dissolution, liquidation or winding up is to
take place, and the time, if any is to be fixed, as of which the holders of
record of Common Stock (or Other Securities) shall be entitled to exchange their
Common Stock (or Other Securities) for securities or other property deliverable
on such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding up, and (iii) the
amount and character of any stock or other securities, or rights or options with
respect thereto, proposed to be issued or granted, the date of such proposed
issue or grant and the persons or class of persons to whom such proposed issue
or grant is to be offered or made. Such notice shall be mailed at least thirty
(30) days prior to the date specified in such notice on which any such action is
to be taken.
10. EXCHANGE OF WARRANTS. On surrender for exchange of any Warrant, properly
endorsed, to the Company, the Company, at its expense, will issue and deliver to
or (subject to Section 2) on the order of the holder thereof a new Warrant or
Warrants of like tenor, in the name of such holder or as such holder (on payment
by such holder or any applicable transfer taxes) may direct, calling in the
aggregate on the face or faces thereof for the number of shares of Common Stock
called for on the face or faces of the Warrant or Warrants so surrendered.
11. REPLACEMENT OF WARRANTS. On receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of any Warrant and, in
the case of any such loss, theft or destruction of any Warrant, on delivery of
an indemnity agreement or security reasonably satisfactory in form and amount to
the Company or, in the case of any such mutilation, on surrender and
cancellation of such Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
12. WARRANT AGENT. The Company may, by written notice to each holder of a
Warrant, appoint an agent having an office in New York, New York, for the
purpose of issuing shares of Common Stock on the exercise of the Warrants
pursuant to Section 3, exchanging Warrants pursuant to Section 10, and replacing
Warrants pursuant to Section 11, or any of the foregoing, and thereafter any
such issuance, exchange or replacement, as the case may be, shall be made at
such office by such agent.
13. REMEDIES. The Company stipulates that the remedies at law of the holder of
this Warrant in the event of any default or threatened default by the Company in
the performance of or compliance with any of the terms of this Warrant are not
and will not be adequate, and that such terms may be specifically enforced by a
decree for the specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or otherwise.
14. NEGOTIABILITY, ETC. This Warrant is issued upon the following terms, to all
of which each Registered Holder or owner hereof by the taking hereof consents
and agrees:
(a) subject to the terms of Section 4 of the Securities Purchase
Agreement, title to this Warrant may be transferred by endorsement (by the
Registered Holder hereof executing the form of assignment at the end hereof)
and delivery in the same manner as in the case of a negotiable instrument
transferable by endorsement and delivery;
(b) any person in possession of this Warrant properly endorsed is
authorized to represent himself as absolute owner hereof and is empowered to
transfer absolute title hereto by endorsement and delivery hereof to a bona
fide purchaser hereof for value; each prior taker or owner waives and
renounces all of his equities or rights in this Warrant in favor of each
such bona fide purchaser, and each such bona fide purchaser shall acquire
absolute title hereto and to all rights represented hereby; and
(c) until this Warrant is transferred on the books of the Company, the
Company may treat the Registered Holder hereof as the absolute owner hereof
for all purposes, notwithstanding any notice to the contrary.
<PAGE>
15. NOTICES. All notices and other communications from the Company to the
Registered Holder of this Warrant shall be given in writing (unless otherwise
specified herein) and shall be effective upon personal delivery, via facsimile
(upon receipt of confirmation of error-free transmission) or two business days
following deposit of such notice with an internationally recognized courier
service, with postage prepaid and addressed, to such address as may have been
furnished to the Company in writing by such Registered Holder or, until any such
Registered Holder-furnishes to the Company an address, then to, and at the
address of, the last Registered Holder of this Warrant who has so furnished an
address to the Company.
16. MISCELLANEOUS. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Warrant is being delivered in the State of New York and, except for
provisions with respect to internal corporate matters of the Company which shall
be governed by the corporate laws of the State of Colorado, shall be construed
and enforced in accordance with and governed by the laws of the State of New
York, without regard to principles of conflict of laws. The headings in this
Warrant are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof All nouns and pronouns used herein shall be
deemed to refer to the masculine, feminine or neuter, as the identity of the
person or persons to whom reference is made herein may require.
17. EXPIRATION. The right to exercise this Warrant shall expire at 5:00 p.m.,
New York time, on November 9, 2003.
IN WITNESS WHEREOF, the undersigned has executed this Warrant as of November 9,
1998.
ONLINE SYSTEM SERVICES, INC.
By:
--------------------------------
Name:
Title:
Attest:
By:
-------------------------------
Name:
Title:
<PAGE>
ANNEX A
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right, represented
by this Warrant, to purchase ____________ shares of Common Stock and herewith
tenders in payment for such securities a certified or official bank check
payable in New York Clearing House Funds to the order of ONLINE SYSTEM SERVICES,
INC., in the amount of $__________, all in accordance with the terms hereof The
undersigned requests that a certificate for such shares of Common Stock be
registered in the name of _____________, whose address is
_________________________________________ and that such Certificate be delivered
to whose address is_____________________________________.
Dated:
Name:
-------------------------------------
Signature:
----------------------------------
(Signature must conform in all respects to the name of the
Registered Holder, as specified on the face of the Warrant.)
---------------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
ANNEX B
FORM OF ASSIGNMENT-
(TO BE EXECUTED BY THE REGISTERED HOLDER IF SUCH HOLDER DESIRES TO TRANSFER THE
WARRANT.)
FOR VALUE RECEIVED, ___________
hereby sells, assigns and transfers unto
- ---------------------------------------------
(Please print name and address of transferee)
this Warrant, together with all right, title and interest therein, and does so
hereby irrevocably constitute and appoint _______________________ Attorney, to
transfer the within Warrant on the books of the within-named Company, with full
power of substitution.
Dated:
Name:
-------------------------------------
Signature:
----------------------------------
(Signature must conform in all respects to the name of the
Registered Holder, as specified on the face of the Warrant.)
---------------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF GRAY, PLANT, MOOTY, MOOTY & BENNETT, P.A.]
LINDLEY S. BRANSON
612 343-2827
December 22, 1998
Online System Services, Inc.
1800 Glenarm Place
Suite 800
Denver, CO 80202
RE: Form S-3 Registration Statement
Ladies/Gentlemen:
This opinion is furnished in connection with the registration, pursuant
to the Securities Act of 1933, as amended, of 78,240 issued and outstanding
shares of common stock, no par value (the "Outstanding Shares"), of Online
System Services, Inc. (the "Company" or "OSS") to be sold from time to time by
various selling shareholders for their own account and up to 1,665,260 shares of
common stock, no par value (the "Issuable Shares"), of OSS issuable upon (i)
conversion of the Company's 10% Preferred Stock (the "10% Preferred Stock"),
(ii) conversion of the Company's Series A Preferred Stock (the "Series A
Preferred Stock"), and (iii) exercise of outstanding transferable warrants of
OSS which may sold from time to time by various selling shareholders for their
own account.
We have acted as counsel to the Company in connection with the
preparation of the Form S-3 Registration Statement (the "Registration
Statement"). We have examined the Articles of Incorporation, as amended, the
Bylaws of the Company, such records of proceedings of the Company as we deemed
material and such other certificates, records and documents as we considered
necessary for the purposes of this opinion.
Based on the foregoing, we are of the opinion that (a) the Outstanding
Shares are legally issued, fully paid and non-assessable securities of the
Company and (b) the Issuable Shares (up to a maximum of 1,665,260 shares) will
be, when issued, legally issued, fully paid and non-assessable securities of the
Company. We understand that this opinion is to be issued in connection with the
Registration Statement. We consent to a filing of a copy of this opinion with
the Registration Statement.
Very truly yours,
GRAY, PLANT, MOOTY,
MOOTY & BENNETT, P.A.
By /s/ Lindley S. Branson
------------------------------
Lindley S. Branson
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement on Form S-3, to be filed December 22,
1998, of our report dated February 27, 1998 (except with respect to the matter
discussed in Note 12 as to which the date is March 12, 1998), included in Online
System Services, Inc. Form 10-KSB for the year ended December 31, 1997 and to
all references to our Firm included in the Registration Statement.
/s/ Arthur Andersen LLP
Denver, Colorado
December 22, 1998
