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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
DECEMBER 31, 1997 0-28462
ONLINE SYSTEM SERVICES, INC.
(Exact name of registrant as specified in its charter)
COLORADO 84-1293864
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1800 GLENARM PLACE, DENVER, CO 80202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(303) 296-9200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Units, consisting of one share of Common Stock, no par value and one Warrant
Common Stock, no par value
Warrants for the purchase of Common Stock, no par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained herein, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [__].
Registrant's revenues for fiscal year ended December 31, 1997: $2,791,556
Aggregate market value of voting stock held by non-affiliates of registrant
as of February 28, 1998: Approximately $22,598,163.
Number of shares outstanding as of February 28, 1998: 3,333,577 shares of
Common Stock, no par value, and 1,359,250 common stock purchase warrants.
Documents incorporated by reference: Portions of the registrant's definitive
Proxy Statement, for the 1998 Annual Meeting of Shareholders to be filed with
the Commission, are incorporated by reference in Part III of this Form 10-KSB.
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PART I
Item 1. DESCRIPTION OF BUSINESS.
GENERAL
Online System Services, Inc. ("OSS" or the "Company") develops, markets and
supports products and services that enable broadband operators to provide high-
speed Internet access to their customers. The Company's objective is to partner
with cable television companies (wired and wireless), telephone companies and
other broadband operators, both domestically and internationally, to create
online communities that drive commerce and communications. The Company's
i2u(TM) software further permits the broadband operators to offer a wide range
of online services. The broadband operator, its subscribers and local merchants
can develop and update local content on the Internet. The local content portion
of i2u promotes the sharing of local information and the fostering of e-commerce
and e-banking through data-based Internet Web sites. A time-saving and cost
advantage to the broadband operators, from the use of the Company's software, is
that a significant portion of the local content is generated by the people
actually using the Internet, thus enhancing content quality and developing a
commitment to the local community of Internet Web sites.
Prior to the quarter ended September 30, 1997, the Company's focus generally
was on three markets: general Web site development, maintenance and hosting;
rural or small market Internet service providers ("ISPs"); and healthcare
information services and continuing medical education ("CME"). These activities
were divided into three separate units early in fiscal 1997, the Business
Resource Group ("BRG") for Web site-related activities; Community Access America
("CAA") for the ISP activities; and Healthcare for the CME and healthcare
information activities.
Each of these activities involved in varying degrees the establishment of
online communities. As an outgrowth of the Company's BRG and CAA activities,
and in recognition of the need to increase the availability of high-speed
Internet access, the Company's focus during fiscal 1997 increasingly was on the
development of online communities for broadband (high bandwidth or high data
transmission capabilities) operators such as cable TV operators (wired and
wireless) who the Company believes are in the best position today to provide
high-speed Internet access. This focus has resulted in the introduction of the
Company's i2u (formerly "CAP" or "Community Access Partnership") products and
services which include a wide range of online services which enable operators
and operators' customers to generate online local content, create Web pages and
conduct online commerce and banking and a turnkey product and service package
which provides the equipment, training and systems necessary for the broadband
operator to become a fully operational ISP. The Company intends to focus its
future efforts primarily on its i2u products and services.
During November 1997, the Company announced to its customers that it was
terminating Web site development, maintenance and hosting activities and began
to transition this business to other companies. OSS is ceasing Web site
development activities which are not related to the development of products for
its i2u products and services or which do not involve the creation of online
communities for particular businesses or information purposes. In addition,
during October 1997, the Company licensed its MD Gateway Web site to Medical
Education Collaborative ("MEC") and is no longer developing products for the
healthcare market. In the future, revenues from the healthcare market are
expected to be limited to license fees received from MEC in connection with the
use of MD Gateway.
As discussed more fully in the sections that follow and in "Item 7 -
Financial Statements - Note 1 to the Financial Statements," the Company's cash
on hand and working capital will be sufficient to fund operations only through
May 1998. See Note 1 to the Financial Statements and "Item 6 Management's
Discussion and Analysis or Plan of Operations - Liquidity and Capital
Resources."
The Company was incorporated in March 1994 and commenced operations in
February 1995.
INVESTMENT CONSIDERATIONS
Investors should consider all of the information contained in this report
including the factors discussed under "Item 1 - Description of Business -
General, Competition and Factors That May Affect Future Results," and "Item 6 -
Management Discussion and Analysis or Plan of Operations," and "Item 7 -
Finanical Statements" before making an investment decision with regard to the
Company's stock.
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Information contained in this report, other than historical information,
should be considered forward looking and reflects management's current view of
future events and financial performance that involve a number of risks and
uncertainties. The factors that could cause actual results to differ materially
include, but are not limited to, the following: availability of additional
working capital, general economic product development and technology changes;
competition and pricing pressures; length of sales cycle; variability of sales
order flow; and management growth.
THE INTERNET
The Internet is a global web of computer networks. Developed over 25 years
ago, this "network of networks" allows any computer attached to the Internet to
talk to any other using Internet protocols. Individuals connect directly to the
Internet through Internet Service Providers ("ISPs"). The rapid growth in
popularity of the Internet is in large part due to the increasing availability
of user-friendly navigational and utility tools designed to enable easier access
to the Internet; continued penetration of computers and modems into U.S.
households; the growth of Internet applications and the awareness of those
applications; and the emergence of the World Wide Web.
The World Wide Web ("Web") is the term commonly used to describe the network
of services and information available on the Internet. This technology uses Web
browser software that allows non-technical users to exploit the capabilities of
the Internet. The Web enables users to find, retrieve and link information on
the Internet with easy to use graphical interfaces. The term "Web site" is
commonly used to describe the computer screen layouts and the file server
computer that are accessible by users of the Web. A Web site typically has a
collection of "Web pages" which may contain text, graphics, pictures, sound,
animation, video or other multimedia content.
Increased Internet use and the availability of powerful new tools for the
development and distribution of Internet content have led to a proliferation of
Internet based services, such as advertising, online magazines, specialized news
feeds, interactive games, electronic commerce, electronic banking and
educational and entertainment applications, that are increasingly incorporating
multimedia information such as video and near-CD-quality audio clips. The
Internet has the potential of becoming a platform through which consumers and
businesses can easily access rich multimedia information and entertainment and
conduct business, creating new sources of revenue for broadband operators,
advertisers, content providers and other businesses. However, multimedia
content and other data-intensive applications require high bandwidth.
Today, the average Internet user accesses the Internet via telephone
connection. Telephone modems are edging toward 56 kilobits per second ("Kbps")
transfer rates, but most current users are still using transfer rates of 14.4
Kbps. At these rates, to send an image filling a computer screen with a color
photograph requires about 16 seconds. To download a 10 megabyte ("Mb") software
file requires upwards of an hour or more. Despite the frustration of lengthy
downloading, Internet and PC usage is growing rapidly. It is estimated that by
the year 2,000, 63% of U.S. households will have PCs and 34% of U.S. households
will be online. Demand for high-speed Internet access is increasing due to the
growing number of telecommuters, home businesses, home PCs, Internet-literate
students entering the work place and an increase in the availability and
complexity of multimedia.
Several new technologies attempt to address the performance problems of the
Internet. These include Integrated Services Digital Network ("ISDN") technology
with data transmission speeds of 128 Kbps and Asymmetric Digital Subscriber Line
("ADSL") technology with peak data transmission speeds of 8.4 megabits per
second ("Mbps"), both telecommunications based offerings which are relatively
expensive to implement. Wireless offerings include satellite-delivered
approaches such as direct broadcast satellite ("DBS") which currently provide
peak data transmission speeds of approximately 400 Kbps downstream (delivering
information from Web sites) and rely on dial-up modems and the telephone network
for upstream transmission ("telephone return") and multichannel multipoint
distribution service ("MMDS") and local multipoint distribution service
("LMDS"). MMDS and LMDS are one-way and two-way high-bandwidth wireless digital
broadcasting systems, respectively. In recent years, cable system operators
have been upgrading to hybrid fiber-coaxial cable infrastructure both to compete
more effectively with DBS television providers, which offer a large number of
television channels with digital audio and video, and to increase revenue by
offering digital television, telephone and data transmission using cable modems
through the upgraded infrastructure. In addition, new cable modems have been
introduced which can be used with the cable
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infrastructure currently in place in most systems to provide data transmission
speeds of 10 Mbps and more downstream and rely on dial-up telephone modems for
upstream transmission ("hybrid access"). For most Internet users, it is more
important to have high bandwidth for obtaining information from Web sites
(downstream transmission) than it is for sending information over the Internet
(upstream transmission). The following table demonstrates comparative data
transmission speeds.
COMPARATIVE DATA TRANSMISSION SPEEDS
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TIME TO TRANSMIT A SINGLE 1MB GRAPHIC IMAGE (SUCH AS A HIGH RESOLUTION COLOR PHOTOGRAPH)
<S> <C>
Telephone Modem (28.8 Kbps) Approximately 5 minutes
ISDN (64 Kbps) Approximately 2 minutes
Cable Modem (10 Mbps) Approximately 1 second
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</TABLE>
<TABLE>
<CAPTION>
TIME TO TRANSMIT A 5MB AUDIO/VIDEO CLIP (APPROXIMATELY 1.5 MINUTES IN LENGTH)
<S> <C>
Telephone Modem (28.8 Kbps) Approximately 22 minutes
ISDN (64 Kbps) Approximately 10 minutes
Cable Modem (10 Mbps) Approximately 4 seconds
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</TABLE>
OSS'S STRATEGY
OSS believes technological convergence is occurring rapidly in the areas of
television, telecommunications, PCs and the Internet and that with improving
data transmission speeds, the Internet will become the global communications
medium enabling millions of people to share information and conduct business
electronically. As multiple solutions to the data transmission speed problem
are developed, OSS believes the ISPs that will be most successful will be those
that provide unique services to their subscribers. OSS emphasizes the
development of local communities which will drive online commerce and
communications and enable ISPs to distinguish their services from competing
services. The Company's strategies to achieve its growth objective include:
(i) expanding its marketing and sales resources to gain early market share; (ii)
implementing the i2u program by providing the capital equipment in exchange for
a larger share of the revenues from Internet access and commerce; (iii)
continuing to expand and improve the i2u program; and (iv) developing strategic
alliances, both domestically and internationally, with multiple system broadband
operators and other partners.
There are two types of electronic communities. One is a physical community
that represents all the people and businesses in a specific town or city. A
broadband customer utilizing the operator for Internet access begins his journey
at the operator's Web site. While providing Internet access, the operator
drives traffic to its Web site. This is built-in traffic flow that creates a
significant opportunity for the operator to provide information and services to
the local community, everything from business directories, online shopping at
stores that serve the community, online cable customer billing statements and
ordering of services to program guides.
A second type of community is an online community. The people who use the
broadband operator's Web site become a community. They share ideas and messages
and participate in an online experience. OSS's software systems can also be
used to create virtual communities that encompass individuals who live in
geographically disbursed regions of the country or world. An online community
can represent any group of individuals who share a common interest. For
example, real estate agents that work for a national brokerage firm, sales
representatives or distributors of an international manufacturing firm, or
physicians of a large health maintenance organization. OSS has developed
software designed to assist in the development of online communities, both for
those which are local in scope and those which are geographically disbursed.
Of the various broadband operators, OSS believes that cable operators (wired
and wireless) are in the best position to solve the data transmission speed
problem the soonest, as they already have the infrastructure in place needed to
deliver high-speed Internet access at competitive rates. For this reason, OSS
has developed a turnkey product and service package featuring the use of two-way
and hybrid modem technology designed to put cable television operators in the
Internet service provisioning business. As well as providing cable operators
with local
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content, this package provides them with the equipment, all or a portion of
which OSS may fund, the training and the systems required to become a fully
operational ISP.
OSS INTERNET ACCESS PRODUCTS AND SERVICES
OSS's i2u products and services, which may be marketed and sold together or
individually, fall within four main areas:
. High-speed Internet access;
. A virtual online community of user-generated content;
. Online commerce; and
. Online banking.
For operators who wish to learn more about Internet service provisioning, OSS
offers two Internet Clinics - one for cable and one for wireless operators.
These informative educational sessions show interested operators what the
Internet is, what it means to be an ISP, financial models, the value of Web
content, and how OSS can assist them in successfully deploying the business.
OSS licenses its i2u products and services to broadband operators in return for
and up-front fee and for a percentage of the operator's Internet related
revenues. The percentage varies based on the package of services used and the
extent to which OSS provides the equipment required to provide high-speed
Internet access.
HIGH-SPEED INTERNET ACCESS. The Company's i2u products and services include a
complete, turnkey system that facilitates a broadband operator's entry into a
new business, providing its customers high-speed access to the Internet. This
system includes all necessary hardware, software, training and ongoing support
required for the Internet service provisioning business.
Hardware. The hardware products OSS provides includes routers, interface
equipment, terminal servers, and telephone modems, for which the Company is
an authorized reseller. Typical packages will cost from $124,000 to
$300,000 for headend (a cable distribution center) equipment and license
fees plus $200 to $800 per customer modem. In most cases, a complete
system, including cable modem headend interface hardware, can fit inside a
single, standard equipment rack at the headend.
Software. Software includes servers for the Web, electronic mail, Usenet
news, file transfer (FTP), domain name service (DNS), among others. OSS
has also developed a proprietary system management and customer billing
package known as Sage(TM). With Sage, a cable or wireless operator can
handle all routine operational and administrative tasks with minimal effort
and training. Account setup, customer management, statement generation,
automated credit card billing, customized service setup and report
generation are all streamlined for the operator with the Sage package. OSS
also offers the ability to interface Sage with operators' existing systems,
such as cable television billing systems.
Training and Ongoing Support. With the wide range of hardware and software
needed to provide competitive Internet services, effective assistance and
guidance is essential. To meet this need, OSS provides consulting,
training, technical support and comprehensive documentation, including
documentation covering general system administration, technical
documentation for the equipment and system configuration, sales and
marketing manuals and documentation for the various training programs. OSS
advises the broadband operator on implementation schedules, product
offerings, pricing of services, marketing and sales; everything the
operator needs to know to implement effectively and profitably the
business. Specific training and after-sale ongoing support includes:
. Product knowledge and sales techniques for customer service
representatives;
. How to respond to end-user technical queries for technical support
representatives; and
. Operation and troubleshooting system software.
ONLINE COMMUNITIES (I2U FOUNDATION SOFTWARE). OSS's i2u Foundation software
enables broadband operators to create complex Web sites where content itself is
generated and updated by the people who use the operator's Web site. Using very
simple, on-screen templates, individuals and businesses can post information
about their interests
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and services. Furthermore, by allowing users to participate in the development
of the community, OSS believes users will develop "ownership" in the site and be
more interested in using the site on an ongoing basis. The trend towards local
content delivered via the Internet is significant. A recent study by New York
City-based FIND/SVP predicts that in 1998 more than 24 million adults will be
using the Internet to obtain local news, sports, weather and yellow pages, and
to locate community resources. The report concludes that, if successful, local
online advertising revenues could rise to more than $500 million by the year
2000. Similarly, The Yankee Group forecasts $1.1 billion in online classifieds
and local banner ads by the year 2000.
Local-Revenue Opportunities. User-generated content reduces the broadband
operator's expense of creating local content. OSS believes that high-
value, useful local content offers the opportunity for additional, and
potentially significant, revenue streams for the broadband operator. The
operator can obtain a valuable database on its customers including their
interests, purchasing history and viewing habits which can be used for
highly-targeted marketing campaigns. This information may be used by the
operator or sold to outside organizations and advertisers for their use.
Local Content Development Areas. The current i2u Foundation system
provides six specific areas that generate local content:
. Personal home pages;
. Enhanced business Web pages;
. Business directory listings;
. Community and events listings;
. Online discussion forums; and
. A local cable channel programming guide.
To use the Web site, users must first complete an online registration. At
this time the system collects detailed profile information about their
interests and hobbies. In exchange for providing this information, users
may create a free personal Web page. Using a template, the user can input
text and chose from a variety of visuals to create their signature Web
site. OSS believes this is a powerful incentive for registration, as
having a personal Web site is attractive to many people. The data obtained
from the online registration can then be used to develop a data-base
marketing system for advertising and other revenue-generating activities.
The i2u system provides businesses with a low-cost means for preparing a
business Web page while also providing a new revenue stream for the
broadband operator. Business owners need only fill out on-screen forms to
self-create their Web page. Billing information is automatically routed to
the operator. Since the i2u system does not require interaction of the
broadband operator for updating information, the store owner can change
information as needed.
Any business in the community can add a "Yellow Pages" type listing to the
system. This free listing is added to a comprehensive database that users
of the site can search, both by category and keyword, to quickly locate a
business that may fit their needs.
Communities have many events that can be shared easily with the i2u system.
Users can search for information on current and upcoming events while out-
of-date events are automatically deleted from the system.
The i2u software lets users communicate online about any subject. They can
share ideas and concerns with other members of the local community. i2u
ties the content of these open discussion areas into electronic commerce
opportunities. The i2u system automatically serves both banner advertising
(animated, rolling advertising) and direct purchasing opportunities to
users based upon the local content they are viewing. For example, a user
might be viewing a discussion forum on gardening. The i2u system would
automatically present an ad for a local gardening store where users could
"click through" to visit the store, or present an ad for a bouquet
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of flowers where the user can click and instantly order the bouquet for
delivery from a local florist.
The i2u software enables the broadband operator to add its channel guide to
this online service. The operator can promote special pay-per-view events
and enhanced services such as pay channels. If the operator purchases
ordering capabilities through an addressable system, users can instantly
purchase and pay for services.
Site Monitoring. The i2u software also provides a number of features that
enable the operator to modify and monitor the site. The operator can
provide rights to individual users, monitor site traffic, create new online
forums and assign moderators to these forums, and process orders for
services and enhanced business listings on the site.
ONLINE COMMERCE. Although there have been concerns in the past about the
viability of online or e-commerce, particularly because of security issues,
technological developments have helped make electronic commerce an effective,
safe and profitable way of doing business. At the end of June 1997, an
estimated 17% of Internet users were making purchases online, with a median
monthly expenditure of $50. About 75% of product and service trade on the
Internet belongs to companies based in the U.S. Online e-commerce is expected
to increase dramatically over the next few years. Input, a California-based
research firm, predicts that e-commerce will grow from approximately $57 million
in 1995 to more than $2 billion at the turn of the century. Microsoft has
introduced software that is integrated into i2u which provides both security for
online transactions and helps the users and merchants quickly enter and process
credit card information.
The i2u system has the ability to simultaneously compare a user's personal
preferences (based upon information the user supplies), the nature of the
content that the user is viewing, and the sales opportunities which merchants
and advertisers offer. This instant personalization of sales opportunities
facilitates electronic commerce because it presents items of interest to the
user and also makes the purchasing process immediate and simple. OSS helps
businesses that do not have online stores create them. The inventory and
product descriptions are automatically added to the database which creates,
personalized, just-in-time purchasing messages for the site users. Once the
cable operator has a critical mass of stores, they can be combined into an
online, community-based shopping mall.
ONLINE BANKING. Online or e-banking represents a key element in the i2u system
as it offers inexpensive and easy startup for the broadband operator as well as
a potential revenue stream for OSS. OSS has taken a service bureau approach to
e-banking. OSS's e-banking system includes access to account activity, history
and current account balance information 24 hours a day, seven days a week, the
ability to obtain electronic statements and transfer funds between accounts, pay
bills, make loan applications and download transactions into personal financial
software such as Quicken or Microsoft Money. By providing online banking
capabilities, OSS plans to "close the loop" on online transactions. According
to a recent FIND/SVP survey, 14% of Internet users have searched the Internet
for online banking services.
CURRENT PROJECTS AND TECHNOLOGY DEVELOPMENT
OSS is working with domestic and international customers on such projects as
developing high-speed turnkey Internet access systems, e-commerce, e-banking,
and an online retail showroom, including the following:
FiberTel. The FiberTel TCI2 S.A. ("FiberTel") system located in Buenos
Aires, Argentina has more than 600,000 subscribers. OSS has signed an
agreement to provide this international cable operator its i2u turnkey
Internet access product and services, including all necessary equipment to
offer FiberTel's subscriber base high-speed Internet access and related
services. The system offers both two-way and hybrid access. OSS is
providing headend hardware and software necessary to connect FiberTel's
system to the Internet; customer support in the areas of local content,
marketing and business development; as well as training and technical
services. An i2u license enables FiberTel to create a system for providing
localized Internet content from subscribers, local newspapers, schools,
government and businesses. For the services
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provided, OSS received an up-front fee and shares in ongoing revenues from
both Internet access and content services.
InterMedia Partners. InterMedia Partners, based in Nashville, is the
nation's fifteenth largest multiple cable system operator (MSO), serving
more than 930,000 subscribers in the Southeastern United States.
InterMedia's Kingsport system is currently providing telephone dial-up
Internet access services to consumers in the Kingsport market using OSS's
i2u products and services. OSS has installed an i2u Web site for
Intermedia in Kingsport and is working with the Company to access and begin
implementation of e-commerce in this marketplace.
Rockwell Federal Credit Union. OSS has developed a state-of-the-art system
for providing online banking services for Rockwell Federal Credit Union's
(RFCU) 54,000 members. RFCU is a non-profit organization that provides a
wide range of financial services for employees of Rockwell International,
Boeing North America, and approximately 100 other companies. RFCU has
entered into a three-year agreement with OSS whereby OSS has developed the
Internet solution with applications customized specifically for the needs
of the RFCU membership, and has integrated Edify's Electronic Banking
System(TM) and CheckFree's bill payment system with RFCU's host system.
Under the terms of the agreement, OSS has received income for system
development and is receiving a monthly fee per member for providing the
online banking services.
The e-banking system includes a comprehensive suite of features including
access to account activity, history and current account balance information
24 hours a day, seven days a week, and the ability to obtain electronic
statements for accounts and transfer funds in member accounts and download
transactions into personal financial software such as Quicken or Microsoft
Money. In addition, users can pay their bills electronically and in real-
time through CheckFree, the industry leader in bill paying systems.
American Telecasting, Inc.. OSS has an agreement with American
Telecasting, Inc. (ATI) to provide six markets with high speed internet
access equipment and software and local content software using the i2u
product suite. Four markets, Denver, Portland, Colorado Springs and
Seattle are operational with two additional markets to be determined at a
later date. ATI is one of the largest wireless cable operators in the
United States. They are marketing the high speed access services under the
brand WantWEB. In addition to fees associated with the design and
installation of the equipment, OSS will receive a percentage of access and
content roylaties over the five-year term of the agreement.
RE/MAX International, Inc.. RE/MAX International, Inc. (RE/MAX) is
currently testing a sophisticated internet/intranet system called "RE/MAX
Mainstreet" which was designed and built by OSS. The system is designed to
be REMAX's primary communication tool linking agents, management and
approved suppliers worldwide. The password protected site utilizes many of
the features of OSS's standard i2u product but is customized to meet
RE/MAX's unique requirements. OSS will receive a monthly fee from RE/MAX
subscribers over the term of the three-year agreement.
Kaufman's Tall and Big Men's Shop. Kaufman's Tall & Big Men's Shop has an
online, virtual showroom of business, casual, and formal clothing for tall,
big, and athletically built men. The Web site, http:www.kaufmans.com,
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offers a comprehensive online catalog of suits, sportswear, shirts, ties,
shoes, accessories, sleepwear, and complete lines of golf, skiing, and
outdoor gear. The virtual store joins two other brick-and-mortar showrooms
operated by the Kaufman family in Englewood, Colorado and Bellevue,
Washington. The site, developed by OSS with Microsoft's platform for
electronic ordering, will be upgraded to the latest version of Microsoft
Commerce which offers features such as new order pipeline process and the
Microsoft Wallet for ordering. The site also uses vPos, Veriphone's
product for credit card processing on the Internet. OSS incorporated these
products into the design of a comprehensive Internet presence that
facilitates secure ordering and real-time credit card purchasing via the
Web. The user interface was designed with easy, intuitive shopping in
mind.
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RECENT EVENTS
On March 19, 1998, the Company entered into an Agreement and Plan of Merger
with Durand Acquisition Corporation (a wholly owned subsidiary of the Company)
and Durand Communications, Inc. ("Durand"), pursuant to which Durand would
become a wholly owned subsidiary of the Company. The consummation of the merger
is subject to a number of conditions, including approval by the Company's
shareholders. The Agreement contemplates the issuance of approximately 970,000
shares of the Company's Common Stock to acquire Durand.
Durand, a privately held company located in Santa Barbara, California,
develops and markets internet "community" building tools and services, training
in the use of these tools and services and an on-line service for hosting these
communities. Durand's target markets are businesses, associations, schools,
educational organizations and social organizations which will benefit from using
the Internet to facilitate and promote communications, information sharing and
commerce. Using Durand's new Internet service, CommunityWare(TM), an Internet
community-building and hosting service, users can create and manage their own
public or private on-line communities with no additional hardware or software
purchases, no technical expertise, no specific operating system, and no
integration time, all at a monthly rate below the cost of purchasing and
integrating these services or capabilities individually. Durand also offers
accredited long-distance on-line courses for colleges and universities through
America Online, Inc. During the fiscal year ended December 31, 1997, Durand and
an acquired business reported combined revenues of $773,237 (unaudited) and
incurred a combined net loss of ($2,419,210)(unaudited). At December 31, 1997,
Durand had a shareholder's deficit of ($1,523,102)(unaudited).
Assuming all of the contingencies are satisfied, the Company expects to close
the acquisition of Durand during June or July, 1998. There can be no assurance
that the Company will successfully complete the acquisition of Durand.
MARKETING
OSS's potential market includes most broadband operators. In an effort to
obtain early market share, the Company's initial focus is on domestic and
international cable television (wired and wireless) operators who the Company
believes are best positioned today to provide high-speed Internet access at
competitive rates. Domestically, OSS is focusing on wired cable operators and
is targeting the top twenty-five multiple system operators (MSOs), promoting its
i2u products and services to their second-tier markets (typically markets with
150,000 or fewer subscribers), areas that generally will not have the hybrid
fiber cable required for two-way services for years. These systems are best
suited for the i2u products and services which rely on dial-up modems and
telephone return for upstream transmission. OSS will also market its i2u
products and services in first-tier markets which do not have affiliations with
@ Home Corporation or other national cable access networks. Internationally,
OSS is focusing primarily on larger markets in Latin America, Europe and parts
of Asia.
The Company's marketing activities will include advertising in trade
publications, developing advertising campaigns and materials for use by
broadband operators to promote the use of the Internet to their subscribers,
developing public relations programs featuring the Company and its products and
services and attendance at trade shows. The Company's marketing message will
emphasize that its i2u products and services, based on its local community
content, can help operators establish strong early market shares thereby
improving their ability to withstand competition from other sources of high-
speed Internet access.
A substantial portion of the Company's sales is derived from a limited
number of customers. During fiscal 1997, one customer accounted for 26% of
sales and one customer accounted for 14% of sales for the year. During fiscal
1996, one customer accounted for in excess of 10% of sales for the year. While
major customers in one fiscal period are not necessarily likely to be major
customers in future fiscal periods, the loss of a major customer could have an
adverse effect on the Company's business.
9
<PAGE>
WEB SITE DEVELOPMENT AND MAINTENANCE
The set up and operation of a Web site requires a computer file server,
software resident on that file server and dedicated telephone communication
access to the file server. The file server is given an Internet address for
each of the Web sites located on that server. When an Internet user enters that
address, they are then connected to that customer's file server where the
resident Web pages are located. Once connected, the user can view and interact
with the information and content of the customer's Web pages.
Web sites vary significantly in their complexity and interactivity. A simple
Web site may have only text in outline form. More complex sites may have
colored text, graphics, pictures, sound, animation, video or other multi-media
content. A limiting factor on the content for a site is that as sites get more
complex, significantly more data must be transmitted, making transmission speed
an issue. The speed at which a user can access a Web site will vary based on
the user's modem speed or type of connection to the Internet. As the
availability of increased transmission speeds grows, more complex presentations
of information will become practical at Web sites. Web sites may also vary in
their level of interactivity with the user. Many Web sites are for inquiry
only, while others allow the user to interact with, enter and process
information. A properly designed Web site shares many attributes of the
telephone, namely, widespread connectivity, widespread access to services, and a
simple, easy-to-use interface. However, because of the computer keyboard and
screen, a Web site has the added capabilities of communicating text, graphics,
pictures, animation, video or other multimedia content.
During November 1997, in connection with the Company's strategic decision to
focus on its i2u products and services, the Company ceased its general Web site
development business. OSS will continue to develop Web sites to the extent that
they support the development and implementation of the Company's i2u products
and services.
During November 1997, the Company notified its Web site customers that it was
terminating the development and maintenance of Web sites due to the strategic
decision to focus on its i2u product offerings and that OSS would cease
providing these services by early 1998. During fiscal 1997 and 1996, the
Company's revenues from this business were $905,649 and $1,063,509,
respectively, and 32% and 74%, respectively, of the
Company's total revenues for such periods.
HEALTHCARE MARKET
One of the markets first targeted by the Company was the healthcare medical
education and information market. The Company offered Internet-based products
designed to help physicians and other healthcare professionals obtain access to
timely and mission-critical education and information via the Internet. MD
Gateway, introduced by the Company in 1996, is a central clearing house for
education and information about conferences, associations, relevant sites and
other useful content. This marketspace integrates the professional and
educational needs of physicians with the unique interests of professional
associations, multimedia publishers, managed care organizations and
pharmaceutical and medical device companies.
The Company had a joint development and marketing arrangement with Charles
Spickert, a director of the Company, and Medical Education Collaborative
("MEC"). MEC is a nonprofit medical education firm founded by Mr. Spickert in
1988 and is a nationally accredited provider of continuing medical education
credits for physicians. Mr. Spickert has worked in continuing medical education
for over 15 years.
During November 1997, in connection with the Company's strategic decision to
focus on the i2u product and service offerings, OSS licensed to MEC the
Company's rights in MD Gateway, in return for a royalty fee of 35% of the amount
by which MEC's MD Gateway related revenues exceed certain expenses. Included in
the license were the hardware and software which comprised the MD Gateway Web
site.
10
<PAGE>
TRADEMARKS AND PROPRIETARY PROTECTION
The Company does not believe that its current products or services are
patentable. The Company plans to rely on a combination of copyright, trade
secret, trademark laws, and nondisclosure and other contractual provisions to
protect its proprietary rights. As a part of its confidentiality procedures,
the Company generally enters into written nondisclosure and nonsolicitation
agreements with its officers and employees which restrict the use and disclosure
of proprietary information and the solicitation of customers for the purpose of
selling competing products or services. The Company has not entered into
noncompetition agreements with its officers, directors or employees. Because
the policing of proprietary rights may be difficult and the ideas and other
aspects underlying the Company's products and services may not in all cases be
protectable under intellectual property laws, there can be no assurance that the
Company can prevent competitors from marketing the same or similar products and
services. In addition, competitors may independently develop products and
services that compete with the Company.
COMPETITION
The market for Internet products and services is highly competitive and the
Company expects that this competition will continue to intensify in the future.
The Company's current and prospective competitors include many companies that
have substantially greater financial, technical, marketing, and other resources
than the Company. Increased competition could result in price reductions and
increased spending on marketing and product development. Any of these events
could have a material adverse effect on the Company's financial condition and
operating results. There can be no assurance that the Company will be able to
compete successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, financial condition, and results of operations.
Competitors for the Company's i2u offering fall into one of three primary
categories: first-tier MSO backed services; broadband operators; and other
companies which like OSS provide hardware, service, support and management of
online customers. MSO backed companies such as @ Home Corporation and Time
Warner (through its RoadRunner(TM) product) are focusing their activities on
major markets as they generally require systems with two-way high-speed data
transmission to fully implement their high-speed Internet access programs. For
this reason, OSS is emphasizing second-tier markets of the major MSOs and is
exploring partnerships with national content providers who the Company believes
can benefit from OSS's local content offering. While broadband operators may
enter the high-speed Internet access business on their own, the Company believes
that most broadband operators do not currently have the knowledge and systems
required to undertake this new business development activity. OSS is aware of
two companies, Internet Ventures, Inc. and Community Networks, Inc., which are
offering Internet access services which may compete with the Company's i2u
products and services. The Company believes that Internet Ventures, Inc.
commenced its first high-speed service early in 1997 and that Community
Networks, Inc. is focusing on cable systems with two-way communication
capabilities. In addition, the Company is aware of a number of companies
specializing in the creation of local content but does not believe that any of
these companies also are providing Internet access provisioning services.
National ISPs, including companies such as MCI Telecommunications
Corporation, AT&T, Sprint Corp., Netcom Online Communications Services, Inc. and
Performance Systems International, Inc. and Internet access providers such as
America Online, Inc. could also develop products which compete with the
Company's i2u products and services. Further, the market for the Company's
products and services is characterized by rapidly changing technology, evolving
industry standards, emerging competition and frequent new product and service
introductions. There can be no assurance that the Company can successfully
identify new product and service opportunities or develop and bring new products
and services to market in a timely manner, or that products and services or
technologies developed by others will not render the Company's products and
services noncompetitive or obsolete.
11
<PAGE>
GOVERNMENT REGULATION
The Company's products and services pertaining to Web site content and
development are not currently subject to direct regulation by the Federal
Communications Commission or any other federal or state agency, other than
regulations applicable to businesses generally. Changes in the regulatory
environment relating to the Internet content or connectivity industries,
including regulatory changes that directly or indirectly affect
telecommunication costs or increase the likelihood or scope of competition from
regional telephone companies or others, could have a material adverse effect on
the Company's business. The Company cannot predict the impact, if any, that
future regulation or regulatory changes may have on its business.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Factors that may affect the Company's future results include, but are not
limited to, the following items as well as the information in "Item 1 -
Description of Business - General and Competition," "Item 6 - Managements
Discussion and Analysis or Plan of Operations," and "Item 7 - Financial
Statements - Note 1 to the Financial Statements."
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, it is difficult to predict the rate at which the market
will grow or at which new or increased competition will result in market
saturation. If the Internet markets fail to grow, grow more slowly than
anticipated or become saturated with competitors, the Company's business,
operating results and financial condition will be materially adversely affected.
Product Development; Technological Change. The Company's success depends
upon its ability to develop new products and services that meet changing
customer requirements. The market for the Company's products and services is
characterized by rapidly changing technology, evolving industry standards,
emerging competition and frequent new product and service introductions. There
can be no assurance that the Company can successfully identify new product and
service opportunities or develop and bring new products and services to market
in a timely manner, or that products and services or technologies developed by
others will not render the Company's products and services or technologies
noncompetitive or obsolete.
General Risks of Business. The Company has formulated its business plans and
strategies based on the rapidly increasing size of the Internet markets, the
Company's anticipated participation in those markets, and the estimated sales
cycle, price and acceptance of the Company's products and services. Although
these assumptions are based on the best estimates of management, there can be no
assurance that these assumptions will prove to be correct. No independent
marketing studies have been conducted on behalf of or otherwise obtained by the
Company, nor are any such studies planned. Any future success that the Company
might enjoy will depend upon many factors including some beyond the control of
the Company or that it cannot predict at this time.
Limited Availability of Proprietary Protection. The Company does not believe
that its current products or services are patentable. The Company relies on a
combination of copyright, trade secret and trademark laws, and nondisclosure and
other contractual provisions to protect its proprietary rights. Notwithstanding
these safeguards, it may be possible for competitors of the Company to imitate
the Company's products and services or to develop independently competing
products and services. See "Business-Trademarks and Proprietary Protection."
Security Risks. The Company's software and equipment are vulnerable to
computer viruses or similar disruptive problems caused by OSS customers or other
Internet users. Computer viruses or problems caused by third parties could lead
to interruptions, delays or cessation in service to the Company's customers.
Furthermore, inappropriate use of the Internet by third parties could also
potentially jeopardize the security of confidential information stored in the
computer systems of the Company's customers. The Company has 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 the
Company attempts to limit its liability to customers for these types of risks
through contractual provisions, there is no assurance that these limitations
will be enforceable.
Dependence on the Internet. Sales of the Company's Internet related products
and services will depend in large part upon a robust industry and infrastructure
for providing Internet access and carrying Internet traffic. The
12
<PAGE>
Internet may not prove to be a viable commercial marketplace because of
inadequate development of the necessary infrastructure, such as a reliable
network backbone or timely development of complementary products. Because
global commerce and online exchange of information on the Internet and other
similar open wide area networks are new and evolving, it is difficult to predict
with any assurance whether the Internet will prove to be a viable commercial
marketplace. There can be no assurance that the infrastructure or complementary
products necessary to make the Internet a viable commercial marketplace will be
developed, or, if developed, that the Internet will become a viable commercial
marketplace. If the necessary infrastructure or complementary products are not
developed, or if the Internet does not become a viable commercial marketplace,
the Company's business, operating results and financial condition will be
materially impaired. See "Business-The Internet."
EMPLOYEES
At February 28, 1998, the Company employed 54 people, all of whom are full
time employees. In addition to these Company personnel, OSS contracts with
other creative and production resources, as required for peak load situations,
to create Web pages. None of the Company's employees are represented by a labor
union and the Company considers its employee relations to be good.
The directors and officers of the Company are as follows:
<TABLE>
<CAPTION>
Director
Name Age Since Position
- - ---- ------- ----------- --------
<S> <C> <C> <C>
R. Steven Adams............... 45 1994 President, Chief Executive Officer and a Director
William R. Cullen............. 56 1998 Chief Operating Officer and a Director
Thomas S. Plunkett............ 44 ----- Chief Financial Officer
Robert M. Geller.............. 45 1995 Secretary and a Director
Edward C. Robinson............ 38 ---- Vice President-Business Development
Paul H. Spieker............... 54 1995 Vice President-Technical Operations and a Director
Vincent D. Bradshaw........... 57 ----- Vice President-Sales
Michael S. Murphy............. 46 ---- Vice President-Operations
Donald L. Smith, III.......... 48 ---- Vice President-Product Development
Robert J. Lewis............... 67 1995 Director
H. Robert Gill................ 61 1996 Director
Richard C. Jennewine.......... 59 1996 Director
Charles P. Spickert........... 44 1997 Director
</TABLE>
R. STEVEN ADAMS, founder of the Company, has served as President, Chief
Executive Officer and a director since the Company's incorporation in March
1994. From 1985 to 1994, Mr. Adams was President-Sheridan Hotel Management, a
full service hotel management company. Mr. Adams was the creator and founder of
HotelNet, which was an online information system for the hospitality industry.
Mr. Adams' experience includes software development, personal computer
manufacturing and management of online information systems.
WILLIAM R. CULLEN, has served as the Chief Operating Officer of the Company
since March 1998. From 1994 to 1997, Mr. Cullen was Chairman and CEO of Access
Television Network, Inc., a privately held company specializing in providing
paid programming to local cable systems. From 1992 to 1994, Mr. Cullen was
President and CEO of California News Channel, a programming project of Cox Cable
Communications. Previously, Mr. Cullen was Senior Vice President of the
Southwest division of Untied Artist Cable Corporation. Following an early career
in banking, he served as a top financial officer of three companies. Prior to
joining United Cable as Vice President of Operations and President of United
Cable of Los Angeles, Inc., he served as President of Tribune Company Cable of
California, Inc. and CEO of United-Tribune Cable of Sacramento.
13
<PAGE>
THOMAS S. PLUNKETT, has served as Vice President-Chief Financial Officer of
the Company since October 1996. From 1995 to 1996 Mr. Plunkett was the Vice
President of Business Management at Maxtor Corporation, a manufacturer of disk
drives. From 1994 to 1995 Mr. Plunkett was the Vice President of Operations for
Hi-Tech Manufacturing, an electronic manufacturing services company. From 1992
to 1994 he was a Controller at Conner Peripherals, a manufacturer of disk
drives. From 1989 to 1992, Mr. Plunkett served as Vice President and C.F.O. of
Discovery Technologies, a manufacturer of high resolution medical image
transmission equipment. Prior to joining Discovery Technologies, Mr. Plunkett
held various senior operations and financial management positions with
Miniscribe Corporation from 1982 to 1989.
ROBERT M. GELLER, has been a director and corporate secretary of the
Company since May 1995. He also served as Vice President-Chief Financial Officer
of the Company on a one-half time basis from May 1995 to October 1996. Mr.
Geller currently provides consulting services to the Company on a one-half time
basis. From 1986 to the present, Mr. Geller has been President of The Growth
Strategies Group, a consulting company specializing in board and executive
services for emerging growth companies. Mr. Geller is a director of Integral
Peripherals, Inc., a privately held manufacturer of computer disk drives;
Renaissance Entertainment Corporation, a publicly held owner and operator of
renaissance fairs; and Armanino Foods of Distinction, Inc., a publicly held
producer of Italian foods.
EDWARD C. ROBINSON, joined OSS in May 1997 and is responsible for business
development for the i2u products and services. From 1992 to 1994, Mr. Robinson
was Director of Marketing and Sales, New Media for U S WEST Marketing Resources,
responsible for preparing the $1.0 Billion division of U S WEST for entrance
into the interactive services/Internet content businesses. From 1994-1996, Mr.
Robinson was the Director of Business Development for U S WEST Interactive
Services, responsible for negotiating and finalizing content and distribution
agreements worldwide for U S WEST in it's broadband ventures. From 1996 to 1997
Mr. Robinson was the Director of Business Development for Broadvision an
Internet software company in Los Altos, CA.
PAUL H. SPIEKER, has been Vice President-Technical Operations and a
director of the Company since February 1995. From 1992 to 1994 Mr. Spieker was
President of Business Regulatory Coalition-Colorado, a public affairs company
responsible for policy formulation and activities primarily dealing with
regulatory matters representing companies before the Colorado Public Utilities
Commission. From 1991 to 1994, he was a private consultant primarily for
businesses in voice and data communications. From 1990 to 1991, Mr. Spieker was
President of Developers Cable Construction, a startup company providing contract
construction services for residential developers and local telephone and cable
companies. From 1987 to 1990, Mr. Spieker was employed by Volt Information
Sciences, Inc., a New York based telecommunications company. Mr. Spieker was
employed by U S WEST Communications, Inc. and its predecessor from 1966 to 1987
and served in several senior management capacities, including the head of the
strategic business unit which served large telephone customers in a seven state
territory.
VINCENT D. BRADSHAW, joined the Company as Director-Sales in June 1996 and
was promoted to Vice President-Sales and made an officer of the Company in
September 1996. From May 1993 to May 1996, he was Director of Business
Development for Source One Management, Inc., a privately held Denver based
company in the business of providing technical operations, management and
engineering services. From 1987 to 1996, Mr. Bradshaw was an independent, Denver
based marketing and business consultant, doing business as Foresight Business
Services. As a consultant, he provided marketing and business operations advice
to a number of private and public companies. From May 1981 to December 1986, Mr.
Bradshaw was employed by Mountain Bell and its parent company in different sales
positions leading to his being named Vice President-Federal Services from 1985
to 1986. From August 1960 to April 1981, he held progressive technical
operations, engineering and sales/marketing positions with AT&T Company in
several eastern states. Mr. Bradshaw is currently a business advisor with the
Boulder Technology Incubator, a not-for-profit corporation that assists
inventors and firms in marketing their technologies.
14
<PAGE>
MICHAEL S. MURPHY, joined the Company in April 1997 as Vice President -
Operations. From November 1996 to April 1997, he was an independent management
consultant. From May 1994 to November 1996, Mr. Murphy was co-founder and Vice
President of Operations of Requisite Technology, Inc., a developer of software
and electronic catalog publishing. From January 1993 to May 1994, Mr. Murphy
was Director of Strategic Business Development for Ball Aerospace and
Telecommunications Corporation and from July 1987 to January 1993, Manager, San
Diego Operations of Ball System Engineering Division.
DONALD L. SMITH, III, joined OSS in November, 1997 and is responsible for
product development. He has worked the past eleven years in the software
development area in a variety of industries. His most recent experience included
establishing and growing the development organization at Jones Cyber Solutions
from a single resource to one hundred persons working on the development and
customization of subscriber management and customer care software being sold to
the cable and telephony marketplaces. His previous position included developing
performance measurement and project management applications for multi-billion
dollar Martin Marietta defense contracts.
ROBERT J. LEWIS, has been a director of the Company since February 1995.
Mr. Lewis retired in October 1995 after having spent 37 years in the cable
television industry as an owner and developer of cable systems and senior
executive with several cable television companies. From 1987 until his
retirement, Mr. Lewis was employed by TCI Telecommunications, Inc. ("TCI"), one
of the largest cable television companies in the United States. Mr. Lewis served
as a Senior Vice President of TCI from 1991 to 1993 and as a Senior Advisor to
TCI from 1993 until his retirement.
H. ROBERT GILL, has been a director of the Company since August 1996. From
April 1996 to the present, Mr. Gill has been the President of The Topaz Group, a
consulting company offering board of director services to high technology,
emerging growth, public and private corporations. From March 1995 to March
1996, Mr. Gill was the Senior Vice President and President, Enhanced Products
Group for Frontier Corporation, a telecommunications company. From January 1989
to March 1995 he was President, Chief Executive Officer and a director or
Confer-Tech International, Inc. Mr. Gill is a director of TOPRO, Inc., a
systems integration company offering equipment and services to a variety of
growth manufacturing industries; QualMark Corporation, a provider of accelerated
Life testing equipment and services; MOSAIX, Inc., a marketer of inbound and
outbound call center systems and services; and Spatial Technologies, Inc., a
developer and marketer of three dimensional modeling software for CAD
applications.
RICHARD C. JENNEWINE, has been a director of the Company since November
1996. From September 1995 to the present, Mr. Jennewine has been President-
International Operations and Regional Manager-Western Operations for Computer
Aid, Inc. a leader in strategic outsourcing and information services consulting.
From December 1991 to February 1995, Mr. Jennewine served as the Senior Vice
President of the CONCORD Group, a privately held entrepreneurial group of 40
international enterprises. From January 1994 to February 1995, he served as the
President of the Concord Trading Corporation, a company focusing on trading and
business ventures in Asia, Russia, the Middle East and South America. Prior to
these positions, Mr. Jennewine spent 26 years with IBM Corporation, including
startup operations in mainland China. Mr. Jennewine is a director of Easter
Seals of Colorado and is a member of the Corporate Management Committee of
Computer Aid, Inc.
CHARLES P. SPICKERT, has been a director since April 1997. Mr. Spickert
founded Medical Education Collaborative ("MEC"), a non-profit medical education
organization, in March 1988 and currently serves as MEC's President and Chief
Executive Officer. From June 1990 to July 1992 Mr. Spickert also served as the
President and Chief Operating Officer of HealthWatch, Inc., a developer and
manufacturer of medical supplies and devices. Prior to these positions, Mr.
Spickert held marketing and sales management positions with Allertech, a
provider of allergy products and services; International Medical Corporation, a
manufacturer of cardiovascular devices and supplies; and Becton Dickinson, a
provider of microbiology equipment and supplies.
Mr. Geller currently provides services to the Company on a part-time basis.
All of the other officers of the Company are full time employees of the Company.
There are no family relationships among any of the directors or executive
officers of the Company.
15
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's principal offices are located in approximately 16,800
square feet of space in Denver, Colorado, leased for a period of three years
ending on September 30, 1999. The current base monthly rental is $18,208. The
spouse of R. Steven Adams, President, Chief Executive Officer and a director of
the Company, is an officer of the firm which manages the building where the
Company's principal offices are located. See "Certain Transactions."
ITEM 3. LEGAL PROCEEDINGS.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
16
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The number of record holders of the Company's Common Stock ("Common
Stock") and Common Stock Purchase Warrants ("Warrants") on February 28, 1998 was
63 and 14, respectively. The Company estimates that the number of beneficial
owners of the Common Stock on February 28, 1998 exceeded 1,200. Prior to May 23,
1996 there was no public trading market for the Common Stock and Warrants.
Since May 23, 1996, the high and low bid prices for the Common Stock and the
Warrants as reported on the NASDAQ Small Cap Market are shown in the table
below, based on information provided by the Nasdaq Stock Market. These
quotations represent prices between dealers, and do not include retail markups,
markdowns or commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
---------------------------------- ------------------------------------
Quarter Ended High Bid LOW BID HIGH LOW
- - ------------- -------- ------- ---- ---
1996
- - ----
<S> <C> <C> <C> <C>
June 30 10 1/2 5 5/8 2 3/8 7/8
September 30 5 3/4 3 1/8 1 1/8 1/2
December 31 5 3 1/4 3/4 3/8
1997
- - ----
March 31 5 3 1/4 25/32 1/2
June 30 4 1 1/4 9/16 3/16
September 30 10 7/8 2 1/16 2 1/8 1/2
December 31 12 1/2 6 1/8 2 5/8 1
</TABLE>
The Company has never paid a cash dividend on its Common Stock. The
payment by the Company of dividends, if any, in the future rests within the
discretion of its Board of Directors and will depend, among other things, upon
the Company's earnings, capital requirements and financial condition. Dividends
on the Company's 10% Cumulative, Convertible, Redeemable Preferred Stock shall
be declared and paid before dividends can be paid on the Company's Common Stock.
On December 31, 1997, the Company completed the sale of 24.5 units
("Units") of its securities to a total of 18 private investors for an aggregate
consideration of $2,450,000 ($100,000 per Unit). An additional 2.25 Units
($225,000) were sold to four private investors during February 1998. Each unit
consisted of 10,000 shares of the Company's 10% Cumulative, Convertible,
Redeemable Preferred Stock, 2,500 shares of its Common Stock, and 2,000 Common
Stock Purchase Warrants. Each Warrant entitled the holder thereof to purchase
one share of Common Stock of the Company for the purchase price of $15.00 per
share at any time during the three-year period ending on December 31, 2000.
Cohig & Associates, Inc. served as the placement agent for the offering and
received a commission equal to 8% of the gross proceeds of the offering and a
non-accountable expense allowance of 2% of the gross proceeds. The Preferred
Stock may be redeemed by the Company at any time for $10.00 per share. If the
Preferred Stock is not redeemed prior to October 1, 1998, the Preferred Stock
shall become convertible at the election of the holder thereof, into a number of
shares of Common Stock of the Company equal to $10.00 divided by the lessor of
$10.00 or 80% of the average per share closing bid price of the Company's Common
Stock for the five trading days preceding the date of conversion (as defined).
The securities were not registered under the Securities Act of 1933, as amended,
based upon the exemption provided in Section 4(2) of such act and Regulation D
promulgated thereunder. The securities were "restricted" securities as defined
in Rule 144 promulgated by the Securities and Exchange Commission and were
acquired for investment purposes. The certificates representing such securities
contained restrictive legends. The securities are subject to a demand
registration right granting the holders thereof the right to request that one
registration statement covering certain of the securities be filed with the
Securities and Exchange Commission, provided that the Company is not obligated
to file the registration statement prior to September 30, 1998. See Note 6 of
Notes to Financial Statements for additional information regarding this
transaction.
17
<PAGE>
On May 23, 1996 the Company's first registration statement under the
Securities Act of 1933, as amended, was declared effective by the Securities and
Exchange Commission (Commission File No. 333-3282-D). Pursuant to such
registration statement, on May 23, 1996 the Company commenced an offering of
1,100,000 units (the "Units") (plus an over-allotment option of an additional
165,000 Units), each Unit composed of one share of the Company's Common Stock,
no par value, and one common stock purchase warrant. Two warrants entitle the
holder to purchase one share of the Company's Common Stock at a price of $9.00
per share. The aggregate offering price of the Units (including Units allocable
to the over-allotment option) was $8,538,750.
The managing underwriter for the offering was Cohig & Associates, Inc.
The Company sold all 1,100,000 Units, plus the over-allotment option of 165,000
Units, for total aggregate proceeds of $8,538,750. Expenses for such offering
were as follows:
<TABLE>
Payments to directors, officers of the
Company or its associates, persons
owning 10% or more of the Company's
equity securities, or
affiliates of the Company Payment to others
------------------------- -----------------
<S> <C> <C>
Underwriting discounts and
commissions -- $ 768,488
Expenses paid to or for
underwriters -- $ 256,163
Other expenses -- $ 282,118
- - -------------------------------------- --------------------------------------- ----------
Total expenses None $1,306,769
</TABLE>
After deducting $1,306,769, in offering expenses, the net offering
proceeds to the Company were $7,231,981. To date, the Company has used all of
such proceeds as follows:
<TABLE>
Payments to directors, officers of the
Company or its associates, persons
owning 10% or more of the Company's
equity securities, or
affiliates of the Company Payments to others
------------------------- -------------------------
<S> <C> <C>
Purchase and installation of
machinery and equipment -- $ 500,000
Repayment of indebtedness $50,000 $ 250,000
Working capital -- $3,771,981
Other purposes:
Community Access America -- $1,500,000
Web Site development -- $1,000,000
Commitments -- $ 160,000
- - -------------------------------------- --------------------------------------- ----------
Total $50,000 $7,181,981
</TABLE>
18
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
GENERAL
To date, the Company has generated revenues through the sale of design and
consulting services for Web site development, resale of software licenses, mark-
ups on computer hardware and software sold to customers, maintenance fees
charged to customers to maintain computer hardware and Web sites, license fees
based on a percentage of revenues from the i2u products and services, training
course fees, and monthly fees paid by customers for Internet access provided by
the Company. The Company commenced sales in February 1995, and was in the
development stage through December 31, 1995. The Company has incurred losses
from operations since inception. At December 31, 1997, the Company had an
accumulated deficit of ($5,011,757).
Prior to the quarter ended September 30, 1997, the Company's focus
generally was on three markets: general Web site development, maintenance and
hosting; rural or small market Internet service providers ("ISPs"); and
healthcare information services and continuing medical education ("CME"). These
activities were divided into three separate units early in fiscal 1997; the
Business Resource Group ("BRG") for Web site-related activities; Community
Access America ("CAA") for the ISP activities; and Healthcare for the CME and
healthcare information activities.
Each of these activities involved in varying degrees the establishment of
online communities. As an outgrowth of the Company's BRG and CAA activities,
and in recognition of the need to increase the availability of high-speed
Internet access, the Company's focus during fiscal 1997 increasingly was on the
development of online communities for broadband (high bandwidth or high data
transmission capabilities) operators such as cable TV operators (wired and
wireless) who the Company believes are in the best position today to provide
high-speed Internet access. This focus has resulted in the introduction of the
i2u products and services which include a wide range of online services which
enable operators and operators' customers to generate online local content,
create Web pages and conduct online commerce and banking and a turnkey product
and service package which provides the equipment, training and systems necessary
for the broadband operator to become a fully operational ISP. OSS's revenues for
the i2u products and services include payments for hardware, software licenses,
training and other implementation services as well as a percentage of Internet
access fees paid by subscribers of the Company's broadband operator customers
and in connection with e-commerce and e-banking transactions which these
subscribers conduct on the broadband operator's systems. The Company intends to
focus its future efforts primarily on its i2u products and services.
During November 1997, the Company announced to its customers that it was
terminating Web site development, maintenance and hosting activities and began
to transition this business to other companies. OSS is ceasing Web site
development activities which are not related to the development of products for
its i2u products and services or do not involve the creation of online
communities for particular businesses or information purposes. In addition,
during October 1997, the Company licensed its MD Gateway Web site to Medical
Education Collaborative ("MEC") and is no longer developing products for the
healthcare market. In the future, revenues from the healthcare market are
expected to be limited to license fees received from MEC in connection with the
use of MD Gateway.
Revenues for the businesses that the Company is no longer emphasizing
represented $905,649 and $1,063,509 of the Company's revenues during the years
ended December 31, 1997 and 1996, respectively, representing 32% and 74%,
respectively, of the total revenues for such periods.
The Company intends to increase its capital expenditures and operating
expenses in order to expand its i2u products and services to support additional
broadband operators in future markets and to market and provide the Company's
products and services to a growing number of potential subscribers of the
broadband operators who partner with the Company. As a result, OSS expects to
incur additional substantial operating and net losses in fiscal
19
<PAGE>
1998 and possibly for one or more fiscal years thereafter. There can be no
assurance that such increase will result in increased revenue and/or customers.
Based on applicable current accounting standards, the Company estimates
that it will be required to record a non-operating expense of approximately
$1,200,000 during fiscal 1998 in connection with the private placement of
$2,675,000 of the Company's preferred stock which was completed during December,
1997 and February, 1998. While these charges will not affect the Company's
operating loss or working capital, they will result in a decrease in the
Company's net income available to common stockholders during 1998. In addition,
the Company has signed an engagement letter for the private placement of an
additional $2 million of preferred stock which, if completed as contemplated,
would result in an additional non-operating expense during fiscal 1998. See note
6 of Notes to Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
net sales by items contained in the statements of operations. All percentages
are calculated as a percentage of total net sales, with the exception of cost of
services and cost of hardware/software which are calculated as a percentage of
service sales and hardware/software sales, respectively.
<TABLE>
<CAPTION>
For the Twelve Months Ended December 31,
1997 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
Net Sales:
Service sales 60.0% 77.9% 59.4%
Hardware/software sales 40.0% 22.1% 40.6%
------ ------ ------
Total net sales 100.0% 100.0% 100.0%
Cost of sales:
Cost of services
(as percentage of service sales) 61.0% 63.7% 70.3%
Cost of hardware/software
(as percentage of hardware/software sales) 87.0% 72.8% 83.4%
------ ------ ------
Total cost of sales 71.4% 65.7% 75.6%
Gross Margin 28.6% 34.3% 24.4%
Operating expenses:
Sales and marketing expenses 42.9% 43.8% 21.2%
Product development expenses 39.7% 32.0% 20.1%
General and administrative expenses 65.8% 61.8% 98.7%
Depreciation and amortization expenses 7.1% 7.4% 5.3%
------ ------ ------
Total operating expenses 155.5% 145.0% 145.3%
Loss from operations (126.9%) (110.7%) (120.9%)
Net Loss (120.9%) (98.3%) (121.2%)
</TABLE>
TWELVE MONTHS ENDED DECEMBER 31, 1997 AND 1996.
Net sales for the twelve months ended December 31, 1997 totaled $2,791,556,
including $1,674,198 for service sales and $1,117,358 for hardware and software
sales. This represents an increase of 93% above 1996 net sales of $1,445,042
which consisted of $1,125,617 for service sales and $319,425 for hardware and
software sales. The Company had one customer representing 26% of sales and one
customer representing 14% of sales for the year ended December 31, 1997. In
1996, one customer accounted for sales in excess of 10% of net sales.
20
<PAGE>
The increase in sales for the 1997 period compared to 1996, was due to the
expanded development of the Company's i2u product and service offerings, and to
a substantial increase in marketing and sales efforts in the broadband market.
The sales increase includes Web site development revenue from three customers
associated with electronic commerce, initial revenue from an online banking
service bureau application and sales of the i2u product, including hardware,
software and consulting services to a South American cable provider and a large
domestic wireless operator.
Cost of sales as a percentage of net sales was 71.4% for the twelve month
1997 period and 65.7% for the comparable 1996 period. Cost of sales on hardware
and software sales are generally higher than on service sales. Therefore, the
Company's overall gross profit margin is higher during periods when service
sales are a greater percentage of total net sales. Sales of hardware and
software as a percent of total sales increased significantly over the 1996
period which contributed to the higher overall cost of sales. The higher cost
of sales on hardware and software for the 1997 period was due to equipment sales
to larger customers, which were at lower margins.
Sales and marketing expenses were $1,197,038 for the twelve months ended
December 31, 1997 and $633,025 for the twelve months ended December 31, 1996.
Sales and marketing expenses as a percentage of net sales decreased slightly
from 43.8% in 1996 to 42.9% in 1997. The increase in dollars spent during the
1997 twelve-month period, was due to the hiring of new sales and marketing
personnel and associated expenditures. The Company also developed initial
marketing materials, began lead generation activity and began to sell its i2u
and CME products and services. In addition the Company entered into an
agreement with Telemedical Systems Integration, Inc. (TMED) during the fourth
quarter of 1996 to serve as the Company's primary sales group for its healthcare
products. The Company incurred significant expenses during the early part of
the twelve-month period ended December 31, 1997 related to initial training of
and lead generation for this sales force. During the last quarter of the 1997
period, the Company incurred expenses associated with marketing and trade shows
directed towards the wireless cable market and began to market its i2u products
and services to markets outside of the United States.
Product development expenses were $1,108,456 for the twelve months ended
December 31, 1997, compared to $462,108 for the 1996 period. Product
development expense as a percentage of net sales increased from 32.0% in 1996 to
39.7% in 1997. The increase in these expenses, as well as the increase as a
percentage of net sales during the 1997 period, reflect the continued
development of the Company's products and services. Product development
expenses during the 1997 period included the completion of the initial
development of the Company's i2u product, addition of wireless cable
capabilities, and initial product offerings targeted at the CME segment of the
healthcare market. Product development expenses during the 1996 period included
enhancements to the initial CAA product and early development of the Company's
WebQuest process. Product development expenses are expected to continue to
increase during 1998 as the Company continues to develop the i2u, e-banking and
e-commerce products and services.
General and administrative expenses were $1,837,330 for the twelve months
ended December 31, 1997, compared to $892,799 for the 1996 period. General and
administrative expenses as a percentage of net sales increased from 61.8% in
1996 to 65.8% in 1997. The dollar and percentage increases reflect the
development of the Company's general and administrative infrastructure,
including finance, accounting, business development and investor relations
capabilities, as well as additional expenses related to being a public company.
In addition, during the latter part of the twelve-month period ended December
31, 1997, the Company incurred expenses and developed capabilities to enter into
the international market for its i2u products and services.
Depreciation and amortization expenses were $198,788 for the twelve months
ended December 31, 1997, compared to $106,814 for the 1996 period. This
increase reflects the increase in fixed assets and equipment to support higher
levels of Web site and Internet access services, i2u development and testing, as
well as to support the growth in the number of employees.
Interest income was $168,298 during the twelve-month period ended December
31, 1997, compared to $179,192 for the 1996 period. Upon completion of the
Company's initial public offering, the Company paid a portion of its outstanding
debt resulting in a reduction of future interest expense and began earning
interest income
21
<PAGE>
on the invested net proceeds. The Company's investments consist of U.S.
Treasury bills, corporate bonds and cash equivalents.
Net losses were $3,375,279 for the twelve-month period ended December 31,
1997 compared to $1,420,432 for the 1996 period. The increase in losses in the
1997 period reflect expenses in the marketing and sales, product development,
and general and administrative areas that have increased at a faster rate than
net sales. This is due to the time lag associated with product development and
market introduction as well as the long sales cycle for most of the Company's
products and services. The Company expects to continue to experience increased
operating expenses and capital investments during fiscal 1998, as it continues
to develop new product offerings and the infrastructure required to support its
anticipated growth. The Company believes that, initially, these expenses will
be greater than increases in net sales. The Company expects to report operating
and net losses for fiscal 1998 and for one or more fiscal years thereafter.
TWELVE MONTHS ENDED DECEMBER 31, 1996 AND 1995
Net sales for the twelve months ended December 31, 1996 total $1,445,042,
including $1,125,617 for service sales and $319,425 for hardware and software
sales. This represents an increase of 263.3% above 1995 net sales of $397,756,
which consisted of $236,412 for service sales and $161,344 for hardware and
software sales. Net sales for the 1995 period were predominantly from two
initial customers. In 1996, one customer accounted for sales in excess of 10%
of net sales. The increase in sales for the 1996 period, compared to 1995, was
due to the expanded development of the Company's product and service offerings
and to a substantial increase in marketing and sales activities in general.
Cost of sales as a percentage of net sales was 65.7% for the 1996 period and
75.6% for the 1995 period. The Company's gross profit margin on service sales
has fluctuated and has been lower during periods when the Company has hired
additional service personnel and incurred other fixed costs in anticipation of
future growth. Cost of sales on hardware and software sales are generally
higher than on service sales. Therefore, the Company's overall gross profit
margin is higher during periods when service sales are a greater percentage of
total net sales. The decrease in the cost of sales as a percentage of net sales
in the twelve-month period of 1996 is due to the higher percentage of service
sales in the 1996 period, compared to the 1995 period, and the higher relative
fixed costs associated with providing initial services during 1995.
Sales and marketing expenses were $633,025 for the 1996 period and $84,444
for the 1995 period. Sales and marketing expenses as a percentage of net sales
increased from 21.2% in 1995 to 43.8% in 1996. The increase in dollars spent,
as well as the increase as a percentage of net sales during the 1996 period,
were due to the hiring of new sales and marketing personnel and associated
expenditures. The Company also increased the promotion and marketing of its MD
Gateway and CAA products and services.
Product development expenses were $462,108 for the twelve months ended
December 31, 1996, compared to $79,760 for the 1995 period. Product development
expense as a percentage of net sales increased from 20.1% in 1995 to 32.0% in
1996. The increase in these expenses, as well as the increase as a percentage
of net sales during the 1996 period, reflects the continued development of the
Company's products and services. Product development expenses during the 1996
period include enhancements to the CAA products with an emphasis during the
fourth quarter on a line of new offerings targeted at the cable industry,
continued development work on WebQuest, an interactive design process intended
to expedite the design of Web sites, and initial feasibility studies on various
broadband transmission products and services. During the fourth quarter of
fiscal 1996, the Company also developed a group of Web-based products and
services targeted to CME providers. Product development expenses during the
1995 period included the development of the Company's training courses entitled
"The Internet Game" and "The Business Person's Guide to the Internet" which are
primarily utilized as marketing tools to enhance Web development sales activity
and the initial development of the CAA products and services.
General and administrative expenses were $892,799 for the twelve months
ended December 31, 1996, compared to $392,600 for the 1995 period. General and
administrative expenses as a percentage of net sales decreased from 98.7% in
1995 to 61.8% in 1996. The dollar increase reflects the development of the
Company's
22
<PAGE>
general and administrative infrastructure, including finance, accounting,
business development and investor relation capabilities, as well as additional
expenses related to being a public company. The expenditures as a percentage of
net sales decreased during 1996 compared to 1995 as a portion of the general and
administrative infrastructure expenses represents fixed costs that do not
increase at the same rate as increases in net sales.
Depreciation and amortization expenses were $106,814 for the twelve months
ended December 31, 1996, compared to $20,936 for the 1995 period. This increase
reflects the increase in fixed assets and equipment to support higher levels of
Web site and Internet access services, as well as to support the growth in the
number of employees. During 1996, the Company enhanced its training facility
utilized to educate potential customers.
Interest income (expense) was $179,192 during the twelve-month period ended
December 31, 1996 compared to ($1,635) for the 1995 period. Upon completion of
the Company's initial public offering, the Company paid a portion of its
outstanding debt resulting in a reduction of future interest expense and began
earning interest income on the invested net proceeds. The Company's investments
consist of U.S. treasury bills and cash equivalents.
Net losses were $1,420,432 in the twelve-month period ended December 31,
1996 compared to $482,239 for the 1995 period. These losses reflect expenses
incurred to develop and identify the Company's initial products and services,
and to develop marketing and sales programs and operational and administrative
expenses incurred to support its business.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had cash and cash equivalents of
$3,680,282 and working capital of $3,868,172. The Company has financed its
operations and capital equipment expenditures through a combination of public
and private sales of common stock, issuing common stock for services, lease
financing, short-term loans and the utilization of trade payables. During 1996,
the Company completed an initial public offering which resulted in net proceeds
to the Company of $7,231,981 and the issuance of an additional 1,265,000 shares
of common stock. During the twelve months ended December 31, 1997, the Company
purchased for the price of $75,000 from a consultant to the Company, a stock
option to buy 100,000 shares of the Company's common stock at $.50 per share.
Upon purchase, the options were canceled. During the twelve months ended
December 31,1997, the Company completed a private placement which resulted in
net proceeds to the Company of $2,137,321 and the issuance of 245,000 shares of
10% cumulative convertible redeemable preferred stock, 61,250 shares of common
stock and 49,000 common stock purchase warrants.
During the twelve months ended December 31, 1997, the Company purchased
$727,094 of fixed assets. These purchases were primarily computer equipment,
communications equipment, cable modems and software necessary to develop and
demonstrate the recently introduced i2u products as well as for hardware and
software necessary to provide online banking services. In anticipation of
future growth, the Company expects to invest a minimum of $500,000 during fiscal
1998 to purchase additional computer equipment, software and office equipment.
Accounts receivable balances increased from $229,350 at December 31, 1996 to
$701,330 at December 31, 1997, due to the increased sales level during the 1997
twelve-month period and a concentration of billing towards the end of the fourth
quarter. Due to the Company's utilization of the percentage of completion
method of revenue recognition for its Web services, an asset of $143,543
representing revenue earned and not billed, is shown as accrued revenue
receivables at December 31, 1997. This amount has increased from $90,337 at
December 31, 1996, due to two large web development projects that require
several months to complete. A liability for amounts invoiced but not earned of
$9,321 is shown as deferred revenue at December 31, 1997. The Company's
hardware and software inventory of $235,441 at December 31, 1997 increased from
$195,941 at December 31, 1996, and consists of software licenses and computer
hardware purchased by the Company for resale.
Prepaid expenses increased to $249,510 at December 31, 1997, from $132,544
at December 31, 1996, primarily due to amounts prepaid for insurance for the
Company and amounts paid to a consultant to the Company for services not yet
rendered. The major portion of the remaining balance consists of a software
license and inventory purchased at a discount which is anticipated to be
consumed in 1998. Trade accounts payable at
23
<PAGE>
December 31, 1997, increased to $792,908 from $331,809 at December 31, 1996, due
to the increased level of business activity for the twelve-month period.
The Company believes that its cash and cash equivalents and working capital
at December 31, 1997, plus the net proceeds of the offering of preferred stock
that was completed during February 1998 will be adequate to sustain operations
through at least May 1998. In March 1998, the Company entered into an agreement
with an underwriter to offer preferred stock which, if successfully closed, will
result in net proceeds to the Company of approximately $1,800,000. In addition,
the Company has entered into a letter of intent with an underwriter for a
secondary offering of its securities for proceeds of $15 to $20 million, which
is expected to occur during July or August 1998. The Company estimates that it
needs to raise approximately $15 million through equity, debt or other external
financing, to implement its business development plan. However, there can be no
assurances that the Company and its underwriter will be able to complete such
offerings in amounts required by the Company or upon terms acceptable to the
Company. There is no assurance that any additional capital resources which the
Company may need will be available when required, or, if available, available on
terms acceptable to the Company. See Note 1 to Financial Statements for further
discussion.
YEAR 2000
The Company utilizes software and related technologies throughout its
business and relies on suppliers of services and materials that will be affected
by the date change in the year 2000 or prior. The Year 2000 issue exists
because many computer systems and applications currently use two-digit fields to
designate a year. As the century date change occurs, date-sensitive systems
will recognize the year 2000 as 1900, or not at all. This inability to
recognize or properly treat the Year 2000 may cause systems to process critical
financial and operational information incorrectly. All computer hardware and
software used, developed or sold by the Company, is Year 2000 compliant. An
internal study is currently under way to determine the full scope and related
costs, if any, to insure that the Company's vendors' systems continue to meet
its internal needs and those of its customers. The Company does not anticipate
incurring significant expenses related to this issue.
LENGTH OF SALES CYCLE; POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The decision to enter the Internet service provisioning business and the
development and implementation of interactive Web sites are often enterprise-
wide decisions by prospective customers and may require the Company to engage in
lengthy sales cycles. The pursuit of sales leads typically involves an analysis
of the prospective customer's needs, preparation of a written proposal, one or
more presentations and contract negotiations. The Company often provides
significant education to prospective customers regarding the use and benefits of
the i2u product including pro forma financial modeling. While the sales cycle
varies from customer to customer, it typically has ranged from one to six months
for broadband customers evaluating the i2u product. The sales cycle may also be
subject to a prospective customer's budgetary constraints and internal
acceptance reviews, over which the Company has little or no control.
Consequently, if sales forecasted from a specific customer for a particular
quarter are not realized in that quarter, the Company is unlikely to be able to
generate revenue from alternate sources in time to compensate for the shortfall.
If a larger order is delayed or lost to a competitor, the Company's revenues for
that quarter could be materially diminished. Moreover, to the extent that
significant sales occur earlier than expected, operating results for subsequent
quarters may be adversely affected. A significant portion of the Company's
future sales are expected to come from Internet access fees paid by subscribers
of the Company's broadband operator customers and in connection with e-commerce
and e-banking transactions these subscribers conduct on the broadband operators'
systems. OSS expects that it may take broadband operators several months or
more to market and sell high-speed Internet access to their subscribers and that
it will take even longer for these subscribers to conduct significant e-commerce
or e-banking transactions. For these reasons, OSS does not expect to realize
significant sales, if at all, from these activities until a significant time
after OSS has licensed its i2u products and services to broadband operators.
Further, as a result of the Company's limited operating history, the Company
does not have historical financial data for a sufficient number of periods on
which to base planned operating expenses. Accordingly, the Company's expense
levels are based in part on its expectations as to future sales and to a large
extent are fixed. The Company typically operates with little or no backlog and
the sales cycles for its products and services may vary significantly. As a
result, quarterly sales and operating results generally depend on the volume and
timing of and ability to close customer contracts within the quarter, which are
difficult to forecast. The Company may be unable
24
<PAGE>
to adjust spending on a timely manner to compensate for any unexpected sales
shortfalls. Accordingly, any significant shortfall of demand for the Company's
products and services in relation to the Company's expectations would have an
immediate adverse impact on the Company's business, operating results and
financial condition. In addition, since a significant portion of the Company's
future sales are expected to be based on Internet access fees and e-commerce and
e-banking activities, OSS does not expect to realize significant sales, if at
all, from these activities until a significant time after OSS has licensed its
i2u products and services to broadband operators. Further, the Company plans to
increase its operating expenses to fund product development and increase sales
and marketing. To the extent that such expenses precede or are not subsequently
followed by increased sales, the Company's business, operating results and
financial condition will be materially adversely affected.
25
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
ONLINE SYSTEM SERVICES, INC.
----------------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
----
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Public Accountants 27
Balance Sheets as of December 31, 1997 and 1996 28
Statements of Operations for the Years Ended December 31, 1997 and 1996 29
Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1997 and 1996 30
Statements of Cash Flows for theYears Ended December 31, 1997 and 1996 31
Notes to Financial Statements 33
</TABLE>
26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Online System Services, Inc.:
We have audited the accompanying balance sheets of ONLINE SYSTEM SERVICES, INC.
(a Colorado corporation) as of December 31, 1997 and 1996, and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Online System Services, Inc. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As further discussed in Note 1 to the
financial statements, among other factors, the Company has incurred significant
and recurring losses from operations, and such losses are expected to continue
in the near future, which raises substantial doubt about the ability of the
Company to continue as a going concern. Management's plans in regard to these
matters are described in Note 1. The accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 27, 1998 (except with respect to the matter discussed
in Note 12 as to which the date is March 12, 1998).
27
<PAGE>
ONLINE SYSTEM SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1997 1996
------------------ ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $3,680,282 $1,645,163
SHORT-TERM INVESTMENTS - 3,855,343
ACCOUNTS RECEIVABLE, NET (NOTE 2) 701,330 229,350
ACCRUED REVENUE RECEIVABLES 143,543 90,337
INVENTORY, NET 235,441 195,941
PREPAID EXPENSES 249,510 132,544
SHORT-TERM DEPOSITS 77,372 61,015
------------------ ----------------
TOTAL CURRENT ASSETS 5,087,478 6,209,693
EQUIPMENT, NET (NOTES 2 AND 3) 1,015,632 486,344
CAPITALIZED SOFTWARE COSTS, NET (NOTE 4) 122,029 -
OTHER ASSETS 101,352 164,616
------------------ ----------------
$6,326,491 $6,860,653
================== ================
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CURRENT LIABILITIES:
<S> <C> <C>
ACCOUNTS PAYABLE $ 792,908 $ 331,809
ACCRUED EXPENSES 177,029 17,684
ACCRUED SALARIES AND TAXES PAYABLE 216,493 82,806
CURRENT PORTION OF NOTE AND CAPITAL LEASES PAYABLE (NOTES 5 AND 10) 23,555 30,437
DEFERRED REVENUE 9,321 48,669
----------------- -----------------
TOTAL CURRENT LIABILITIES 1,219,306 511,405
----------------- -----------------
NOTE AND CAPITAL LEASES PAYABLE (NOTES 5 AND 10) 585 32,647
COMMITMENTS AND CONTINGENCIES (NOTES 1, 10, 11, 12 AND 13)
STOCKHOLDERS' EQUITY:
REDEEMABLE, CONVERTIBLE PREFERRED STOCK, 10% CUMULATIVE RETURN;
NO PAR VALUE, 5,000,000 SHARES AUTHORIZED, 245,000 AND NONE
ISSUED AND OUTSTANDING, RESPECTIVELY 1,483,282 -
COMMON STOCK; NO PAR VALUE, 10,000,000 SHARES
AUTHORIZED, 3,315,494 AND 3,162,545 SHARES
ISSUED AND OUTSTANDING, RESPECTIVELY 8,635,075 7,953,665
STOCK SUBSCRIPTIONS RECEIVABLE (NOTE 7) - (586)
ACCUMULATED DEFICIT (5,011,757) (1,636,478)
----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 5,106,600 6,316,601
----------------- -----------------
$ 6,326,491 $ 6,860,653
================= =================
</TABLE>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE
BALANCE SHEETS.
28
<PAGE>
ONLINE SYSTEM SERVICES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------------------
1997 1996
<S> <C> <C>
NET SALES:
SERVICE SALES $ 1,674,198 $ 1,125,617
HARDWARE AND SOFTWARE SALES 1,117,358 319,425
----------------- -----------------
2,791,556 1,445,042
COST OF SALES:
COST OF SERVICES 1,021,261 717,409
COST OF HARDWARE AND SOFTWARE 972,260 232,511
----------------- -----------------
1,993,521 949,920
----------------- -----------------
GROSS MARGIN 798,035 495,122
OPERATING EXPENSES:
SALES AND MARKETING EXPENSES 1,197,038 633,025
PRODUCT DEVELOPMENT EXPENSES 1,108,456 462,108
GENERAL AND ADMINISTRATIVE EXPENSES 1,837,330 892,799
DEPRECIATION AND AMORTIZATION 198,788 106,814
----------------- -----------------
4,341,612 2,094,746
----------------- -----------------
LOSS FROM OPERATIONS (3,543,577) (1,599,624)
INTEREST INCOME, NET 168,298 179,192
----------------- -----------------
NET LOSS $(3,375,279) $(1,420,432)
================= =================
LOSS PER SHARE, BASIC AND DILUTED (NOTE 2) $(1.05) $(.55)
================= =================
WEIGHTED AVERAGE SHARES OUTSTANDING (NOTE 2) 3,200,474 2,573,273
================= =================
</TABLE>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE
STATEMENTS.
29
<PAGE>
ONLINE SYSTEM SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK STOCK
--------------------------- ---------------------------- SUBSCRIPTIONS ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT RECEIVABLE DEFICIT EQUITY (DEFICIT)
------ ------ ------ ------ ---------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December
31, 1995 - $ - 1,625,000 $ 272,864 $(57,269) $ (216,046) $ (451)
Common stock issued
in conjunction with
private placement
(Note 6) - - 182,245 410,000 - - 410,000
Less offering costs - - - (6,330) - - (6,330)
Common stock issued
in conjunction with
initial public
offering for cash at
$6.75 per unit
(Note 6) - - 1,265,000 8,538,750 - - 8,538,750
Less offering costs - - - (1,306,769) - - (1,306,769)
Exercises of stock
options and warrants
(Note 6) - - 90,300 45,150 - - 45,150
Stock subscriptions
receivable (Note 7) - - - - 56,683 - 56,683
Net loss - - - - - (1,420,432) (1,420,432)
------------ ------------ ----------- -------------- ------------ -------------- --------------
Balances, December
31, 1996 - - 3,162,545 7,953,665 (586) (1,636,478) 6,316,601
Preferred stock
issued in
conjunction with
private placement
(Note 6) 245,000 2,198,875 - - - - 2,198,875
Less offering costs - (280,629) - - - - (280,629)
Common stock issued
in conjunction with
private placement
(Note 6) - - 61,250 251,125 - - 251,125
Less offering costs - - - (32,050) - - (32,050)
Guaranteed return on
preferred stock
(Note 6) - (434,964) - 434,964 - - -
Exercises of stock
options and warrants
(Note 6) - - 91,699 65,611 - - 65,611
Repurchase of option
to buy common stock
(Note 6) - - - (75,000) - - (75,000)
Stock options issued
for services - - - 36,760 - - 36,760
Stock subscriptions
receivable (Note 7) - - - - 586 - 586
Net loss - - - - - (3,375,279) (3,375,279)
------------ ------------ ----------- -------------- ------------ -------------- --------------
Balances, December
31, 1997 245,000 $1,483,282 3,315,494 $ 8,635,075 $ - $(5,011,757) $ 5,106,600
============ ============ =========== ============== ============ ============== ==============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
30
<PAGE>
ONLINE SYSTEM SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $(3,375,279) $(1,420,432)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 198,788 106,814
GAIN ON SALE OF EQUIPMENT (1,535) -
STOCK ISSUED FOR SERVICES 37,346 36,683
CHANGES IN OPERATING ASSETS AND LIABILITIES:
INCREASE IN SHORT-TERM DEPOSIT (16,357) (61,015)
INCREASE IN ACCOUNTS RECEIVABLE (471,980) (131,068)
INCREASE IN ACCRUED REVENUE RECEIVABLES (53,206) (90,337)
INCREASE IN INVENTORY (39,500) (195,941)
INCREASE IN PREPAID EXPENSES (116,966) (127,544)
(INCREASE) DECREASE IN OTHER ASSETS 63,264 (162,622)
INCREASE IN ACCOUNTS PAYABLE 461,099 256,819
INCREASE IN ACCRUED EXPENSES 159,345 6,664
INCREASE IN ACCRUED SALARIES AND TAXES PAYABLE 133,687 63,403
INCREASE (DECREASE) IN DEFERRED REVENUE (39,348) 48,669
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (3,060,642) (1,669,907)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASE OF SHORT-TERM INVESTMENTS - (3,855,343)
REDEMPTION OF SHORT-TERM INVESTMENTS 3,855,343 -
PURCHASE OF EQUIPMENT (727,094) (459,997)
CAPITALIZED SOFTWARE DEVELOPMENT COSTS (124,097) -
PROCEEDS FROM SALE OF EQUIPMENT 2,621 -
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,006,773 (4,315,340)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
PAYMENTS ON NOTE PAYABLE AND CAPITAL LEASES (38,944) (32,111)
PROCEEDS FROM ISSUANCE OF COMMON STOCK 316,736 8,993,900
PROCEEDS FROM ISSUANCE OF PREFERRED STOCK 2,198,875 -
PAYMENTS ON SHORT-TERM NOTES PAYABLE - (50,814)
RE-PURCHASE OF STOCK OPTIONS ISSUED TO CONSULTANT (75,000) -
PAYMENTS ON NOTE PAYABLE RELATED PARTY - (12,707)
PAYMENTS RECEIVED ON STOCK SUBSCRIPTIONS RECEIVABLE - 20,000
STOCK OFFERING COSTS (312,679) (1,313,099)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,088,988 7,605,169
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,035,119 1,619,922
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,645,163 25,241
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,680,282 $ 1,645,163
============= =============
</TABLE>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE
STATEMENTS.
31
<PAGE>
ONLINE SYSTEM SERVICES, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------
1997 1996
-------------- ---------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 5,987 $12,100
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
STOCK ISSUED FOR SERVICES 37,346 36,683
CAPITAL LEASE FOR EQUIPMENT - 5,623
NOTE PAYABLE FOR FIXED ASSETS PURCHASED - 30,323
</TABLE>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE
STATEMENTS.
32
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
Online System Services, Inc. (the "Company") was incorporated on March 22,
1994, under the laws of Colorado, and principal operations began in 1995. To
date, the Company has generated revenues through the sale of design and
consulting services for Web site development, resale of software licenses, mark-
ups on computer hardware and software sold to customers, maintenance fees
charged to customers to maintain computer hardware and Web sites, license fees
based on a percentage of revenues from the Company's flagship products and
services (known as "i2u"), training course fees, and monthly fees paid by
customers for Internet access provided by the Company. The Company commenced
sales in February 1995, and was in the development stage through December 31,
1995.
Prior to the quarter ended September 30, 1997, the Company's focus
generally was on three markets: general Web site development, maintenance and
hosting; rural or small market Internet service providers ("ISPs"); and
healthcare information services and continuing medical education ("CME"). These
activities were divided into three separate units early in fiscal 1997: the
Business Resource Group ("BRG") for Web site-related activities: Community
Access America ("CAA") for the ISP activities: and Healthcare for the CME and
healthcare information activities.
Each of these activities involved in varying degrees the establishment of
online communities. As an outgrowth of the Company's BRG and CAA activities,
and in recognition of the need to increase the availability of high-speed
Internet access, the Company's focus during fiscal 1997 increasingly was on the
development of online communities for broadband (high bandwidth or high data
transmission capabilities) operators such as cable TV operators (wired and
wireless). This focus has resulted in the introduction of the i2u products and
services which include a wide range of online services that enable operators and
operators' customers to generate online local content, create Web pages and
conduct online commerce and banking and a turnkey product and service package
which provides the equipment, training and systems necessary for the broadband
operator to become a fully operational ISP. The Company intends to focus its
future efforts primarily on its i2u products and services. The Company earns
revenue for up-front fees paid for hardware, software licenses, training and
other implementation services. The Company also earns revenue from access and
consulting services and content software licenses through revenue sharing
(royalties) based on a formula calculated on the gross income billed by the
broadband operator to its customers for both Internet access and Internet
content. To date, royalties earned by the Company from this program are not
significant. In conjunction with its Web site services, the Company generated
revenue from design and consulting services for Web site development, computer
hardware and software sold to customers of its Web site development services,
maintenance fees charged to customers to maintain computer hardware and Web
sites, license fees based on a percentage of revenues from its CAA program,
training course fees and monthly fees paid by customers for Internet access
provided by the Company in the Denver, Colorado market.
During November 1997, the Company announced that it was terminating Web
site development, maintenance and hosting activities and began to transition
this business to other companies. The Company is ceasing Web site development
activities, which are not related to the development of products for its i2u
products and services or do not involve the creation of online communities for
particular businesses or information purposes. In addition, during October 1997,
the Company licensed its MD Gateway Web site to Medical Education Collaborative
("MEC") and is no longer developing products for the healthcare market. In the
future, revenues from the healthcare market are expected to be limited to
license fees received from MEC in connection with the use of MD Gateway.
33
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS (CONTINUED)
The Company has not been profitable since inception. The Company had at
December 31, 1997, $3,680,282 in cash and cash equivalents and $3,868,172 in
working capital, primarily resulting from the gross proceeds of a private
placement of equity totaling $2,450,000 which closed on December 31, 1997 (See
Note 6). The Company competes in an intensively competitive industry, which has
been characterized by price erosion, rapid technological change, short product
life cycles, and rapidly changing business models. Significant technological
changes in the Internet access and broadband data delivery require that the
Company expend significant funds in order to compete in a ever-changing
marketplace. The Company has expended significant funds to develop its current
product offerings. During 1998, the Company anticipates increased operating
expenses and research and development expenditures, which are necessary for the
Company to further develop and market its products, and to achieve market
acceptance of its products in sufficient quantities to achieve positive cash
flow from operations. The Company's current business plan is highly dependent on
future revenues based on the extent to which the subscribers of the Company's
broadband operator customers utilize the operators for Internet access and
conduct business on the Internet. There can be no assurances that the Company
will be successful in marketing its products or that it will be able to generate
sufficient revenues to achieve positive cash flow from operations.
The continued viability of the Company depends upon, in part, its ability
to obtain additional profitable customer contracts and to obtain additional
capital through debt or equity financing. The Company believes that its
cash and cash equivalents and working capital plus the net proceeds of the
offering of Preferred Stock that was completed during February 1998 (See Note
12) will be adequate to sustain operations through May 1998. In March of 1998,
the Company entered into an agreement to offer Preferred Stock which, if
successfully closed in April 1998, will result in net proceeds to the Company of
approximately $1,800,000. The Company estimates that it will need to raise
approximately $15,000,000 through equity, debt or other external financing, to
implement its business development plan. The Company has entered into a letter
of intent with an underwriter to raise $15,000,000 to $20,000,000 through an
offering of common stock. There is no assurance that any additional capital
resources, which the Company may need, will be available if and when required,
or, if available, available on terms that will be acceptable to the Company, or
that the above contemplated financings will be closed.
As a result of the foregoing, substantial doubt exists about the ability of
the Company to continue as a going concern. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue from Web site design and consulting fees is recognized on the
percentage of completion method on an individual contract basis. Percentage
complete is determined primarily based upon the ratio that labor costs incurred
bear to total estimated labor costs. The Company's use of the percentage of
completion method of revenue recognition requires estimates of the degree of
project completion. To the extent these estimates prove to be inaccurate, the
revenues and gross margin, if any, reported for periods during which work on the
project is ongoing, may not accurately reflect the final results of the project,
which can only be determined upon project completion. Provisions for any
estimated losses on uncompleted contracts are made in the period in which such
losses are determinable. Amounts earned but not billed under development
contracts are shown as accrued revenue receivables in the accompanying balance
sheets. Amounts invoiced but not earned are shown as deferred revenue in the
accompanying balance sheets.
34
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue from hardware and software sales is recognized upon shipment
provided that the Company has no significant remaining obligations. Revenue
from maintenance fees, training courses and Internet access fees are recognized
as the services are performed. License fees are recognized when the Company has
no further material obligations.
Revenue from access and content royalties is recognized when earned,
generally as the services are provided.
Capitalized Software Development Costs and Research and Development Costs
The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
Capitalization of development costs of software products begins once the
technological feasibility of the product is established. The establishment of
technological feasibility is highly subjective and requires the exercise of
judgment by management. Based on the Company's product development process,
technological feasibility is established upon completion of a detailed program
design. Capitalization ceases when such software is ready for general release,
at which time amortization of the capitalized costs begins.
Amortization of capitalized software development costs is computed using
the greater of the straight-line method or the product's estimated useful life,
generally five years, or based on relative current revenue. During 1997, the
Company has used the straight-line method to amortize such capitalized costs,
and recorded $2,068 of amortization expense.
Product development costs relating principally to the design and
development of non-software products are generally expensed as incurred. The
cost of developing routine software enhancements are expensed as product
development costs as incurred because of the short time between the
determination of technological feasibility and the date of general release of
related products.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers cash and cash
equivalents to include highly liquid investments with original maturities of 90
days or less that are readily convertible into cash and are not subject to
significant risk from fluctuations in interest rates.
Short-Term Investments
Short-term investments consist of U.S. Government Treasury Bills. These
investments are classified as held-to-maturity securities and are measured at
amortized cost.
Accounts Receivable
Accounts receivable are shown net of allowance for doubtful accounts of
$58,059 and $64,851 at December 31, 1997 and 1996, respectively.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market.
Inventory consists of software licenses which the Company has purchased for the
purpose of sub-licensing the software to its customers, and hardware
purchased for resale.
35
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Equipment
Equipment is stated at cost and depreciation is provided using the
straight-line method over the estimated useful lives of the respective assets.
Maintenance and repairs are expensed as incurred and improvements are
capitalized.
Concentration of Credit Risk
The Company has no significant off balance-sheet concentrations of credit
risk such as foreign exchange contracts, option contracts or other foreign
hedging arrangements. In addition, the Company maintains the majority of its
cash with financial institutions in the form of demand deposits, and denominates
the majority of its transactions in U.S. dollars. At December 31, 1997, the
Company had contracted with an Argentine company to provide ongoing technical
support to one of the Company's customers. The payment for these services is
denominated in Argentine pesos.
The Company performs ongoing evaluations of its customers' financial
condition and generally does not require collateral, except for billings in
advance of work performed. Its accounts receivable balances are primarily
domestic.
Income Taxes
The Company recognizes deferred income tax assets and liabilities for the
expected future income tax consequences, based on enacted tax laws, of temporary
differences between the financial reporting and tax bases of assets, liabilities
and carryforwards. Deferred tax assets are then reduced, if deemed necessary,
by a valuation allowance for the amount of any tax benefits which, more likely
than not, based on current circumstances, are not expected to be realized (See
Note 9).
Net Loss Per Share
Net loss per share has been computed based upon the weighted average number
of common shares outstanding.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per
Share." Under SFAS 128, primary earnings per share previously required under
Accounting Principles Board No. 15 is replaced with basic earnings per share.
Basic earnings per share is computed by dividing reported earnings available to
common stockholders by weighted average shares outstanding, excluding the
dilution for any potentially dilutive securities. Fully diluted earnings per
share as defined under Accounting Principles Board No. 15 is called diluted
earnings per share under SFAS 128. Diluted earnings per share reflects the
potential dilution assuming the issuance of common shares for all dilutive
potential common shares outstanding during the period. As a result of the
Company's net losses, all potentially dilutive securities, 1,002,910 stock
options and 1,359,250 warrants in 1997, and 719,258 stock options and 1,303,450
warrants in 1996, would be anti-dilutive.
Pursuant to Securities and Exchange Commission ("SEC") rules, common stock
and common stock equivalent shares issued by the Company at prices below the
initial public offering during the twelve- month period prior to the offering
("cheap stock") were included in the calculation as if they were outstanding for
1996, regardless of whether they were antidilutive. In Staff Accounting
Bulletin 98, the SEC redefined cheap stock. As a result, 169,381 shares, which
were originally treated as cheap stock and included in the 1996 weighted average
36
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
shares outstanding of 2,742,654, have been excluded in the restated 1996
weighted average shares outstanding of 2,573,273. This change in weighted
average shares had a (.03) increase to (.55) net loss per share when compared to
the previously reported net loss per share of (.52).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions may affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Long-Lived Assets
Long-lived assets and certain identifiable intangibles to be held and used
by the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Any long-lived assets and certain identifiable intangibles to be
disposed of are reported at the lower of carrying amount or fair value less cost
to sell.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
short-term trade receivables and payables, short-term investments and notes
payable. As of December 31, 1997 and 1996, the carrying values of such
instruments approximated their fair value.
(3) EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
--------------- ----------------
<S> <C> <C>
Computer equipment $1,082,097 $ 450,743
Office furniture and equipment 131,121 85,558
Software 85,850 83,387
Leasehold improvements 58,410 52,608
Assets under construction 12,525 -
--------------- ----------------
1,370,003 672,296
Less accumulated depreciation (354,371) (185,952)
--------------- ----------------
Net equipment $1,015,632 $ 486,344
=============== ================
</TABLE>
Certain office equipment is pledged as collateral for capital leases
payable (See Note 5).
The Company depreciates computer equipment, office equipment, and software
over five years, office furnishings over seven years, and leasehold improvements
over the life of the lease.
Depreciation expense was $196,720 and $106,814 for the years ended December
31, 1997 and 1996, respectively.
37
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(4) CAPITALIZED SOFTWARE COSTS
Capitalized software costs consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
--------------- ----------------
<S> <C> <C>
Capitalized i2u software $124,097 $ -
Less accumulated amortization (2,068) -
--------------- ----------------
Net capitalized software costs $122,029 $ -
=============== ================
</TABLE>
The Company amortizes the i2u software over its estimated useful life of
five years or relative revenues, whichever is greater.
(5) NOTE AND CAPITAL LEASES PAYABLE
Note and capital leases payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
--------------- -----------------
<S> <C> <C>
Capital lease payable in monthly principal and interest payments of $1,733, for
thirty-six months beginning January 15, 1996, effective interest rate of 14.9%,
secured by office equipment $ 19,203 $ 35,747
Capital lease payable in monthly principal and interest payments of $471, for
thirty-six months beginning July 28, 1995, effective interest rate of 35.8%,
secured by a phone system 2,261 6,485
Capital lease payable in monthly principal and interest payments of $198 for
thirty-six months beginning April 26, 1996, effective interest rate of 19.7%,
secured by a phone system 2,676 4,293
Note payable for purchase of equipment, monthly principal payments of $1,588
beginning March 1996 for twelve months after which payment changes to $625 for the
remaining twenty-four months, effective interest rate of 9.0%, unsecured
- 16,559
--------------- -----------------
24,140 63,084
Less-current portion (23,555) (30,437)
--------------- -----------------
$ 585 $ 32,647
=============== =================
</TABLE>
Future minimum lease payments under capital leases as of December 31, 1997
are as follows:
<TABLE>
<S> <C>
1998 $25,604
1999 605
-------------
Total minimum lease payments 26,209
Less amount representing interest (2,069)
-------------
$24,140
=============
</TABLE>
38
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(6) STOCKHOLDERS' EQUITY
Preferred Stock
On December 31, 1997, the Company completed a private placement for gross
proceeds of $2,450,000 with a small group of investors. The Company sold 24.5
units, which consisted of an aggregate of 245,000 shares of 10% cumulative
convertible redeemable preferred stock, 61,250 shares of common stock, and
warrants to purchase 49,000 shares of common stock. Net proceeds to the Company
were $2,137,321 after deducting $312,679 in offering costs.
The preferred stock issued in the above private placement entitles the
holder to voting rights at one vote per share and specifies a 10% per annum
cumulative non-compounding dividend based on the stated value of $10.00 per
share. The Company may redeem the preferred stock at any time for $10.00 per
share. However, if the Company completes a secondary public offering of its
securities, as defined, within nine months from December 31, 1997, the Company
shall redeem all of the outstanding preferred stock. If the secondary offering
is not completed before September 30, 1998, each share of preferred stock shall
become convertible, at the election of the holder, into the number of shares of
common stock of the Company equal to $10.00 divided by the lesser of (1) $10.00
or (2) 80% of the average per share closing bid price, as defined, on the date
of conversion.
The conversion discount of the preferred stock is considered to be an
additional preferred stock dividend. The maximum discount available of $434,964
(the "Guaranteed Return") is initially recorded as a reduction of preferred
stock and an increase to additional paid-in capital. The Guaranteed Return
reduction to preferred stock will be accreted, as additional dividends, by
recording a charge to income available to common stockholders during 1998 over
the nine month period to the earliest date of conversion of the preferred
stock. The Company will also record annual dividends of $1.00 per share as a
reduction of income available to common stockholders, whether or not declared by
the Board of Directors.
Any difference between the highest redemption value ($10 per share) and the
recorded value, (excluding the Guaranteed Return discussed above), primarily
offering costs, will be accreted as a charge to income available to common
stockholders during 1998, over the nine month period when the Company can redeem
the preferred stock.
The 49,000 common stock purchase warrants issued in the above private
placement entitle the holder to purchase one share of the Company's common stock
for a purchase price of $15.00 per share at any time during the three-year
period commencing on December 31, 1997. On the date of issuance, the Company
determined the warrants had a nominal value.
In conjunction with services provided during the private placement
offering, the Company also issued to the underwriters warrants to purchase
12,250 common shares of the Company for a purchase price of $15.00 per share.
The warrants can be exercised at any time during the three-year period
commencing December 31, 1997. On the date of issuance, the Company determined
the warrants had a nominal value.
Common Stock
Private Placement Completed March 1996
In March 1996, the Company completed a private placement of common stock.
The Company sold 41 units, each consisting of 4,445 shares of common stock and
450 common stock purchase warrants. The units sold at a price of $10,000 per
unit. Total proceeds from the private placement, after deducting offering costs
of $6,330, were $403,670.
39
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(6) STOCKHOLDERS' EQUITY (CONTINUED)
Initial Public Offering
In May 1996, the Company completed an initial public offering of its common
stock. The Company sold 1,265,000 units, each consisting of one share of common
stock and one common stock purchase warrant. The units sold at a price of $6.75
per unit. Total proceeds from the initial public offering were $7,231,981 after
deducting offering costs of $1,306,769.
Stock Option Plan
During 1995, the Company adopted the 1995 Stock Option Plan (the "Plan").
Under the terms of the Plan, the Company may grant options for up to 1,400,000
shares under the Plan. As of December 31, 1997, the Company has options
outstanding for 1,002,910 shares. Under the Plan, the option exercise price
equals the stock's fair market value on the date of grant and the options vest
over various terms with a maximum vesting period of 42 months and expire after a
maximum of ten years. The Company accounts for the Plan under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees."
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-
Based Compensation." SFAS 123 defines a fair value-based method of accounting
for employee stock options and similar equity instruments. However, it also
allows an entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by APB Opinion No. 25.
Entities electing to remain with the accounting in APB Opinion No. 25 must make
pro forma disclosures of net income and earnings per share as if the fair value-
based method of accounting defined in SFAS 123 had been applied. The Company has
elected to make the pro forma disclosures in accordance with SFAS 123 as set
forth below.
The fair value of each option grant is estimated on the date of grant using
the Black Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996, respectively: risk-free interest
rate of 6.21 and 5.90 percent, no expected dividend yields, expected lives of
3.0 and 2.7 years, and expected volatility of 98 and 75 percent (actual
volatility of the Company's common stock since the initial public offering.)
Fair value computations are highly sensitive to the volatility factor assumed;
the greater the volatility, the higher the computed fair value of options
granted.
Had compensation cost for options granted under the Plan been determined
consistent with SFAS 123, the Company's net loss and net loss per common and
common equivalent share would have been increased to the following pro forma
amounts:
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
<S> <C> <C> <C>
Net loss: As Reported $(3,375,279) $(1,420,432)
------------------- -------------------
Pro Forma (3,730,827) (1,541,985)
------------------- -------------------
Net loss per share-basic and diluted
As Reported $ (1.05) $ (0.55)
------------------- -------------------
Pro Forma (1.17) (0.59)
=================== ===================
</TABLE>
40
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(6) STOCKHOLDERS' EQUITY (CONTINUED)
Because the fair value method of accounting required by SFAS 123 has not
been applied to options granted prior to January 1, 1995, the resulting pro
forma compensation cost may not be representative of that to be expected in
future years.
A summary of the status of the Plan at December 31, 1997 and 1996, and
changes during the years then ended is presented in the tables and narrative
below:
<TABLE>
<CAPTION>
1997 1996
----------------------------------- -----------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 719,258 $1.87 510,558 $0.50
Granted 924,200 3.24 466,100 3.28
Exercised (86,249) 0.72 (85,300) 0.50
Forfeited and canceled (554,299) 3.62 (172,100) 2.27
---------------- ----------------
Outstanding at end of year 1,002,910 $2.26 719,258 $1.87
================ =============== ================ ===============
Exercisable at end of year 246,998 $1.18 209,008 $0.76
================ =============== ================ ===============
Weighted average fair value of options
granted during year $1.64 $1.59
================ ================
</TABLE>
The status of total stock options outstanding and exercisable under the
Stock Option Plan as of December 31, 1997 follows:
<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
---------------------------------------------------- ----------------------------------------------------
Weighted Weighted
Average Weighted Weighted Average
Range of Remaining Average Average Remaining
Exercise Number of Contractual Exercise Number of Exercise Contractual
Prices Shares Life (Years) Price Shares Price Life (Years)
- - ---------------------- --------------- --------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.50 - 1.25 225,676 3.5 $0.62 183,365 $0.64 3.5
1.26 - 3.13 550,834 5.9 1.76 35,333 1.69 5.9
3.14 - 7.83 226,400 5.2 5.13 28,300 4.01 5.2
--------------- ---------------
$ 0.50 - 7.83 1,002,910 5.2 $2.26 246,998 $1.18 4.0
=============== ===============
</TABLE>
Common Stock Options/Warrants
In September 1995, in conjunction with a consulting agreement entered into
by the Company with Creative Business Strategies ("CBS") (See Note 11), the
Company granted stock options under the Plan to purchase 100,000 shares of the
Company's common stock at an exercise price of $.50 per share, which were to
vest 18 months after the date of the agreement and were exercisable for a period
of 5 years. The Company repurchased all the options in 1997 for $75,000, their
intrinsic value on the date of purchase.
41
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(6) STOCKHOLDERS' EQUITY (CONTINUED)
In December 1995, in conjunction with a business relationship entered into
among Charlie Spickert, Medical Education Collaborative ("MEC") and the Company
(See Note 11), the Company granted stock options under the Plan to purchase
50,000 shares of the Company's common stock at an exercise price of $.50 per
share. The options vest over 48 months, which vesting may be accelerated in
certain events. As of December 31, 1997, 50,000 options are vested and none
have been exercised.
During December 1995, in connection with the acquisition of the equipment
described in Note 10, the Company issued warrants to purchase 25,000 shares of
the Company's common stock at an exercise price of $.50 per share, which vested
immediately and are exercisable for 5 years. On the date of issuance, the
Company determined the warrants had a nominal value. During 1997, 5,000
warrants were exercised. As of December 31, 1997, 15,000 warrants were
outstanding.
In connection with the Company's private placement of common stock in March
1996, the Company issued warrants to purchase 18,450 shares of the Company's
common stock at an exercise price of $2.25 per share, which vested immediately
and are exercisable for 5 years. On the date of issuance, the Company
determined the warrants had a nominal value. During the year ended and as of
December 31, 1997, 450 warrants have been exercised.
In conjunction with the initial public offering in May 1996, the Company
issued 1,265,000 units (including 165,000 units under the over-allotment), each
unit consisting of one share of common stock and one common stock purchase
warrant. Two of such warrants entitle the unit holders to purchase one share of
common stock at a price of $9.00 during the three-year period commencing May
1996. Commencing one year from the date of the initial public offering, the
Company has the right, at its discretion, to call all of the warrants for
redemption on 45 days' prior written notice at a redemption price of $.05 per
warrant if: (i) the closing bid price of the Company's common stock exceeds the
exercise price of the warrants ($9.00) by at least 50% during a period of at
least 20 of the 30 trading days immediately preceding the notice of redemption;
(ii) the Company has in effect a current registration statement covering the
common stock issuable upon exercise of the warrants; and (iii) the expiration of
the 45-day notice period is within the term of the warrants. If the Company
elects to exercise it's redemption right, holders of warrants may either
exercise their warrants, or their warrants will be redeemed. As of December 31,
1997, none of the warrants have been exercised or redeemed.
In conjunction with the initial public offering, the Company issued to the
underwriters an option to purchase 110,000 units (consisting of one share of
common stock and one warrant, of which two warrants purchase one share of common
stock at a price of $9.00) (the "Representative's Securities"). The
Representative's Securities are not exercisable for one year after the date of
the initial public offering. Thereafter, for a period of four years, the
Representative's Securities are exercisable at a price of $8.10 per unit. The
warrants included in the Representative's Securities are exercisable consistent
with those issued in the initial public offering. As of December 31, 1997, the
option has not been exercised by the underwriter.
42
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(7) STOCK SUBSCRIPTIONS RECEIVABLE
The Company entered into two stock subscription agreements. The first
agreement stipulates that the purchase price of certain shares will be paid
through the fair market value of services rendered to the Company. The $36,683
of required services was completed as of December 31, 1996. The second
agreement required the payment of $20,000 cash on or before January 31, 1996.
The payment was received prior to the expiration date. In 1997, the remaining
services of $586 were completed.
(8) MAJOR CUSTOMERS
A substantial portion of the Company's sales is derived from a limited
number of customers. The Company's sales to customers in excess of 10% of net
sales for the years ended December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- ----------------
<S> <C> <C>
Customer A $738,460 $ -
Customer B 382,441 -
Customer C 21,295 149,175
</TABLE>
The Company's accounts receivable balances from customers in excess of 10%
of the accounts receivable and accrued revenue receivables balance for the years
ended December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- ----------------
<S> <C> <C>
Customer A $386,233 $ -
Customer D - 39,834
Customer E - 33,850
</TABLE>
Customer B operates in Buenos Aries, Argentina; however all 1997 revenue
transactions with this customer were denominated in U.S. Dollars.
(9) INCOME TAXES
At December 31, 1997, for income tax return purposes, the Company has
approximately $5,149,905 of net operating loss carryforwards that expire at
various dates through the year 2012. The net operating loss for tax purposes
differs from that for financial reporting purposes due to differences in
reporting certain transactions for income tax and financial reporting purposes.
The Tax Reform Act of 1986 contains provisions which may limit the net operating
loss carryforwards available to be used in any given year if certain events
occur, including significant changes in ownership interests.
The Company has determined that deferred tax assets resulting from the net
operating loss carryforwards, as of December 31, 1997 and 1996, respectively,
did not satisfy the realization criteria. Accordingly, a valuation allowance
was recorded against the entire deferred tax asset. No other significant
deferred tax assets or liabilities existed at December 31, 1997 or 1996.
The difference between the expected statutory rate and the effective rate
is primarily a result of the increase in the valuation allowance.
43
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(10) RELATED PARTY TRANSACTIONS
Capital Lease-Related Party
To provide working capital for the Company, shareholders of the Company formed
a partnership that purchased the equipment from the Company for cash and then
leased the equipment back through a capital lease (See Note 5). Amounts due
under capital leases to related parties were $19,203 and $35,747 at December 31,
1997 and 1996, respectively.
Office Lease
The Company's principal offices are located in a building managed by an
affiliate, in that an officer of the Company is related to the vice president of
the management company. The Company was in need of expanding its office space
and due to several vacant floors in the building, the management company agreed
to rent an additional floor to the Company and its current office space at a
total monthly rate of $13,657, which increased to $18,208 in January 1998 as new
space was occupied.
(11) COMMITMENTS AND CONTINGENCIES
Minimum future annual lease payments as of December 31, 1997, including
amounts committed to related parties, are as follows:
<TABLE>
<C> <S>
1998 $358,178
1999 257,504
2000 50,074
---------------
$665,756
===============
</TABLE>
In conjunction with an operating lease entered into during 1996, the
Company made a security deposit of $222,693, which will be returned to the
Company during the lease term as payments are made. During 1997, the Company
had deposits totaling $61,016 refunded with $161,677 remaining on deposit as of
December 31, 1997. The security deposit is included in short-term deposit and
other assets in the accompanying balance sheet.
The total lease expense for the years ended December 31, 1997 and 1996, was
$339,456 and $122,578, respectively.
The Company entered into a business relationship on December 7, 1995 with
Charlie Spickert and MEC. Mr. Spickert and MEC will provide the knowledge and
reputation to penetrate the medical training and services market. The Company
will provide the needed resources and expertise in Internet services. In
addition to receiving a percentage of revenues from the results of the joint
efforts of the parties, Mr. Spickert was granted 50,000 common stock options
(See Note 6).
As part of the joint development and marketing arrangement with MEC and Mr.
Spickert, the Company has agreed to perform Web site development services as a
vendor to MEC.
44
<PAGE>
ONLINE SYSTEM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)
In September 1995, the Company entered into a consulting agreement with CBS
wherein CBS assisted the Company in developing its business plan, advises the
Company regarding business opportunities and financings and promotes the Company
and its services. For these services, CBS was to be paid a fee of $2,500 a
month, was granted a stock option to purchase 100,000 shares of the Company's
common stock (See Note 6), and was to be paid a transaction-based fee for
business combinations or certain other transactions completed by the Company
that were initiated by CBS. Effective February 1, 1996, the agreement with CBS
was amended to provide for a monthly fee of $4,000 for a period of 36 months and
to eliminate any transaction-based compensation. In June 1997, the Company
repurchased the 100,000 stock options from CBS for $75,000 (See Note 6) and
prepaid $74,663 for the consulting agreement. The Company is amortizing the
prepayment over the remaining 20 months of the consulting agreement. As of
December 31, 1997, $48,531 remained unamortized and is included in prepaid
expenses in the accompanying balance sheet.
(12) SUBSEQUENT EVENT
On March 12, 1998, the Company sold an additional 2.25 units related to the
private placement for gross proceeds of $225,000. The units sold have the same
terms and conditions as discussed in Note 6 and consisted of an aggregate of
22,500 shares of 10% cumulative convertible redeemable preferred stock, 5,625
shares of common stock, and warrants to purchase 4,500 shares of common stock.
Net proceeds to the Company were approximately $202,500 after deducting
approximately $22,500 in offering expenses.
The 4,500 common stock purchase warrants issued entitle the holder to
purchase one share of the Company's common stock for a purchase price of $15.00
per share. The warrants can be exercised at any time during the three-year
period commencing March 12, 1998.
(13) SUBSEQUENT EVENT (UNAUDITED)
On March 19, 1998, the Company entered into an agreement and Plan of Merger
with Durand Acquisition Corporation (a wholly owned subsidiary of the Company)
and Durand Communications, Inc. ("Durand"), pursuant to which Durand would
become a wholly owned subsidiary of the Company. Durand is a privately held
company which creates and supports on-line communities and electronic commerce
applications.
The agreement contemplates the issuance of approximately 970,000 shares of
restricted common stock for all of the outstanding shares of Durand. The
consummation of the merger is subject to approval by the shareholders of the
Company and other contingencies.
45
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
CHANGE IN ACCOUNTANTS
(i) On October 7, 1996, the Company dismissed Jones, Jensen & Company as its
independent accountants effective October 7, 1996.
(ii) The reports of Jones, Jensen and Company, regarding the Company's
consolidated financial statements since the Company's inception on March
22, 1994 through December 31, 1995, contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles, except for an explanatory paragraph
in Jones, Jensen and Company's report dated February 9, 1996, concerning
the Company's ability to continue as a going concern.
(iii)The Company's board of directors approved the decision to change
independent accountants.
(iv) In connection with the Company's audits since its inception on March 22,
1994 through December 31, 1995 and through October 7, 1996, there have been
no disagreements with Jones, Jensen and Company on any matter of accounting
principles or practice, financial statement disclosure, or auditing scope
or procedure, which disagreements if not resolved to the satisfaction of
Jones, Jensen and Company would have caused them to make reference thereto
in their reports on the financial statements for such years.
NEW INDEPENDENT ACCOUNTANTS
(i) On October 7, 1996, the Company engaged Arthur Andersen LLP as its new
independent accountants for the fiscal year ended December 31, 1996.
(ii) Since its inception on March 22, 1994 and through October 7, 1996 the
Company did not engage or consult with Arthur Andersen LLP regarding the
matters described in Regulation S-B, Item 304(a)(2).
46
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Reference is made to the pertinent information contained in the Company's
definitive proxy statement for its 1998 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission, which information is
incorporated herein.
ITEM 10. EXECUTIVE COMPENSATION.
Reference is made to the pertinent information contained in the
Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission, which information is
incorporated herein.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Reference is made to the pertinent information contained in the
Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission, which information is
incorporated herein.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made to the pertinent information contained in the
Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission, which information is
incorporated herein.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) For Financial Statements filed as a part of this Report, reference is
made to "Index to Financial Statements" on page F-1 of this Report. For
a list of Exhibits filed as a part of this Report, see Exhibit Index on
page 50 of this Report.
(b) During the last quarter of the period covered by this Report, the
Company did not file any reports on Form 8-K.
47
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ONLINE SYSTEM SERVICES, INC.
Date: April 2, 1998 By /s/ R. Steven Adams
---------------------
R. Steven Adams, President and Chief Executive
Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ R. Steven Adams April 2, 1998
- - ---------------------------------------------------
R. Steven Adams,
(President, Chief Executive Officer and a Director)
/s/ Thomas Plunkett April 2, 1998
- - ---------------------------------------------------
Thomas Plunkett
(Chief Financial Officer)
/s/ Stuart Lucko April 2, 1998
- - ---------------------------------------------------
Stuart Lucko
(Controller)
/s/ Paul H. Spieker April 2, 1998
- - ---------------------------------------------------
Paul H. Spieker
(Director)
/s/ William R. Cullen April 2, 1998
- - ---------------------------------------------------
William R. Cullen
(Director)
/s/ Robert M. Geller April 2, 1998
- - ---------------------------------------------------
Robert M. Geller
(Director)
/s/ Robert J. Lewis April 2, 1998
- - ---------------------------------------------------
Robert J. Lewis
(Director)
48
<PAGE>
/s/ H. Robert Gill April 2, 1998
- - ---------------------------------------------------
H. Robert Gill
(Director)
/s/ Richard C. Jennewine April 2, 1998
- - ---------------------------------------------------
Richard C. Jennewine
(Director)
/s/ Charles P. Spickert April 2, 1998
- - ---------------------------------------------------
Charles P. Spickert
(Director)
49
<PAGE>
ONLINE SYSTEM SERVICES, INC.
INDEX TO EXHIBITS
FORM 10-KSB (For Fiscal Year Ended December 31, 1997)
(a) Listing of 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 Stock Option Plan of 1995(1)
4.4 Form of Incentive Stock Option Agreement for Stock Option Plan of
1995(1)
4.5 Form of Nonstatutory Stock Option Agreement for Stock Option Plan of
1995(1)
4.6 Nonstatutory Stock Option Agreement for options issued to Creative
Business Strategies, Inc.(2)
4.7 Form of Warrant issued in connection with Sale-Leaseback of
Equipment(1)
4.8 Form of Warrant issued in 1996 to private investors(1)
4.11 Specimen of Warrant Certificate--See Exhibit A filed with Exhibit 4.2
4.12 Form of Warrant Agreement issued in 1997 and 1998 to private
investors.*
10.1 Equipment Lease Agreement dated December 15, 1995 between the Company
and OSS Equipment Leasing General Partnership(1)
10.2 Financial Advisory Agreement dated February 23, 1996 between the
Company and Cohig and Associates(1)
10.3 Form of Nondisclosure and Nonsolicitation Agreement between the
Company and its employees(2)
10.4 Office Lease for the Company's principal offices(2)
10.5 Long-Term Equipment Sale and Software License Agreement dated October
7, 1997 between the Company and FiberTel TCI2 S.A.*
10.6 Agreement and Plan of Merger dated March 19, 1998 among the Company,
Durand Acquisition Corporation and Durand Communications, Inc.*
10.7 Agreement dated October 7, 1997 between the Company and Medical
Education Collaborative, Inc.*
13 The registrant intends to deliver to its shareholders a copy of 1997
Annual Report on form 10-KSB (without exhibits), in lieu of a separate
Annual Report to Shareholders
16 Letter on change in certifying accountant(3)
23.1 Consent of Arthur Andersen LLP*
27 Financial Data Schedule*
- - -----------------------------
* 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 the Form 8-K Report, dated October 7, 1996, Commission File No.
0-28462.
50
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION, AS AMENDED
ONLINE SYSTEM SERVICES, INC.
<PAGE>
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.
<PAGE>
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.
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 one 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.
<PAGE>
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.
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:
<PAGE>
(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
(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, partnership, joint venture,
<PAGE>
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.
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
<PAGE>
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.
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 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.
----- -----
<PAGE>
/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.
/s/ Colleen K. Overocker
------------------------
Notary Public
My Commission Expires: 05/17/1995
<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.
<PAGE>
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
<PAGE>
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
<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.
<PAGE>
(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 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.
<PAGE>
(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.
(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
<PAGE>
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
<PAGE>
Notice") to the 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.
<PAGE>
EXHIBIT 4.12
FORM OF WARRANT TO PURCHASE COMMON STOCK OF
ONLINE SYSTEM SERVICES, INC.
ISSUED TO DECEMBER 1997 AND MARCH 1998
PRIVATE INVESTORS
<PAGE>
Warrant to
Purchase _______
Shares
WARRANT TO PURCHASE COMMON STOCK OF
ONLINE SYSTEM SERVICES, INC.
THIS CERTIFIES THAT for value received ____________________ is entitled,
subject to the terms and conditions hereinafter set forth, to purchase from
ONLINE SYSTEM SERVICES, INC., a Colorado corporation (the "Company"), __________
fully paid and non-assessable shares of Common Stock of the Company (the "Common
Stock"), upon presentation and surrender of this Warrant with the Subscription
Form duly executed, at any time during the term hereof, at the principal office
of the Company or at such other office as shall have theretofore been designated
by the Company by notice pursuant hereto and upon payment therefor of the
Purchase Price, in lawful money of the United States of America, determined as
set forth below. The term of this Warrant shall commence on the date hereof,
and terminate, if not exercised prior thereto, at 5:00 p.m. Mountain Time, on
____________________ (the "Expiration Date").
This Warrant is one of a series of Warrants issued in connection with the
offering of Units (the "Units") of the Company each comprised of 10,000 shares
of the Company's 10% Preferred Stock, 2,500 shares of the Company's Common
Stock, and 2,000 of the Company's Common Stock Purchase Warrants pursuant to a
Private Placement Memorandum dated December 4, 1997 (the "Memorandum").
This Warrant is subject to the following terms and conditions:
1. (a) The purchase rights represented by this Warrant are exercisable
at any time after the initial closing date of the offering contemplated by the
Memorandum and prior to 5:00 p.m. Mountain Time on the Expiration Date, at the
option of the registered holder hereof (the "Holder"), in whole or in part (but
not as to a fractional share of Common Stock). Exercise of this Warrant shall
be made by the surrender hereof by the Holder to the Company at its principal
office together with (i) the attached Subscription Form designating the number
of shares of Common Stock being purchased, (ii) a certified check or cash in
payment for such shares and (iii) a letter of transmittal setting forth the
computation of the amount of said payment. The Company shall thereafter
promptly (in any event within seven (7) business days after such exercise) issue
certificates for the number of shares of the Common Stock of the Company
purchased at the Purchase Price in effect at the time of such exercise, together
with cash in lieu of any fraction of a share. The Company shall thereupon cancel
this Warrant; and in the event that less than the entire number of shares
purchasable are purchased, shall issue a new Warrant for the number not so
purchased.
(b) (1) Provided the Company's Common Stock shall then be traded on
an exchange or quoted on the Nasdaq National Market or the Nasdaq Small Cap
Market or
<PAGE>
otherwise traded as described in Section 1(b)(4) hereof, the holder of this
Warrant shall have the right to require the Company to convert this Warrant (the
"Conversion Right"), at any time after the initial closing date of the offering
contemplated by the Memorandum and prior to its expiration into shares of Common
Stock as provided for in this Section 1(b). Upon exercise of the Conversion
Right, the Company shall deliver to the Holder (without payment by the Holder of
any exercise price) that number of shares of Common Stock equal to the quotient
obtained by dividing (x) the value of this Warrant at the time the Conversion
Right is exercised (determined by subtracting the aggregate Purchase Price (as
determined below) for the Warrant shares being exercised and in effect
immediately prior to the exercise of the Conversion Right from the aggregate
Fair Market Value (as determined below) for the Warrant shares being exercised
immediately prior to the exercise of the Conversion Right) by (y) the Fair
Market Value of one share of Common Stock immediately prior to the exercise of
the Conversion Right.
(2) The Conversion Right may be exercised by the Holder by
delivering the attached Subscription Form to the Company at its principal office
designating (i) the total number of shares of Common Stock the Holder will
purchase pursuant to such conversion and (ii) a date not less than five (5) nor
more than twenty (20) business days from the date of the Conversion Notice for
the closing of such purchase, together with a letter of transmittal setting
forth the computation of the number of shares to be so purchased.
(3) At any closing under section 1(b)(2) hereof, (i) the Holder
will surrender this Warrant, (ii) the Company will deliver to the Holder a
certificate or certificates for the number of shares of Common Stock issuable
upon such conversion, together with cash, in lieu of any fraction of a share,
and (iii) the Company will deliver to the Hholder a new Warrant representing the
number of shares, if any, with respect to which the Warrant shall not have been
exercised.
(4) "Fair Market Value" of a share of Common Stock as of a
particular date (the "Determination Date") shall mean:
(i) If the Company's Common Stock is traded on an exchange
or is quoted on the Nasdaq National Market, or the Nasdaq Small Cap Market, then
the average closing or last sale prices, respectively, reported for the ten (10)
business days immediately preceding the Determination Date.
(ii) If the Company's Common Stock is not traded on an
exchange or on the Nasdaq National Market, or the Nasdaq Small Cap Market, but
is traded in the over-the counter market, then the average of the closing bid
and asked prices reported for the ten (10) business days immediately preceding
the Determination Date.
2. The purchase price for each share of Common Stock purchasable pursuant
to the exercise of this Warrant shall be Fifteen Dollars ($15.00) per share (the
"Initial Purchase Price") or the adjusted price, if applicable, determined as
set forth in Section 8 hereof. The Initial Purchase Price, and from time to time
the number of shares of Common Stock subject to purchase hereunder are subject
to adjustment in certain circumstances provided for below. The purchase price,
as defined above, is hereinafter referred to as the "Purchase Price".
(a) In case the Company shall (i) pay a dividend in shares of its
capital stock (other than an issuance of shares of capital stock to holders
of Common Stock who have elected to receive a dividend in shares in lieu of
cash), (ii)
<PAGE>
subdivide its outstanding shares of Common Stock, (iii) reduce, consolidate
or combine its outstanding shares of Common Stock into a smaller number of
shares, or (iv) issue by reclassification of its shares of Common Stock any
shares of the Company, the number of shares of Common Stock issuable upon
exercise of this Warrant shall be the number of shares of Common Stock of
the Company which the Warrant Holder would have owned or would have been
entitled to receive after the happening of any of the events described
above had this Warrant been exercised immediately prior to the happening of
such event. Such adjustment shall be made successively whenever any such
effective date or record date shall occur. An adjustment made pursuant to
this subsection (a) shall become effective retroactively, immediately after
the record date in the case of a dividend and shall become effective
immediately after the effective date in the case of a subdivision,
reduction, consolidation, combination or reclassification.
(b) In case of any consolidation of the Company with or merger of the
Company with or into another corporation or in case of any sale, transfer
or lease to another corporation of all or substantially all of the property
of the Company, the Company or such successor or purchasing corporation, as
the case may be, shall execute an agreement that the Holder of a Warrant
shall have the right thereafter upon payment of the Initial Purchase Price
in effect immediately prior to such action to purchase upon exercise of the
Warrant the kind and amount of shares and other securities and property
which the Holder would have owned or would have been entitled to receive
after the happening of such consolidation, merger, sale, transfer or lease
had the Warrant been exercised immediately prior to such action. The
Company shall give prompt written notice of the execution of any such
agreement to the Holder of each Warrant at the address of such Holder as
shown on the records of the Company. Such agreement shall provide for
subsequent adjustments, which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this section 2, after the
happening of such consolidation, merger, sale, transfer or lease. The
provisions of this subsection 2(b) shall similarly apply to successive
consolidations, mergers, sales, transfers or leases.
3. In case at any time:
(a) The Company shall declare any cash dividend on its Common Stock at
a rate in excess of the rate of the last cash dividend theretofore paid;
(b) The Company shall pay any dividend payable in stock upon its
Common Stock or make any distribution (other than regular cash dividends)
to the holders of its Common Stock;
(c) The Company shall offer for subscription pro rata to the holders
of its Common Stock any additional shares of stock of any class or other
rights;
<PAGE>
(d) There shall be any capital reorganization, or reclassification of
the capital stock of the Company or consolidation or merger of the Company
with, or sales of all or substantially all of its assets to, another
corporation; or
(e) There shall be a voluntary or involuntary dissolution, liquidation
or winding up of the Company;
then, in any one or more of said cases, the Company shall give written notice,
by first class mail, postage prepaid, addressed to the Holder at the address of
such holder as shown on the books of the Company, of the date on which (1) the
books of the Company shall close or a record shall be taken for such dividend,
distribution or subscription rights, or (2) such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up shall take place, as the case may be. Such notice shall also specify
the date as of which the holders of Common Stock of record shall participate in
such dividend, distribution or subscription rights, or shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, or winding up, as the case may be. Such written notice shall be
given at least 20 days prior to the action in question and not less than 20 days
prior to the record date or the date on which the Company's transfer books are
closed in respect thereto.
4. If any event occurs as to which, in the sole opinion of the Board of
Directors of the Company, the other provisions of this Warrant are not strictly
applicable or if strictly applicable would not fairly protect the rights of the
Holder in accordance with the essential intent and principles of such
provisions, then the Board of Directors shall make such adjustment in the
application of such provisions as may be necessary, in the sole judgment of the
Board of Directors, in accordance with such essential intent and principles, to
protect such rights as aforesaid.
5. The Company covenants and agrees that all shares which may be issued
upon the exercise of this Warrant will, upon issuance, be duly and validly
authorized and issued, fully paid and nonassessable, and free from all taxes,
liens and charges with respect to the issue thereof; and without limiting the
generality of the foregoing, the Company covenants and agrees that it will, from
time to time, take all such action as may be requisite to assure that the par
value or stated value per share of the Common Stock to be acquired upon the
exercise of this Warrant is at all times equal to or less than the then
effective Purchase Price per share of the Common Stock issuable pursuant to
exercise of this Warrant. The Company further covenants and agrees that during
the period within which this Warrant may be exercised, the Company will at all
times have authorized and reserved for the purpose of the issue upon exercise of
this Warrant a sufficient number of shares of its Common Stock to provide for
such exercise.
6. (a) The Holder represents that he is acquiring this Warrant and, in
the absence of an effective registration statement under the Securities Act
of 1993 (the "1933 Act") for the shares of Common Stock issuable hereunder,
such shares for the purpose of investment and not with a view to or for
sale in connection with
<PAGE>
any distribution thereof. The Holder and the holder of any shares of Common
Stock issued upon exercise hereof, by his acceptance hereof, agrees that he
will notify the Company in writing before selling or otherwise disposing of
this Warrant or any shares of Common Stock issued to him upon exercise
hereof, describing briefly the nature of any such sale or other
disposition, and no such sale or other disposition shall be made unless and
until (i) the Company has received an opinion of counsel reasonably
acceptable to it that no registration (or perfection of an exemption) under
the 1933 Act is required with respect to such sale or disposition (which
opinion may be conditioned upon the transferee's assuming the Holder's
obligation under this section 6) or (ii) an appropriate registration
statement with respect to such Warrant or such Common Stock, or both, has
been filed with the Securities and Exchange Commission (the "Commission")
and declared effective by the Commission. The Company may require that this
Warrant and certificates representing shares of Common Stock issued upon
exercise hereof be stamped or imprinted with an appropriate legend
reflecting the foregoing restrictions. For the purposes of this section 6,
the term "Securities" shall include this Warrant and the shares of Common
Stock issued or issuable upon the exercise hereof.
(b) The restrictions imposed by this section 6 on the transfer of the
Securities shall terminate as to any portion of the Securities when:
(i) Such portion of the Securities shall have been effectively
registered under the 1933 Act and sold by the holder thereof in
accordance with such registration or exemption; or
(ii) Written opinions to the effect that such a registration is no
longer required or necessary under any Federal or State law or
regulation of governmental authority shall have been received from
legal counsel for the Company and counsel for the holder of such
portion of the Securities; or, if a favorable opinion is obtained from
holder's counsel, and counsel for the Company declines to render such
an opinion, upon the holder's undertaking to indemnify the Company, on
terms satisfactory to the Company, against all liability or loss the
Company may sustain in connection with such transfer.
Whenever the restrictions imposed by this section 6 shall terminate,
as provided above, any holder of the Securities as to which such
restrictions shall have terminated shall be entitled to receive promptly
from the Company, without expense to such holder, a new certificate, not
bearing the restrictive legend referred to in clause (a) hereof.
7. The Holder acknowledges and agrees that the Company has no future
obligation to register this Warrant or the shares of Common Stock issued or
issuable upon the exercise of
<PAGE>
this Warrant under the 1933 Act, or under any state securities laws except as is
set forth in the Registration Rights Agreement, a copy of which is Exhibit A to
the Memorandum, executed by the Company in connection with the issuance of the
Units.
8. This Warrant is exchangeable, upon the surrender hereof by the Holder
at the principal office of the Company, for new warrants of like tenor and date
representing in the aggregate the right to purchase the number of shares
purchasable hereunder, each of such new Warrants to represent the right to
purchase such number of shares as shall be designated by said Holder at the time
of such surrender. Subject to section 6 hereof, this Warrant and all rights
hereunder are transferable in whole or in part by the Holder, in person or by
duly authorized attorney, upon surrender of this Warrant duly endorsed, at the
principal office of the Company.
9. Upon the receipt by the Company of evidence reasonably satisfactory to
it of the loss, theft, destruction or mutilation of this Warrant, and, in case
of loss, theft or destruction, of indemnity or security reasonably satisfactory
to it, and reimbursement to the Company of all reasonable expenses incidental
thereto, and upon surrender and cancellation of this Warrant, if mutilated, the
Company will make and deliver a new Warrant of like tenor, in lieu of this
Warrant.
10. All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been made when delivered or
mailed first-class postage prepaid or delivered to a telegraph office for
transmission:
(a) If to the Holder at such address as may have been furnished by
such holder to the Company in writing; and
(b) If to the Company at such address as may have been furnished by
the Company to the Holder of this Warrant in writing.
11. This Warrant shall be binding upon any successors or assigns of the
Company.
12. This Warrant shall be construed in accordance with and governed by the
laws of the State of Colorado.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
and delivered as of the date set forth below by one of its officers thereunto
duly authorized.
Dated: ____________________.
ONLINE SYSTEM SERVICES, INC.
By______________________________________
R. Steven Adams
Its: President
<PAGE>
______________________________
SUBSCRIPTION FORM
To be signed only upon exercise of Warrant
The undersigned the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, __________ of the shares of Common Stock of ONLINE SYSTEM
SERVICES, INC. to which such Warrant relates and herewith makes payment therefor
in cash or by certified check or through the and requests that the certificates
for such shares be issued in the name of, and be delivered to,
______________________________, the address for which is set forth below the
signature of the undersigned. If this transaction relates to the exercise of
the Conversion Right, the closing of such purchase shall take place at the
Company's offices on ____________________ (not less than five (5) nor more than
twenty (20) business days from the date of this Subscription Form).
Dated: ____________________
________________________________________
(Signature)
________________________________________
________________________________________
(Address)
________________________________________
____________________________________________
TRANSFER FORM
To be signed only upon transfer of Warrant
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto _______________ ______________________________ the right to
purchase shares of Common Stock of ONLINE SYSTEM SERVICES, INC. to which the
within Warrant relates and appoints ______________________________, attorney, to
transfer said right on the books of ONLINE SYSTEM SERVICES, INC. with full power
of substitution in the premises.
Dated: ____________________
<PAGE>
________________________________________
(Signature)
________________________________________
________________________________________
(Address)
<PAGE>
EXHIBIT 10.5
LONG-TERM EQUIPMENT SALE AND
----------------------------
SOFTWARE LICENSE AGREEMENT
--------------------------
LONG-TERM EQUIPMENT SALE AND SOFTWARE LICENSE AGREEMENT ("Agreement") dated this
third day of October, 1997 by and between Online System Services, Inc. ("OSS") a
Colorado corporation with its principal place of business located at 1800
Glenarm Place, Denver, Colorado and FiberTel TCI/2/ S.A., an Argentinean
corporation, with its principal place of business located at Amenabar 23, 1414
Buenos Aires Argentina ("FiberTel").
WHEREAS, OSS is a company generally engaged in the business of providing
Internet related equipment software and services such as hardware and software
selection, installation, initial training, consulting and general assistance in
the implementation and operation of a turn-key Internet Service Provider ("ISP")
business as well as documentation and supporting materials for administration,
marketing, sales and web site design and development support for ISP systems;
WHEREAS, OSS provides and/or has the right to license a package of OSS
proprietary programs developed by OSS including but not limited to the
"Community Access Partner" ("CAP") Web site software, with future versions to
include, without limitation, "Electronic Banking" and "Electronic Commerce"
functionality, and user documentation (hereinafter collectively described as the
"Application Program"). The basic CAP web site software is a multi-faceted
software program allowing the operator to provide customer service information,
link to pertinent local, national and international World Wide Web sites as well
as develop local user generated content. The CAP software also allows operators
to develop advertising revenues. Schedule "G" details the CAP software
functionality as of the date of this Agreement as well as the future
enhancements features and associated release dates.
WHEREAS, OSS sells the non-proprietary software, Equipment, and related
materials and services as specifically set forth on Schedules "A" (except CAP
and other proprietary software to be released in the future), "B" and "C",
respectively attached hereto and made a part hereof and which may be modified by
the parties from time to time (collectively referred to as the "Equipment") for
use with the Application Program. The Equipment and the Application Program are
hereinafter collectively referred to as the "System";
WHEREAS, FiberTel has licensed the Application Program (the "Software License")
and purchased certain Equipment from OSS to establish an Internet point of
presence, to design web pages for customers to perform such services and,
generally, to enable FiberTel to become an Internet Service Provider to its own
customers in Argentina (the "Territory"); and to that end have incorporated the
essential terms of their agreement into a "Memorandum of Agreement" dated August
8, 1997 [the "MOA"].
NOW THEREFORE, the parties, intending to be legally bound, hereby agree as
follows:
1. PURPOSE: OSS shall provide to FiberTel all the software and services and,
-------
generally, all the know-how and software technology owned, developed, or
licensed to OSS, to develop the Internet content related business in Argentina.
OSS further undertakes to channel all its Internet content related business
activities in the Territory via FiberTel, subject to the provisions set forth in
section 16.6.
1
<PAGE>
2. TERM: The term of the Agreement shall commence on the date set forth above,
----
and shall continue for a period of five (5) years unless sooner terminated in
accordance with the terms of this Agreement including but not limited to Section
16 hereunder (the "Term").
3. PROVISIONS APPLICABLE TO EQUIPMENT SALE AND PURCHASE
- - -------------------------------------------------------
3.1 Purchase and Sale: Pursuant to the MOA, FiberTel has previously purchased
---------------------
from OSS the Equipment set forth as items 1-46 on Schedule "B" (attached hereto)
along with the materials and services set forth on Schedule "C" (attached
hereto), which delivery is partially pending at the time of execution of this
Agreement, at the price set forth on Schedule "B" ("Equipment Purchase Price").
3.2 Payment:
-----------
(a) Receipt of payment of fifty (50%) percent of the Equipment Purchase
Price for items 1 - 46 of Schedule "B" and the items on Schedule "C" is hereby
acknowledged by OSS. The remaining fifty (50%) percent shall be paid to OSS upon
Acceptance by FiberTel of the Equipment which shall be deemed to be granted
within thirty (30) days of delivery by OSS, unless within that thirty (30) days
FiberTel provides OSS with documentation that OSS has failed to comply with a
material term of the MOA, in which event payment will be made within ten (10)
days of OSS' rectification of such material term. For purposes hereof,
Acceptance shall mean that either: (i) all of the Equipment has been delivered
and complies with and functions in accordance with the acceptance criteria set
forth in Item 6 of Schedule "D" hereto; or (ii) in the case of a "partial
delivery", the accepted Equipment complies with and functions in accordance with
such criteria and has been placed in commercial use by FiberTel for purposes
other than testing.
(b) OSS shall provide a written invoice to FiberTel for all amounts due.
No rights in or title to any separately invoiced Equipment shall pass to
FiberTel unless and until FiberTel has fully satisfied all payments required to
be made for such Equipment already purchased. Notwithstanding anything to the
contrary contained herein, in the case of FiberTel's Acceptance of a Partial
Delivery of Equipment, FiberTel agrees to make partial payments to OSS based on
the amounts set forth on Schedule "B" for the respective pieces of Equipment.
3.3 Shipping: The cost of all shipping charges, including insurance, shall be
------------
borne by FiberTel.
4. PROVISIONS APPLICABLE TO LICENSE OF THE APPLICATION PROGRAM
-----------------------------------------------------------
4.1 Grant of Software License: During the Term in the Territory and subject
-----------------------------
to FiberTel's compliance with the terms and conditions herein, OSS hereby grants
to FiberTel a Software License granting FiberTel the right to use and execute
the Application Program and its future releases and versions throughout the
Term, with no further costs to FiberTel than those set forth in Section 7.
Except for the license herein granted to FiberTel, it is hereby acknowledged and
agreed to by the parties that as between OSS and FiberTel all rights of any
nature whatsoever in and to the Application Program and any other intellectual
property relating to Cable Access America are retained exclusively by OSS. The
License shall be non-exclusive to FiberTel, subject to the provisions set forth
in Section 1 and 16.6.
4.2 Reservation of Rights: The Software License may not, under any
-------------------------
circumstances whatsoever be considered a transfer, either direct or indirect of
the intellectual and/or industrial property rights of the licensed software and
FiberTel shall not have the right to assign, sub-license, rent, lease, sell,
encumber, or otherwise transfer ("Assign") any of the rights granted hereunder.
Notwithstanding the foregoing, FiberTel shall have the right to Assign any of
the rights granted hereunder to any "Affiliate". For
2
<PAGE>
purposes hereof, Affiliate shall mean any person or entity controlling,
controlled by or under common control with FiberTel. Any person or entity owning
at least twenty (20%) percent of the equity interest in an entity shall be
deemed to control that entity. FiberTel hereby waives any "moral" or other
rights of authorship (droit moral) which may accrue or have accrued to it under
any laws of any jurisdiction, including, without limitation, any right to
publish or withhold publication, to be or not be associated with the Application
Program or to preserve the integrity of the Application Program (the droit de
divulgation, droit a la paternite and droit de retrait ou de repentir,
respectively).
Notwithstanding the above, in case that FiberTel enhances, modifies or
jointly develops with OSS any of the Application Program, as between OSS and
FiberTel, ownership of such modifications, enhancements or developments rest
jointly with the parties. Regarding the non proprietary software provided by OSS
to FiberTel hereunder ownership rest exclusively with FiberTel. Except for the
rights expressly granted herein, any and all rights in and to the Application
Program are hereby reserved to OSS.
4.3 Continued Licensing: Notwithstanding anything contained in Section 16.3
-----------------------
to the contrary, upon the termination of this Agreement for any reason, except
FiberTel's material breach of this Agreement, or in the event OSS ceases to do
business during the Term hereof, FiberTel shall obtain the source code developed
by OSS for the Application Program, and shall have the right to modify it and
utilize it subject to the rates set forth below. In that case, OSS agrees to
provide FiberTel with a copy of all source code relating to the Application
Program. OSS further agrees to provide that the license to FiberTel devolves to
OSS' successors in interest.
<TABLE>
<CAPTION>
Date of Termination Annual License Fee
-------------------------------------------------------------------
<S> <C>
After the beginning of Year 4,
or more, of the Term $ 20,000
After the beginning of Year 3 of the Term $ 40,000
After the beginning of Year 2 of the Term $ 80,000
After the beginning of Year 1 of the Term $160,000
</TABLE>
Should the Agreement be terminated by OSS or OSS's material breach of this
Agreement, FiberTel shall not be obliged to pay any annual License Fee for the
continued licensing of the Application Program.
In case of expiration of the Term or termination of this Agreement, the
parties undertake to agree a fair market value for the continuous upgrading of
the Application Program licensed pursuant to this provision. In case of the
parties' failure to reach an agreement on the above mentioned fair market value,
this value will be determined by one of the consultants set forth in Schedule I.
5. RESPONSIBILITIES OF FIBERTEL:
----------------------------
5.1 Ancillary Services: FiberTel shall be solely responsible for the
----------------------
provision of telecommunication services provided by the local telephone company,
interchange carriers and any other telecommunications company which may be
necessary for the FiberTel's use of the System. In addition, FiberTel shall be
responsible for insuring for the provision of adequate 110/220 volt power
circuits for the System, including backup (uninteruptible power supply, if
desired) power.
3
<PAGE>
6. OSS INSTALLATION
- - -------------------
6.1 Installation Plan and Acceptance: With respect to Equipment purchased by
------------------------------------
FiberTel from OSS, OSS agrees that it shall promptly provide on-site
installation assistance comprised of the installation and other services
described in the Installation Plan set forth in Schedule "D" attached hereto and
such other services as the parties mutually agree are necessary to permit
FiberTel to begin use of the System in accordance with such Installation Plan in
compliance with the timetable set forth therein. An OSS technician shall be
responsible to demonstrate to FiberTel the successful material operation of all
functions of the installed System prior to certifying in writing that the
installation has been completed.
6.2 Passage of Title/Risk of Loss/Equipment Delivery: Title to the System
----------------------------------------------------
shall not pass to FiberTel until the issuance of the certification of the
Installation Plan and payment of the Equipment Purchase Price and any related
installation fees due and owing. Until such time as title passes to FiberTel
hereunder, OSS shall bear the risk of loss or damage to the System, or any part
thereof. Unless otherwise determined by OSS, OSS shall deliver all Equipment to
FiberTel F.O.B. OSS' or manufacturer's principal place of business, whichever is
least expensive. OSS reserves the right to make partial deliveries and to ship
the Equipment as it becomes available. Delivery dates are approximate. FiberTel
shall provide an acceptable installation and operation environment suitable for
computer equipment.
6.3 FiberTel Responsibilities: FiberTel shall promptly perform all
-----------------------------
responsibilities it is assigned under the Installation Plan. FiberTel shall also
furnish to OSS, free of charge, for the period of time required for installation
of the System: 1) access during normal business hours to the location in which
the Equipment is to be placed; 2) the cooperation of a management-level employee
(hereinafter the Project Leader) knowledgeable in aspects of FiberTel's business
and technical operations.
7. OSS SUPPORT
-----------
7.1 FiberTel Support: OSS agrees to furnish FiberTel with on-going support.
--------------------
The parameters of such on-going support and the establishment of a Buenos Aires
office by OSS are defined in Schedule "E" attached hereto.
7.2 Training: Prior to commencing use of the System, FiberTel and OSS shall
------------
determine a mutually acceptable training schedule during normal business hours
for OSS training of FiberTel's Personnel ("Training Services"), as specified in
the MOA. During the Training Services, FiberTel shall provide employees who are
technicians familiar with computers, computer networks, communications and data
protocols and who shall be competent to handle routine questions from current
and potential customers obtaining Internet access from FiberTel. OSS will
provide FiberTel and or its chosen representative with said training set forth
in Schedule "F" attached hereto. FiberTel shall be responsible for training on
FiberTel's internal systems used in conjunction with the Application Program.
Schedule "F" of this Agreement identifies what ongoing training will be
provided at OSS' expense.
7.3 Marketing Support: OSS shall provide FiberTel with pre-existing and
---------------------
ongoing marketing support materials developed for other markets at no additional
cost and OSS shall use best efforts to effect delivery of such materials within
two (2) weeks of development.
4
<PAGE>
7.4 OSS Professional Management and Intellectual Property Fees: In
--------------------------------------------------------------
consideration of the rights and licenses granted hereunder, FiberTel shall
pay to OSS:
(a) The following percentage of all "Internet Access Gross Receipts"
which shall be defined as all fees received by FiberTel or its Assignees
attributable to the provision of "Internet Access" to be defined for the purpose
of this Agreement as dial-up, telco return and two way cable modem Internet
residential access revenues (including residential webhosting revenues) minus
uncollectible billings, equipment related revenues (to be calculated based on a
three year amortization period for the equipment - i.e. cable modem costs),
installation charges, value added, sales and other transactional taxes (other
than those taxes which FiberTel is legally obligated to pay on its own behalf):
<TABLE>
<CAPTION>
Contract Year Billed Percentage of Gross Receipts
-------------------- ----------------------------
<S> <C>
Year One 2%
Year Two 2%
Year Three 1%
Year Four 1%
Year Five 1%
</TABLE>
(b) Eleven (11%) Percent of all "Content Related Gross Receipts" which
shall be defined as all fees received by FiberTel or its Assignees attributable
to all content directly related activities, including but not limited to
sponsorships, electronic advertising, electronic banking and electronic commerce
minus custom software and web-design development cost, uncollectible billings,
installation charges, value added, sales and other transactional taxes (other
than those taxes which FiberTel is legally obligated to pay on its own behalf).
OSS's rights to receive payment of the percentage foreseen in this
paragraph is conditioned upon the use by FiberTel of OSS' proprietary software.
(c) In addition, FiberTel shall be responsible for payment to OSS of
those percentages of Internet Access Gross Receipts and Content Related Gross
Receipts set forth above for any expansion of FiberTel's offering of the OSS
products and services to the Affiliates.
7.5 Escrowed OSS Professional Management and Intellectual Property Fees: The
-----------------------------------------------------------------------
Professional Management and Intellectual Property Fee of US$170,000 paid into an
escrow account by FiberTel for the benefit of OSS pursuant to Section 4.3 of the
MOA shall be released to FiberTel upon the full execution of this Agreement.
7.6 Additional Professional Management Fees: Pursuant to Section 4.4 of the
-------------------------------------------
MOA, FiberTel has agreed to pay to OSS One Hundred Sixty Thousand ($160,000)
U.S. Dollars, in consideration for the rendition by OSS of the additional
Professional Management Service set forth on Schedule F of the MOA. OSS hereby
acknowledges receipt of Fifty (50%) percent of such payment. The remaining fifty
(50%) percent shall be paid by FiberTel to OSS in scheduled installments upon
the completion of the individual services listed in Schedule "E of the MOA. Such
payments shall be made in the Argentine Peso (the legal currency in force as of
the date hereof), or such other legal currency that may be in force at the time
payment is due to OSS hereunder, equivalent of the amounts set forth in U.S.
Dollars and are net of any and all value added, sales or transactional taxes
(other than those taxes which FiberTel is legally obligated to pay on its own
behalf), duties, customs, deductions or withholdings or any other
5
<PAGE>
monies required to be withheld by any other government regulation which FiberTel
shall bear on its own account and pay.
7.7 Payment of Professional Management and Intellectual Property Fee: The
--------------------------------------------------------------------
Professional Management and Intellectual Property Fees provided for in Section
6.4 shall be paid by FiberTel on or before the forty-fifth day following each
month for Gross Receipts collected by FiberTel, with respect to the FiberTel
Business during the previous month.
8. MANNER OF PAYMENT:
-----------------
All payments required to be made hereunder shall be made in the Argentine
Peso and shall be payable by electronic wire transfer to OSS' account at the
Argentine Bank of OSS' choice or, at OSS' election, to OSS' account at NORWEST
BANK, COLORADO, N.A., Account #101 8048688, ABA #102000076. OSS, or its
Argentinean affiliate, shall provide a written invoice to FiberTel for all
amounts due. FiberTel will provide OSS with a statement of revenues and expenses
as set forth in this Agreement on or before the thirtieth day following each
month of FiberTel business.
9. TAXES
-----
9.1 General taxes: Except as provided in Section 7.6, FiberTel shall have the
-----------------
right to deduct the amount of any withholding taxes, value added taxes, sales
and other transactional taxes (other than those taxes which FiberTel is legally
obligated to pay on its own behalf) from the monies due to OSS hereunder;
provided, however, that FiberTel shall furnish to OSS, at FiberTel's expense,
the following information and documents: (a) an original receipt from taxing
authority with respect to the tax paid (and if such receipt is in a language
other than English, a certified English translation thereof); (b) a report
setting forth the fees with respect to which the tax is paid, including the
statutory citations and general description of the provision; and (c) such other
information as OSS may from time to time reasonably request to evidence OSS'
right to credit such tax against its income tax liability in the United States.
9.2 Stamp Tax: The Stamp tax imposed by the Argentine Government outside the
-------------
city of Buenos Aires shall be jointly borne by the parties on a 50/50 basis.
10. AUDITS/INSPECTIONS
------------------
FiberTel and its Assignees shall prepare and maintain complete and accurate
records of all matters directly relating to this Agreement, in accordance with
generally accepted accounting principles, on a calendar annual basis, throughout
the Term and for not less than two years thereafter. During each calendar year
of the Term, and within one year after the expiration of this Agreement, OSS, or
its designated representative, may inspect and audit such books and records,
once per year, upon at least sixty (60) business days prior notice to FiberTel
for the purpose of verifying and confirming the accuracy of the payments made to
OSS. Under no circumstance shall OSS be entitled to audit the books and records
of FiberTel corresponding to the second precedent year which will be considered
accepted if not challenged in due time. In the event that any audit reveals any
error in the calculation of the amounts due to OSS, FiberTel shall immediately
pay or be refunded the difference unless FiberTel contests such audit in good
faith. In the event that the amount due to OSS exceeds five (5%) percent of the
total amount due to OSS for such audited period, FiberTel shall pay the costs
associated with the audit unless FiberTel contests such audit in good faith. In
the event FiberTel contests such audit, the dispute shall be subject to Section
18.5 hereunder.
6
<PAGE>
11. FORCE MAJEURE
-------------
11.1 If OSS' or FiberTel's performance of any of its obligations hereunder
are delayed or impaired by reason of any Act of God, civil disturbance, strike,
adverse weather condition, inability to arrange for or delays in transportation,
unavoidable casualty, inability to acquire or delays in acquiring any component
from a manufacturer or supplier, inability to obtain or delays in obtaining any
permits or any law, rule or order of any governmental agency or official or any
cause not reasonably within OSS' or FiberTel's control including without
limitation the non-renewal or termination of or inability to obtain an OSS
license of any of the Application Program, and not due to any fault, neglect,
act or omission on the part of OSS or FiberTel, then OSS or FiberTel, as the
case may be shall be entitled to an extension of time for completion of same for
a period equivalent to the time lost by reason thereof; provided, however, that
such party gives the other party notice thereof within five (5) business days
(unless circumstances require immediate notification) of the commencement of
such claim of delay or impairment. In the event any delay or impairment
continues for a period of one month, either party shall have the right to
terminate this Agreement in accordance with Section 16 below.
11.2 Withdrawal and Replacement: Subject to Section 11.1 above, and
-------------------------------
notification to and approval by FiberTel, at anytime during the Term, OSS shall
have the right to withdraw the Application Program or any component and upon
FiberTel's consent replace same with another comparable application program.
12. INSURANCE: Prior to commencement of any work associated with the
---------
Installation Plan, OSS shall be responsible for the procurement of adequate
liability insurance and worker's compensation insurance with limits of no less
than $1,000,000 per each casualty along with a certificate of insurance
evidencing same, naming FiberTel as additional insured. OSS shall maintain the
insurance for as long as the Equipment is utilized.
13. PERMITS: FiberTel and OSS shall jointly, at FiberTel's sole cost, obtain all
-------
consents, licenses, permits, approvals, authorizations, and inspections from
Argentine federal, state, and local governmental authorities, agencies, or
officials required for the execution and completion of the installation and
construction work to be performed hereunder. FiberTel and OSS shall also be
responsible for and correct any violations of any such laws resulting from or in
connection with their performance of the work hereunder. FiberTel and OSS shall
furnish each other such proof of its compliance as either party may reasonable
request by giving the other party notice thereof.
14. CONFIDENTIALITY/PUBLIC DISCLOSURE/PROPRIETARY RIGHTS:
----------------------------------------------------
The parties hereto agree to execute a Non-Disclosure Agreement substantially
in the form of Schedule "H" attached hereto.
14.1 Public Disclosure: OSS and FiberTel shall obtain the others consent
----------------------
prior to making any press release, announcement or other public disclosure
concerning this Agreement, which consent shall not be unreasonably withheld.
Notwithstanding the foregoing, each party shall be free to discuss with third
parties Internet services and the design and development of ISP business,
subject to the Non-Disclosure Agreement between the parties, and to Section 16.6
hereunder.
7
<PAGE>
14.2 Proprietary Rights: As between FiberTel and OSS, FiberTel acknowledges
-----------------------
that OSS is the sole owner of all "System Information", defined as all
proprietary information of OSS relating to the System or OSS' services, and
FiberTel shall not, by reason of disclosure or access to any System Information
during the course of the parties' relationship or otherwise, acquire any right,
title, or interest in or to any System Information. No license, or other right
in or to the System Information is intended to be granted to FiberTel pursuant
to this Agreement or otherwise and no license or other right shall be
incorporated herein by reference, implication, or any other means with respect
to or under any invention, patent, copyright, trademark, (or any pending
application for same) trade secret, or other proprietary right contained in or
in any way relating to the System Information disclosed pursuant to this
Agreement or to which FiberTel may be given or have access. FiberTel shall not
itself, nor shall it permit, by way of carrying out its reasonable commercial
efforts, any third parties to remove any copyright except as specifically
authorized hereunder.
15. WARRANTIES AND INDEMNITIES/SPECIFICATIONS AND CAPACITY
------------------------------------------------------
15.1 Services Warranty: OSS warrants that the services to be supplied under
----------------------
this Agreement will be provided by qualified senior technical personnel, agreed
to by FiberTel in advance, in a professional and timely manner and will conform
to the highest generally accepted industry standard practices.
15.2 Assignment of Warranty: OSS hereby assigns to FiberTel (to the extent
---------------------------
OSS has the right to so assign) the benefits of any warranties or guarantees
provided to OSS by the manufacturer(s) of the System or any parts, replacements,
or additional units and agrees to provide a detailed description of same to
FiberTel within thirty (30) days as of the date hereof. Said assignment is not
intended to deprive OSS of its rights under said warranties and shall not be
construed to do so.
15.3 Compatibility:
------------------
a. OSS warrants and represents that the Equipment being sold to FiberTel
by OSS and the Software being Licensed to FiberTel by OSS hereunder are
compatible.
b. FiberTel acknowledges that certain software and equipment may not be
compatible with the System and FiberTel therefore agrees that it shall not use
any equipment on which the Application Program is run other than the Equipment,
the Application Program and other software provided hereunder without first
consulting OSS. In the event that FiberTel fails to inform OSS of such use, any
damages to the Equipment or otherwise as a result of such use shall be borne by
FiberTel.
8
<PAGE>
15.4 System Functions: The System shall accommodate and/or perform in an
---------------------
efficient and cost effective manner in accordance with generally accepted
industry standards, including but not limited to, the following primary and
commonly used Internet functions: Domain Name Service; Internet E-Mail
processing; World Wide Web Access, News Groups, File Transfer Protocol (ftp),
Telnet, and dialup user access and perform all accounting and control functions
of FiberTel.
15.5 Repair of Manufacturer Defects: OSS shall use best efforts to assist
-----------------------------------
FiberTel in obtaining the repair of any operational deficiencies from third
party manufacturer in accordance with manufacturer's warranty assigned to
FiberTel herein. Nothing contained in this section shall be deemed to require
OSS to maintain the Equipment or to repair any defect caused by FiberTel's
failure to properly maintain the Equipment. Notwithstanding the above, all
repair, replacement and restoration of any Equipment manufactured by OSS will be
done by OSS without extra costs or charges to FiberTel.
15.6 OSS Indemnification: OSS shall indemnify and hold FiberTel harmless
------------------------
from and against any claims, liabilities, damages and expenses, including,
without limitation, reasonable attorney's fees relating to or arising out as
OSS' breach of any of its material obligations under this Agreement. OSS shall
not be liable for any third party claims based upon or arising from FiberTel's
negligent operation of the System or for any indirect, incidental or
consequential damages arising from the use of or inability to use the System
attributable to FiberTel's negligence, provided that OSS is not also negligent.
15.7 FiberTel Indemnification: FiberTel shall indemnify and hold harmless
-----------------------------
OSS from and against any claims, liabilities, damages and expenses, including,
without limitation, reasonable attorney's fees relating to or arising out of a
breach of any of FiberTel's material obligations hereunder. FiberTel shall not
be liable in front of any third party for any indirect, incidental or
consequential damages arising from the use of or inability to use the System
attributable to OSS's negligence, provided that FiberTel is not also negligent.
FiberTel agrees, on a best effort basis, to secure an agreement from each of its
commercial and residential customers releasing and holding harmless OSS,
FiberTel, their Affiliates, officers and employees form any liability resulting
from the business contemplated hereunder.
16. DEFAULT/PERFORMANCE REVIEWS/TERMINATION
---------------------------------------
16.1 Default: Either party may immediately terminate this Agreement upon
------------
thirty (30) days prior written notice to the other party (the "Non-Terminating
Party") and upon the occurrence of any of the following events of default by the
Non-Terminating Party and the Non-Terminating Party's failure to cure same
within fifteen (15) days of notice: the Non-Terminating Party's breach of any
material obligation under this Agreement; the Non-Terminating Party's failure to
make timely payment to OSS in accordance with the payment obligations set forth
in this Agreement; the Non-Terminating Party ceases to do business or sells all
or a portion of its assets used in the business of providing Internet service
using the System:, or the Non-Terminating Party files for bankruptcy or a
trustee or receiver is appointed or the Non-Terminating Party makes an
assignment for the benefit of creditors.
9
<PAGE>
16.2 Performance Review: As from the first yearly anniversary of this
-----------------------
Agreement and on each subsequent yearly anniversary of the same, and for an
extra thirty (30) day period, FiberTel shall have the option to request OSS to
meet so as to have a performance review carried out by an independent and well-
known consultant from the list of those firms attached hereto under Exhibit 1.
Failing the parties' agreement to the same, the appointment of the independent
consultant will be made by FiberTel. The independent consultant's performance
review will be aimed to address the quality of the services provided under this
agreement by OSS and to inform if the same are substantially similar to those
provided by the three top-rank companies dedicated to providing the same
services. Only if the reports of the independent consultant indicates that said
level of compliance and services is below the said threshold, can FiberTel place
a notice to OSS so that within a thirty (30) day period, it take appropriate
steps in order to have the services provided by OSS hereunder, meet the said
level of compliance. If at the end of the said thirty-day period, OSS has not
duly updated its level of services, FiberTel will be authorized to declare a
material breach of contract in which case FiberTel's remedies will be expressly
limited to termination of this Agreement without any indemnification or
obligation towards OSS, subject with respect to the Application Program, to what
is provided under Section 4.4. In the event of such termination, OSS will have
to pay the consultant fees.
16.3 Effect of Termination: Upon the termination of this Agreement: 1) the
--------------------------
Non-Terminating Party, its receivers, trustees, assigns or other representatives
shall immediately surrender all rights, licenses and privileges granted under
this Agreement, cease using or displaying the other party's trademarks, service
marks or logos, shall cease to identify itself with the other party in any way,
shall immediately pay any and all outstanding payments due to the other party;
and shall return to the other party any and all property belonging to such other
party including without limitation, all manuals, billing, and other proprietary
software and informational materials furnished by the other party to the
breaching party, subject, with respect to the Application Program, to what is
provided under Section 4.3.;. and 2) Any Equipment fully paid for shall remain
FiberTel Equipment; provided, however, that as to any Equipment for which
FiberTel has made partial payment, FiberTel shall: provide full payment
immediately upon termination and the Equipment shall be delivered to FiberTel
upon full payment; or such Equipment shall be returned to OSS and OSS shall
refund FiberTel the difference between the fair market value of the returned
Equipment (after deduction of costs of retrieving and shipping such Equipment)
and the total amount due for the purchase of the Equipment.
16.4 Non Release of Obligations: No termination of this Agreement shall
-------------------------------
release FiberTel from any obligation to pay OSS any amounts accrued or become
payable prior to the date of termination.
16.5 Survival: The provisions of Sections 14, 15, 16.3, 16.5 and 18.1 shall
-------------
survive the expiration or termination of this Agreement.
10
<PAGE>
16.6 Good Faith Negotiation: During the term of the Agreement, neither party
---------------------------
shall participate in any business which is effectively capable of being
developed through the Application Program within the Territory without first
offering the other party the right to collaborate in such business under the
terms set forth in this Agreement. The only exception to the preceding rule will
be all those businesses which, although effectively capable of being developed
through the Application Program from time to time, may not be accepted by a
client of FiberTel, in which case, FiberTel would be able to provide the
services to the said client without OSS. FiberTel will under all circumstances
have a first right of refusal to accept and/or participate in all other Internet
related businesses other than those covered by this agreement which OSS may wish
or plan to introduce into the Territory. To this effect, FiberTel will be
granted an exclusive ten-day negotiation period, to commence upon written
notification served by OSS, during which period neither party shall discuss such
business with any third party. In the absence of the parties reaching an
agreement within such ten-day period, OSS shall be free to deal with third
parties but not on overall economic terms more favorable than those offered to
FiberTel without first re-offering such terms to FiberTel and allowing FiberTel
an additional three business day period to accept such more favorable terms. The
entire commercial management of all business either developed or capable of
being developed through the Application Program will be conducted within the
Territory by FiberTel. Should FiberTel not reach an understanding with a certain
client, then OSS will be able to approach said potential client directly.
16.7. Out clause: After the second yearly anniversary of this Agreement, the
----------------
parties may at their sole discretion, and without needing to invoke any specific
grounds for termination, decide to terminate this Agreement. Should this option
be exercised by either of the parties, the terminating party will have to render
a hundred and twenty (120) day prior written notice to the non-terminating
party. In the event that FiberTel is the terminating party an indemnification
calculated as $ 3.400.000 less all amounts already paid by FiberTel to OSS under
the terms of this Agreement and the MOA, excluding payments set forth in
Schedule B of the MOA, multiplied by 0.60, will be payable by FiberTel to OSS as
sole, full and complete compensation for the termination of this Agreement as
per this paragraph. In the event of OSS is the terminating party the following
indemnification will be payable by OSS to FiberTel as sole, full and complete
compensation for the termination of this Agreement as per this paragraph:
<TABLE>
<CAPTION>
Termination date Compensation
<S> <C>
Within month 25 and 30 of the Term $1.000.000
Within month 31 and 36 $1.200.000
Within month 37 and 42 $1.400.000
Within month 43 and 48 $1.800.000
Within month 49 and 60 $2.000.000
</TABLE>
11
<PAGE>
17. INTELLECTUAL PROPERTY
---------------------
17.1 Infringement Claims: If FiberTel receives a claim that any Equipment or
------------------------
Application Program manufactured or provided by OSS infringes upon any patent,
copyright, or other intellectual property interest, FiberTel shall immediately
notify OSS in writing. OSS shall have the exclusive authority to handle any such
claims and, at its sole option will: 1) settle or defend the claim; 2) procure
for FiberTel the right to use the Equipment and Application Program or
compatible Equipment and Application Program; 3) replace or restore the
Equipment and Application Program. OSS will maintain FiberTel harmless from all
and any liability arising from any of the foregoing without limitation.. In the
event that any Equipment or Application Program is not manufactured nor provided
by OSS, OSS shall not be required to indemnify FiberTel except to the extent
such infringement arises from OSS' integration of such Equipment or Application
Program or the System. OSS shall also not be required to indemnify FiberTel for
any claims of infringement relating to Equipment or Application Program modified
or altered in any way or made to FiberTel's designs or specifications without
OSS consent.
18. MISCELLANEOUS
-------------
18.1 Non Waiver: A failure by either party to enforce any right hereunder
---------------
shall not constitutes a waiver of such right or any other right, and shall not
modify the rights or obligations of either party under this Agreement; 18.2
----
Notice: Any standard notice required to be given under this Agreement shall be
- - -------
provided in writing and delivered by letter or fax, to the parties address
indicated herein. Any non standard notice required to be given under this
Agreement shall be provided in writing and delivered by certified mail (carta
documento) to the parties address indicated herein; 18.3 Severability: The
------------------
invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision, the remaining
provisions being deemed to continue in full force and effect; 18.4 Governing
--------------
law: The Agreement shall be governed by and construed under the laws of
- - ----
Argentina; 18.5 Dispute Resolution: The parties hereby agree and consent to the
------------------------
exclusive jurisdiction and venue of the state courts situated in Buenos Aires
for resolution of any dispute arising from this Agreement 18.6 Entire Agreement:
----------------------
This Agreement constitutes the entire agreement between the parties and
supersedes all prior agreements and communications, whether oral or in writing,
between the parties with respect to the subject matter of this Agreement. No
amendment or modification of this Agreement shall be effective unless made in
writing and signed by OSS and FiberTel. Notwithstanding the above, the MOA will
continue applying to the relations between the parties insofar it does not
contradict or otherwise conflict with any of the provisions of this Agreement;
18.7 Relationship of Parties: There is no intent within this Agreement to grant
- - -----------------------------
a franchise, create a partnership, joint venture, or business relationship
between the parties other than that described within this Agreement. FiberTel
and OSS are and at all times shall remain independent contractors and shall have
no authority to bind the other to any commitments of any kind; 18.8 Assignment:
----------------
This Agreement is nonassignable except to any Affiliate. Any assignment by
either party hereto, except as provided above, shall require the written
approval of the other party, such approval not to be unreasonably withheld; 18.9
----
Successors in Interest: This Agreement shall inure to the benefit of
- - -----------------------
and be binding upon the successors in interest to either of the parties.
12
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has duly executed and delivered
this Agreement as of the date first written above.
ONLINE SYSTEM SERVICES [Corporate Seal]
By: /s/ R. STEVEN ADAMS
-------------------
R. Steven Adams, President and Chief Executive Officer
Date: 10/3/97
-------
Date Accepted: 10/3/97
-------
FIBERTEL [Corporate Seal]
By: /s/ GEORGE Y. STEWART - C.O.O.
------------------------------
(Print Name and Title of Authorized Signatory)
Date: 10/3/97
-------
Date Accepted: 10/3/97
-------
13
<PAGE>
SCHEDULE "A" APPLICATION PROGRAMS
- - ---------------------------------
1 Windows 95 Software for Administrative Computer
1 Microsoft Front Page Software
6 NT Server 4.0 Software (w 10 Client Licensees)
1 Community Access Partners (CAP) web site software
To include:
-Electronic Commerce module for CAP when completed
-Electronic Banking module for CAP when completed
-Any and all kinds of software related to the Internet content business,
developed produced, owned by or licensed to OSS during the Term of this
Agreement, duly customized to the Territory.
14
<PAGE>
SCHEDULE "B" EQUIPMENT AND EQUIPMENT PRICE
- - ------------------------------------------
<TABLE>
<CAPTION>
Item # Qty. Item Code Description Price
- - ------ ---- --------- ----------- -----
<C> <C> <C> <S> <C>
1 1 Adaptec SCSI Controller $ 113
2 1 710167 ARCserve Enterprise Backup (NT) $ 781
3 2 667406 Bay Networks 100BaseT Hub (24-Port) $ 3,960
4 2 718481 Bay Networks 100BaseT Module (2 Port) $ 2,827
5 1 718468 Bay Networks 10BaseT Module (8 Port) $ 1,309
6 1 718467 Bay Networks 28200 Ethernet Switch $ 1,760
7 1 Bi-directional Printer Cable (6") $ 4
8 1 CISMEM-NPE-64 Cisco 64MB Memory Upgrade $ 2,640
9 1 CIS7206 Cisco 7206 Chasis $ 4,510
10 1 CISMEM-I/0-8 Cisco 8MB Flash Memory $ 605
11 1 CISPA-8T-V35 Cisco 8-Port V.35 Interface Card $ 7,260
12 1 CISC7200-I/0-FE Cisco IO Controller with 100Base T Port $ 2,750
13 1 CISFR-IR72 Cisco Interdomain Routing Protocals $ 3,025
14 1 CISSW72C- 11.2 Cisco IOS 11.2 (IP Only) $ 2,750
15 1 CISNPE-150 Cisco Network Processing Engine $ 4,510
16 1 CISCAB-OCT Cisco Octal Serial Cable $ 715
17 5 Compaq 250OR Server $ 67,078
18 1 Compaq 250OR Server $ 13,416
19 2 Compaq 4.3GB Pluggable Hard Drive (Spares) $ 2,688
20 1 Compaq 4/8GI3 4mm, DAT Tape Drive $ 1,159
21 6 Compaq Netflex 3 Ethernet Card $ 601
22 1 Compaq Rail Kit (for tape drive) $ 6
23 1 Cybex 19" Rack Mount Kit $ 28
24 1 Cybex Autoboot Commander (8-Port) $ 1,540
25 8 Cybex Video/Keyboard/Mouse Cable $ 660
26 7 742348 DAT Tape (120 length) $ 85
27 1 DAT Tape (5-Pack 90 length) $ 40
28 1 DNEWS Server Software (Electronic Key) $ 550
29 1 703595 HP OpenView Professional $ 990
30 1 796303 ICVerify for Windows $ 292
31 1 633004 Lexmark Laser Printer $ 429
32 1 M25-Pin to F25-Pin Serial Cable (6') $ 3
33 1 Management Consol (Rack-Mount) $ 3,417
34 1 752232 Microsoft FrontPage 97 $ 138
35 1 794803 Microsoft SQL Server 6.5 (10 User) $ 1,870
36 1 499459 Panasonic 17" Monitor $ 593
37 1 Post.Office E-Mail Server Software (Electronic Key) $ 2,200
38 2 TYONS-153E-1-1 Tylink ONS153 (E1 CSU/DSU) $ 2,420
39 1 499459 US Robotics V.Everything Modem $ 263
40 3 USR0668-0 USR Fan Tray $ -
41 6 USR0790-0 USR Quad Modem Card $ 11,220
42 3 USR2059-0 USR Total Control 48-Port Bundle $ 61,545
43 1 USR1091 USR Total Control Management Software $ 1,485
44 5 Windows NT Server (5-User) $ 2,745
45 1 Windows NT Workstation $ 219
46 1 Accounting & Control Software $ 2,500
TOTAL $219,696
</TABLE>
15
<PAGE>
SCHEDULE "C" MATERIALS AND SERVICES
- - -----------------------------------
System Documentation:
- - --------------------
1. General ISP Operations Manual
2. Tier 1 Customer Service Manual
3. Tier 2 Customer Service Manual
4. Start up Manual for Cable Operators
5. Instruction Manual
Consulting Assistance on the following:
- - --------------------------------------
6. Internet Backbone Services
7. Initial Telephone Connections
8. General Telecommunications Issues
9. Pricing of Services
10. Financial Models
11. Domain Name Registering
12. Equipment Installation & Testing
13. Initial Technician & Administrative Training
14. Brochures, Flyers Ad Formats
15. FiberTel Contracts & Agreements
16. Administrative Procedures
16
<PAGE>
SCHEDULE "D" INSTALLATION PLAN
- - ------------------------------
OSS will provide the following services at Installation on or before October 1,
1997 or date that is mutually agreed to by the parties in addition to providing
written documentation in the form of an Instruction Manual for FiberTel:
1. OSS will prepare and design an Internet Point of Presence (POP) consisting of
computers, network, servers, data termination and routing equipment, modems,
software and all wiring. The POP will provide the connection from FiberTel to
the Internet backbone network. OSS will prepare an equipment hardware and
software list with specific manufacturer, model number, serial number and
estimate of the cost, shipping fees and delivery interval.
2. OSS will order, configure and interconnect all of the above elements which
comprise the FiberTel Internet POP, including routers, servers and network.
3. OSS will deliver, install and test all of the equipment and software at times
agreed to between the parties.
4. OSS will connect the dialup telephone lines to the FiberTel's modem bank.
5. OSS will connect the Internet backbone provider's line to the FiberTel's
equipment.
6. OSS will conduct an overall acceptance test, with the assistance of the
FiberTel's technician(s) which will demonstrate that all elements of the ISP POP
are working satisfactorily. The tests will include DNS, e-mail, Web services,
News Groups, ftp, ping, dialup access, dedicated access (if installed), and any
other Internet related services provided at the FiberTel's POP.
7. FiberTel will provide access to installation site during regular business
hours and, upon OSS' request, for extended hours up to twenty-four hours seven
days per week
8. FiberTel will provide network administrators to be present during the
installation who are experienced with Microsoft NT servers and who will be
responsible for maintaining the equipment post the installation.
9. FiberTel will be responsible for the provision of adequate 110/120 volt power
circuits for the system including backup (uninterruptible power supply; if
desired) power.
10. FiberTel is responsible for the provision of all telecommunications,
Internet and all other external connectivity necessary for the operation of the
System.
17
<PAGE>
SCHEDULE "E" CUSTOMER SUPPORT
- - -----------------------------
OSS agrees to open a Buenos Aires office to support FiberTel in the content
related business. This office will be opened within sixty (60) days of the
execution of this Long-Term Agreement. OSS, with the approval of FiberTel, may
use a pre-existing Buenos Aires corporation in association with OSS senior
management oversite to provide said support. OSS agrees to provide support in
the following areas:
1. Technical Support (OSS software): OSS will support the Application Program
--------------------------------
with one full time technical Resource trained by OSS on CAP software. This
full time Resource will be resident in Buenos Aires, Argentina. The Resource
will be available during Buenos Aires business hours (generally 9:00 a.m. - 7:00
p.m. Buenos Aires time) Monday through Friday. This Resource will be able to be
contacted via telephone at the local OSS office or via cellular phone when away
from the office. After hours and on recognized Argentine holidays, support will
be via pager and is intend for emergency situations only. OSS and FiberTel will
jointly agree on the specific Resource for this position.
2. General Business and Marketing Consulting: OSS will provide a Senior OSS
-----------------------------------------
business Resource to provide consulting on general business and marketing issues
on five (5) full business days in each month. This Resource will be resident in
Buenos Aires, Argentina at the OSS Office. Additional days of consulting will be
available to FiberTel at a rate of One Thousand ($70) Dollars per hour. OSS and
FiberTel will jointly agree on the specific Resource for this position.
3. SQL Web Server Support: OSS will support the FiberTel SQL Web Server(s)
----------------------
with one full time technical Resource trained by OSS on SQL Servers. This full
time Resource will be resident in Buenos Aires, Argentina. The Resource will be
available during Buenos Aires business hours (generally 9:00am-7:00pm Buenos
Aires time) Monday thru Friday. This Resource will be able to be contacted via
telephone at the local OSS office or via cellular phone when away from the
office. After hours and on recognized Argentine holidays, support will be via
pager and is intend for emergency situations only. OSS and FiberTel will jointly
agree on the specific Resource for this position.
Response Time: OSS will respond to FiberTel's on-site problems associated with
- - -------------
the CAP software and SQL Server within sixty (60) minutes of initial call.
18
<PAGE>
SCHEDULE "F" TRAINING
- - ---------------------
INITIAL TRAINING
- - ----------------
CSR TIER ONE TRAINING
OSS will instruct FiberTel's customer representatives in the sales and basic
customer service techniques to allow FiberTel's representatives to answer
Frequently Asked Questions (FAQ's) specific to FiberTel's service and the Buenos
Aires marketplace, service options, additions of subscribers, deletions of
subscribers.
OSS will also train FiberTel's representatives on how to troubleshoot
insignificant problems that may arise with FiberTel's customers using the
System. OSS and FiberTel will determine parameters of these problems and develop
documented methods and procedures to escalate problem resolution to a more
technical resource (tier 2) to achieve final resolution. Travel for this
training will be handled per the provisions of the Memorandum of Agreement dated
August 8, 1997.
CSR TIER TWO HELP DESK TRAINING
OSS will train FiberTel's representatives in the standard Internet Service
Provider (ISP) problem resolution techniques. OSS will assist FiberTel's cable
modem vendors in supporting technical problem resolution associated with cable
modems. OSS will document common ISP problems and provide this documentation to
FiberTel. In addition, role plays of these problems will be conducted during
training. Travel for this training will be handled per the provisions of the
Memorandum of Agreement dated August 8, 1997.
SALES TRAINING
OSS will provide basic sales training (for designated CSRs or sales personnel)
related to Internet access and the sale of business web pages which businesses
can purchase on the FiberTel CAP Web site.
CAP SYSTEM ADMINISTRATION TRAINING
OSS will provide on-site training of the CAP software system administration
tools that enable FiberTel personnel to manage and update the content of Web
site and the access rights of users and forum moderators.
ONGOING TRAINING
- - ----------------
TRAINING AND SUPPORT MATERIALS
Documentation and training materials related to the Application Program
Management software will be provided. As OSS develops online documentation and
training, FiberTel will be given access to these materials. As new releases of
the CAP software become available, FiberTel will be provided new release
software and documentation. OSS would be available for on-site training of new
release software. Ongoing training provided to FiberTel by OSS will be at OSS'
expense.
19
<PAGE>
SCHEDULE "G" - CAP WEBSITE DEFINITION
- - -------------------------------------
Application Program Development Schedule
- - ----------------------------------------
CAP PRODUCT (V.1.0) Provided to BA 9/30/97 (final install)
- - ----------------------------------------------------------
Features include:
* Site tailored to include visual design elements of client
* User registration system with security
* Personal home page generation system that users create after registration
* Business listings (Yellow Pages) system where businesses can add their
information to a database
* OSS preloads approximately 1,100 business listings to the listings system
* Event listing system where local events can be added and searched for by users
* Business Web page generation system that businesses can sign up for and then
create their pages with a wizard
* CableVision movie database search and retrieval system
* Movie video preview system where users can watch streaming video clips
* Links to numerous Web sites
* Cable channel program guide system (searchable)
* Online forums with conferences, threads and message capabilities
* System administration system where FiberTel can add/modify forums and forum
moderators; verify and add/delete users from the system; add content, images
and videos to the site; system administration can add additional links for
users to visit other sites; system administration can add/update the
CableVison channel program guide
CAP PRODUCT (V2.0) Ready by 12/30/97
- - ------------------------------------
Features include:
- - -----------------
* Ad server system
* Additional personalization of content for users
* Chat system for user chat sessions
* Polling/voting system that can tally and present results of polls created by
system administrator
* Listserver
CAP PRODUCT (v3.0) Ready by 4/31/98
- - -----------------------------------
Features Include:
- - -----------------
* Electronic Commerce where the site can personalize advertising and just -in-
time purchase opportunities to users based upon their profiles and the
content of the site. Online stores and produce sales system with secure online
ordering
CAP PRODUCT (v4.0) Ready by 8/30/98
- - -----------------------------------
Features Include:
- - -----------------
* Electronic Banking capabilities in place (launch date of specific online
banking projects determined after project requirements and system integration
issues are resolved)
OSS's obligations include the provision of any future version enhancement of the
above detailed features and all new features created to be included in the
Application Program, duly tailored to FiberTel in accordance to the latter's
requirements.
OSS shall provide FiberTel with a Beta version of any software to be delivered
hereunder with at least a thirty (30) day period to the final release.
20
<PAGE>
SCHEDULE "H" - NON-DISCLOSURE AGREEMENT
- - ---------------------------------------
THIS NON-DISCLOSURE AGREEMENT (the "Agreement") is entered into as of the ___
day of 199_, by and between Online System Services, Inc. ("OSS") a Colorado
corporation with its principal place of business located at 1800 Glenarm Place,
Denver, Colorado and FiberTel, an Argentinean corporation and wholly owned
subsidiary of Cablevision/FiberTel, with its principal place of business located
at Amenabar 23, 1414 Buenos Aires Argentina ("FiberTel").
NOW, THEREFORE, in consideration of the mutual covenants and conditions set
forth in this Agreement, and other good and valuable consideration, FiberTel and
OSS agree as follows:
1. Definition of Confidential Information. For purposes of this Agreement,
--------------------------------------
"Confidential Information" means any non-public information of either FiberTel
or OSS (the "Parties"), disclosed by either Party to the other Party in the
following forms:
a. information originally disclosed in written, graphic, machine-readable or
any other tangible medium to the extent conspicuously marked with a
"confidential," "proprietary" or similar legend; and
b. information originally disclosed orally or by way of observation, to the
extent identified as Confidential Information at the time of such original
disclosure; and (ii) summarized in reasonable detail and confirmed as being
Confidential Information in a written notice delivered to the receiving Party
within 30 days after original disclosure, which notice includes a reference to
the date of the original disclosure and a reference to this Agreement.
2. Exceptions. Confidential Information shall not include information which:
----------
a. was acquired by a Party prior to the time of its disclosure by the other
Party, as shown by files of the receiving Party in existence at the time of
disclosure, and at a time when the receiving Party was under no obligation to
the disclosing Party to keep such information confidential;
b. is or becomes available in the public domain through no act of the
receiving Party that violates this Agreement;
c. is received by the receiving Party from a third person or entity that is
not known by the receiving Party to be sharing such information in violation of
rights of the disclosing Party;
d. is developed by or on behalf of the receiving Party without any access to
or use of Confidential Information of the disclosing Party; or
e. is at any time furnished to a third party by the disclosing Party without
restrictions on the third party's rights to disclose.
The Party claiming that any of the foregoing exceptions applies shall have the
burden of proving such applicability.
21
<PAGE>
3. Obligations. Each Party shall:
-----------
a. treat Confidential Information of the other Party with the same degree of
confidentiality with which it treats its own Confidential Information, in no
case less than a reasonable degree of confidentiality;
b. use Confidential Information only for the purposes of evaluating the
Confidential Information and determining whether the Parties will pursue further
negotiations with each other, and in the performance of obligations under
subsequent agreements between the Parties, if any;
c. refrain from copying Confidential Information, in whole or in part, except as
required in furtherance of the uses thereof permitted by this Agreement, and
except with accurate reproduction of all proprietary legends and notices located
in the originals;
d. limit dissemination of Confidential Information to employees and agents of
such Party or of such Party's affiliates who have a need to know the
Confidential Information in furtherance of the uses thereof permitted by this
Agreement; provided, however, that a receiving Party shall in all events be
responsible to the disclosing Party for any action or inaction of such employees
and agents, and former employees and agents, that would violate this Agreement,
had the action or inaction been that of the receiving Party directly;
e. comply with all applicable U.S. export and all other applicable laws, rules
and regulations with respect to the Confidential Information; and
f. destroy or return to the disclosing Party any Confidential Information
received in written or other tangible media, including all copies and records
thereof, upon any request by the disclosing Party, except for a single set of
copies which the receiving Party may retain solely as an archival record of
materials submitted.
4. Legally Required Disclosure. If a Party becomes compelled to disclose any
---------------------------
Confidential Information of the other Party pursuant to applicable laws, rules
or regulations, or pursuant to rules and regulations of any stock exchange or
stock association on which securities of the receiving Party may be traded from
time to time (collectively, the "Requirements"), the receiving Party shall
provide the disclosing Party with prompt notice of any such Requirement and
shall cooperate with the disclosing Party, at the disclosing Party's sole
expense, in seeking to obtain any protective order or other arrangement pursuant
to which the confidentiality of the Confidential Information is preserved. If
such an order or arrangement is not obtained, the receiving party shall disclose
only that portion of the Confidential Information as is required pursuant to
such Requirements. Any such required disclosure shall not, in and of itself,
change the status of the disclosed information as Confidential Information under
the terms of this Agreement.
5. Term. This Agreement shall commence on the date first above written and shall
----
continue in effect for a period of six months thereafter.
6. Survival. The restrictions and obligations of Paragraphs 3 and 4 of this
--------
Agreement shall survive the expiration of this Agreement, and shall continue to
bind the Parties, their successors, heirs and assigns, for a period of two years
after the date first above written.
22
<PAGE>
7. Ownership of Confidential Information. Each of the Parties acknowledges that
-------------------------------------
Confidential Information of the other Party is and shall remain the exclusive
property and a valuable trade secret of the other Party. Nothing in this
Agreement shall be construed as granting any license or other rights under any
patents or copyrights of either Party, or any rights in or to Confidential
Information of either Party except for the limited rights to use and disclose
such Confidential Information expressly granted to the other Party in this
Agreement.
8. No Agency. Neither this Agreement nor the disclosure or receipt of
---------
Confidential Information shall constitute or imply any promise or intention to
enter into a partnership, agency, employment or joint venture relationship
between the Parties, to make or purchase any products or services by any Party
or to make any commitment by any Party with respect to the present or future
marketing of any product or service. Nothing in this Agreement shall be
construed to limit either Party's rights to independently develop or acquire
products or services without use of the other Party's Confidential Information.
9. No Warranty. No Party shall disclose information to the other that such
-----------
Party is not entitled to disclose under applicable laws, rules or regulations,
or under applicable agreements binding upon the disclosing Party. Subject to the
foregoing, all information disclosed by either Party to the other is provided
"AS IS" without any warranty whatsoever, including without limitation any
warranty as to the accuracy, reliability or fitness of such information for any
particular purpose.
10. No Assignment. Neither Party may assign any of its rights or delegate any of
-------------
its obligations under this agreement, except upon the prior written consent of
the other party, and except as provided for in the Long Term Equipment Sale
Software License Agreement executed by the parties simultaneously herewith.
11. Equitable Relief. Each of the Parties acknowledges that a disclosing Party
----------------
may be irreparably injured by a breach of this Agreement by the receiving
Parties, and that a disclosing Party, in addition to any other remedies
available at law or in equity, shall be entitled to equitable relief, including
injunctive relief and specific performance, in the event of any breach of the
provisions of this Agreement by the receiving Party.
12. Invalid Provisions. If any provision of this Agreement is held to be
------------------
illegal, invalid or unenforceable, the remaining provisions shall remain in full
force and effect. Should any provision be held to be illegal, invalid or
unenforceable as being too broad with respect to the duration, scope or subject
matter thereof, such provisions shall be automatically modified to reflect the
maximum duration, scope or subject matter allowable by law..
13. Notices. Any notices or other communications contemplated or required under
-------
this agreement, in order to be valid, shall be in writing and shall be given via
personal delivery, telefax or overnight courier, or via U.S. Certified Mail,
Return Receipt Requested, at the following addresses:
23
<PAGE>
If to FiberTel: Amenabar 23 With carbon copy to:
(1426) Buenos Aires Marcello Bombau
Argentina Suipacha 268
Attn: General Manager (1355) Buenos Aires
If to OSS: Online System Services, Inc. With carbon copy to:
1800 Glenarm Place, #800 Stephen Stim & Assoc
Denver, CO 80202 200 West 57th St., #1005
Attn: Steve Adams, Pres. & CEO New York, NY 10019
or at such other addresses as either party may designate by notice to the other.
Such notices or other communications shall be deemed received when actually
delivered (where given via personal delivery, telefax or overnight courier) or
three business days after mailing (where given via U.S. Certified Mail).
14. Integration. This Agreement supersedes all previous oral and written
-----------
agreements, if any, among the Parties regarding the confidentiality of
information disclosed to
each other.
15. Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with the laws of the State of Colorado.
16. Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which, taken together, shall constitute the Agreement.
IN WITNESS WHEREOF, the Parties have entered into this Agreement effective as of
the date first above written.
FIBERTEL:
By: /s/ GEORGE Y. STEWART
---------------------
Name: George Y. Stewart
-------------------
Title: C.O.O.
------------------
ONLINE SYSTEM SERVICES, INC.:
By: /s/ R. STEVEN ADAMS
---------------------
Name: R. Steven Adams
-------------------
Title: President/CEO
------------------
24
<PAGE>
SCHEDULE "I" PERFORMANCE BENCHMARKS
- - -----------------------------------
1. KPMG Peat Marwick
2. Forrester
3. Gartner
4. Andersen Consulting
5. Paul Kagan and Associates
25
<PAGE>
EXHIBIT 10.6
AGREEMENT AND PLAN OF MERGER
Dated as of March 19, 1998
Among
ONLINE SYSTEM SERVICES, INC.
DURAND ACQUISITION CORPORATION
AND
DURAND COMMUNICATIONS, INC.
<PAGE>
TABLE OF CONTENTS
ARTICLE 1 - THE MERGER........................................................1
1.1 The Merger...........................................................1
1.2 Closing..............................................................1
1.3 Effective Time of the Merger.........................................2
1.4 Effects of the Merger................................................2
1.5 Articles of Incorporation; Bylaws....................................2
1.6 Directors............................................................2
1.7 Officers.............................................................2
ARTICLE 2 - EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS.............................................................2
2.1 Exchange of Shares...................................................2
(a) Common Stock of Sub.............................................2
(b) Cancellation of Treasury Stock and Parent-Owned Company Common
Stock..........................................................3
(c) Conversion of Company Common Stock..............................3
(d) Dissenting Stockholders.........................................3
(e) Cancellation and Retirement of Company Common Stock.............3
2.2 Options, Warrants, etc...............................................3
2.3 Exchange of Certificates.............................................4
(a) Exchange Agent..................................................4
(b) Exchange Procedures.............................................4
(c) Distributions with Respect to Unexchanged Shares................5
(d) No Further Ownership Rights in Company Common Stock.............5
(e) No Fractional Shares............................................5
(f) No Liability....................................................5
ARTICLE 3 - REPRESENTATIONS AND WARRANTIES....................................6
3.1 Representations and Warranties of the Company........................6
(a) Organization, Standing and Corporate Power......................6
(b) Subsidiaries....................................................6
(c) Capital Structure...............................................6
(d) Authority; Noncontravention.....................................7
(e) Financial Statements; Undisclosed Liabilities...................8
(f) Absence of Certain Changes or Events............................8
(g) Litigation......................................................9
(h) Labor Matters; Employee Matters.................................9
(i) Tax Returns and Tax Payments....................................11
(j) State Antitakeover Laws Not Applicable..........................12
(k) Real Estate.....................................................12
(l) Compliance with Laws; Environmental Matters.....................12
(m) Leased Tangible Personal Property...............................13
(n) Contracts.......................................................13
(o) Assets..........................................................15
(p) Intellectual Property...........................................15
(q) Accounts Receivable.............................................16
(r) Properties......................................................16
i
<PAGE>
(s) Transactions with Directors, Officers, Employees and
Affiliates....................................................16
(t) Insurance.......................................................16
(u) Brokers.........................................................16
(v) Asset Sales; Merger.............................................16
(w) Pooling of Interests............................................17
(x) Full Disclosure.................................................17
(y) Board Recommendation............................................17
(z) Required Company Vote...........................................17
(aa) Information Supplied...........................................17
3.2 Representations and Warranties of Parent.............................17
(a) Organization, Standing and Corporate Power......................17
(b) Subsidiaries....................................................18
(c) Capital Structure...............................................18
(d) Authority; Noncontravention.....................................18
(e) SEC Documents; Undisclosed Liabilities..........................19
(f) Absence of Certain Changes or Events............................20
(g) Litigation......................................................20
(h) Tax Returns and Tax Payments....................................20
(i) Compliance with Laws; Environmental Matters.....................20
(j) Intellectual Property...........................................21
(k) Properties......................................................21
(l) Interim Operations of Sub.......................................21
(m) Brokers.........................................................22
ARTICLE 4 - COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO MERGER.........22
4.1 Conduct of Business of the Company...................................22
ARTICLE 5 - ADDITIONAL AGREEMENTS.............................................24
5.1 Preparation of Proxy Statement; Stockholder Meeting..................24
5.2 Letter of the Company's Accountants..................................24
5.3 Parent Access to Information.........................................24
5.4 Registration of Parent Stock.........................................25
5.5 Board of Directors...................................................25
5.6 Best Efforts.........................................................25
5.7 Expenses.............................................................25
5.8 Public Announcements.................................................26
5.9 Takeover Statutes....................................................26
5.10 Certain Agreements..................................................26
ARTICLE 6 - CONDITIONS PRECEDENT..............................................26
6.1 Conditions to Each Party's Obligation to Effect the Merger...........26
----------------------------------------------------------
(a) No Injunctions or Restraints....................................26
(b) Nasdaq Governance Requirements..................................26
(c) Compliance with Federal and State Securities Laws...............26
6.2 Conditions to Obligation of Parent and Sub...........................26
(a) Representations and Warranties..................................26
(b) Performance of Obligations of the Company.......................27
(c) Consents, etc...................................................27
(d) Affiliate Letters...............................................27
(e) Opinion of Counsel to the Company...............................27
ii
<PAGE>
(f) Opinion of Accountants..........................................28
(g) CompuLearning Systems, Inc......................................28
(h) Total Liabilities...............................................28
(i) Dissenter's Rights..............................................28
(j) Undertakings of Company Securities Holders......................28
(k) Noncompete Agreements...........................................28
(l) Releases, Termination of Agreements.............................28
6.3 Conditions to Obligation of the Company..............................28
(a) Representations and Warranties..................................28
(b) Performance of Obligations of Parent and Sub....................29
(c) Opinion of Counsel to Parent....................................29
ARTICLE 7 - TERMINATION, AMENDMENT AND WAIVER.................................29
7.1 Termination..........................................................29
7.2 Effect of Termination................................................30
7.3 Amendment............................................................30
7.4 Extension; Waiver....................................................30
ARTICLE 8 - GENERAL PROVISIONS................................................30
8.1 Survival of Representations and Warranties...........................30
8.2 Further Assurances..................................................30
8.3 Notices..............................................................30
8.4 Definitions..........................................................31
8.5 Interpretation.......................................................32
8.6 Counterparts.........................................................32
8.7 Entire Agreement; No Third-party Beneficiaries.......................32
8.8 Governing Law........................................................32
8.9 Assignment...........................................................32
8.10 Enforcement.........................................................32
8.11 Severability........................................................32
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (the "Agreement") is entered into as
of March 19, 1998, by and among ONLINE SYSTEM SERVICES, INC., a Colorado
corporation ("Parent"), DURAND ACQUISITION CORPORATION, a Minnesota corporation
and a direct wholly owned subsidiary of Parent ("Sub"), and DURAND
COMMUNICATIONS, INC., a California corporation (the "Company").
RECITALS
A. The Boards of Directors of Parent and the Company have approved,
and deem it advisable and in the best interests of their respective companies
and stockholders to consummate, a merger of Sub with and into the Company (the
"Merger"), with the Company as the surviving corporation in the Merger, upon the
terms and subject to the conditions set forth in this Agreement, pursuant to
which each share of common stock, no par value per share, of the Company
("Company Common Stock") issued and outstanding immediately prior to the
Effective Time (as defined in Section 1.3), other than shares of Company Common
Stock owned, directly or indirectly, by the Company or any subsidiary (as
defined in Section 8.4) of the Company or by Parent, Sub or any other subsidiary
of Parent, will be converted into the right to receive, subject to the terms
hereof, 2.46 shares of common stock, no par value per share, of Parent ("Parent
Stock"); provided, however, that the total number of shares of Parent Stock
exchanged for Company Common Stock shall not exceed 971,250 shares of Parent
Stock.
B. The Merger has been approved by a vote of the majority of the
outstanding shares of Company Common Stock entitled to vote thereon for the
approval thereof (the "Company Stockholder Approval").
C. For United States Federal income tax purposes, it is intended that
the Merger shall qualify as a reorganization under the provisions of Section 368
of the Internal Revenue Code of 1986, as amended (the "Code") and this Agreement
is intended to be and is adopted as a plan of reorganization within the meaning
of Section 368 of the Code.
AGREEMENT
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:
ARTICLE 1
THE MERGER
1.1 The Merger . Upon the terms and subject to the conditions set
----------
forth in this Agreement, and in accordance with the California General
Corporation Law (the "CGCL") and the Minnesota Business Corporation Act (the
"MBCA"), the Sub shall be merged with and into the Company at the Effective
Time. Upon the Effective Time, the separate existence of Sub shall cease, and
the Company shall continue as the surviving corporation (the "Surviving
Corporation") having the name Durand Communications, Inc.
1.2 Closing . Unless this Agreement shall have been terminated and
-------
the transactions herein contemplated shall have been abandoned pursuant to
Section 7.1, and subject to the satisfaction or waiver
<PAGE>
of the conditions set forth in Article 6, the closing of the Merger (the
"Closing") will take place at 10:00 a.m. Mountain Time within three business
days of the date that the shareholders of Parent approve the Merger (the
"Closing Date"), at the offices of Parent, unless another date, time or place is
agreed to in writing by the parties hereto.
1.3 Effective Time of the Merger . On the Closing Date, the parties
----------------------------
shall file articles of merger or other appropriate documents (in any such case,
the "Articles of Merger") executed in accordance with the relevant provisions of
the CGCL and MBCA and shall make all other filings or recordings required under
the CGCL and MBCA. The Merger shall become effective at such time as the
Articles of Merger is duly filed with the Secretary of State of the State of
California and the Secretary of State of the State of Minnesota, or at such
other time as is permissible in accordance with the CGCL and MBCA and as Parent
and the Company shall agree should be specified in the Articles of Merger (the
time the Merger becomes effective being the "Effective Time").
1.4 Effects of the Merger.
---------------------
The Merger shall have the effects set forth in the CGCL and MBCA.
1.5 Articles of Incorporation; Bylaws.
--------------------------------------
(a) The Articles of Incorporation of the Company as in effect
immediately prior to the Effective Time shall be the Articles of
Incorporation of the Surviving Corporation until thereafter changed or
amended as provided therein or by applicable law.
(b) The Bylaws of the Company as in effect at the Effective Time
shall be the Bylaws of the Surviving Corporation until thereafter
changed or amended as provided therein or by applicable law.
1.6 Directors . The directors of Sub at the Effective Time shall be
---------
the directors of the Surviving Corporation, until the earlier of their
resignation or removal or until their respective successors are duly elected and
qualified, as the case may be.
1.7 Officers . The officers of the Company at the Effective Time
--------
shall be the officers of the Surviving Corporation, until the earlier of their
resignation or removal or until their respective successors are duly appointed
and qualified, as the case may be.
ARTICLE 2
EFFECT OF THE MERGER ON THE CAPITAL STOCK
OF THE CONSTITUENT CORPORATIONS
2.1 Exchange of Shares . As of the Effective Time, by virtue of the
------------------
Merger and without any action on the part of the holder of any shares of Company
Common Stock or any shares of capital stock of Sub:
(a) Common Stock of Sub . Each share of common stock of Sub
-------------------
issued and outstanding immediately prior to the Effective Time shall be
converted into one share of common stock of the Surviving Corporation and
shall be the issued and outstanding capital stock of the Surviving
Corporation.
2
<PAGE>
(b) Cancellation of Treasury Stock and Parent-Owned Company
-------------------------------------------------------
Common Stock. Each share of the Company Common Stock that is owned by
------------
the Company or by any subsidiary of the Company, and each share of Company
Common Stock that is owned by Parent, Sub or any other subsidiary of Parent
shall automatically be canceled and retired and shall cease to exist, and
no cash, Parent Stock or other consideration shall be delivered or
deliverable in exchange therefor.
(c) Conversion of Company Common Stock. Except as otherwise provided
----------------------------------
herein and subject to Section 2.3, at the Effective Time each issued and
outstanding share of Company Common Stock shall be automatically converted
into 2.46 fully paid and nonassessable shares of Parent Stock (the "Merger
Consideration"); provided, however, that the total number of shares of
Parent Stock exchanged for Company Common Stock shall not exceed 981,671
shares of Parent Stock.
(d) Dissenting Stockholders. Notwithstanding anything in
-----------------------
this Agreement to the contrary, any issued and outstanding shares of
Company Common Stock held by a person (a "Dissenting Stockholder") who duly
demands appraisal of his shares of Company Common Stock pursuant to the
CGCL and complies with all the provisions of the CGCL concerning the right
of holders of Company Common Stock to demand appraisal of their shares in
connection with the Merger ("Dissenting Shares") shall not be converted as
described in Section 2.1(c), but shall become the right to receive such
cash consideration as may be determined to be due to such Dissenting
Stockholder as provided in the CGCL. If, however, such Dissenting
Stockholder withdraws his demand for appraisal or fails to perfect or
otherwise loses his right of appraisal, in any case pursuant to the CGCL,
his shares shall be deemed to be converted as of the Effective Time into
the right to receive Parent Stock, without interest, pursuant to Section
2.1(c). The Company shall give Parent (i) prompt notice of any demands for
appraisal of shares received by the Company; and (ii) the opportunity to
participate in and direct all negotiations and proceedings with respect to
any such demand. The Company shall not, without the prior written consent
of Parent, make any payment with respect to, or settle, offer to settle or
otherwise negotiate any such demands.
(e) Cancellation and Retirement of Company Common Stock. As of the
---------------------------------------------------
Effective Time, all shares of Company Common Stock (other than shares
referred to in Section 2.1(b)) issued and outstanding immediately prior to
the Effective Time, shall no longer be outstanding and shall automatically
be canceled and retired and shall cease to exist, and each holder of a
certificate representing any such shares of Company Common Stock shall
cease to have any rights with respect thereto, except the right to receive
pursuant to Section 2.3, (i) a certificate or certificates of Parent Stock
representing the number of full shares of Parent Stock into which the
shares of Company Common Stock theretofore represented by such canceled and
retired certificate shall have been converted pursuant to Section 2.1(c),
and (ii) in lieu of fractional shares of Parent Stock, a cash payment for
the fair market value of a fractional share to be issued in consideration
therefor based on the closing bid price for Parent's common stock on the
Nasdaq Small Cap Market on the day prior to the Closing Date.
2.2 Options; Warrants, etc. At the Effective Time, all options,
----------------------
warrants, and convertible promissory notes exercisable for or convertible into
Company Common Stock granted or issued prior to the date hereof, which are
outstanding and unexercised or unconverted immediately prior to the Effective
Time (the "Prior Securities"), shall be automatically converted into options,
warrants and convertible promissory notes exercisable for or convertible into
shares of Parent Stock (the "Substitute Securities"),
3
<PAGE>
in accordance with the terms of such options, warrants and convertible
promissory notes, appropriately adjusted (as to both number of shares and
exercise price) as follows:
(a) The number of shares of Parent Stock covered by each of the
Substitute Securities shall equal the number of shares of Company Common
Stock covered by the applicable Prior Security immediately prior to the
Effective Time, adjusted to reflect the Merger Consideration and rounded to
the nearest whole number;
(b) The per share exercise price or conversion price for each
Substitute Security shall equal the per share exercise price under the
applicable Prior Option immediately prior to the Effective Time, adjusted
to reflect the Merger Consideration; and
(c) In all other respects, the terms of the Substitute Securities
shall be in such form and contain such other terms as Parent shall
reasonably require, forms of such securities to be made available to the
holders of the Prior Securities prior to the Closing Date.
2.3 Exchange of Certificates.
------------------------
(a) Exchange Agent . At the Effective Time, Parent shall designate
--------------
Corporate Stock Transfer, Inc., Parent's transfer agent (the "Exchange
Agent"), to act as agent for the holders of shares of Company Common Stock
in connection with the Merger to issue the certificate or certificates to
which holders of shares of Company Common Stock shall become entitled
pursuant to Section 2.1(c). Parent shall authorize and instruct the
Exchange Agent to issue to the holders of Company Common Stock, in the
aggregate, certificates representing the number of shares of Parent Stock
required to effectuate the terms of the Merger. The Exchange Agent shall,
pursuant to instructions from Parent, issue the certificates provided for
in Section 2.1(d).
(b) Exchange Procedures . As soon as practicable after the
-------------------
Effective Time, the Exchange Agent shall mail to each holder of an
outstanding certificate or certificates which prior thereto represented
shares of Company Common Stock (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to such
certificate shall pass, only upon delivery of such certificates to such
Exchange Agent), and (ii) instructions for use in effecting the surrender
of the certificates representing shares of Company Common Stock for shares
representing Parent Stock. Upon proper surrender to the Exchange Agent of
such certificates for cancellation, the holder of such certificates shall
after the Effective Time be entitled only to a certificate or certificates
representing the number of full shares of Parent Stock, into which the
aggregate number of shares of Company Common Stock previously represented
by such certificate or certificates surrendered shall have been converted
pursuant to this Agreement plus payment for the fair market value of a
fractional share as provided in Section 2.3(e). The Exchange Agent shall
accept such certificates upon compliance with such reasonable terms and
conditions as the Exchange Agent may impose to effect an orderly exchange
thereof in accordance with normal exchange practices. After the Effective
Time, there shall be no further transfer on the records of the Company or
its transfer agent of certificates representing shares of Company Common
Stock and if such certificates are presented to the Company for transfer,
they shall be canceled against delivery of certificates for Parent Stock as
hereinabove provided. If any certificate for such Parent Stock is to be
issued in a name other than that in which the certificate for Company
Common Stock surrendered for exchange is registered, it shall be a
condition of such exchange that the certificate so surrendered shall be
properly endorsed, with signature guaranteed, or otherwise in proper form
for transfer and that the person requesting such
4
<PAGE>
exchange shall pay to Parent or its transfer agent any transfer or other
taxes required by reason of the issuance of certificates for such Parent
Stock in a name other than that of the registered holder of the certificate
surrendered, or establish to the satisfaction of Parent or its transfer
agent that such tax has been paid or is not applicable.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
------------------------------------------------
other distributions with respect to Parent Stock with a record date after
the Effective Time shall be paid to the holder of any unsurrendered
certificate for shares of Company Common Stock with respect to the shares
of Parent Stock represented thereby. Subject to the effect of applicable
laws, following surrender of any such certificate, there shall be paid to
the holder of the certificate representing whole shares of Parent Stock
issued in exchange therefor, without interest, (i) at the time of such
surrender the amount of dividends or other distributions with a record date
after the Effective Time theretofore paid with respect to such shares of
Parent Stock, and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective
Time but prior to such surrender and a payment date subsequent to such
surrender payable with respect to such shares of Parent Stock.
(d) No Further Ownership Rights in Company Common Stock. All shares of
---------------------------------------------------
Parent Stock issued upon the surrender for exchange of certificates
representing shares of Company Common Stock in accordance with the terms of
this Article 2 (including any certificates issued pursuant to Section
2.3(e)) shall be deemed to have been issued in full satisfaction of all
rights pertaining to the shares of Company Common Stock theretofore
represented by such certificates.
(e) No Fractional Shares.
--------------------
(i) No certificates or scrip representing fractional shares
of Parent Stock shall be issued upon the surrender for exchange of
certificates representing shares of Company Common Stock, and such
fractional share interests will not entitle the owner thereof to vote
or to any rights of a stockholder of Parent; and
(ii) Notwithstanding any other provision of this Agreement,
each holder of shares of Company Common Stock converted pursuant to
the Merger who would have otherwise been entitled to receive a
fraction of a share of Parent Stock shall receive, in lieu thereof,
payment in cash of the fair market value of the fractional share, such
value based on the closing bid price for Parent Common Stock on the
Nasdaq Small Cap Market on the last business day prior to the Closing
Date.
(f) No Liability . None of Parent, Sub, the Company or the
------------
Exchange Agent shall be liable to any person in respect of any shares of
Parent Stock (or dividends or distributions with respect thereto) delivered
to a public official pursuant to any applicable abandoned property, escheat
or similar law. If any certificates representing shares of Company Common
Stock shall not have been surrendered prior to five years after the
Effective Time (or immediately prior to such earlier date on which any
cash, shares of Parent Stock, any cash in lieu of fractional shares of
Parent Stock or any dividends or distributions with respect to Parent Stock
in respect of such certificate would otherwise escheat to or become the
property of any Governmental Entity (as defined in Section 3.1(d)), any
such shares, cash dividends or distributions in respect of such certificate
shall, to the extent permitted by applicable law, become the property of
the Surviving Corporation, free and clear of all claims or interest of any
person previously entitled thereto.
5
<PAGE>
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company . The Company represents
---------------------------------------------
and warrants to Parent and Sub as follows:
(a) Organization, Standing and Corporate Power. Each of the Company and
------------------------------------------
each of its Subsidiaries (as defined in Section 3.1(b)) is duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is incorporated and has the requisite corporate power and
authority to carry on its business as now being conducted. The Company and
each of its Subsidiaries is duly qualified or licensed to do business and
is in good standing in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such
qualification or licensing necessary, other than in such jurisdictions
where the failure to be so qualified or licensed (individually or in the
aggregate) would not have a material adverse effect (as defined in Section
8.4) with respect to the Company. Attached as Section 3.1(a) of the
disclosure schedule ("Disclosure Schedule") delivered to Parent by the
Company at the time of execution of this Agreement are complete and correct
copies of the Articles of Incorporation and Bylaws of the Company.
(b) Subsidiaries . The only direct or indirect subsidiaries of
------------
the Company (the "Subsidiaries") and other ownership interests held by the
Company in any other person are those listed in Section 3.1(b) of the
Disclosure Schedule. Except as set forth in Section 3.1(b) of the
Disclosure Schedule, all the outstanding shares of capital stock of each
such Subsidiary which is a corporation have been validly issued and are
fully paid and nonassessable and are owned (of record and beneficially) by
the Company, by another Subsidiary (wholly owned) of the Company or by the
Company and another such Subsidiary (wholly owned), free and clear of all
pledges, claims, liens, charges, encumbrances and security interests of any
kind or nature whatsoever (collectively, "Liens"). Except as set forth in
Section 3.1(b) of the Disclosure Schedule, the Company does not own,
directly or indirectly, any capital stock or other ownership interest in
any corporation, partnership, business association, joint venture or other
entity.
(c) Capital Structure . The authorized capital stock of the
-----------------
Company consists of 1,000,000 shares of Company Common Stock. As of the
date of this Agreement, there are (i) 388,474 shares of Company Common
Stock issued and outstanding, (ii) 6,086 shares of Company Common Stock
reserved for issuance to certain private investors for an aggregate
consideration of $140,000; (iii) no shares of Company Common Stock held in
the treasury of the Company or held by any Subsidiary of the Company; and
(iv) 89,758 shares of Company Common Stock reserved for issuance upon
exercise or conversion of outstanding securities of the Company ("Prior
Securities"). Section 3.1 (c) of the Disclosure Schedule contains a list
of all Prior Securities, including a description of their terms. Except as
set forth above, no shares of capital stock or other equity securities of
the Company are issued, reserved for issuance or outstanding. All
outstanding shares of capital stock of the Company are, and all shares
which may be issued pursuant to the Prior Securities will be when issued,
duly authorized, validly issued, fully paid and nonassessable and, except
as described in Section 3.1(c) of the Disclosure Schedule, are not subject
to preemptive rights. There are no outstanding bonds, debentures, notes or
other indebtedness or other securities of the Company having the right to
vote on any matters on which stockholders of the Company may vote. Except
as set forth above, there are no outstanding securities, options, warrants,
calls, rights, commitments, agreements, arrangements
6
<PAGE>
or undertakings of any kind to which the Company or any of its Subsidiaries
is a party, or by which any of them is bound, obligating the Company or any
of its Subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock or other equity or
voting securities of the Company or of any of its Subsidiaries or
obligating the Company or any of its Subsidiaries to issue, grant, extend
or enter into any such security, option, warrant, call, right, commitment,
agreement, arrangement or undertaking. There are no outstanding contractual
obligations, commitments, understandings or arrangements of the Company or
any of its Subsidiaries to repurchase, redeem or otherwise acquire or make
any payment in respect of or measured or determined based on the value or
market price of any shares of capital stock of the Company or any of its
Subsidiaries and, to the knowledge of the Company, there are no irrevocable
proxies with respect to shares of capital stock of the Company or any
Subsidiary of the Company. Except as provided in Section 3.1(c) of the
Disclosure Schedule, there are no agreements or arrangements pursuant to
which the Company is or could be required to register shares of Company
Common Stock or other securities under the Securities Act of 1933, as
amended (the "Securities Act").
(d) Authority; Noncontravention . The Company has the
---------------------------
requisite corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby. The execution and
delivery of this Agreement by the Company and the consummation by the
Company of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of the Company and its
shareholders and no other corporate action on the part of the Company or
its shareholders is necessary to authorize the execution and delivery of
this Agreement and the consummation by the Company of the transactions
contemplated hereby. This Agreement has been duly executed and delivered
by the Company and constitutes a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms.
Except as disclosed in Section 3.1(d) of the Disclosure Schedule, the
execution and delivery of this Agreement does not, and the consummation of
the transactions contemplated hereby and compliance with the provisions
hereof will not, (a) conflict with or result in any breach of any provision
of the articles of incorporation or bylaws of the Company or the comparable
charter documents of its Subsidiaries or (b) conflict with, or result in
any breach or violation of, or constitute a default under (with or without
notice or lapse of time, or both), or give rise to a right of termination,
cancellation or acceleration under (i) any loan or credit agreement, note,
bond, mortgage, indenture, lease or other agreement, instrument, permit,
concession, franchise or license applicable to the Company or any of its
Subsidiaries or their respective properties or assets or (ii) any judgment,
order, decree, statute, law, ordinance, rule, regulation or arbitration
award applicable to the Company or any of its Subsidiaries or their
respective properties or assets, or (c) result in the creation of any Lien
upon any of the parties or assets of the Company or any of its
Subsidiaries, other than, in the case of clauses (b) and (c), any such
conflicts, breaches, violations, defaults, rights, losses or Liens that
individually or in the aggregate could not have a material adverse effect
with respect to the Company or could not prevent, hinder or materially
delay the ability of the Company to consummate the transactions
contemplated by this Agreement. No consent, approval, order or
authorization of, or registration, declaration or filing with, or notice
to, any Federal, state or local government or any court, administrative
agency or commission or other governmental authority or agency, domestic or
foreign (a "Governmental Entity"), is required by or with respect to the
Company or any of its Subsidiaries in connection with the execution and
delivery of this Agreement by the Company or the consummation by the
Company of the transactions contemplated hereby, except for (i) the filing
of the Articles of Merger with the Secretary of States of the State of
California and Minnesota, and appropriate documents with the relevant
authorities of other states in which the
7
<PAGE>
Company is qualified to do business and (ii) such other consents,
approvals, orders, authorizations, registrations, declarations, filings or
notices as are set forth in Section 3.1(d) of the Disclosure Schedule.
(e) Financial Statements; Undisclosed Liabilities. The consolidated
---------------------------------------------
financial statements of the Company for the years ended June 30, 1996 and
1997 audited by KPMG Peat Marwick, LLP and the unaudited balance sheet of
the Company as of December 31, 1997 and the unaudited statements of income
and retained earnings of the Company for the fiscal period then ended
compiled by the Company attached hereto in Section 3.1(e) of the Disclosure
Schedule (the "Financial Statements") are true, complete and correct and
have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved. The
Financial Statements fairly present the financial position and assets and
liabilities, whether accrued, absolute, contingent or otherwise, of the
Company as of the dates thereof and the results of operations and cash
flows of the Company for the periods then ended (subject, in the case of
unaudited quarterly statements, to normal year-end audit adjustments).
Since December 31, 1997, the Company has not incurred any liabilities or
obligations of any nature (whether accrued, absolute, contingent or
otherwise) except (i) as and to the extent set forth on the balance sheet
of the Company as of December 31, 1997 (including the notes thereto), (ii)
as incurred in connection with the transactions contemplated by this
Agreement, (iii) as incurred after December 31, 1997 in the ordinary course
of business and consistent with past practice, (iv) as set forth in Section
3.1(e) of the Disclosure Schedule, or (v) as would not, individually or in
the aggregate, have a material adverse effect with respect to the Company.
(f) Absence of Certain Changes or Events . Except as described
------------------------------------
in Section 3.1(f) of the Disclosure Schedule, since December 31, 1997 there
has not been:
(i) any material adverse change in the working capital,
financial condition, assets, liabilities (whether absolute, accrued,
contingent or otherwise), operating profits, business or prospects of
the Company;
(ii) any damage, destruction or loss (whether or not covered
by insurance) affecting the Company's business or its assets;
(iii) any increase or decrease in the rates of compensation
payable or to become payable by the Company to any of its officers,
directors or employees over or under the rates in effect during the
year ended December 31, 1997, other than general increases made in
accordance with past practices which are described in Section 3.1(f)
of the Disclosure Schedule; or any declaration, payment, commitment,
or obligation of any kind for the payment by the Company of any bonus
(other than standard year-end bonuses consistent with past practices
which are described in Section 3.1(f) of the Disclosure Schedule),
additional salary or compensation, or retirement, termination or
severance benefits to officers, directors or employees;
(iv) any material amendment or termination of any material
contract, lease or license to which the Company is a party or by which
it may be bound, other than in the ordinary course of business;
8
<PAGE>
(v) any disposition, mortgage, pledge, or subjection to any
lien, claim, charge, option, or encumbrance of any property or asset
of the Company, or any cancellation or compromise of any debt or claim
of the Company other than in the ordinary course of business;
(vi) any labor dispute or threat of a labor dispute or any
attempt or threat of an attempt by a labor union to organize the
Company's employees;
(vii) any acquisition by the Company of the assets or capital
stock of another business entity;
(viii)any distribution or disposition of the Company's assets
other than in the ordinary course of business;
(ix) any termination of any permit or license issued to the
Company or to any of its employees or agents;
(x) any statute, order, judgment, writ, injunction, decree,
permit, rule or regulation of any court or any governmental or
regulatory body adopted or entered or proposed to be adopted or
entered which may adversely affect the property or business of the
Company;
(xi) any event or occurrence affecting the Company, its business
or its industry which may cause an adverse change affecting the
Company's sales, profitability or financial condition or which may
otherwise adversely affect the Company; or
(xii) any dividend or distribution declared, set aside or paid in
respect of the Company Common Stock or any repurchase by the Company
of shares of Company Common Stock.
(g) Litigation. Except as disclosed in Section 3.1(g) of the
----------
Disclosure Schedule, there is no suit, action or proceeding or
investigation pending or, to the knowledge of the Company, threatened
against or affecting the Company or any of its Subsidiaries or any basis
for any such suit, action, proceeding or investigation. There is no
judgment, decree, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against the Company or any of its Subsidiaries.
(h) Labor Matters; Employee Matters.
-------------------------------
(i) Neither the Company nor any of its Subsidiaries is a party
to, or bound by, any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor
organization, nor is it or any of its Subsidiaries the subject of any
proceeding asserting that it or any Subsidiary has committed an unfair
labor practice or seeking to compel it to bargain with any labor
organization as to wages or conditions of employment, nor is there any
strike, work stoppage or other labor dispute involving it or any of
its Subsidiaries pending or, to its knowledge, threatened.
(ii) No employee of the Company has a written or oral agreement
(or an assurance pursuant to any employee manual) which would preclude
the Company from
9
<PAGE>
terminating such employee's employment at any time with no obligation
of the Company to make any payment except wages and accrued benefits
to the date of termination. The Company has not engaged in any
discriminatory hiring or employment practices nor have any employment
discrimination complaints been filed against the Company with any
state or federal agency. The Company has not been threatened by any
former employee with any suit alleging wrongful termination.
(iii) The Company has delivered to Parent (i) all employment
manuals utilized by the Company within the past three (3) years, (ii)
copies of any determination letters received by the Company from the
Internal Revenue Service or any other governmental authority with
respect to any employee benefit plan, (iii) copies of any summary plan
descriptions or summaries of material modifications relating to any
employee benefit plan (as defined in Section 3(3) of ERISA) that have
been prepared or distributed in the past three (3) years, and (iv) any
annual reports (Form 5500 series) filed for any employee benefit plan
or fringe benefit plan (within the meaning of Code Section 6039D) for
plan years ending in June 30, 1997. All such summary plan
descriptions, summaries, and annual reports, were true, complete and
correct, and complied with all requirements applicable thereto, at the
time such documents were distributed or filed. The current summary
plan descriptions comply with all applicable requirements and properly
describe the current versions of the plans to which they relate.
(iv) There are no present or former Company employees, directors
or independent contractors entitled to (i) pension benefits that are
"unfunded" as defined under ERISA or (ii) any pension benefit or
welfare benefit to be paid after termination of employment. Except
with respect to continuation coverage under group health plans
pursuant to Section 4980B of the Code or state law, and except with
respect to continuation coverage under group life insurance plans
pursuant to state law, no other benefits (whether or not pursuant to
any plan or benefit arrangement that is subject to the Employee
Retirement Income and Security Act ("ERISA")) whatsoever are payable
to any present or former Company employees after termination of
employment or to any present or former directors or independent
contractors after cessation of service to the Company (including, but
not limited to, any post-retirement medical or death benefits, any
severance benefits or any disability benefits).
(v) There are no arrangements or contracts with any director,
officer, employee or independent contractor of the Company that
require any deferred compensation, retirement or welfare benefits to
be paid or provided following termination of services.
(vi) Each "employee welfare benefit plan" (as defined in Section
3(1) of ERISA) of the Company is either funded through insurance or is
unfunded for purposes of ERISA. There are no reserves, assets,
surplus or prepaid premiums under any such plan, and, the Company is
not in default under any such plan, and all such plans are in
compliance with all applicable laws (including, but not limited to,
ERISA, the Code and the Age Discrimination in Employment Act of 1967).
(vii) Each of any "employee welfare benefit plan" (as defined
above) maintained by the Company, any fiduciary thereof, and the
Company is not subject to any liability (other than normal liabilities
and expenses associated with maintenance of
10
<PAGE>
such plan or arrangement as an ongoing benefit plan or arrangement)
under ERISA or the Code or any other applicable law, including without
limitation, liability resulting from a partial plan termination.
(viii) The Company is not subject to any liability (other than
normal liabilities and expenses associated with maintenance of such
plan or arrangement as an ongoing benefit plan or arrangement) under
ERISA or the Code or any other applicable law, including without
limitation, liability resulting from a partial plan termination or
from prohibited transactions.
(ix) The Company neither maintains, nor has it ever maintained
or ever been obligated to contribute to, (i) a multi-employer plan
within the meaning of Section 3(37) of ERISA, or (ii) any employee
benefit plan within the meaning of Section 3(3) of ERISA.
(x) There are and there have been no inquiries, proceedings,
claims or suits pending or, to the best knowledge of the Company,
threatened by any governmental agency or authority or by any
participant or beneficiary against any of the Company's "employee
welfare benefit plans" (as defined above) with respect to the
operation of such benefit plans.
(xi) The consummation of the transactions contemplated by this
Agreement will not, alone or together with any other event, (i)
entitle any employee of the Company to severance pay or any other
payment, or (ii) accelerate the time of payment or vesting, or
increase the amount of, compensation due to any such employee.
(xii) The Company has no obligation for (i) any long-term
disability benefits to or for any of the Company's employees who
become disabled prior to the Closing Date (including any individual
who is disabled but has not satisfied any applicable waiting period)
and (ii) any life insurance benefits promised, due and/or payable to
or for any of the Company's employees who die prior to the Closing
Date.
(i) Tax Returns and Tax Payments. The Company and each of its
----------------------------
Subsidiaries has timely filed, with the appropriate authority, (or, as to
Subsidiaries, the Company has filed, with the appropriate authority, on its
behalf) all Tax Returns (as defined below) required to be filed by it, has
paid (or, as to Subsidiaries, the Company has paid on its behalf) all Taxes
(as defined below) shown thereon to be due and has provided (or, as to
Subsidiaries, the Company has made provision on its behalf of) adequate
reserves in the Financial Statements for any Taxes that have not been paid,
whether or not shown as being due on any Tax Returns. All Tax Returns were
correct as filed. Except as set forth in Section 3.1(i) of the Disclosure
Schedule (i) no claim for unpaid Taxes has been asserted by a Tax authority
or has become a lien (except for liens not yet due and payable) against the
property of the Company or any of its Subsidiaries or is being asserted
against the Company or any of its Subsidiaries, (ii) no audit of any Tax
Return of the Company or any of its Subsidiaries is being conducted by any
government entity, and (iii) no extension of the statute of limitations on
the assessment of any Taxes has been granted by the Company or any of its
Subsidiaries and is currently in effect. Neither the Company nor any of
its Subsidiaries is or has been a member of any consolidated, combined,
unitary or aggregate group for Tax purposes except such a group consisting
only of the Company and its Subsidiaries. As used herein, "Taxes" shall
mean all taxes of any kind, including, without limitation, those on
11
<PAGE>
or measured by or referred to as income, gross receipts, sales, use, ad
valorem, franchise, profits, license, withholding, payroll, employment,
excise, severance, stamp, occupation, premium, value added, property or
windfall profits taxes, customs, duties or similar fees, assessments or
charges of any kind whatsoever, together with any interest and any
penalties, additions to tax or additional amounts imposed by any
governmental authority, domestic or foreign. As used herein, "Tax Return"
shall mean any return, report or statement required to be filed with any
governmental authority with respect to Taxes.
(j) State Antitakeover Laws Not Applicable. No state takeover
--------------------------------------
statute or similar statute or regulation of the State of California applies
or purports to apply to this Agreement or the transactions contemplated
hereby and no provision of the Articles of Incorporation, Bylaws or other
governing instruments of the Company or any of its Subsidiaries or the
terms of any rights plan or agreement of the Company would, directly or
indirectly, restrict or impair the ability of Parent to vote, or otherwise
to exercise the rights of a stockholder with respect to, securities of the
Company and its Subsidiaries that may be acquired or controlled by Parent
by virtue of this Agreement or the transactions contemplated hereby or
permit any shareholder to acquire securities of the Company or of Parent or
any of its Subsidiaries on a basis not available to Parent in the event
that Parent were to acquire securities of the Company.
(k) Real Estate. The Company does not own or have title to any
-----------
real estate, and has never owned or had title to any real estate. The
Company does not lease any real estate other than pursuant to real estate
leases listed in Section 3.1(k) of the Disclosure Schedule, true and
correct copies of which has been delivered to Parent (the "Leases"), and,
other than pursuant to the Leases, has not leased any other real estate
during the past five years. Each of the Company and the other party
thereto is not in default under the Lease, and there are no facts which,
with notice and/or the passage of time, would constitute such a default.
All buildings leased by the Company pursuant to the Leases are in good
condition, normal wear and tear excepted, and the heating, air
conditioning, plumbing and electrical systems of each such building are in
good operating order, ordinary wear and tear excepted. The Company has not
received notice that said buildings do not comply with municipal, state and
federal statutes, ordinances, rules and regulations applicable to the
construction of the buildings and their actual use, and the buildings
comply with said statutes, ordinances, rules and regulations. No consent
is required under the Leases in connection with the Merger
(l) Compliance with Laws; Environmental Matters.
-------------------------------------------
(i) The Company and its subsidiaries and their operations and
assets, including owned or leased real property, are in compliance in
all material respects with all statutes, laws, regulations,
ordinances, rules, judgments, orders, decrees or arbitration awards
applicable thereto, including Environmental Laws (as defined below).
(ii) There are no legal, administrative, arbitral or other
proceedings, claims, actions, causes of action, private environmental
investigations or remediation activities or governmental
investigations of any nature seeking to impose, or that reasonably
could be expected to result in the imposition, on the Company or any
of its Subsidiaries of any liability or obligations arising under
common law standards relating to environmental protection, human
health or safety, or under any local, state, federal, national or
supernational environmental statute, regulation or ordinance,
including the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as
12
<PAGE>
amended (collectively, "Environmental Laws"), pending or, to the
knowledge of the Company, threatened, against the Company or any of
its Subsidiaries, which liability or obligation would have or would
reasonably be expected to have a material adverse effect on the
Company or any of its Subsidiaries. To the knowledge of the Company or
any of its Subsidiaries, there is no reasonable basis for any such
proceeding, claim, action or governmental investigation that would
impose any liability or obligation that would have or would reasonably
be expected to have a material adverse effect on the Company or any of
its Subsidiaries. To the knowledge of the Company, during or prior to
the period of (i) its or any of its Subsidiaries' ownership or
operation of any of their respective current properties, (ii) its or
any of its Subsidiaries' participation in the management of any
property, or (iii) its or any of its Subsidiaries' holding of a
security interest or other interest in any property, there was no
release or threatened release of hazardous, toxic, radioactive or
dangerous materials or other materials regulated under Environmental
Laws in, on, under or affecting any such property which would
reasonably be expected to have a material adverse effect on the
Company or any of its Subsidiaries. Neither the Company nor any of its
Subsidiaries is subject to any agreement, order, judgment, decree,
letter or memorandum by or with any court, governmental authority,
regulatory agency or third party imposing any liability or obligations
pursuant to or under any Environmental Law.
(m) Leased Tangible Personal Property. The Company does
---------------------------------
not lease any personal property other than pursuant to (i) leases in the
ordinary course of business which can be terminated on not more than 30
days notice by the Company without payment of any penalty or termination
payment, and (ii) leases ("Personal Property Leases") which are listed in
Section 3.1(m) of the Disclosure Schedule, true and correct copies of which
have been delivered to Parent. Each of the Company and the other parties
thereto is not in default under any of the Personal Property Leases, and
the Company is not aware of any fact which, with notice and/or passage of
time, would constitute such a default. No consent is required under the
Personal Property Leases in connection with the Merger.
(n) Contracts. Section 3.1(n) of the Disclosure Schedule
---------
lists, and the Company has previously delivered to Parent, true and
complete copies of, all of the following contracts or other obligations to
which the Company is a party or by which it is bound:
(i) employment agreements and any other contracts or
understandings with or loans to any of the Company's
shareholders, officers, directors, employees, consultants,
salesmen, distributors or sales representatives, including but
not limited to any which relate to bonuses or deferred
compensation
(ii) any employee benefit plan made available by the
Company to any of its employees;
(iii) any collective bargaining agreement or other agreement
with any union;
(iv) any outstanding contracts with customers;
13
<PAGE>
(v) any deeds of trust, mortgages, conditional sales
contracts, security agreements, pledge agreements, trust receipts, or
any other agreements or arrangements whereby any assets of the Company
are subject to a lien, encumbrance, charge or other restriction;
(vi) any loan agreements (whether for borrowing or lending),
letters of credit or lines of credit;
(vii) any contracts restricting the Company from doing
business in any areas or in any way limiting competition and any
contracts which limit, restrict or transfer rights to any technology
utilized or developed by the Company or which establish rights of a
supplier or customer to a particular product marketed or being
developed by the Company; for each such contract, Section 3.1(n) of
the Disclosure Schedule briefly describes the restrictions or
limitations contained in the contract;
(viii) any construction contracts, or contracts for the
purchase of equipment, and any contracts calling for aggregate
payments by the Company in excess of $5,000.00 and which are not
terminable without cost or liability on notice of 90 days or less;
(ix) any joint venture, partnership or limited partnership
agreement involving the Company;
(x) any indemnification by the Company and any guarantees by
the Company of the obligations of any other party except those
resulting from the endorsement of customer checks deposited by the
Company for collection;
(xi) any license or franchise agreement, either as licensor or
licensee or franchisor or franchisee, including any such agreements
relating to intangible property, and any distributorship, dealership,
or sales agency agreement.
(xii) any insurance policies or contracts;
(xiii) any other contracts which may have material impact on
the Company's results of operations or financial condition; and
(xiv) Any commitments to enter into any of the types of
contracts and obligations referred to in this Section 3.1(n).
Except as set forth in Section 3.1(n) of the Disclosure Schedule, the
Company has not received notice of any default under any such contracts,
obligations or commitments, the Company is not in default under any such
contracts, obligations or commitments, there are no facts which, with notice
and/or the passage of time, would constitute such a default, and no other party
thereto is in default. All such contracts are enforceable by the Company in
accordance with their terms. No consent is required under the contracts,
obligations and commitments referred to in this Section 3.1(n) in connection
with the Merger.
14
<PAGE>
None of the Company's purchase commitments is in excess of the normal,
ordinary, and usual requirements of the Company's business or was made at any
price substantially in excess of then-current market price, or contains terms
and conditions significantly more onerous than those which are usual and
customary in the Company's industry.
Schedule 3.1(n) of the Disclosure Schedule lists, and the Company has
previously delivered to Parent true and complete copies of all outstanding bids,
proposals to perform services for customers, or unfilled orders quoting prices.
The Company is not a party to or otherwise bound by any contract,
agreement, plan, lease, license, commitment, or undertaking which is materially
adverse, materially onerous, or materially harmful to any aspect of the
Company's business.
(o) Assets. The equipment, furniture, computers, and other tangible
------
personal property owned, leased or used by the Company in its business is in
good condition, normal wear and tear excepted, and is in good operating order.
Section 3.1(o) of the Disclosure Schedule lists all furniture, equipment, and
other tangible personal property of the Company (other than inventory and
supplies) having an original cost of $5,000.00 or more. Section 3.1(o) of the
Disclosure Schedule also lists all equipment, furniture, computers and other
tangible personal property which (i) is used by the Company or which is located
on the Company's premises and (ii) which is not owned by the Company, except for
items leased under the Personal Property Leases and except for normal personal
property of employees. Except for sales of inventory in the ordinary course of
business, since the date of the most recent balance sheet contained in the
Financial Statements no tangible assets (whatever their original cost) have been
transferred from the Company, whether by sale, dividend or otherwise.
(p) Intellectual Property . Each of the Company and its Subsidiaries
---------------------
owns or has a license to use all of the copyrights, patents, trademarks, service
marks, service names, trade names, applications therefore, technology rights and
licenses, computer software (including any source or object codes therefore or
documentation relating thereto), trade secrets, franchises, know-how,
inventions, and other intellectual property rights (collectively, the
"Intellectual Property") which is used by them in their respective businesses.
All software used in the Company's business and sold by the Company is year 2000
compliant. Each of the Company and its Subsidiaries is the owner of or has a
license to any Intellectual Property sold or licensed to a third party in
connection with their business operations, and have the right to convey by sale
or license any Intellectual Property so conveyed. Neither the Company nor any of
its Subsidiaries is in default under any of their Intellectual Property
licenses. No proceedings have been instituted or are pending, or to the
knowledge of the Company has any person claimed or alleged any rights to such
Intellectual Property. Except as set forth in Schedule 3.1(p) of the Disclosure
Schedule, neither the Company nor any of its Subsidiaries is obligated to any
recurring royalties to any person with respect to any such Intellectual
Property. No officer, director, or employee of the Company or any of its
Subsidiaries is a party to a contract or agreement which requires such officer,
director or employee to assign any interest in any Intellectual Property to the
Company or any of its Subsidiaries and to keep confidential any trade secrets,
proprietary data, customer information,
15
<PAGE>
or other business information of the Company or any of its Subsidiaries and
to the knowledge of the Company no such officer, director or employee is a
party to a contract or agreement which requires such officer, director or
employee to assign any interest in any Intellectual Property to any person
other than the Company or any of its subsidiaries or to keep confidential
any trade secrets, proprietary data, customer information, or other
business information of any person other than the Company or any of its
Subsidiaries. Except as set forth in Section 3.1(p) of the Disclosure
Schedule, no officer or director of the Company or any of its Subsidiaries,
or to the knowledge of the Company, other employee of the Company or any of
its Subsidiaries, is a party to any contract or agreement which restricts
or prohibits such officer, director or employee from engaging in activities
competitive with any person.
(q) Accounts Receivable. All accounts receivable of the
-------------------
Company reflected in the most recent balance sheets contained in the
Financial Statements originated in the ordinary course of its business, are
valid, and to the knowledge of the Company are fully collectible and not
subject to any defense, counterclaim or setoff, except and only to the
extent of the reserve against accounts receivable shown on such balance
sheet.
(r) Properties. Each of the Company and its Subsidiaries (i) has
----------
good, clear and marketable title to all the properties and assets reflected
in the latest balance sheet of the Company contained in the Financial
Statements as being owned by the Company or one of its Subsidiaries or
acquired after the date thereof (except properties sold or otherwise
disposed of since the date thereof in the ordinary course of business),
free and clear of (a) all Liens except statutory liens securing payments
not yet due and (b) all real property mortgages and deeds of trust and (ii)
is the lessee of all leasehold estates reflected in the latest financial
statements or acquired after the date thereof and is in possession of the
properties purported to be leased thereunder, and each such lease is valid
without default thereunder by the lessee or, to the Company's knowledge,
the lessor.
(s) Transactions with Directors, Officers, Employees and Affiliates .
---------------------------------------------------------------
There have been no transactions since December 31, 1997 between the Company
and any director, officer, employee or affiliate of the Company, except on
an arm's length basis in accordance with normal business practices. Since
June 30, 1997 none of the officers, directors, employees or affiliates of
the Company, or any member of the immediate family of any such persons, has
been a director of officer of, or has had a material interest in, any firm,
corporation, association or business enterprise which during such period
has been a material supplier, customer or sales agent of the Company or has
competed to a material extent with the Company.
(t) Insurance. The Company has not received any notice of
---------
cancellation with respect to any insurance policy of the Company. All
premiums due under any such insurance policy have been paid in full. The
Company has timely filed all claims or timely notified insurance carriers
of events or circumstances giving rise to any claims under such policies.
(u) Brokers. Except for the fee payable to National
-------
Securities Corporation ("National") pursuant to that certain letter
agreement dated December 2, 1997, between the Company and National, no
broker, investment banker, financial advisor or other person is entitled to
any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of the Company.
(v) Asset Sales; Merger. The Company has not, except for
-------------------
sales of inventory in the ordinary course of business, sold, transferred or
distributed any significant portion of its assets during the two-year
period preceding the date hereof nor has the Company taken any other action
16
<PAGE>
which would preclude the Merger from qualifying as a reorganization within
the meaning of Section 368 of the Code.
(w) Pooling of Interests. To the Company's knowledge,
--------------------
based on consultation with KPMG Peat Marwick LLP, its independent auditors,
neither the Company nor any of its officers, directors or stockholders has
taken any action which would preclude Parent's ability to account for the
Merger as a pooling of interests.
(x) Full Disclosure. No representation or warranty made
---------------
by the Company under or in connection with this Agreement, no certification
furnished or to be furnished to Parent pursuant to this Agreement, and no
agreements, instruments or documents delivered by the Company to Parent or
its counsel hereunder, contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary to
make the statements contained herein or therein not misleading.
(y) Board Recommendation. The Board of Directors of the
--------------------
Company, pursuant to an action in writing, has by unanimous action of all
directors then in office (i) determined that this Agreement and the
transactions contemplated hereby, including the Merger, are fair to and in
the best interests of the stockholders of the Company, and (ii) resolved to
recommend that the holders of the shares of Company Stock approve this
Agreement and the transactions contemplated herein, including the Merger.
(z) Required Company Vote. The Company Stockholder
---------------------
Approval which has been obtained prior to the signing of this Agreement,
being the affirmative vote of a majority of the outstanding shares of the
Company Common Stock, is the only vote of the holders of any class or
series of the Company's securities necessary to approve this Agreement, the
Merger and the other transactions contemplated hereby. Prior to the
signing of this Agreement, registered holders of more than 50% of the
Company Common Stock entitled to vote on the Merger have given Parent
irrevocable proxies granting Parent the right to vote their shares of
Company Common Stock at any meeting called to consider the Merger, for the
approval of this Agreement, the Merger and all transactions contemplated
herein.
(aa) Information Supplied. None of the information
--------------------
supplied or to be supplied by the Company for inclusion or incorporation by
reference in (i) the proxy statement to be filed with the SEC by Parent in
connection with the Parent stockholder approval of the Merger (the "Proxy
Statement") will, at the time the Proxy Statement is filed with the SEC,
and at any time it is amended or supplemented, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein regarding the Company
not misleading, except that no representation is made by the Company with
respect to statements made or incorporated by reference therein based on
information supplied by Parent for inclusion or incorporation by reference
therein.
3.2 Representations and Warranties of Parent. Parent represents
----------------------------------------
and warrants to the Company as follows:
(a) Organization, Standing and Corporate Power. Each of Parent and
------------------------------------------
Sub is duly organized, validly existing and in good standing under the laws
of the jurisdiction in which it is incorporated and has the requisite
corporate power and authority to carry on its business as now being
conducted. Each of Parent and Sub is duly qualified or licensed to do
business and is in
17
<PAGE>
good standing in each jurisdiction in which the nature of its business or
the ownership or leasing of its properties makes such qualification or
licensing necessary, other than in such jurisdictions where the failure to
be so qualified or licensed (individually or in the aggregate) would not
have a material adverse effect with respect to Parent.
(b) Subsidiaries. The only direct or indirect subsidiary of Parent
------------
is Sub. All the outstanding shares of capital stock of Sub have been
validly issued and are fully paid and nonassessable and are owned (of
record and beneficially) by Parent free and clear of all Liens.
(c) Capital Structure. The authorized capital stock of Parent
-----------------
consists of 10,000,000 shares of Parent Stock and 5,000,000 shares of
preferred stock, with such par value as the board of directors of Parent
may designate. As of the date of this Agreement: (i) 3,351,616 shares of
Parent Common Stock, and 267,500 shares of Parent 10% Preferred Stock
(which at a future date, may be convertible into Parent Common Stock) are
issued and outstanding or are reserved for issuance pursuant to signed
Subscription Agreements; (ii) 1,800,000 shares of Parent Common Stock are
reserved for issuance upon exercise of authorized but unissued options
under Parent's 1995 Stock Option Plan; (iv) 1,326,567 shares of Parent
Common Stock are issuable upon exercise of outstanding options under
Parent's 1995 Stock Option Plan; and (v) 1,004,000 shares of Parent Common
Stock are issuable upon exercise of issued and outstanding common stock
purchase warrants. Except as set forth above, no shares of capital stock
or other equity securities of Parent are issued, reserved for issuance or
outstanding. All outstanding shares of capital stock of Parent are, and
all shares of Parent Stock which may be issued pursuant to this Agreement
will be, when issued, duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights. All shares of Parent
Stock issued pursuant to this Agreement will, when so issued, be registered
or exempt from registration under any applicable federal or state
securities laws. Other than the 10% Preferred Stock, there are no
outstanding bonds, debentures, notes or other indebtedness or other
securities of Parent having the right to vote on any matters on which
stockholders of Parent may vote. Except as set forth above, there are no
outstanding securities, options, warrants, calls, or rights obligating
Parent or any of its subsidiaries to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock or other
equity securities of Parent or any of its subsidiaries or obligating Parent
or any of its subsidiaries to issue, grant, extend or enter into any such
security, option, warrant, call, or right. The authorized capital stock of
Sub consists of 10,000 shares of common stock, par value $.01 per share.
(d) Authority; Noncontravention. Parent and Sub have all requisite
---------------------------
corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated by this Agreement. The execution
and delivery of this Agreement by Parent and Sub and the consummation by
Parent and Sub of the transactions contemplated by this Agreement have been
duly authorized by all necessary corporate action on the part of Parent and
Sub and no other corporate action on the part of the Company or Sub is
necessary to authorize the execution and delivery of this Agreement or the
consummation by Parent and Sub of the transactions contemplated hereby.
However, the approval of the transactions contemplated in this Agreement of
the shareholders of Parent, which has not been obtained as of the date of
this Agreement, is required under applicable rules of The Nasdaq Stock
Market, Inc. for Parent's Common Stock to continue to be listed on the
Nasdaq Small Cap Market. This Agreement has been duly executed and
delivered by and constitutes a valid and binding obligation of each of
Parent and Sub, enforceable against such party in accordance with its
terms. The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated by this Agreement
18
<PAGE>
and compliance with the provisions hereof will not (a) conflict with or
result in any breach of any provision of the articles of incorporation or
bylaws of either Parent or Sub, or (b) conflict with, or result in any
breach or violation of, or constitute a default under (with or without
notice or lapse of time, or both), or give rise to a right of termination,
cancellation or acceleration under (i) any loan or credit agreement, note,
bond, mortgage, indenture, lease or other agreement, instrument, permit,
concession, franchise or license applicable to Parent or Sub or their
respective properties or assets or (ii) any judgment, order, decree,
statute, law, ordinance, rule, regulation or arbitration award applicable
to Parent or Sub or their respective properties or assets, or (c) result in
the creation of any Lien upon any of the properties or assets of Parent or
Sub, other than, in the case of clauses (b) and (c), any such conflicts,
breaches, violations, defaults, rights, losses or Liens that individually
or in the aggregate could not have a material adverse effect with respect
to Parent or could not prevent, hinder or materially delay the ability of
Parent to consummate the transactions contemplated by this Agreement. No
consent, approval, order or authorization of, or registration, declaration
or filing with, or notice to, any Governmental Entity is required by or
with respect to Parent or Sub or in connection with the execution and
delivery of this Agreement by Parent or Sub or the consummation by Parent
or Sub, as the case may be, of any of the transactions contemplated by this
Agreement, except for (i) the filing with the SEC of such reports under the
Securities Act of 1933, as amended (the "Securities Act") and the
Securities Exchange Act of 1934 (the "Exchange Act") as may be required in
connection with this Agreement and the transactions contemplated hereby,
(ii) the filing of the Articles of Merger with the Secretaries of State of
the State of California and the State of Minnesota and appropriate
documents with the relevant authorities of other states in which the
Company is qualified to do business, and (iii) such other consents,
approvals, orders, authorizations, registrations, declarations, filings or
notices as may be required under the "takeover" or "blue sky" laws of
various states.
(e) SEC Documents; Undisclosed Liabilities. Parent has filed all
--------------------------------------
required reports, schedules, forms, statements and other documents with the
SEC since May 23, 1996 (collectively, and in each case, including all
exhibits and schedules thereto and documents incorporated by reference
therein, the "Parent SEC Documents"). As of their respective dates, the
Parent SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be,
and the rules and regulations of the SEC promulgated thereunder applicable
to such Parent SEC Documents, and none of the Parent SEC Documents
(including any and all financial statements included therein) as of such
date contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The financial statements of Parent included in the
Parent SEC Documents comply as to form in all material respects with
applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with
generally accepted accounting principles (except, in the case of unaudited
consolidated quarterly statements, as permitted by Form 10-QSB of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly present the consolidated
financial position of Parent as of the dates thereof and the results of
operations and changes in cash flows for the periods then ended (subject,
in the case of unaudited quarterly statements, to normal year-end audit
adjustments). Since December 31, 1997, neither Parent nor any of its
subsidiaries has incurred any liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise) except (i) as and to
the extent set forth on the balance sheet of Parent as of December 31, 1997
(including the notes thereto), (ii) the placement of up to $2,675,000
stated amount of Parent's 10% Preferred Stock, (iii) as
19
<PAGE>
incurred in connection with the transactions contemplated by this
Agreement, (iv) as incurred after December 31, 1997 in the ordinary course
of business and consistent with past practice, (v) as described in the SEC
Documents filed since September 30, 1997 (the "Recent Parent SEC
Documents"), or (vi) as would not, individually or in the aggregate, have a
material adverse effect with respect to Parent.
(f) Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
this Agreement, the Recent Parent SEC Documents and the unaudited balance
sheet of Parent as of December 31, 1997 (including the notes thereto),
since December 31, 1997, Parent has conducted its business only in the
ordinary course consistent with past practice, and there is not and has not
been (i) any material adverse change with respect to Parent; (ii) any
condition, event or occurrence which, individually or in the aggregate,
could reasonably be expected to have a material adverse effect or give rise
to a material adverse change with respect to Parent; or (iii) any
condition, event or occurrence which could reasonably be expected to
prevent, hinder or materially delay the ability of Parent to consummate the
transactions contemplated by this Agreement.
(g) Litigation. There is no suit, action or proceeding or
----------
investigation pending or, to the knowledge of Parent, threatened against or
affecting Parent or Sub or any basis for any such suit, action, proceeding
or investigation. There is no judgment, decree, injunction, rule or order
of any Governmental Entity or arbitrator outstanding against Parent or Sub.
(h) Tax Returns and Tax Payments. Parent has timely filed, with
----------------------------
the appropriate authority, all tax returns required to be filed by it, has
paid all Taxes shown thereon to be due and has provided adequate reserves
in the Financial Statements for any Taxes that have not been paid, whether
or not shown as being due on any Tax Returns. All Tax Returns were correct
as filed. Further, (i) no claim for unpaid Taxes has been asserted by a
Tax authority or has become a lien (except for liens not yet due and
payable) against the property of Parent or is being asserted against
Parent, (ii) no audit of any Tax Return of Parent is being conducted by any
Government Entity, and (iii) no extension of the statute of limitations on
the assessment of any Taxes has been granted by Parent and is currently in
effect. Parent has not been a member of any consolidated, combined,
unitary or aggregate group for Tax purposes.
(i) Compliance with Laws; Environmental Matters.
-------------------------------------------
(i) Parent and its operations and assets, including owned or
leased real property, are in compliance in all material respects with
all statutes, laws, regulations, ordinances, rules, judgments, orders,
decrees or arbitration awards applicable thereto, including
Environmental Laws.
(ii) There are no legal, administrative, arbitral or other
proceedings, claims, actions, causes of action, private environmental
investigations or remediation activities or governmental
investigations of any nature seeking to impose, or that reasonably
could be expected to result in the imposition, on Parent of any
liability or obligations arising under common law standards relating
to environmental protection, human health or safety, or under any
local, state, federal, national or supernational environmental
statute, regulation or ordinance, including the Environmental Laws,
pending or, to the knowledge of Parent, threatened, against Parent,
which liability or obligation would have or would reasonably be
expected to have a material adverse effect on Parent. To the
knowledge of the Parent, there is no reasonable basis for any such
proceeding, claim,
20
<PAGE>
action or governmental investigation that would impose any liability
or obligation that would have or would reasonably be expected to have
a material adverse effect on Parent. To the knowledge of Parent,
during or prior to the period of (i) its ownership or operation of any
of its current properties, (ii) its participation in the management of
any property, or (iii) its holding of a security interest or other
interest in any property, there was no release or threatened release
of hazardous, toxic, radioactive or dangerous materials or other
materials regulated under Environmental Laws in, on, under or
affecting any such property which would reasonably be expected to have
a material adverse effect on Parent. Parent is not subject to any
agreement, order, judgment, decree, letter or memorandum by or with
any court, governmental authority, regulatory agency or third party
imposing any liability or obligations pursuant to or under any
Environmental Law.
(j) Intellectual Property. Parent owns or has a license to use all of
---------------------
the copyrights, patents, trademarks, service marks, service names, trade
names, applications therefore, technology rights and licenses, computer
software (including any source or object codes therefore or documentation
relating thereto), trade secrets, franchises, know-how, inventions, and
other intellectual property rights (collectively, the "Intellectual
Property") which is used in its business. All software used in Parent's
business and sold by Parent is year 2000 compliant. Parent is the owner of
or has a license to any Intellectual Property sold or licensed to a third
party in connection with its business operations, and has the right to
convey by sale or license any Intellectual Property so conveyed. Parent is
not in default under any of its Intellectual Property licenses. No
proceedings have been instituted or are pending, or to the knowledge of
Parent has any person claimed or alleged any rights to such Intellectual
Property. Parent is not obligated to any recurring royalties to any person
with respect to any such Intellectual Property. No officer, director, or
employee of Parent is a party to a contract or agreement which requires
such officer, director or employee to assign any interest in any
Intellectual Property to Parent and to keep confidential any trade secrets,
proprietary data, customer information, or other business information of
Parent and to the knowledge of Parent no such officer, director or employee
is a party to a contract or agreement which requires such officer, director
or employee to assign any interest in any Intellectual Property to any
person other than Parent or to keep confidential any trade secrets,
proprietary data, customer information, or other business information of
any person other than Parent. No officer or director of Parent, or to the
knowledge of Parent, other employee of Parent, is a party to any contract
or agreement which restricts or prohibits such officer, director or
employee from engaging in activities competitive with any person.
(k) Properties. Parent (i) has good, clear and marketable title to
----------
all the properties and assets reflected in the latest balance sheet of
Parent contained in the Financial Statements as being owned by Parent or
acquired after the date thereof (except properties sold or otherwise
disposed of since the date thereof in the ordinary course of business),
free and clear of (a) all Liens except statutory liens securing payments
not yet due and (b) all real property mortgages and deeds of trust and (ii)
is the lessee of all leasehold estates reflected in the latest financial
statements or acquired after the date thereof and is in possession of the
properties purported to be leased thereunder, and each such lease is valid
without default thereunder by the lessee or, to Parent's knowledge, the
lessor.
(l) Interim Operations of Sub. Sub was formed on March 4, 1998,
-------------------------
solely for the purposes of engaging in the transactions contemplated
hereby, has engaged in no other business activities and has conducted its
operations only as contemplated hereby.
21
<PAGE>
(m) Brokers. No broker, investment banker, financial advisor or
-------
other person is entitled to or may be paid any broker's, finder's,
financial advisor's or other similar fee or commission in connection with
the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of Parent.
ARTICLE 4
COVENANTS RELATING TO
CONDUCT OF BUSINESS PRIOR TO MERGER
4.1 Conduct of Business of the Company. From the date of this
----------------------------------
Agreement to the Effective Time (except as otherwise specifically required by
the terms of this Agreement), the Company shall, and shall cause its
Subsidiaries to, act and carry on their respective businesses in the usual,
regular and ordinary course of business consistent with past practice and, to
the extent consistent therewith, use its best efforts to preserve intact their
current business organizations, keep available the services of their current
officers and employees and preserve their relationships with customers,
suppliers, franchisees, licensors, licensees, advertisers, distributors and
others having business dealings with them to the end that their goodwill and
ongoing businesses shall not be impaired in any material respect at the
Effective Time. Without limiting the generality of the foregoing, from the date
of this Agreement to the Effective Time, the Company shall not, and shall not
permit any of its Subsidiaries to, without the prior written consent of Parent:
(a) (i) declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock, other than dividends
and distributions by a direct or indirect wholly owned Subsidiary of the
Company to its parent, (ii) split, combine or reclassify any of its capital
stock or issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for shares of its capital stock, or (iii)
purchase, redeem or otherwise acquire any shares of capital stock of the
Company or any of its Subsidiaries or any other securities thereof or any
rights, warrants or options to acquire any such shares or other securities;
(b) authorize for issuance, issue, deliver, sell, pledge or otherwise
encumber any shares of its capital stock or the capital stock of any of its
Subsidiaries, any other voting securities or any securities convertible
into, or any rights, warrants or options to acquire, any such shares,
voting securities or convertible securities or any other securities or
equity equivalents (including without limitation stock appreciation
rights), or contractual obligation valued or measured by the value or
market price of Company Common Stock (other than the issuance of Company
Common Stock upon the exercise or conversion of stock options, warrants or
convertible securities or pursuant to antidilution provisions of securities
outstanding on the date of this Agreement and in accordance with their
present terms, such issuance, together with the acquisitions of shares of
Company Common Stock permitted under clause (a) above, being referred to
herein as "Permitted Changes");
(c) amend its articles of incorporation, by-laws or other comparable
charter or organizational documents;
(d) acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial portion of the stock or assets of, or by any
other manner, any business or any corporation, partnership, joint venture,
association, or other business organization or division thereof;
22
<PAGE>
(e) sell, lease, license, mortgage or otherwise encumber or subject to
any Lien or otherwise dispose of any of its properties or assets except in
the ordinary course of business consistent with past practice;
(f) (i) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another person, issue or sell any debt Securities or
warrants or other rights to acquire any debt securities of the Company or
any of its Subsidiaries, guarantee any debt securities of another person,
enter into any "keep well" or other agreement to maintain any financial
statement condition of another person or enter into any arrangement having
the economic effect of any of the foregoing, except for short-term
borrowings incurred in the ordinary course of business consistent with past
practice, or (ii) make any loans, advances or capital contributions to, or
investments in, any other person, other than to the Company or any direct
or indirect wholly owned Subsidiary of the Company;
(g) acquire or agree to acquire any assets or make or agree to make
any capital expenditures except in the ordinary course of business
consistent with past practice;
(h) pay, discharge or satisfy any claims (including claims of
shareholders), liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), except for the payment, discharge or
satisfaction, of (i) liabilities or obligations in the ordinary course of
business consistent with past practice or in accordance with their terms as
in effect on the date hereof, (ii) liabilities reflected or reserved
against in, or contemplated by, the most recent financial statements (or
the notes thereto) of the Company set forth in Section 3.1(e) of the
Disclosure Schedule, or waive, release, grant, or transfer any rights of
value or modify or change in any respect any existing license, lease,
contract or other document, other than in the ordinary course of business
consistent with past practice;
(i) adopt or amend in any respect (except as may be required by law or
by this Agreement) any bonus, profit sharing, compensation, stock option,
pension, retirement, deferred compensation, employment or other employee
benefit plan, agreement, trust, fund or other arrangement for the benefit
or welfare of any employee, director or former director or employee or,
other than increases for individuals (other than officers and directors) in
the ordinary course of business consistent with past practice, increase the
compensation or fringe benefits of any director, employee or former
director or employee; pay any benefit not required by any existing plan,
arrangement or agreement, grant any new or modified severance or
termination arrangement or increase or accelerate any benefits payable
under its severance or termination pay policies in effect on the date
hereof, other than any such increase or acceleration provided for under
such policies as in effect on the date of this Agreement;
(j) change any material accounting principle used by it, except for
such changes as may be required to be implemented following the date of
this Agreement pursuant to generally accepted accounting principles or
rules and regulations of the SEC;
(k) take any action that would, or is reasonably likely to, result in
any of its representations and warranties in this Agreement becoming
untrue, or result in any of the conditions to the Merger set forth in
Article 6 not being satisfied;
(l) except in the ordinary course of business and consistent with past
practice, make any tax election or settle or compromise any federal, state,
local or foreign income tax liability;
23
<PAGE>
(m) do anything which would preclude the Company from being a party to
a pooling of interests transaction; and
(n) authorize any of, or commit or agree to take any of, the foregoing
actions.
ARTICLE 5
ADDITIONAL AGREEMENTS
5.1 Preparation of Proxy Statement; Stockholder Meeting.
---------------------------------------------------
(a) Promptly following the date of this Agreement, Parent shall
prepare and file with the SEC a Proxy Statement which will be used by
Parent to solicit approval of its stockholders of this Agreement, the
Merger and the other transactions contemplated herein. Each of the Company
and Parent shall use its reasonable best efforts to cause the Proxy
Statement to be filed with the SEC as promptly as practicable and to have
the Proxy Statement finalized as promptly as practicable after such filing.
Parent shall also take any action (other than qualifying to do business in
any jurisdiction in which it is not now so qualified) required to be taken
under any applicable state securities laws in connection with the issuance
of Parent Stock in the Merger, and the Company shall furnish all
information concerning the Company and the holders of the Company Common
Stock and rights to acquire Company Common Stock as may be reasonably
requested in connection with any such action.
(b) Parent will, as promptly as practicable following the date of
this Agreement, duly call, give notice of, convene and hold a meeting of
its stockholders (the "Stockholder Meeting") for the purpose of approving
this Agreement, the Merger and the transactions contemplated herein. Parent
will, through its Board of Directors, recommend to its stockholders
approval of the foregoing matters. Parent will use its reasonable efforts
to hold such meeting as soon as practicable after the date hereof.
5.2 Letter of the Company's Accountants. ' The Company shall use
-----------------------------------
its best efforts to cause to be delivered to Parent a letter of KPMG Peat
Marwick LLP, the Company's independent public accountants, dated a date within
two business days before the date on which the Proxy Statement shall become
effective and addressed to Parent, in form and substance reasonably satisfactory
to Parent and customary in scope and substance for letters delivered by
independent public accountants in connection with registration statements.
5.3 Parent Access to Information .
----------------------------
(a) The Company shall, and shall cause its Subsidiaries,
officers, employees, counsel, financial advisors and other representatives
to, afford to Parent and its representatives reasonable access during
normal business hours during the period prior to the Effective Time to its
properties, books, contracts, commitments, personnel and records and,
during such period, shall, and shall cause its Subsidiaries, officers,
employees and representatives to, furnish promptly to Parent information
concerning its business, properties, financial condition, operations and
personnel as Parent may from time to time reasonably request. No
investigation pursuant to this Section 5.3 shall affect any representations
or warranties of the Company herein or the conditions to the obligations of
the parties hereto.
24
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(b) The Company shall report on operational matters and promptly
advise Parent orally and in writing of any change or event having, or
which, insofar as can reasonably be foreseen, could have, a material
adverse effect on the Company and its Subsidiaries taken as a whole.
5.4 Registration of Parent Stock. Within one hundred twenty (120) days
----------------------------
after the Closing Date, Parent shall prepare and file a registration statement
(including a prospectus, pre- and post-effective amendments, and all exhibits
thereto) (the "Registration Statement"), covering the Parent Stock issued to the
shareholders of the Company in accordance with Section 2.3 of this Agreement and
any Parent Common Stock issuable upon exercise or conversion of the Prior
Securities converted into similar securities of Parent in accordance with
Section 2.2 of this Agreement with the Securities and Exchange Commission (the
"SEC") and use its best efforts to cause the Registration Statement to be
declared effective under the Securities Act of 1933, as amended (the "Securities
Act"), as promptly as practicable after its filing. The Registration Statement
shall be on form SB-2, Form S-1, Form S-3 or such other form as is appropriate
in order to register such Parent Stock with the SEC pursuant to section 5 of the
Securities Act. Parent shall use its best efforts to cause the Registration
Statement to be declared effective by the SEC as soon as possible following the
filing thereof and shall use its best efforts to maintain the Registration
Statement continually effective under the Securities Act for a period of two (2)
years after the date on which the Registration Statement is declared effective
by the SEC. No person may participate in any such registration unless such
person (i) agrees to execute, if so requested by Cohig & Associates, Inc.,
National Securities Corporation or other underwriter of Parent's securities, a
lockup agreement pursuant to which such person agrees not to offer, sell,
contract to sell, pledge, hypothecate, or otherwise dispose of any shares of
Parent Stock (or securities convertible into or exchangeable for Parent Stock )
beneficially owned or otherwise held by such person on the date of such
agreement or acquired on or prior to the effectiveness of the Registration
Statement for a period not to exceed eight months from the date of such
agreement and (ii) completes and executes all questionnaires, powers of
attorney, indemnities and other documents required under the terms of any such
registration.
5.5 Board of Directors. Parent shall use its best efforts to cause two
------------------
persons selected by the Company and reasonably acceptable to Parent to be
nominated to and elected to serve on Parent's Board of Directors at Parent's
1998 Annual Meeting of Shareholders.
5.6 Best Efforts. Each of the parties agrees to use its best efforts to
------------
take, or cause to be taken, all actions, and to do, or cause to be done, and to
assist and cooperate with the other parties in doing, all things necessary,
proper or advisable to consummate and make effective, in the most expeditious
manner practicable, the Merger and the other transactions contemplated by this
Agreement. Parent, Sub and the Company will use their best efforts and cooperate
with one another (i) in promptly determining whether any filings are required to
be made or consents, approvals, waivers, permits or authorizations are required
to be obtained under any applicable law or regulation or from any governmental
authorities or third parties in connection with the transactions contemplated by
this Agreement and (ii) in promptly making any such filings, in furnishing
information required in connection therewith and in timely seeking to obtain any
such consents, approvals, waivers, permits or authorizations.
5.7 Expenses. Whether or not the Merger is consummated, all costs and
--------
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses.
25
<PAGE>
5.8 Public Announcements. Parent and Sub, on the one hand, and the
--------------------
Company, on the other hand, will consult with each other before issuing, and
provide each other the opportunity to review and comment upon, any press release
or other public statements with respect to the transactions contemplated by this
Agreement, including the Merger, and shall not issue any such press release or
make any such public statement prior to such consultation, except as may be
required by applicable law, court process or by obligations pursuant to any
listing agreement with any national securities exchange or The Nasdaq Stock
Market, Inc. The parties agree that the initial press release or releases to be
issued with respect to the transactions contemplated by this Agreement shall be
mutually agreed upon prior to the issuance thereof.
5.9 Takeover Statutes. If any "fair price," "moratorium," "control share
-----------------
acquisition" or other form of antitakeover statute or regulation shall become
applicable to the transactions contemplated hereby, the Company and the members
of the Board of Directors of the Company shall grant such approvals and take
such actions as are reasonably necessary so that the transactions contemplated
hereby may be consummated as promptly as practicable on the terms contemplated
hereby and otherwise act to eliminate or minimize the effects of such statute or
regulation on the transactions contemplated hereby.
5.10 Certain Agreements. Neither the Company nor any Subsidiary of the
------------------
Company will waive or fail to enforce any provision of any confidentiality or
standstill or similar agreement to which it is a party without the prior written
consent of Parent.
ARTICLE 6
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
----------------------------------------------------------
respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) No Injunctions or Restraints. No temporary restraining order,
----------------------------
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Merger shall be in effect; provided, however, that
-------- -------
the parties hereto shall use their best efforts to have any such
injunction, order, restraint or prohibition vacated.
(b) Nasdaq Governance Requirements. The issuance of Parent Stock
------------------------------
pursuant to the Merger shall satisfy all applicable requirements of The
Nasdaq Stock Market, Inc. for Parent's Common Stock to be listed on the
Nasdaq Small Cap Market.
(c) Compliance with Federal and State Securities Laws. The issuance
-------------------------------------------------
of Parent's securities to the holders of the Company Common Stock and Prior
Securities shall be exempt from the registration requirements of the
Securities Act, and applicable state blue sky laws.
6.2 Conditions to Obligation of Parent and Sub. The obligations of Parent
------------------------------------------
and Sub to effect the Merger are further subject to the following conditions:
(a) Representations and Warranties. The representations and
------------------------------
warranties of the Company set forth in this Agreement shall be true and
correct in all respects, in each case as of the date of this Agreement and
as of the Closing Date as though made on and as of the Closing
26
<PAGE>
Date. Parent shall have received a certificate signed on behalf of the
Company by the chief executive officer of the Company to such effect.
(b) Performance of Obligations of the Company. The Company shall
-----------------------------------------
have performed the obligations required to be performed by it under this
Agreement at or prior to the Closing Date (except for such failures to
perform as have not had or could not reasonably be expected, either
individually or in the aggregate, to have a material adverse effect with
respect to the Company or adversely affect the ability of the Company to
consummate the transactions herein contemplated or perform its obligations
hereunder), and Parent shall have received a certificate signed on behalf
of the Company by the chief executive officer of the Company to such
effect.
(c) Consents, etc. Parent shall have received evidence, in form and
-------------
substance reasonably satisfactory to it, that such licenses, permits,
consents, approvals, authorizations, qualifications and orders of
governmental authorities and other third parties as are necessary in
connection with the transactions contemplated hereby have been obtained,
except such licenses, permits, consents, approvals, authorizations,
qualifications and orders which are not, individually or in the aggregate,
material to Parent or the Company or the failure of which to have been
received would not (as compared to the situation in which such license,
permit, consent, approval, authorization, qualification or order had been
obtained) materially dilute the aggregate benefits to Parent of the Merger.
(d) Affiliate Letters. Parent shall have received the agreements
-----------------
from each of the officers and directors of the Company and Parent and from
each of the beneficial owners of 5% or more of the outstanding shares of
Company Common Stock and Parent Common Stock, pursuant to which they shall
have agreed to not take any action which adversely affect the
appropriateness of pooling of interests accounting for the Merger. The
agreements shall be in substantially the form of Exhibit 6.2(d) hereto.
(e) Opinion of Counsel to the Company. Parent shall have received,
---------------------------------
on and as of the Closing Date, an opinion of Pollet & Woodbury, counsel to
the Company, in usual and customary form reasonably acceptable to Parent,
to the effect that (i) the Company is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of
California, (ii) the execution and delivery of this Agreement by the
Company and the consummation by the Company of the transactions
contemplated hereby have been duly authorized by all necessary corporate
and shareholder action, (iii) this Agreement has been duly executed and
delivered by the Company and constitutes a valid and binding obligation of
the Company, enforceable in accordance with its terms (subject to customary
exceptions), and (iv) the execution and delivery of this Agreement does
not, and the consummation by the Company of the transactions contemplated
hereby will not, (a) violate the Articles of Incorporation or Bylaws of the
Company, or (b) to the best knowledge of such counsel based upon due
inquiry of the Company, conflict with, or result in any breach or violation
of, or constitute a default under (with or without notice or lapse of time,
or both), or give rise to a right of termination, cancellation or
acceleration under (i) any loan or credit agreement, note, bond, mortgage
indenture, lease or other agreement, instrument, permit, concession,
franchise, or license applicable to the Company of any of its Subsidiaries
or their respective properties and assets, or (ii) any judgment, order,
decree, statute, law, rule, ordinance, regulation or arbitration award
applicable to the Company or any of its Subsidiaries or their respective
properties or assets, or
27
<PAGE>
(iii) result in the creation of any Lien upon any of the properties or
assets of the Company or any of its Subsidiaries.
(f) Opinion of Accountants. Parent shall have received a letter from
----------------------
Arthur Andersen LLP regarding such firm's concurrence with Parent
management's conclusions as to the appropriateness of pooling of interests
accounting for the Merger under Accounting Principles Board Opinion No. 16,
if consummated in accordance with this Agreement. In addition, the
Company's accountants shall have provided a letter, satisfactory in form
and substance to Parent, regarding the appropriateness of pooling of
interests accounting for a transaction involving the Company.
(g) CompuLearning Systems, Inc. The Company shall have completed the
--------------------------
acquisition of CompuLearning Systems, Inc., the owner and operator of the
Electronic University Network, and shall have completed payment in full for
the purchase price thereof.
(h) Total Liabilities. The total liabilities of the Company and its
-----------------
consolidated Subsidiaries shall not exceed $915,000 as of the Closing Date
plus the amount of any indebtedness incurred by the Company following the
execution of this Agreement which Parent has previously approved, it being
understood that the Company expects to require up to $300,000 of additional
funding to sustain its operations prior to the Closing Date.
(i) Dissenter's Rights. At least 95% of the shareholders of the
------------------
Company shall have waived any dissenter's rights they may have with respect
to the Merger pursuant to the CGCL.
(j) Undertakings of Company Securities Holders. All of the
------------------------------------------
shareholders of the Company and the holders of the Company's other
securities shall have completed, executed and delivered to Parent the
Securities Holder Agreement and Undertakings in substantially the form of
Exhibit 6.2(j) hereto.
(k) Noncompete Agreements. Andre Durand, Steven Eskow and Sarah
---------------------
Blackmum, executive officers of the Company shall have entered into
noncompete agreements with Parent in substantially the form of Exhibit
6.2(k) hereto.
(l) Releases, Termination of Agreements. Parent shall have received
-----------------------------------
such releases, undertakings or agreements as it shall reasonably require to
evidence that neither the Company nor any of its affiliates have any
ongoing obligations or commitments with respect to Durand Brazil or any of
its officers, directors, shareholders, affiliates or related companies,
other than the Company's commitments pursuant to the exclusive
CommunityWare(R) license for Brazil, a copy of which is included as Exhibit
6.2(l) hereto. In addition, Parent shall have received such evidence as it
may reasonably require to demonstrate that the Company's agreements with
Spencer Trask Securities and AJ Capital have been terminated and are of no
further force and effect.
6.3 Conditions to Obligation of the Company. The obligation of the
---------------------------------------
Company to effect the Merger is further subject to the following conditions:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Parent and Sub set forth in this Agreement shall be true and
correct in all respects, in each case as of the date of this Agreement and
as of the Closing Date as though made on and as of the Closing Date;
28
<PAGE>
provided, however, that between the date of this Agreement and the Closing
Date, Parent may have issued or agreed to issue additional securities of
Parent in connection with one or more private or public offerings of its
securities or incurred or agreed to incur additional indebtedness in order
to raise additional working capital. The Company shall have received a
certificate signed on behalf of Parent by the chief executive officer of
Parent to such effect.
(b) Performance of Obligations of Parent and Sub . Parent and Sub
--------------------------------------------
shall have performed the obligations required to be performed by them under
this Agreement at or prior to the Closing Date (except for such failures to
perform as have not had or could not reasonably be expected, either
individually or in the aggregate, to have a material adverse effect with
respect to Parent or adversely affect the ability of Parent to consummate
the transactions herein contemplated or perform its obligations hereunder),
and the Company shall have received a certificate signed on behalf of
Parent by the chief executive officer of Parent to such effect.
(c) Opinion of Counsel to Parent . The Company shall have received,
----------------------------
on and as of the Closing Date, an opinion of Gray, Plant, Mooty, Mooty &
Bennett, P.A., counsel to Parent, in usual and customary form reasonably
acceptable to the Company, to the effect that (i) Parent and Sub are
corporations duly incorporated, validly existing and in good standing under
the laws of the state of their incorporation, (ii) the execution and
delivery of this Agreement by Parent and Sub and the consummation by Parent
and Sub of the transactions contemplated hereby have been duly authorized
by all necessary corporate action, (iii) this Agreement has been duly
executed and delivered by Parent and Sub and constitutes a valid and
binding obligation of each of Parent and Sub, enforceable in accordance
with its terms (subject to customary exceptions), and (iv) the execution
and delivery of this Agreement does not, and the consummation by Parent and
Sub of the transactions contemplated hereby will not violate the Articles
of Incorporation or Bylaws of Parent or Sub.
ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated and abandoned at any
-----------
time prior to the Effective Time of the Merger:
(a) by mutual written consent of Parent and the Company; or
(b) by either Parent or the Company if any Governmental Entity shall
have issued an order, decree or ruling or taken any other action
permanently enjoining, restraining or otherwise prohibiting the Merger and
such order, decree, ruling or other action shall have become final and
nonappealable; or
(c) by Parent if the Merger shall not have been consummated on or
before July 31, 1998; or
(d) by Parent if the Company shall have withdrawn, modified or amended
in any respect adverse to Parent or Sub its approval or recommendation of
this Agreement or the Merger; or
(e) by Parent, if the Company fails to perform any of its material
obligations under this Agreement; or
29
<PAGE>
(f) by the Company, if Parent or Sub fails to perform any of their
respective material obligations under this Agreement; or
(g) by Parent if the Merger cannot be accounted for as a pooling of
interests.
7.2 Effect of Termination. In the event of termination of this Agreement
---------------------
by either the Company or Parent as provided in Section 7.1, this Agreement shall
forthwith become void and have no effect, without any liability or obligation on
the part of Parent, Sub or the Company, other than pursuant to the provisions of
Section 5.7 and this Section 7.2. Nothing contained in this Section 7.2 shall,
however, relieve any party for any breach of the representations, warranties,
covenants or agreements set forth in this Agreement prior to any such
termination.
7.3 Amendment. This Agreement may be amended by the parties at any time
---------
before or after required approval of the Merger by the stockholders of the
Company; provided, however, that after such approval, there shall be made no
-------- -------
amendment that by law requires further approval by such stockholders without the
further approval of such stockholders. This Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties.
7.4 Extension; Waiver. At any time prior to the Effective Time, the
-----------------
parties may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties contained in this Agreement or in any document
delivered pursuant to this Agreement or (c) subject to the proviso of Section
7.3, waive compliance with any of the agreements or conditions contained in this
Agreement. Any agreement on the part of a party to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf of
such party. The failure of any party to this Agreement to assert any of its
rights under this Agreement or otherwise shall not constitute a waiver of such
rights.
ARTICLE 8
GENERAL PROVISIONS
8.1 Survival of Representations and Warranties. The respective
------------------------------------------
representations and warranties of each of the parties to this Agreement shall
not be deemed to be waived or otherwise affected by any investigation made by
the other parties to this Agreement. The representations of Parent, Sub, and the
Company contained in this Agreement or in any instrument delivered pursuant to
this Agreement shall survive the Merger.
8.2 Further Assurances. From time to time, on and after the Effective
------------------
Time, as and when requested by Parent or its successors or assigns, the proper
officers and directors of the Company immediately before the Effective Time, or
other proper officers or directors, shall, at Parent's expense, and for and on
behalf and in the name of the Company, or otherwise, execute and deliver all
such deeds, bills of sale, assignments and other instruments and shall take or
cause to be taken such further or other reasonable actions as Parent or its
successors or assigns may deem necessary or desirable in order to confirm or
record or otherwise transfer to the Surviving Corporation title to and
possession of all the properties, rights, privileges, powers, franchises and
immunities of the Company and otherwise to reasonably carry out fully the
provisions and purposes of this Agreement.
8.3 Notices. All notices, requests, claims, demands and other
-------
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by overnight
30
<PAGE>
courier (providing proof of delivery) to the parties at the following addresses
(or at such other address for a party as shall be specified by like notice):
(a) if to Parent or Sub, to:
Online System Services, Inc.
1800 Glenarm Place, Suite 800
Denver, Colorado 80202
Attention: Chairman of the Board
with a copy to:
Gray, Plant, Mooty, Mooty & Bennett, P.A.
33 South Sixth Street, Suite 3400
Minneapolis, Minnesota 55402
Attention: Lindley S. Branson
(b) if to the Company, to:
Durand Communications, Inc.
147 Castilian Drive
Santa Barbara, California 93117
Attention: President
with a copy to:
Pollet & Woodbury, a law corporation
10900 Wilshire Boulevard, Suite 500
Los Angeles, California 90024
Attention: John M. Woodbury, Jr.
8.4 Definitions. For purposes of this Agreement:
-----------
(a) an "affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such first person;
(b) "material adverse change" or "material adverse effect" means, when
used in connection with the Company or Parent, any change or effect that
either individually or in the aggregate with all other such changes or
effects is materially adverse to the business, assets, properties,
condition (financial or otherwise) or results of operations of such party
and its subsidiaries taken as a whole; provided, however, that, (i) a
-------- -------
decline in general economic conditions affecting the Company or Parent
shall not be deemed to be a "material adverse change" or to have a
"material adverse effect" with respect to either such party or its
subsidiaries;
(c) "person" means an individual, corporation, partnership, joint
venture, association, trust, unincorporated organization or other entity;
and
31
<PAGE>
(d) a "subsidiary" of any person means another person, an amount of
the voting securities, other voting ownership or voting partnership
interests of which is sufficient to elect at least a majority of its board
of directors or other governing body (or, if there are no such voting
interests, 50% or more of the equity interest of which) is owned directly
or indirectly by such first person.
8.5 Interpretation. A reference made in this Agreement to a Section,
--------------
Exhibit or Schedule, shall be to a Section of, or an Exhibit or Schedule to,
this Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation."
8.6 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
8.7 Entire Agreement; No Third-party Beneficiaries. This Agreement
----------------------------------------------
constitutes the entire agreement, and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter of this Agreement. This Agreement is not intended to confer upon
any person other than the parties any rights or remedies.
8.8 Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the State of Colorado regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
8.9 Assignment. Neither this Agreement nor any of the rights, interests
----------
or obligations under this Agreement shall be assigned, in whole or in part, by
operation of law or otherwise, by any of the parties without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of, and be enforceable by, the
parties and their respective successors and assigns.
8.10 Enforcement. The parties agree that irreparable damage would occur in
-----------
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the State of Colorado
or of the United States located in the State of Colorado in the event any
dispute arises out of this Agreement or any of the transactions contemplated by
this Agreement, and each party agrees (a) it will not attempt to deny or defeat
personal jurisdiction or venue in any such court by motion or other request for
leave from any such court and (b) it will not bring any action relating to this
Agreement or any of the transactions contemplated by this Agreement in any court
other than any such court.
8.11 Severability. Whenever possible, each provision or portion of any
------------
provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law but if any provision or portion of any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision
or portion of any provision in such jurisdiction, and this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or
32
<PAGE>
unenforceable provision or portion of any provision had never been contained
herein, so long as the economic and legal substance of the transactions
contemplated hereby are not affected in a manner materially adverse to any party
hereto.
IN WITNESS WHEREOF, Parent, Sub, and the Company have caused this Agreement
to be signed by their respective officers thereunto duly authorized, all as of
the date first written above.
ONLINE SYSTEM SERVICES, INC.
By: /s/ R. Steven Adams
-----------------------------------------------
R. Steven Adams
Its Chairman of the Board and Chief Executive
Officer
DURAND ACQUISITION CORPORATION
By: /s/ R. Steven Adams
-----------------------------------------------
R. Steven Adams
Its President
DURAND COMMUNICATIONS, INC.
By: /s/ Andre Durand
-----------------------------------------------
Andre Durand
Its President
33
<PAGE>
Exhibit 3.1(z)
SHAREHOLDERS' AGREEMENT
This SHAREHOLDERS' AGREEMENT (the "Agreement") is entered into as of
________________, 1998, by and between ONLINE SYSTEM SERVICES, INC., a Colorado
corporation ("Parent"), and each of the persons whose signature appears on the
signature page hereto (each a "Shareholder" and collectively, the
"Shareholders").
RECITALS
A. Concurrently with the execution and delivery of this Agreement, Parent,
Durand Communications, Inc., a California corporation (the "Company"), and
Durand Acquisition Corporation, a Minnesota corporation ("Sub"), are
executing and delivering to each other that certain Agreement and Plan of
Merger of even date herewith (the "Merger Agreement"), pursuant to which
Sub will merge with and into the Company (the "Merger") and each share of
common stock of the Company will be automatically converted into shares of
common stock of Parent, all pursuant to the terms and conditions of the
Merger Agreement.
B. After considering the best interests of the Company and its
shareholders, reviewing the Merger Agreement, and weighing the
possibilities of acquisition proposals from parties other than Parent, each
of the Shareholders has determined that an acquisition of the Company by
Parent is in the best interests of the Company.
C. Parent is willing to execute and deliver the Merger Agreement only if
each of the Shareholders executes and delivers this Agreement and only in
reliance upon the agreements, representations, and warranties of each of
the Shareholders contained in this Agreement, and each of the Shareholders
is willing to execute and deliver this Agreement in order to induce Parent
to execute and deliver the Merger Agreement.
AGREEMENT
NOW THEREFORE, in consideration of the above recitals and the promises set
forth in this Agreement, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Representations and Warranties of the Shareholders. Each Shareholder
--------------------------------------------------
hereby severally represents and warrants to Parent as follows:
1.1 Authority; No Violation. Such Shareholder has all necessary
-----------------------
power and authority to enter into and perform all of such Shareholder's
obligations hereunder. The execution and delivery of this Agreement by
such Shareholder and consummation by such Shareholder of the transactions
contemplated hereby will not violate, conflict with, or constitute a
default under any contract, commitment, restriction, arrangement, or other
agreement to which such Shareholder is a party or by which such Shareholder
is bound, including any proxy, proxy agreement, voting agreement, voting
trust, shareholders' agreement, or trust agreement. There is no other
person, including any beneficiary of or other holder of an interest under
any trust of which such Shareholder is a trustee, whose consent is required
for the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby. This Agreement has been duly
34
<PAGE>
and validly executed and delivered by such Shareholder (and such
Shareholder's spouse if such spouse's signature is required under
applicable law in order to convey to Parent the full benefit of this
Agreement), and constitutes a valid and binding agreement of such
Shareholder (and such spouse if applicable), enforceable against such
Shareholder (and such spouse) in accordance with its terms.
1.2 Ownership of Shares. Such Shareholder is the beneficial owner or
-------------------
record holder of the number of shares of Company Common Stock indicated
under such Shareholder's name on the signature page hereto (the "Existing
Shares", and together with any shares of the Company Common Stock acquired
by Shareholder after the date hereof, the "Shares") and, as of the date
hereof, the Existing Shares constitute all of the shares of Company Common
Stock owned beneficially or of record by such Shareholder. With respect to
the Existing Shares, such Shareholder has sole voting power, sole power to
issue instructions with respect to the matters set forth in Section 2
hereof, sole power to dispose, sole power to demand a dissenting
shareholder's appraisal rights and sole power to engage in the actions set
forth in Section 2 hereof, with no restriction on the voting rights, rights
of disposition or otherwise, subject to applicable federal or state
securities laws restricting "affiliates" of the Company.
2. Voting Agreement, Proxy, and Other Agreements.
---------------------------------------------
2.1 Agreement to Vote for Merger. Each Shareholder hereby severally
----------------------------
and irrevocably agrees to vote all of the Shares as follows: (i) in favor
of the Merger Agreement, the Merger, and the other transactions
contemplated by the Merger Agreement; (ii) in favor of any other matter
necessary to the consummation of the Merger and the other transactions
contemplated by the Merger Agreement, and (iii) against any other action or
agreement that would result in a breach in any material respect of any
covenant, representation or warranty or any other obligation or agreement
of the Company under the Merger Agreement or that is intended, or could
reasonably be expected, to impede, interfere with, delay, postpone,
discourage or adversely affect the consummation of the Merger or the other
transactions contemplated by the Merger Agreement. Such Shareholder will
not enter into any agreement or understanding prior to the Termination Date
(as defined below) to vote after the Termination Date in any manner
inconsistent with clauses (i), (ii), or (iii) of the preceding sentence.
2.2 Irrevocable Proxy. Each Shareholder hereby severally grants to,
-----------------
and appoints, Parent and R. Steven Adams, President of Parent, Robert M.
Geller, Secretary of Parent, and Thomas S. Plunkett, Chief Financial
Officer of Parent, in their respective capacities as officers of Parent,
and any individual who shall succeed to such office of Parent, and any
other designee of Parent, and each of them, such Shareholder's proxy and
attorney-in-fact (with full power of substitution and resubstitution), to
vote the Shares as stated in clauses (i), (ii), and (iii) of Section 2.1.
This proxy is, and such Shareholder intends this proxy to be, irrevocable
and coupled with an interest. This proxy will expire at the close of
business on the Termination Date. Such Shareholder will take any and all
further actions and will execute and deliver any and all further
instruments (including a proxy separate from this Agreement) as may be
necessary or desirable, in Parent's sole determination, to effectuate the
intent of this proxy. Such Shareholder hereby revokes any and all proxies,
voting agreements, voting trusts, or
35
<PAGE>
other arrangements of any kind previously granted by such Shareholder with
respect to the voting of the Shares.
2.3 No Transfer of Shares. Each Shareholder hereby severally agrees
---------------------
not to (i) sell, transfer, assign, or otherwise dispose, by gift or
otherwise, of any of the Shares or any interest therein, (ii) pledge,
mortgage, hypothecate, or otherwise encumber any of the Shares or any
interest therein, (iii) deposit the Shares or any interest therein into any
voting trust, voting agreement, proxy, or other arrangement of any kind
with respect to the voting of the Shares, or (iv) enter into any contract,
option, or other arrangement with respect, directly or indirectly, to the
foregoing, provided that nothing herein shall be deemed to prohibit (a) the
pledge of any of the Shares pursuant to the terms of any bank credit
agreement, or (b) any Shareholder from making bona fide gifts of any of the
Shares, if the donee of such Shares agrees in writing with Parent to be
bound by the terms of this Agreement. Except as expressly set forth above,
without the prior written consent of Parent, any purported sale, transfer,
assignment, disposition, pledge, mortgage, hypothecation, encumbrance, or
deposit of the Shares or any interest therein, or contract, option, or
other arrangement with respect, directly or indirectly, thereto will be
null, void, and unenforceable and will have no effect on the agreements,
including the proxy, contained in this Agreement.
2.4 Waiver of Appraisal Rights. Such Shareholder waives any rights
--------------------------
of appraisal or rights to dissent from the Merger that such Shareholder may
have.
2.5 Stop Transfer. Each Shareholder hereby severally agrees that
-------------
such Shareholder (i) will not request that the Company register the
transfer (by book-entry or otherwise) of any certificate or uncertificated
interest representing any of such Shareholder's Shares, unless such
transfer is made with Parent's prior written consent, (ii) will tender to
the Company, within fifteen business days of the date of this Agreement,
all certificates representing such Shareholder's Shares for the Company to
inscribe thereupon the following legend: "The shares of Common Stock
represented by this certificate are subject to a Shareholders' Agreement
dated as of [date], and may not be sold or otherwise transferred, except in
accordance therewith. A copy of such Agreement is available for inspection
at the principal executive office of the Company", and (iii) will, within
fifteen business days of the date of this Agreement, no longer hold any
Shares, whether certificated or uncertificated, in "street name" or in the
name of any nominee.
3. Affiliate Status. Each Shareholder hereby severally acknowledges that
----------------
such Shareholder may be deemed an "affiliate" of the Company within the meaning
of Rule 145 ("Rule 145") promulgated under the Securities Act of 1933, as
amended (the "Act"), although nothing contained herein should be construed as an
admission of such fact. Shareholder represents to and covenants with Parent
that such Shareholder will not sell, assign, transfer or otherwise dispose of,
or offer to sell, transfer or otherwise dispose of, the Parent Shares that such
Shareholder receives in the Merger except (i) in conformity with Rule 145, (ii)
pursuant to an effective registration statement under the Act, or (iii) in a
transaction that, in the opinion of independent counsel reasonably satisfactory
to Parent, is exempt from registration under the Act.
36
<PAGE>
4. Stockholder Capacity. Each Shareholder is entering this Agreement in
--------------------
his capacity as the record and beneficial owner of such Shareholder's Shares,
and not in his capacity as a director of the Company.
5. Termination. The obligations of the Shareholders, other than those
-----------
set forth in the last sentence of Section 2.1 and those set forth in Section 3,
shall terminate upon the earlier to occur of (i) termination of the Merger
Agreement in accordance with Article 7 thereof, or (ii) consummation of the
Merger. The date of such termination is referred to herein as the "Termination
Date".
6. Specific Performance. The Shareholders each acknowledge and agree
--------------------
with Parent that irreparable damages would occur in the event that any provision
of this Agreement is not performed in accordance with the terms hereof, that
monetary damages would be an inadequate remedy to Parent, and that Parent shall
be entitled to specific performance of the terms hereof, in addition to any
other remedy at law or in equity.
7. Miscellaneous.
-------------
7.1 Definitional Matters. Any capitalized terms used but not defined
--------------------
in this Agreement shall have the respective meanings that the Merger
Agreement ascribes to such terms. The phrase "including" shall be deemed
to mean "including without limitation".
7.2 Integration. This Agreement embodies the entire agreement and
-----------
understanding among the parties relative to subject matter hereof and
supersedes all prior agreements and understandings relating to such subject
matter.
7.3 Applicable Law. This Agreement and the rights of the parties shall be
--------------
governed by and construed and enforced in accordance with the laws of the
state of Colorado (without regard to its conflicts of laws rules). The
venue for any action hereunder shall be in the state of Colorado, whether
or not such venue is or subsequently becomes inconvenient, and the parties
consent to the jurisdiction of the courts of the state of Colorado and the
U.S. District Court, District of Colorado.
7.4 Counterparts. This Agreement may be executed in several counterparts
------------
and as so executed shall constitute one agreement binding on the parties
hereto.
7.5 Binding Effect. Except as herein or otherwise provided to the
--------------
contrary, this Agreement shall be binding upon and inure to the benefit of
the parties and their respective heirs, successors, assigns and personal
representatives; provided, however, that neither party may assign its
rights or obligations hereunder without the prior written consent of the
other party.
7.6 Notices. All notices, requests and other communications hereunder
-------
shall be given in writing and deemed to have been duly given or served if
personally delivered, or sent by first class, certified mail, return
receipt requested, postage prepaid, to the party at the address as provided
below, or to such other address as such party may hereafter designate by
written notice to the other party:
(a) If to Parent, to the address of its then principal office.
(b) If to Employee, to the address last shown in the records of
Parent.
37
<PAGE>
7.7 Modification. This Agreement shall not be modified or amended except
------------
by a written instrument signed by the parties.
7.8 Severability. The invalidity or partial invalidity of any portion of
------------
this Agreement shall not invalidate the remainder thereof, and said
remainder shall remain in full force and effect. Moreover, if one or more
of the provisions contained in this Agreement shall, for any reason, be
held to be excessively broad as to scope, activity, subject or otherwise,
so as to be unenforceable at law, such provision or provisions shall be
construed by the appropriate judicial body by limiting or reducing it or
them, so as to be enforceable to the maximum extent compatible with then
applicable law.
7.9 Assignment. Neither party may assign its rights or obligations
----------
hereunder without prior written consent of the other party.
7.10 Headings. The section headings contained in this Agreement are
--------
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
ONLINE SYSTEM SERVICES, INC.
By______________________________________
R. Steven Adams
Its: President
[SHAREHOLDERS]
_________________________________________
[Shareholder]
Number of Shares of
Company Stock:__________________
38
<PAGE>
AFFILIATE LETTER
Gentlemen:
The undersigned, a holder of shares of common stock of Durand
Communications, Inc., a California corporation ("DCI") or Online System
Services, Inc., a Colorado corporation ("OSS"), hereby submits this letter
pursuant to Section 6.2(d) of that certain Agreement and Plan of Merger between
DCI, OSS, and Durand Acquisition Corporation, a Minnesota corporation and a
direct wholly owned subsidiary of OSS ("DAC"), pursuant to which DAC will merge
with and into DCI (the "Merger"). The undersigned is either (i) a director of
DCI or OSS, (ii) an officer of DCI or OSS, or (iii) the beneficial owner of five
percent (5%) or more of the outstanding common stock of either DCI or OSS.
The undersigned hereby represents and warrants to and covenants with DCI,
OSS, and DAC that the undersigned will not, for a period commencing on the date
that is thirty (30) days prior to the consummation of the Merger and ending on
the date that is thirty (30) days after financial statements for the combined
companies which include thirty (30) or more days of the operations of the
combined companies have been released to the general public, sell, assign,
transfer, or otherwise dispose any of the securities of DCI or OSS beneficially
owned or otherwise held by the undersigned as of the date of this letter or
acquired on or prior to the date on which such period ends, including securities
received by the undersigned in connection with the Merger.
The undersigned acknowledges that OSS and DCI may instruct their respective
transfer agents to place stop transfer orders on any of such securities for
purposes of carrying the representations, warranties and covenants contained in
this letter into effect.
The undersigned acknowledges that (i) the undersigned has carefully read
this letter and understands the requirements hereof and the limitations imposed
upon the sale, assignment, transfer, or other disposition of securities of DCI
or OSS and (ii) the receipt by OSS of this letter is an inducement and a
condition precedent to OSS's obligations to consummate the Merger.
Dated: _________________, 1998
Very truly yours,
________________________________________
39
<PAGE>
IMPORTANT: PLEASE READ CAREFULLY BEFORE SIGNING.
SIGNIFICANT REPRESENTATIONS ARE CALLED FOR HEREIN.
SECURITIES HOLDER AGREEMENT
AND
UNDERTAKINGS
Online System Services, Inc.
1800 Glenarm Place
Suite 800
Denver, Colorado 80202
Gentlemen:
The undersigned (the "Subscriber") hereby tenders this subscription for the
acquisition of shares of the Common Stock ("Common Stock"), of Online System
Services, Inc., a Colorado corporation (the "Company") and/or options, warrants
or convertible notes of the Company ("Derivative Securities") issued in
replacement of similar securities of Durand Communications, Inc., a California
corporation ("Durand"), which are described in the Memorandum dated
____________, 1998 (the "Memorandum"). The Common Stock and Derivative
Securities are to be issued in connection with the proposed merger ("Merger") of
Durand with and into Durand Acquisition Corporation, a Minnesota corporation and
a direct wholly owned subsidiary of the Company ("DAC"). The Common Stock and
Derivative Securities are hereinafter referred to collectively as the
"Securities." By execution below, the Subscriber acknowledges that the Company
is relying upon the accuracy and completeness of the representations contained
herein in complying with its obligations under applicable securities laws.
1. Subscription Commitment. The Subscriber hereby agrees to the issuance
-----------------------
of the Securities in exchange for Subscriber's shares of the Common Stock of
Durand in connection with the proposed merger of Durand with and into DAC.
The Subscriber understands that this subscription is subject to the
completion of the Merger. Subscriber is the beneficial owner or recordholder of
the number of shares of the Common Stock of Durand indicated under Subscriber's
name on the signature page hereto, and that such number of shares constitutes
all of the shares of Durand Common Stock owned beneficially or of record by the
Subscriber. With respect to such shares, Subscriber has sole voting power, sole
power to dispose and sole power to demand a dissenting shareholder's appraisal
rights, with no restriction on the voting rights, rights of disposition or
otherwise, subject to applicable federal or state securities laws.
2. Representations and Warranties. In order to induce the Company to
------------------------------
accept this subscription, the Subscriber hereby represents and warrants to, and
covenants with, the Company as follows:
(a) The Subscriber has received and had the opportunity to review the
Memorandum and has been given access to full and complete information regarding
the Company and has utilized such access to the Subscriber's satisfaction for
the purpose of obtaining such information regarding the Company as the
Subscriber has reasonably requested; and, particularly, the Subscriber has been
given reasonable opportunity to ask questions of, and receive answers from,
representatives of the Company concerning
40
<PAGE>
the terms and conditions of the offering of the Securities and to obtain any
additional information, to the extent reasonably available.
(b) Except for the Memorandum, the Subscriber has not been furnished with
any other materials or literature relating to the offer and sale of the
Securities; except as set forth in the Memorandum, no representations or
warranties have been made to the Subscriber by the Company, any selling agent of
the Company, or any agent, employee, or affiliate of the Company or such selling
agent.
(c) The Subscriber believes that an investment in the Securities is
suitable for the Subscriber based upon the Subscriber's investment objectives
and financial needs. The Subscriber (i) has adequate means for providing for
the Subscriber's current financial needs and personal contingencies; (ii) has no
need for liquidity in this investment; (iii) at the present time, can afford a
complete loss of such investment; and (iv) does not have an overall commitment
to investments which are not readily marketable that is disproportionate to the
Subscriber's net worth, and the Subscriber's investment in the Securities will
not cause such overall commitment to become excessive.
(d) The Subscriber, in reaching a decision to subscribe, has such knowledge
and experience in financial and business matters that the Subscriber is capable
of reading and interpreting financial statements and evaluating the merits and
risk of an investment in the Securities and has the net worth to undertake such
risks.
(e) The Subscriber was not offered or sold the Securities, directly or
indirectly, by means of any form of general advertising or general solicitation,
including, but not limited to, the following: (i) any advertisement, article,
notice or other communication published in any newspaper, magazine, or similar
medium of or broadcast over television or radio; or (ii) to the knowledge of the
undersigned, any seminar or meeting whose attendees had been invited by any
general solicitation or general advertising.
(f) The Subscriber has obtained, to the extent the Subscriber deems
necessary, the Subscriber's own personal professional advice with respect to the
risks inherent in the investment in the Securities, and the suitability of an
investment in the Securities in light of the Subscriber's financial condition
and investment needs.
(g) The Subscriber recognizes that the Securities as an investment involve
a high degree of risk, including those set forth under the caption "Risk
Factors" in the Memorandum.
(h) The Subscriber Questionnaire previously delivered by the Subscriber to
the Company is true, complete and correct in all material respects as of the
date hereof; the Subscriber understands that the Company's determination that
the exemption from the registration provisions of the Securities Act of 1933, as
amended (the "Act"), which is based upon non-public offerings and applicable to
the offer and sale of the Securities, is based, in part, upon the
representations, warranties, and agreements made by the Subscriber herein and in
the Subscriber Questionnaire referred to above, and the Subscriber consents to
the disclosure of any such information, and any other information furnished to
the Company, to any governmental authority, self-regulatory organization, or, to
the extent required by law, to any other person.
(i) The Subscriber realizes that (i) the purchase of the Securities is a
long-term investment; (ii) the purchaser of the Securities must bear the
economic risk of investment for an indefinite period of time because the
Securities have not been registered under the Act or under the securities laws
of any state and, therefore, the Securities cannot be resold unless they are
subsequently registered under said
41
<PAGE>
laws or exemptions from such registrations are available; and (iii) the
transferability of the Securities is restricted and (A) requires conformity with
the restrictions contained in paragraph 3 below and (B) legends will be placed
on the certificate(s) representing the Securities referring to the applicable
restrictions on transferability.
(j) The Subscriber certifies, under penalties of perjury, that the
Subscriber is NOT subject to the backup withholding provisions of Section
3406(a)(i)(C) of the Internal Revenue Code; and
(k) Stop transfer instructions will be placed with the transfer agent for
the Securities, and a legend may be placed on any certificate representing the
Securities substantially to the following effect:
THIS SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE ACT"), IN
RELIANCE UPON THE EXEMPTIONS FROM REGISTRATION PROVIDED IN THE ACT AND
REGULATION D UNDER THE ACT. AS SUCH, THE PURCHASE OF THIS SECURITY
WAS NECESSARILY WITH THE INTENT OF INVESTMENT AND NOT WITH A VIEW FOR
DISTRIBUTION. THEREFORE, ANY SUBSEQUENT TRANSFER OF THIS SECURITY OR
ANY INTEREST THEREIN WILL BE UNLAWFUL UNLESS IT IS REGISTERED UNDER
THE ACT OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
FURTHERMORE, IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS
SECURITY OR ANY INTEREST THEREIN, WITHOUT THE OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY THAT THE PROPOSED TRANSFER OR SALE DOES NOT
AFFECT THE EXEMPTIONS RELIED UPON BY THE COMPANY IN ORIGINALLY
DISTRIBUTING THE SECURITY AND THAT REGISTRATION IS NOT REQUIRED.
3. Restricted Nature of the Securities. The Subscriber has been advised
-----------------------------------
and understands that (i) the Securities have not been registered under the Act
or applicable state securities laws and that the Securities are being offered
and sold pursuant to exemptions from such laws; and (ii) the Memorandum has not
been filed with or reviewed by certain state securities administrators because
of the limited nature of the offering. The Subscriber represents and warrants
that the Securities will be acquired for the Subscriber's own account and for
investment purposes only, and without the intention of reselling or
redistributing the same; the Subscriber has made no agreement with others
regarding any of the Securities; and the Subscriber's financial condition is
such that it is not likely that it will be necessary to dispose of any of such
Securities in the foreseeable future. The Subscriber is aware that, in the view
of the Securities and Exchange Commission, a purchase of such securities with an
intent to resell by reason of any foreseeable specific contingency or
anticipated change in market value, or any change in the condition of the
Company, or in connection with a contemplated liquidation settlement of any loan
obtained for the acquisition of such securities and for which such securities
were pledged, would represent an intent inconsistent with the representations
set forth above. The Subscriber further represents and agrees that if, contrary
to the foregoing intentions, the Subscriber should later desire to dispose of or
transfer any of such securities in any manner, the Subscriber shall not do so
unless and until (i) said Securities shall have first been registered under the
Act and all applicable securities laws; or (ii) the Subscriber shall have first
delivered to the Company a written notice declaring such holder's
42
<PAGE>
intention to effect such transfer and describe in sufficient detail the manner
and circumstances of the proposed transfer, which notice shall be accompanied
either by a written opinion of legal counsel who shall be reasonably
satisfactory to the Company, which opinion shall be to the Company and
reasonably satisfactory in form and substance to the Company's counsel, to the
effect that the proposed sale or transfer is exempt from the registration
provisions of the Act and all applicable state securities laws, or by a "no
action" letter from the Securities and Exchange Commission to the effect that
the transfer of the Securities without registration will not result in
recommendation by the staff of the Commission that action be taken with respect
thereto.
4 Residence. The Subscriber represents and warrants that the Subscriber
---------
is a bona fide resident of, is domiciled in and received the offer and made the
decision to invest in the Securities in the state set forth on the signature
page hereof, and the Securities are being purchased by the Subscriber in the
Subscriber's name solely for the Subscriber's own beneficial interest and not as
nominee for, or on behalf of or for the beneficial interest of, or with the
intention to transfer to, any other person, trust or organization, except as
specifically set forth in paragraph 13 of this Securities Holder Agreement and
Undertakings.
5 Sophistication. The Subscriber further represents and warrants that
--------------
Subscriber has such knowledge and experience in financial and business matters
so as to be capable of evaluating the merits and risks of an investment in the
Securities and protecting the Subscriber's own interests in this transaction,
and does not desire to utilize the services of any other person in connection
with evaluating such merits and risks.
6. Other Representations, Warranties and Agreements of Subscriber.
--------------------------------------------------------------
(a) The Subscriber hereby waives any rights of appraisal or rights to
dissent from the Merger that the Subscriber may have.
(b) In order to induce the Company to accept this subscription, Subscriber,
for himself/herself/itself and its successors and assigns, hereby represents and
warrants that, as between Subscriber and (i) Durand, (ii) Andre Durand, and
(iii) the directors, officers, shareholders and affiliates of Durand
Communications, Inc. (collectively the "Parties"), Subscriber has no past,
present and future claims, demands, obligations, duties, liabilities, actions,
causes of action, at law or in equity, whether arising by contract, common law,
statute or otherwise, of any kind and nature against or relating to any of the
Parties arising from or in any way relating to any written or oral
representations, agreements or business relationships among any of them entered
into or in existence prior to the date of this Securities Holder Agreement and
Undertakings. The Subscriber specifically and expressly acknowledges and agrees
that this representation and warranty covers known and unknown claims for known
and unknown damages, claims for anticipated or unanticipated damages, and claims
for expected and unexpected consequences of all damages which have heretofore
arisen and which may hereafter arise out of any written or oral representations,
agreements or business relationships among any of the Parties and Subscriber
entered into or in existence prior to the date of this Securities Holder
Agreement and Undertakings.
(c) The Subscriber hereby waives any and all preemptive rights, whether
arising by operation of law, contract or otherwise, which the Subscriber has,
may have or be entitled to with respect to Subscriber's interests in Durand.
43
<PAGE>
(d) The Subscriber hereby waives any and all registration rights (except
for the registration rights granted pursuant to the terms of the Merger
Agreement) which the Subscriber has, may have or be entitled to as a result of
any agreement between Subscriber and any of the Parties regardless of whether
such registration rights exist pursuant to contract or otherwise and regardless
of whether such registration rights relate to the common stock of Durand or any
securities convertible into or exchangeable for such common stock.
7. Reliance on Representations. The Subscriber understands the meaning
---------------------------
and legal consequences of the representations, warranties, agreements,
covenants, and confirmations set out above and agrees that the subscription
hereby may be accepted in reliance thereon. The Subscriber agrees to indemnify
and hold harmless the Company and any selling agent (including for this purpose
their employees, officers, directors, agents and each person who controls either
of them within the meaning of Section 20 of the Securities Exchange Act of 1934,
as amended) from and against any and all loss, damage, liability or expense,
including reasonable costs and attorney's fees and disbursements, which the
Company, or such other persons may incur by reason of, or in connection with,
any representation or warranty made herein (or in the Subscriber Questionnaire
referred to above) not having been true when made, any misrepresentation made by
the Subscriber or any failure by the Subscriber to fulfill any of the covenants
or agreements set forth herein, in the Subscriber Questionnaire or in any other
document provided by the Subscriber to the Company.
8. Transferability and Assignability. Neither this Securities Holder
---------------------------------
Agreement and Undertakings nor any of the rights of the Subscriber hereunder may
be transferred or assigned by the Subscriber. The Subscriber agrees that the
Subscriber may not cancel, terminate, or revoke this Securities Holder Agreement
and Undertakings or any agreement of the Subscriber made hereunder (except as
otherwise specifically provided herein) and that this Securities Holder
Agreement and Undertakings shall survive the death or disability of the
Subscriber and shall be binding upon the Subscriber's heirs, executors,
administrators, successors, and assigns.
9. Survival. The representations and warranties of the Subscriber set
--------
forth herein shall survive the sale of the Securities pursuant to this
Securities Holder Agreement and Undertakings.
10. Notices. All notices or other communications hereunder shall be in
-------
writing and shall be deemed to have been duly given if delivered personally or
mailed by certified or registered mail, return receipt requested, postage
prepaid, as follows: if to the Subscriber, to the address set forth below; and
if to the Company to the address at the beginning of this letter, or to such
other address as the Company or the Subscriber shall have designated to the
other by like notice.
11. (Applicable to FLORIDA residents only.) The Subscriber has been
---------------------------------------
informed and recognizes that (a) the Securities have not been registered under
the Florida Securities Act, and (b) under Section 517.061(11) of the Florida
Securities Act, the Subscriber may void the sale of any Securities within three
(3) days after the tender of this Securities Holder Agreement and Undertakings
and payment hereunder to the Company.
12. Counterparts This Securities Holder Agreement and Undertakings may be
------------
executed in one or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same document.
44
<PAGE>
13. Title. Manner in which title is to be held.
--------
Place an "X" in one space below:
(a) _______ Individual Ownership
(b) _______ Community Property
(c) _______ Joint Tenant with Right of Survivorship (both parties
must sign)
(d) _______ Partnership
(e) _______ Tenants in Common
(f) _______ Corporation
(g) _______ Trust
(h) _______ Other (Describe):
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
Please print above the exact name(s) in which the Securities are to be held.
SIGNATURES
The Subscriber hereby represents he has read this entire Securities Holder
Agreement and Undertakings and the Memorandum.
Dated____________________
INDIVIDUAL
Address to which correspondence should be directed
__________________________________________ __________________________________
Signature (Individual)
__________________________________
__________________________________________ __________________________________
Signature (All record holders should sign) City, State and Zip Code
____________________________________________
__________________________________ Tax Identification or Social Security Number
Name(s) Typed or Printed
( )
____________________________________________
Telephone Number
__________________________________________
__________________________________________
Number of Shares of Common Stock of Durand
Communications, Inc. Owned
45
<PAGE>
46
<PAGE>
CORPORATION, PARTNERSHIP, TRUST, OR OTHER ENTITY
Address to which correspondence should be directed
_____________________________ ____________________________________________
Name of Entity
By:__________________________ ____________________________________________
*Signature City, State and Zip Code
____________________________________________
Its:_________________________ Tax Identification or Social Security Number
Title
( )
____________________________________________
_____________________________ Telephone Number
Name Typed or Printed
____________________________________________
Number of Shares of Common Stock of Durand
Communications, Inc. Owned
*If Securities are being subscribed for by an entity, the Certificate of
Signatory must also be completed.
CERTIFICATE OF SIGNATORY
To be completed if Securities are being subscribed for by an entity.
I,_______________________________, am the _________________________________
of _____________________________________________________________ (the "Entity").
I certify that I am empowered and duly authorized by the Entity to execute
and carry out the terms of this Securities Holder Agreement and Undertakings and
to purchase and hold the Securities, and certify that this Securities Holder
Agreement and Undertakings has been duly and validly executed on behalf of the
Entity and constitutes a legal and binding obligation of the Entity.
IN WITNESS WHEREOF, I have hereto set my hand this ____ day of ___________.
________________________________
Signature
47
<PAGE>
NONCOMPETITION AGREEMENT
This NONCOMPETITION AGREEMENT (the "Agreement") is entered into as of
________________, 1998, by and between ONLINE SYSTEM SERVICES, INC., a Colorado
corporation (the "Corporation"), and _________________ ("Recipient").
RECITALS
A. The Corporation, Durand Communications, Inc., a California corporation
("DCI"), and Durand Acquisition Corporation, a Minnesota corporation
("DAC"), are parties to an Agreement and Plan of Merger of even date
herewith (the "Merger Agreement"), pursuant to which DAC will merge with
and into DCI (the "Merger").
B. Recipient is a shareholder of DCI and will receive shares of the
Corporation's common stock as consideration for the Merger.
C. Following the Merger, it is the Corporation's intent that Recipient will
become an employee of the Corporation and in connection therewith, will be
paid a salary of $________ per year and will be granted options pursuant to
the Corporation's Stock Option Plan of 1995 to purchase ________ shares of
the Corporation's common stock at an exercise price equal to the fair
market value for the Corporation's common stock on the first day of such
employment.
D. As a condition precedent to the closing of the transactions contemplated
herein and in the Merger Agreement, Recipient has agreed to enter into this
Agreement for the benefit of the Corporation and its affiliates.
AGREEMENT
NOW THEREFORE, in consideration of the above recitals and the promises set
forth in this Agreement, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Definitions. The following terms, when capitalized and used herein,
-----------
have the meanings set forth below.
1.1 "Affiliates" means any and all entities owned or controlled by Online
----------
System Services, Inc.
1.2 "Competing Business" means any individual or entity, other than the
------------------
Corporation or its Affiliates, engaged in, or about to become engaged in,
(i) any business that consists of developing, marketing, and supporting
products and services that enable broadband operators to provide high-speed
Internet access to their customers, (ii) any business that consists of
developing, marketing and supporting Internet or Intranet community
building tools and services, training in the use of such tools and services
or hosting an online service for such communities, or (iii) any business
that consists of developing, marketing and supporting Internet or Intranet
courses for colleges, universities and other educational endeavors.
2. Noncompetition. From the date hereof through the date that is the later of
--------------
the (i) third anniversary of the Closing Date (as that term is defined in the
Merger Agreement) or (ii) the first anniversary of Recipient's termination of
employment with the Corporation or any of its Affiliates
48
<PAGE>
(whichever the case may be, the "Restricted Period"), without the prior written
consent of the Corporation, Recipient will not, directly or indirectly, own,
manage, operate, join, control, render services to or assist in any way any
Competing Business which is located anywhere within the United States or any
foreign country in which the Corporation (i) conducts business activities,
whether directly or with or through one or more other companies, or (ii)
licenses its products or services. The foregoing notwithstanding, nothing herein
shall prevent Recipient from purchasing and owning securities of any entity
whose securities are regularly traded on a national exchange or in an
established over-the-counter market, provided that such purchases do not result
in Recipient owning beneficially at any time more than five percent of any class
of securities of any Competing Business.
3. Nonsolicitation. During the Restricted Period, Recipient agrees that
---------------
Recipient shall not, either directly or indirectly, on Recipient's own behalf or
in the service or on behalf of others, (i) solicit, divert, or appropriate, or
attempt to solicit, divert, or appropriate, to any Competing Business, (a) any
person or entity that was a customer of the Corporation during the Restricted
Period or (b) any person or entity from whom the Corporation solicited business
during the last year of the Restricted Period or (ii) solicit, divert, or hire
away, or attempt to solicit, divert, or hire away, to any Competing Business,
any person employed by or providing services to the Company or one of its
Affiliates, whether or not such person is a full-time employee, temporary
employee, or consultant of the Company or such Affiliate and whether or not such
employment or service is pursuant to written agreement and whether or not such
employment or service is at will.
4. Remedies. Recipient and the Corporation acknowledge and agree that
--------
irreparable injury will result to the Corporation and its business if Recipient
breaches this Agreement, and, therefore, in the event of any actual or
threatened breach hereof by Recipient, the Corporation shall be entitled to seek
all rights and remedies available at law and in equity, including without
limitation the right to seek damages for such actual or threatened breach and
the right to seek to enjoin Recipient and all other persons acting in actual or
threatened breach hereof, from commencing or continuing, and to remedy, the
activities which constitute such actual or threatened breach. The Corporation
shall also be entitled to recover from Recipient the Corporation's reasonable
attorneys' fees and costs in any action for the breach hereof in which the
Corporation substantially prevails.
5. Miscellaneous.
-------------
5.1 Integration. This Agreement embodies the entire agreement and
-----------
understanding among the parties relative to subject matter hereof and
supersedes all prior agreements and understandings relating to such
subject matter.
5.2 Employment Agreement. Nothing in this Agreement shall be
--------------------
construed to modify the terms of an employment agreement, if any,
between the Corporation and the Recipient or shall be construed to
constitute, or evidence, an agreement or understanding, whether
express or implied, by the Corporation to (i) employ or retain the
Recipient for any specific period of time or (ii) terminate the
Recipient only for cause.
5.3 Applicable Law. This Agreement and the rights of the parties
--------------
shall be governed by and construed and enforced in accordance with the
laws of the state of Colorado (without regard to its conflicts of laws
rules). The venue for any action hereunder shall be in the state of
Colorado, whether or not such venue is or subsequently becomes
inconvenient, and the parties consent to the jurisdiction of the
courts of the state of Colorado and the U.S. District Court, District
of Colorado.
49
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5.4 Counterparts. This Agreement may be executed in several counterparts
------------
and as so executed shall constitute one agreement binding on the parties
hereto.
5.5 Binding Effect. Except as herein or otherwise provided to the
--------------
contrary, this Agreement shall be binding upon and inure to the benefit of
the parties and their respective heirs, successors, assigns and personal
representatives; provided, however, that neither party may assign its
rights or obligations hereunder without the prior written consent of the
other party.
5.6 Notices. All notices, requests and other communications hereunder
-------
shall be given in writing and deemed to have been duly given or served if
personally delivered, or sent by first class, certified mail, return
receipt requested, postage prepaid, to the party at the address as provided
below, or to such other address as such party may hereafter designate by
written notice to the other party:
(a) If to the Corporation, to the address of its then principal
office.
(b) If to Recipient, to the address last shown in the records of the
Corporation.
5.7 Modification. This Agreement shall not be modified or amended except
------------
by a written instrument signed by the parties.
5.8 Severability. The invalidity or partial invalidity of any portion of
------------
this Agreement shall not invalidate the remainder thereof, and said
remainder shall remain in full force and effect. Moreover, if one or more
of the provisions contained in this Agreement shall, for any reason, be
held to be excessively broad as to scope, activity, subject or otherwise,
so as to be unenforceable at law, such provision or provisions shall be
construed by the appropriate judicial body by limiting or reducing it or
them, so as to be enforceable to the maximum extent compatible with then
applicable law.
5.9 Assignment. Neither party may assign its rights or obligations
----------
hereunder without prior written consent of the other party.
5.10 Headings. The section headings contained in this Agreement are for
--------
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
50
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
ONLINE SYSTEM SERVICES, INC.
By______________________________________
R. Steven Adams
Its: President
[RECIPIENT]
________________________________________
[Recipient]
51
<PAGE>
EXHIBIT 10.7
LICENSE AGREEMENT
This LICENSE AGREEMENT (the "Agreement") is entered into as of October 22,
1997, between Online System Services, Inc., a Colorado corporation ("OSS") with
offices at 1800 Glenarm Place, Suite 1800, Denver, Colorado 80202, and Medical
Education Collaborative, a Colorado nonprofit corporation ("MEC") with offices
at 1800 Jackson Street, Suite 200, Golden CO 80401.
RECITALS
WHEREAS, OSS develops sophisticated, high-end WorldWide Web ("Web")
products for use in connection with the Internet, including standard and custom
Web sites targeted at the health-care industry; and
WHEREAS, MEC is a nationally recognized provider of CME in the health-care
industry; and
WHEREAS, OSS has developed an integrated network or "market space," called
MD Gateway ("MD Gateway"), which provides a Web site through which interested
persons may access medical information and continuing medical education ("CME")
information; and
WHEREAS, OSS owns the URL Web address "www.mdgateway.com" as well as
certain trademarks, copyrights, and other intellectual property rights
associated with MD Gateway; and
WHEREAS, MEC desires to improve its existing online medical information
resources and the ability to provide CME information through the Internet for
physicians, nurses, pharmacists and other health-care professionals, and desires
to do so through a license to certain rights in MD Gateway; and
WHEREAS, OSS desires to license to MEC certain rights in MD Gateway on the
terms and conditions set forth herein,
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and other good and valuable consideration, the sufficiency of
which is hereby acknowledged, the parties hereby agree as follows.
ARTICLE I.
GRANT
-----
1.1 MD Gateway. OSS grants to MEC and MEC accepts an exclusive license to
----------
use, market, advertise and promote the following items:
52
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(a) MD Gateway, including all hardware and software comprising the
integrated network and the Web site, as well as a T1 telecommunications
facility, as identified in Schedule A;
(b) Copies of all documentation related to the hardware and software
of MD Gateway including, but not limited to, user's manuals and customer
support manuals;
(c) All trademarks used in connection with MD Gateway, which
trademarks are portrayed in Schedule B;
(d) All other intellectual property rights in and to MD Gateway
including, but not limited to, copyright to the layout of the Web site and
all materials displayed on the Web site on or before the date of this
Agreement; and
(e) The URL Web address "www.mdgateway.com".
(f) The right to use any capacity on the Tl telecommunications faculty
not required in connection with MD Gateway for other Internet communication
purposes of MEC.
1.2 Scope of Exclusivity. OSS acknowledges and agrees that the exclusive
--------------------
rights granted to MEC in Section 1.1 above exclude both OSS and any third party
(defined as any party other than OSS and MEC) from using, advertising,
marketing, or promoting the rights identified in Section 1.1 above while this
Agreement is in effect.
ARTICLE II.
TERM
----
2.1 Term. This Agreement shall commence on the date set forth above and
----
shall continue in effect for a term of five (5) years from such date, unless
sooner terminated in accordance with the provisions of Article VIII below, or
unless renewed in accordance with Section 2.2 below.
2.2 Automatic Renewal. This Agreement shall automatically renew for
-----------------
additional five-year terms unless MEC gives notice to OSS at least 90 days
before the end of a five-year term of this Agreement expressing its desire that
this Agreement not be extended.
ARTICLE III.
DELIVERY INSTALLATION, ACCEPTANCE, AND TRAINING
---------------------------------- --- --------
3.1 Installation of MD Gateway. Within 30 days of the execution and
--------------------------
delivery of this Agreement, OSS shall deliver to the premises of MEC and install
within such premises all of the hardware and software components of MD Gateway
(as identified in Schedule A). OSS shall also arrange for the installation of a
T1 telecommunications facility to connect the MD Gateway
53
<PAGE>
installation on MEC's premises to an Internet gateway computer network operated
and maintained by OSS.
3.2 Acceptance. Unless MEC, within 30 days after the date of delivery of
----------
MD Gateway, notifies OSS in writing to the contrary, MD Gateway shall be deemed
to be acceptable by MEC as of the date of completion of installation. OSS's
warranty set forth in Section 6.1 shall commence on the date OSS has completed
installation.
3.4 Standard Training. OSS shall provide training to two (2) individuals
-----------------
chosen by MEC. The training shall be sufficient to enable those two individuals
to program and operate MD Gateway at a level adequate to act as a replacement of
OSS as the source of all technical support required by MEC.
3.5 Additional Training. In addition to the training provided pursuant to
-------------------
Section 3.4 above, MEC may request additional training from OSS which OSS may
provide upon terms and conditions acceptable to MEC and OSS.
3.6 Maintenance. MEC acknowledges and agrees that this Agreement does not
-----------
contemplate any on-going maintenance services by OSS of the equipment and
software installed by OSS on MEC's premises pursuant to Section 3.1 above. OSS
acknowledges and agrees that OSS shall be responsible for maintaining the Tl
telecommunications facility connecting the MD Gateway system on MEC's premises
with an Internet gateway computer network operated and maintained by OSS. OSS
further acknowledges and agrees that OSS shall be responsible for the on-going
maintenance of the Internet gateway computer network through which MD Gateway
connects to the Internet and for any on-going maintenance of the redundant
version of MD Gateway and the computer on which it is loaded, all as described
in Section 6.5(c) below.
ARTICLE IV.
PAYMENT
-------
4.1 Royalty. MEC agrees to pay OSS, as a royalty for the rights granted
-------
to MEC under this Agreement and in consideration of all other obligations and
commitments of OSS under this Agreement, a royalty fee based on the MD Gateway
Revenue as defined in Section 4.2 below and the Webmaster cost as defined in
Section 4.3 below. The royalty fee shall be calculated at the end of each
calendar quarter in which this Agreement is in effect. The amount of the
quarterly royalty fee shall be 35 % of the amount by which the quarterly MD
Gateway Revenue exceeds the quarterly Webmaster Cost. If for any given calendar
quarter, the quarterly MD Gateway Revenue is less than the quarterly Webmaster
Cost then the quarterly royalty fee for such quarter shall be $0.00 and the
amount of the deficiency shall be added to and included in the quarterly
Webmaster Cost of the succeeding calendar quarter.
4.2 MD Gateway Revenue. For purposes of this Article IV, MD Gateway
------------------
Revenue shall be the sum of all revenue received by MEC, less any refunds
attributable to such revenue, in connection with its operation of MD Gateway
including, but not limited to:
54
<PAGE>
(1) access and usage fees levied on information users of MD Gateway;
(2) service ("hosting") fees charged to information providers on MD
Gateway; and
(3) advertising fees charged to advertisers on MD Gateway.
4.3 Webmaster Cost. For purposes of this Article IV, Webmaster Cost shall
--------------
be the total cost (salary, benefits and withholdings) incurred by MEC in
connection with the employment of one individual as a Webmaster for MD Gateway.
4.4 Quarterly Statements. On or before the 30th day of the month
--------------------
following each calendar quarter (for purposes of this Agreement, a calendar
quarter shall end on the last day of March, June, September and December), MEC
shall furnish to OSS complete and accurate statements certified to be accurate
by MEC showing the MD Gateway Revenue received and the Webmaster cost incurred
during the preceding calendar quarter. OSS agrees that no statement shall be
due for the calendar quarter ending September 30, 1997; rather, all information
relevant for the month of September 1997 shall be included in the statement due
in January 1998.
4.5 Quarterly Payments. Royalty payments due hereunder shall be due on
------------------
the 30th day of the month following the calendar quarter in which earned, and
payment shall accompany the statements furnished as required above. The receipt
or acceptance by OSS of any of the statements furnished pursuant to this
Agreement or of any royalties paid hereunder (or the cashing of any royalty
checks paid hereunder) shall not preclude OSS from questioning the correctness
thereof at any time, within two years from date thereof, and in the event that
any inconsistencies or mistakes are discovered in such statements or payments,
they shall immediately be rectified and the appropriate payment shall be made by
MEC.
ARTICLE V.
ACCOUNTING
----------
5.1 Books and Records. MEC agrees to keep accurate books of account and
-----------------
records at its principal place of business covering all transactions relating to
the license hereby granted, the MD Gateway Revenue and the Webmaster Cost.
5.2 Reasonable Inspections. OSS shall have the right to examine, in
----------------------
person or through its legal representatives, all MEC books of account and
records described in Section 5.1 above at any time during reasonable business
hours of MEC upon three days prior written notice, subject only to such
protection as may be necessary to prevent further dissemination of the
inventions, trade secrets and other confidential information of MEC.
55
<PAGE>
ARTICLE VI.
REPRESENTATIONS. WARRANTIES. AND ADDITIONAL COVENANTS
-------------------------------------------------------
6.1 Representations of OSS. OSS represents and warrants to MEC as set
----------------------
forth in this Section 6.1. Any inaccuracy of such representations and
warranties as of the date of this License Agreement shall constitute a breach of
this Agreement.
(a) OSS is a corporation duly organized, validly existing and in good
standing under the laws of the State of Colorado, U.S.A. OSS has all
corporate authority to enter into this License Agreement and all other
agreements between OSS and MEC, and to perform its obligations hereunder
and thereunder. All action required of OSS's members and managers and any
other similar action by OSS required to authorize the execution and
delivery of each of the agreements between OSS and MEC has been completed.
(b) This Agreement is a valid and binding obligation of OSS
enforceable against OSS in accordance with its terms.
6.2 Representations of MEC. MEC represents and warrants to OSS as set
----------------------
forth in this Section 6.2. Any inaccuracy of such representations and
warranties as of the date of this Agreement shall constitute a breach of this
Agreement.
(a) MEC is a nonprofit corporation duly organized, validly existing
and in good standing under the laws of Colorado. MEC has all corporate
authority to enter into this Agreement. All actions required of MEC's
management, shareholders and any other similar action by MEC required to
authorize the execution and delivery of this Agreement and all other
agreements between OSS and MEC have been completed.
(b) This Agreement constitutes a valid and binding obligation of MEC
enforceable against MEC in accordance with its terms.
6.3 Warranties of OSS.
-----------------
(a) OSS hereby warrants that OSS is the legal and beneficial owner of
the rights granted to MEC pursuant to the exclusive license set forth in
Article I above, and is the owner of all items to be used in connection
with such grant of rights. OSS hereby agrees to indemnify and hold MEC and
its officers, directors, employees and agents harmless from and against any
and all loss, cost, damage, liability or expense (including without
limitation reasonable attorney's fees, court costs and other reasonable
litigation expenses) suffered, sustained or incurred by MEC or its
officers, directors, employees or agents as a result of, arising out of or
in connection with any breach by OSS of the foregoing warranty and
representation.
56
<PAGE>
(b) OSS agrees to defend or settle, at OSS's expense, any action
brought against MEC based upon or arising out of any infringement by OSS or
MEC's use, marketing, advertising, or promoting of MD Gateway of any
patent, trademark, copyright, trade secret, or other proprietary right.
OSS further agrees to pay any costs, damages, and attorneys' fees finally
awarded against MEC in such action by a court of law, after all appeals,
which are attributable to such claim.
6.4 Warranties of MEC. MEC shall indemnify and hold harmless OSS and its
-----------------
officers, directors, employees, agents and affiliates ("Indemnified Parties")
from and against any and all claims, causes of action, suits, damages,
liabilities, and/or judgments and settlements including all costs, expenses, and
attorneys' and accountants' fees that an Indemnified Party may incur due to any
breach by MEC of any of its representations, and/or warranties, obligations
under this Agreement. MEC shall undertake to conduct the defense of such suit
at its own expense, it being understood, however, that OSS has at all times the
option to participate in, or undertake any litigation involving said matters
through counsel of OSS's own selection and at OSS's own expense, subject to the
indemnity and hold harmless obligations of MEC hereunder with respect to such
expense. MEC shall not make any settlement of any claim, suit, or demand for
which OSS may become responsible hereunder without OSS's written consent, which
shall not be unreasonably withheld.
6.5 Covenants of OSS.
----------------
(a) OSS shall not voluntarily take any action or allow any event
within its control to occur that, in either case, would cause any of the
representations and warranties in section 6.1 to become inaccurate.
(b) During the term of this Agreement, OSS shall not provide Web
development services to anyone other than MEC in connection with any
project which is intended to aggregate medical or CME information provided
by two or more providers. The parties intend for the terms of this Section
to be specifically enforceable.
(c) During the term of this Agreement OSS shall continuously provide
Internet access for MD Gateway and other MEC uses via the T1
telecommunications facility and an Internet Gateway computer network as
described in Section 3.1 above. OSS shall also maintain a redundant
version of MD Gateway on an Internet gateway computer, or a computer
connected to an Internet gateway computer, operated and maintained by OSS,
which version shall serve as the active version of MD Gateway in the event
that the T1, telecommunications facility is down or MD Gateway is otherwise
unavailable from MEC's premises.
(d) During the term of this Agreement OSS shall take all steps
necessary to preserve its ownership interest in the items made subject to
an exclusive license to MEC in Article I.
57
<PAGE>
6.6 Covenants of MEC.
----------------
(a) MEC shall not voluntarily take any action or allow any event
within its control to occur that, in either case, would cause any of the
representations and warranties in section 6.2 to become inaccurate.
(b) During the term of this Agreement, MEC shall not engage or work
with any Internet or Web provider other than OSS to obtain Internet or Web
development services. The parties intend for the terms of this paragraph
(b) to be specifically enforceable.
ARTICLE VII.
OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS
-----------------------------------------
7.1 Rights Owned by OSS.
-------------------
(a) MEC acknowledges and agrees that MD Gateway is and shall remain a
proprietary business asset of OSS, and that OSS retains sole ownership of
all right, title and interest in the items enumerated in Section 1.1 above.
7.2 Rights Owned by MEC.
-------------------
(a) OSS acknowledges and agrees that MEC shall own all rights, title
and interest in any copyrights, trademarks, tradenames, patents, trade
secrets, or other intellectual property which MEC creates as part of its
operation of MD Gateway; provided, however, that MEC shall not acquire
under this Agreement any ownership interest in the trademark "MD Gateway."
ARTICLE VIII.
TERMINATION
-----------
8.1 Defaults On This Agreement. As used herein, the term "default" shall
--------------------------
mean a material breach of this Agreement that is not cured by the breaching
party within 30 days following receipt of written notice of default from the
other party. In the event of a default by either party, the party not in
default shall be entitled to any and all remedies available at law or in equity,
including but not limited to damages, specific performance and/or termination of
this Agreement. This Agreement may be terminated by the party not in default,
at any time following a default, by delivery of a written notice of termination
to the defaulting party, and termination shall take effect immediately upon the
giving of notice hereunder.
8.2 External Conditions. In the event that (i) MEC discontinues operation
-------------------
of MD Gateway, (ii) MEC shall make an assignment for the benefit of creditors,
(iii) MEC shall go into liquidation, or (iv) a trustee is appointed for the
benefit of creditors and the trustee is not discharged within 30 days of his
appointment, whether any of the aforesaid events be the outcome of a voluntary
act of MEC or otherwise, OSS shall be entitled to terminate this
58
<PAGE>
Agreement forthwith by giving notice to such effect to MEC, and termination
shall take effect immediately upon the giving of notice hereunder.
8.3 Preservation of Intellectual Property Rights Under This Agreement.
-----------------------------------------------------------------
The termination of this Agreement for any reason shall be without prejudice to
any of OSS's or MEC's intellectual property rights as described in Article VII
of this Agreement.
8.4 Mutual Obligations. Notwithstanding termination of this Agreement,
------------------
the parties shall be required to carry out any provisions hereof which
contemplate performance by them subsequent to such termination, and such
termination shall not affect any liability or other obligation which shall have
accrued prior to such termination.
8.5 OSS Rights in MD Gateway. In the event of any termination of this
------------------------
Agreement according to the terms hereof, MEC shall immediately discontinue all
use of MD Gateway. All rights to MD Gateway as described in Section 7.1 above
shall automatically revert to OSS and MEC shall promptly execute any and all
documents reasonably required by OSS in connection with such discontinuance and
reversion.
8.6 Return of Equipment. After termination and within twenty-one (21)
-------------------
days from the date of OSS's written notice of termination to MEC, MEC shall at
its cost return to OSS all hems associated with MD Gateway as identified in
Article I.
8.7 MEC Intellectual Property. In the event of termination of this
-------------------------
Agreement, OSS acknowledges that MEC shall own all right, title and interest in
and to all intellectual property described in Section 7.2 above.
ARTICLE IX.
MISCELLANEOUS PROVISIONS
------------------------
9.1 Assignment. This Agreement and the fights granted hereunder cannot be
----------
assigned or otherwise transferred by a party hereto without the prior written
consent of the other party hereto. Any attempted assignment or transfer without
such consent shall be null and void.
9.2 Relationship of the Parties. Nothing herein contained shall be deemed
---------------------------
or construed to constitute either party hereto the agent of the other party
hereto or to create a partnership or joint venture between the parties hereto,
and neither party shall have any power hereunder to obligate or bind the other
party in any manner whatsoever.
9.3 Governing Law and Dispute Resolution. This Agreement shall be
------------------------------------
governed by and interpreted in accordance with the laws of the State of
Colorado. Except as provided in Section 9.4 below, any action, claim or suit
initiated in connection with this Agreement shall be prosecuted exclusively
within the courts of the State of Colorado located in Colorado Springs, except
where exclusive federal jurisdiction applies, in which case an action, claim or
suit initiated in connection with this Agreement shall be prosecuted in US
District Court in Denver.
59
<PAGE>
9.4 Arbitration. In addition to its other rights and remedies under
-----------
Section 9.3 above, either party may require that any dispute concerning this
Agreement, its interpretation or application, including any dispute relating to
either party's right to terminate this Agreement, shall be resolved by mandatory
arbitration as set forth below:
(a) In the event of any disagreement or dispute that a party wishes to
submit to arbitration, such party (the "Initiating Party") may request
arbitration by providing a written "notice of dispute" to the other party
(the "Responding Party") and such notice shall require both parties to
submit to mandatory and binding arbitration. The Initiating Party shall
have the responsibility of notifying the American Arbitration Association's
Denver Regional Office, which shall conduct the arbitration in accordance
with the Commercial Arbitration Rules of the American Arbitration
Association then in effect.
(b) The arbitrators shall have frill power to decide the dispute
presented, including the power to order affirmative or negative injunctive
relief and may award compensatory damages to the prevailing party, if any.
The arbitrators shall also award reasonable attorneys' fees and costs to
the prevailing party. The award rendered by the arbitrators shall be final
and judgment may be entered upon it in accordance with applicable law in
any court of competent jurisdiction.
(c) Arbitration shall be conducted by a three-person panel of
arbitrators (or such lesser number of arbitrators as may be mutually
agreed) in accordance with the Commercial Arbitration Rules of the American
Arbitration Association. The arbitrators shall be chosen by mutual
agreement of the parties, or, if no agreement can be reached, by use of the
procedures of the American Arbitration Association.
(d) The arbitration hearing shall be held in Denver, Colorado.
9.5 Notices. All notices, requests and other communications from one of
-------
the parties hereto to any or all of the others shall be given in writing and
deemed to have been duly given or served if personally delivered, or sent by
first class, certified mail, return receipt requested, postage prepaid, to the
party at the address provided below, or to such other address as such party may
hereafter designate by written notice to the other parties.
If to OSS: Online System Services, Inc.
--------- Attn: Steve Adams, President
1800 Glenarm Place
Suite 1800
Denver, Colorado 80202
60
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If to MEC: Medical Education Collaborative, Inc.
--------- Attn: Charles P. Spickert, President
1800 Jackson Street
Suite 200
Golden, Colorado 80401
9.6 Entire Agreement. This Agreement constitutes the complete and
----------------
exclusive statement of the agreement between the parties, and supersedes all
prior and concurrent proposals and understandings, whether oral or written, and
all other communications between the parties relating to the subject matter of
this Agreement. The parties may, from time to Lime during the continuance of
this Agreement, modify, vary or alter any of the provisions of this Agreement,
but only by an instrument in writing duly executed by all parties hereto.
9.7 Force Majeure. If either party is unable to perform any of its
-------------
obligations under this Agreement. Other than payments due hereunder, or to enjoy
any of its benefits, other than payments clue hereunder, because of (or if loss
of the Equipment is caused by) natural disaster, actions or decrees of
governmental bodies or communications line failure not the fault of the affected
party (a "Force Majeure Event"), the party who has been so affected shall
immediately give notice to the other party and shall do everything possible to
resume performance. Upon receipt of such notice, all obligations under this
Agreement shall be immediately suspended. If the period of nonperformance
exceeds 15 days from the receipt of notice of the Force Majeure Event, the party
whose ability has not been so affected may by giving notice terminate this
Agreement. However, delays in delivery due to Force Majeure Events shall
automatically extend the delivery date for a period equal to the duration of
such Events; any warranty period affected by a Force Majeure Event shall
likewise be extended for a period equal to the duration of such event.
9.8 Consent of a Party. Wherever the consent or approval of a party
------------------
hereto is required pursuant to any provisions of this Agreement, the same shall
not be deemed to have been given unless in writing, signed by the party whose
consent or approval is required.
9.9 Execution of Documents. Each party agrees to and shall execute any
----------------------
and all documents and do any and all acts or things reasonably necessary to
fulfill each party's obligations hereunder, including, if necessary to effect
the intent of the parties or to comply with applicable laws, rulings or
regulations, the execution of two or more separate documents to evidence the
terms and conditions of this Agreement.
9.10 Binding Agreement This Agreement shall be binding upon and inure to
-----------------
the benefit of the legal representatives, parent companies, subsidiaries,
affiliates, related companies, successors, and assigns (subject to approval in
accordance with Section 9.1 above) of the parties hereto.
9.11 Interpretation. In the interpretation of this Agreement, words
--------------
importing the singular number shall include the plural and visa versa words
importing the neuter gender shall include the masculine and feminine gender and
words importing a corporation shall include a
61
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person, except to the extent that such interpretation shall be excluded by or be
repugnant to the context.
9.12 Signatures. The individuals signing this Agreement on behalf of the
----------
parties hereto represent and warrant that they have the requisite authority to
do so and to bind the party for whom they sign to the terms of this Agreement.
9.13 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which when so executed shall be an original, but all of
which together shall constitute one agreement.
Executed as of the date first set forth above.
Online System Services, Inc. Medical Education Collaborative, Inc.
By /s/ R. Steven Adams By /s/ Charles P. Spickert
------------------------------- ----------------------------------
Steve Adams Charles P. Spickert, MPH
President President/CEO
62
<PAGE>
SCHEDULE A
COMPONENTS OF MD GATEWAY
------------------------
Router Cisco 2501 (IOS IP software set, 2-Serial, 1 Ethernet)
Tylink T-1 CSU/DSU
Accton 10BaseT hub (16 Ports)
WebMaster Workstation (Pentium P5-133, 32MB RAM, I.7 GB HD,
4X CD-ROM w speakers, 3.5" FD, Intel Ethernet Express 10X card)
Microsoft Windows NT Workstation 4.0
Maxtech 14" monitor
Web Server -- Physically located in the web server suite at OSS
Software necessary to support existing and planned web site features (as
currently exist in CME Gateway, MD Gateway and CAA), including but not limited
to database, statistics, e-commerce, broadcast e-mail (e.g., Visual InterDev,
SQL Enterprise Manager)
<PAGE>
SCHEDULE B
TRADEMARK RIGHTS ASSOCIATED WITH MD GATEWAY
-------------------------------------------
MD GATEWAY(TM)
<PAGE>
EXHIBIT 10.7
LICENSE AGREEMENT
This LICENSE AGREEMENT (the "Agreement") is entered into as of October
22, 1997, between Online System Services, Inc., a Colorado corporation ("OSS")
with offices at 1800 Glenarm Place, Suite 1800, Denver, Colorado 80202, and
Medical Education Collaborative, a Colorado nonprofit corporation ("MEC") with
offices at 1800 Jackson Street, Suite 200, Golden CO 80401.
RECITALS
WHEREAS, OSS develops sophisticated, high-end WorldWide Web ("Web")
products for use in connection with the Internet, including standard and custom
Web sites targeted at the health-care industry; and
WHEREAS, MEC is a nationally recognized provider of CME in the health-care
industry; and
WHEREAS, OSS has developed an integrated network or "market space," called
MD Gateway ("MD Gateway"), which provides a Web site through which interested
persons may access medical information and continuing medical EDUCATION ("CME")
information; and
WHEREAS, OSS owns the URL Web address "www.mdgateway.com" as well as
certain trademarks, copyrights, and other intellectual property rights
associated with MD Gateway; and
WHEREAS, MEC desires to improve its existing online medical information
resources and the ability to provide CME information through the Internet for
physicians, nurses, pharmacists and other health-care professionals, and desires
to do so through a license to certain rights in MD Gateway; and
WHEREAS, OSS desires to license to MEC certain rights in MD Gateway on the
terms and conditions set forth herein,
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and other good and valuable consideration, the sufficiency of
which is hereby acknowledged, the parties hereby agree as follows.
<PAGE>
ARTICLE 1.
GRANT
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1.1 MD Gateway. OSS grants to MEC and MEC accepts an exclusive license to
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use, market, advertise and promote the following items:
(a) MD Gateway, including all hardware and software comprising the
integrated network and the Web site, as well as a T I telecommunications
facility, as identified in Schedule A;
(b) Copies of all documentation related to the hardware and software of
MD Gateway including, but not limited to, user's manuals and customer support
manuals;
(c) All trademarks used in connection with MD Gateway, which trademarks
are portrayed in Schedule B;
(d) All other intellectual property rights in and to MD Gateway
including, but not limited to, copyright to the layout of the Web site and all
materials displayed on the Web site on or before the date of this Agreement; and
(e) The URL Web address "www.mdgateway.com".
(f) The right to use any capacity on the T1 telecommunications facility
not required in connection with MD Gateway for other Internet communication
purposes of MEC.
1.2 Scope of Exclusivity. OSS acknowledges and agrees that the exclusive
--------------------
rights granted to MEC in Section 1. 1 above exclude both OSS and any third party
(defined as any party other than OSS and MEC) from using, advertising,
marketing, or promoting the rights identified in Section 1. 1 above while this
Agreement is in effect.
ARTICLE 11.
TERM
----
2.1 Term. This Agreement shall commence on the date set forth above and
----
shall continue in effect for a term of five (5) years- from such date, unless
sooner terminated in accordance with the provisions of Article VIII below, or
unless renewed in accordance with Section 2.2 below.
<PAGE>
2.2 Automatic Renewal. This Agreement shall automatically renew for
-----------------
additional five-year terms unless MEC gives notice to OSS at least 90 days
before the end of a five-year term of this Agreement expressing its desire that
this Agreement not be extended.
ARTICLE Ill.
DELIVERY, INSTALLATION, ACCEPTANCE, AND TRAINING
------------------------------------------------
3.1 Installation of MD Gateway. Within 30 days of the execution and
--------------------------
delivery of this Agreement, OSS shall deliver to the premises of MEC and install
within such premises all of the hardware and software COMPONENTS OF MD GATEWAY
(AS IDENTIFIED IN SCHEDULE A). OSS shall also arrange for the installation of a
T I telecommunications facility to connect the MD Gateway installation on MEC's
premises to an Internet gateway computer network operated and maintained by OSS.
3.2 Acceptance. Unless MEC, within 30 days after the date of delivery of MD
----------
Gateway, notifies OSS in writing to the contrary, MD Gateway shall be deemed to
be acceptable by MEC as of the date of completion of installation. OSS's
warranty set forth in Section 6.1 shall commence on the date OSS has completed
installation.
3.4 Standard Training. OSS shall provide training to two (2) individuals
-----------------
chosen by MEC. The training shall be sufficient to enable those two individuals
to program and operate MD Gateway at a level adequate to act as a replacement of
OSS as the source of all technical support required by MEC.
3.5 Additional Training. In addition to the training provided pursuant to
-------------------
Section 3.4 above, MEC may request additional training from OSS which OSS may
provide upon terms and conditions acceptable to MEC and OSS.
3.6 Maintenance. MEC acknowledges and agrees that this Agreement does not
-----------
contemplate any on-going maintenance services by OSS of the equipment and
software installed by OSS on MEC's premises pursuant to Section 3.1 above. OSS
acknowledges and agrees that OSS shall be responsible for maintaining the T1
telecommunications facility connecting the MD Gateway system on MEC's premises
with an Internet gateway computer network operated and maintained by OSS. OSS
further acknowledges and agrees that OSS shall be responsible for the on-going
maintenance of the Internet gateway computer network through which NM Gateway
connects to the Internet and for any on-going maintenance of the redundant
version of MD Gateway and the computer on which it is loaded, all as described
in Section 6.5(c) below.
<PAGE>
ARTICLE IV.
PAYMENT
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4.1 Royalty. MEC agrees to pay OSS, as a royalty for the rights granted to
-------
MEC under this Agreement and in consideration of all other obligations and
commitments of OSS under this Agreement, a royalty fee based on the MD Gateway
Revenue as defined in Section 4.2 below and the Webmaster cost as defined in
Section 4.3 below. The royalty fee shall be calculated at the end of each
calendar quarter in which this Agreement is in effect. The amount of the
quarterly royalty fee shall be 35 % of the amount by which the quarterly MD
Gateway Revenue exceeds the quarterly Webmaster Cost. If, for any given calendar
quarter, the quarterly MD Gateway Revenue is less than the quarterly Webmaster
Cost, then the quarterly royalty fee for such quarter shall be $0.00 and the
amount of the deficiency shall be added to and included in the quarterly
Webmaster Cost of the succeeding calendar quarter.
4.2 MD Gateway Revenue. For purposes of this Article IV, MD Gateway Revenue
------------------
shall be the sum of all revenue received by MEC, less any refunds attributable
to such revenue, in connection with its operation of MD Gateway including, but
not limited to:
(1) access and usage fees levied on information users of MD Gateway;
(2) service ("hosting") fees charged to information providers on MD
Gateway; and
(3) advertising fees charged to advertisers on MD Gateway.
4.3 Webmaster Cost. For purposes of this Article IV, Webmaster Cost shall
--------------
be the total cost (salary, benefits and withholdings) incurred by MEC in
connection with the employment of one individual as a Webmaster for MD Gateway.
4.4 Quarterly Statements. On or before the 30th day of the month following
--------------------
each calendar quarter (for purposes of this Agreement, a calendar quarter shall
end on the last day of March, June, September and December), MEC shall furnish
to OSS complete and accurate statements certified to be accurate by MEC showing
the MD Gateway Revenue received and the Webmaster cost incurred during the
preceding calendar quarter. OSS agrees that no statement shall be due for the
calendar quarter ending September 30, 1997; rather, all information relevant for
the month of September 1997 shall be included in the statement due in January
1998.
4.5 Quarterly Payments. Royalty payments due hereunder shall be due on the
------------------
30th day of the month following the calendar quarter in which earned, and
payment shall accompany the statements furnished as required above. The receipt
or acceptance by OSS of any of the statements furnished pursuant to this
Agreement or of any royalties paid hereunder (or the cashing of any royalty
checks paid hereunder) shall not preclude OSS from questioning the
<PAGE>
correctness thereof at any time, within two years from date thereof, and in the
event that any inconsistencies or mistakes are discovered in such statements or
payments, they shall immediately be rectified and the appropriate payment shall
be made by MEC.
ARTICLE V.
ACCOUNTING
----------
5.1 Books and Records. MEC agrees to keep accurate books of account and
-----------------
records at its principal place of business covering all transactions relating to
the license hereby granted, the MD Gateway Revenue and the Webmaster Cost.
5.2 Reasonable Inspections. OSS SHALL HAVE the right to examine, in person
----------------------
or through its legal representatives, all MEC books of account and records
described in Section 5.1 above at any time during reasonable business hours of
MEC upon three days prior written notice, subject only to such protection as may
be necessary to prevent further dissemination of the inventions, trade secrets
and other confidential information of MEC.
ARTICLE VI.
REPRESENTATIONS, WARRANTIES, AND ADDITIONAL COVENANTS
-----------------------------------------------------
6.1 Representations of OSS. OSS represents and warrants to MEC as set forth
----------------------
in this Section 6. 1. Any inaccuracy of such representations and warranties as
of the date of this License Agreement shall constitute a breach of this
Agreement.
(a) OSS is a corporation duly organized, validly existing and in good
standing under the laws of the State of Colorado, U.S.A. OSS has all corporate
authority to enter into this License Agreement and all other agreements between
OSS and MEC, and to perform its obligations hereunder and thereunder. All action
required of OSS's members and managers and any other similar action by OSS
required to authorize the execution and delivery of each of the agreements
between OSS and MEC has been completed.
(b) This Agreement is a valid and binding obligation of OSS enforceable
against OSS in accordance with its terms.
6.2 Representations of MEC. MEC represents and warrants to OSS as set forth
----------------------
in this Section 6.2. Any inaccuracy of such representations and warranties as of
the date of this Agreement shall constitute a breach of this Agreement.
<PAGE>
(a) MEC is a nonprofit corporation duly organized, validly existing
and in good standing under the laws of Colorado.. MEC has all corporate
authority to enter into this Agreement. All actions required of MEC's
management, shareholders and any other similar action by MEC required to
authorize the execution and delivery of this Agreement and all other agreements
between OSS and MEC have been completed.
(b) This Agreement constitutes a valid and binding obligation of MEC
enforceable against MEC in accordance with its terms.
6.3 Warranties of OSS.
------------------
(a) OSS hereby warrants that OSS is the legal and beneficial owner of
the rights granted to MEC pursuant to the exclusive license set forth in Article
I above, and is the owner of all items to be used in connection with such grant
of rights. OSS hereby agrees to indemnify and hold MEC and its officers,
directors, employees and agents harmless from and against any and all loss,
cost, damage, liability or expense (including without limitation reasonable
attorney's fees, court costs and other reasonable litigation expenses) suffered,
sustained or incurred by MEC or its officers, directors, employees or agents as
a result of, arising out of or in connection with any breach by OSS of the
foregoing warranty and representation.
(b) OSS agrees to defend or settle, at OSS's expense, any action
brought against MEC based upon or arising out of any infringement by OSS or
MEC's use, marketing, advertising, or promoting of MD Gateway of any patent,
trademark, copyright, trade secret, or other proprietary right. OSS FURTHER
agrees to pay any costs, damages, and attorneys' fees finally awarded against
MEC in such action by a court of law, after all appeals, which are attributable
to such claim.
6.4 Warranties of MEC. MEC shall indemnify and hold harmless OSS and its
-----------------
officers, directors, employees, agents and affiliates ("Indemnified Parties")
from and against any and all claims, causes of action, suits, damages,
liabilities, and/or judgments and settlements including all costs, expenses, and
attorneys' and accountants' fees that an Indemnified Party may incur due to any
breach by MEC of any of its representations, and/or warranties, obligations
under this Agreement. MEC shall undertake to conduct the defense of such suit at
its own expense, it being understood, however, that OSS has at all times the
option to participate in, or undertake any litigation involving said matters
through counsel of OSS's own selection and at OSS's own expense, subject to the
indemnity and hold harmless obligations of MEC hereunder with respect to such
expense. MEC shall not make any settlement of any claim, suit, or demand for
which OSS may become responsible hereunder without OSS's written consent, which
shall not be unreasonably withheld.
<PAGE>
6.5 Covenants of OSS.
-----------------
(a) OSS shall not voluntarily take any action or allow any event within
its control to occur that, in either case, would cause any of the
representations and warranties in section 6.1 to become inaccurate.
(b) During the term of this Agreement, OSS shall not provide Web
development services to anyone other than MEC in connection with any project
which is intended to aggregate medical or CME information provided by two or
more providers. The parties intend for the terms of this Section to be
specifically enforceable.
(c) During the term of this Agreement OSS shall continuously provide
Internet access for MD Gateway and other MEC uses via the T1 telecommunications
facility and an Internet Gateway computer network as described in Section 3.1
above. OSS shall also maintain a redundant version of MD Gateway on an Internet
gateway computer, or a computer connected to an Internet gateway computer,
operated and maintained by OSS, which version shall serve as the active version
of MD Gateway in the event that the T1 telecommunications facility is down or MD
Gateway is otherwise unavailable from MEC's premises.
(d) During the term of this Agreement OSS shall take all steps
necessary to preserve its ownership interest in the items made subject to an
exclusive license to MEC in Article 1.
6.6 Covenants of MEC.
-----------------
(a) MEC shall not voluntarily take any action or allow any event within
its control to occur that, in either case, would cause any of the
representations and warranties in section 6.2 to become inaccurate.
(b) During the term of this Agreement, MEC shall not engage or work
with any Internet or Web provider other than OSS to obtain Internet or Web
development services. The parties intend for the terms of this paragraph (b) to
be specifically enforceable.
ARTICLE VII.
OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS
-----------------------------------------
7.1 Rights Owned by OSS.
--------------------
(a) MEC acknowledges and agrees that MD Gateway is and shall remain a
proprietary business asset of OSS, and that OSS retains sole ownership of all
right, title and interest in the items enumerated in Section 1.1 above.
<PAGE>
7.2 Rights Owned by MEC.
--------------------
(a) OSS acknowledges and agrees that MEC shall own all rights, title
and interest in any copyrights, trademarks, tradenames, patents, trade secrets,
or other intellectual property which MEC creates as part of its operation of MD
Gateway; provided, however, that MEC shall not acquire under this Agreement any
ownership interest in the trademark WD Gateway."
ARTICLE VIII.
TERMINATION
-----------
8.1 Defaults On This Agreement. As used herein, the term "default" shall
--------------------------
mean a material breach of this Agreement that is not cured by the breaching
party within 30 days following receipt of written notice of default from the
other party. In the event of a default by either party, the party not in default
shall be entitled to any and all remedies available at law or in equity,
including but not limited to damages, specific performance and/or termination of
this Agreement. This Agreement may be terminated by the party not in default, at
any time following a default, by delivery of a written notice of termination to
the defaulting party, and termination shall take effect immediately upon the
giving of notice hereunder.
8.2 External Conditions. In the event that (i) MEC discontinues operation
-------------------
of MD Gateway, (ii) MEC shall make an assignment for the benefit of creditors,
(iii) MEC shall go into liquidation, or (iv) a trustee is appointed for the
benefit of creditors and the trustee is not discharged within 30 days of his
appointment, whether any of the aforesaid events be the outcome of a voluntary
act of MEC or otherwise, OSS shall be entitled to terminate this Agreement
forthwith by giving notice to such effect to MEC, and termination shall take
effect immediately upon the giving of notice hereunder.
8.3 Preservation of Intellectual Property Rights Under This Agreement. The
-----------------------------------------------------------------
termination of this Agreement for any reason shall be without prejudice to any
of OSS's or MEC's intellectual property rights as described in Article VII of
this Agreement.
8.4 Mutual Obligations. Notwithstanding termination of this Agreement, the
------------------
parties shall be required to carry out any provisions hereof which contemplate
performance by them subsequent to such termination, and such termination shall
not affect any liability or other obligation which shall have accrued prior to
such termination.
8.5 OSS Rights in MD Gateway. In the event of any termination of this
------------------------
Agreement according to the terms hereof, MEC shall immediately discontinue all
use of MD Gateway. All rights to MD Gateway as described in Section 7.1 above
shall automatically revert to OSS and MEC shall promptly execute any and all
documents reasonably required by OSS in connection with such discontinuance and
reversion.
<PAGE>
8.6 Return of Equipment. After termination and within twenty-one (2 1) days
-------------------
from the date of OSS's written notice of termination to MEC, MEC shall at its
cost return to OSS all items associated with MD Gateway as identified in Article
1.
8.7 MEC Intellectual Property. In the event of termination of this
-------------------------
Agreement, OSS acknowledges that MEC shall own all right, title and interest in
and to all intellectual property described in Section 7.2 above.
ARTICLE IX
MISCELLANEOUS PROVISIONS
------------------------
9.1 Assignment. This Agreement and the rights granted hereunder cannot be
----------
assigned or otherwise transferred by a party hereto without the prior written
consent of the other party hereto. Any attempted assignment or transfer without
such consent shall be null and void.
9.2 Relationship of the Parties. Nothing herein contained shall be deemed
---------------------------
or construed to constitute either party hereto the agent of the other party
hereto or to create a partnership or joint venture between the parties hereto,
and neither party shall have any power hereunder to obligate or bind the other
party in any manner whatsoever.
9.3 Governing Law and Dispute Resolution. This Agreement shall be governed
------------------------------------
by and interpreted in accordance with the laws of the State of Colorado. Except
as provided in Section 9.4 below, any action, claim or suit initiated in
connection with this Agreement shall be prosecuted exclusively within the courts
of the State of Colorado located in Colorado Springs, except where exclusive
federal jurisdiction applies, in which case an action, claim or suit initiated
in connection with this Agreement shall be prosecuted in U.S. District Court in
Denver.
9.4 Arbitration. In addition to its other rights and remedies under Section
-----------
9.3 above, either party may require that any dispute concerning this Agreement,
its interpretation or application, including any dispute relating to either
party's right to terminate this Agreement, shall be resolved by mandatory
arbitration as set forth below:
(a) In the event of any disagreement or dispute that a party wishes to
submit to arbitration, such party (the "Initiating Party") may request
arbitration by providing a written "notice of dispute" to the other party (the
"Responding Party") and such notice shall require both parties to submit to
mandatory and binding arbitration. The Initiating Party shall have the
responsibility of notifying the American Arbitration Association's Denver
Regional Office, which shall conduct the arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association then in
effect.
<PAGE>
(b) The arbitrators shall have full power to decide the dispute
presented, including the power to order affirmative or negative injunctive
relief and may award compensatory damages to the prevailing party, if any. The
arbitrators shall also award reasonable attorneys' fees and costs to the
prevailing party. The award rendered by the arbitrators shall be final and
judgment may be entered upon it in accordance with applicable law in any court
of competent jurisdiction.
(c) Arbitration shall be conducted by a three-person panel of
arbitrators (or such lesser number of arbitrators as may be mutually agreed) in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association. The arbitrators shall be chosen by mutual agreement of the parties,
or, if no agreement can be reached, by use of the procedures of the American
Arbitration Association.
(d) The arbitration hearing shall be held in Denver, Colorado.
9.5 Notices. All notices, requests and other communications from one of the
-------
parties hereto to any or all of the others shall be given in writing and deemed
to have been duly given or served if personally delivered, or sent by first
class, certified mail, return receipt requested, postage prepaid, to the party
at the address provided below, or to such other address as such party may
hereafter designate by written notice to the other parties.
If to OSS: Online System Services, Inc.
- - -----------
Attn: Steve Adams, President
1800 Glenarm. Place
Suite 1800
Denver, Colorado 80202
If to MEC: Medical Education Collaborative, Inc.
- - -----------
Attn: Charles P. Spickert, President
1800 Jackson Street
Suite 200
Golden CO 80401
9.6 Entire Agreement. This Agreement constitutes the complete and exclusive
----------------
statement of the agreement between the parties, and supersedes all prior and
concurrent proposals and understandings, whether oral or written, and all other
communications between the parties relating to the subject matter of this
Agreement. The parties may, from time to time during the continuance of this
Agreement, modify, vary or alter any of the provisions of this Agreement, but
only by an instrument in writing duly executed by all parties hereto.
<PAGE>
9.7 Force Majeure. If either party is unable to perform any of its
-------------
obligations under this Agreement, other than payments due hereunder, or to enjoy
any of its benefits, other than payments due hereunder, because of (or if loss
of the Equipment is caused by) natural disaster, actions or decrees of
governmental bodies or communications line failure not the fault of the affected
party (a "Force Majeure Event"), the party who has been so affected shall
immediately give notice to the OTHER PARTY AND shall do everything possible to
resume performance. Upon receipt of such notice, all obligations under this
Agreement shall be immediately suspended. If the period of nonperformance
exceeds 15 days from the receipt of notice of the Force Majeure Event, the party
whose ability has not been so affected may by giving notice terminate this
Agreement. However, delays in delivery due to Force Majeure Events shall
automatically extend the delivery date for a period equal to the duration of
such Events; any warranty period affected by a Force Majeure Event shall
likewise be extended for a period equal to the duration of such event.
9.8 Consent of a Party. Wherever the consent or approval of a party hereto
------------------
is required pursuant to any provisions of this Agreement, the same shall not be
deemed to have been given unless in writing, signed by the party whose consent
or approval is required.
9.9 Execution of Documents. Each party agrees to and shall execute any and
----------------------
all documents and do any and all acts or things reasonably necessary to fulfill
each party's obligations hereunder, including, if necessary to effect the intent
of the parties or to comply with applicable laws, rulings or regulations, the
execution of two or more separate documents to evidence the terms and conditions
of this Agreement.
9.10 Binding Agreement. This Agreement shall be binding upon and inure to
-----------------
the benefit of the legal representatives, parent companies, subsidiaries,
affiliates, related companies, successors, and assigns (subject to approval in
accordance with Section 9.1 above) of the parties hereto.
9.11 Interpretation. In the interpretation of this Agreement, words
--------------
importing the singular number shall include the plural and visa versa words
importing the neuter gender shall include the masculine and feminine gender and
words importing a corporation shall include a person, except to the extent that
such interpretation shall be excluded by or be repugnant to the context.
9.12 Signatures. The individuals signing this Agreement on behalf of the
----------
parties hereto represent and warrant that they have the requisite authority to
do so and to bind the party for whom they sign to the terms of this Agreement.
9.13 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which when so executed shall be an original, but all of
which together shall constitute one agreement.
<PAGE>
Executed as of the date first set forth above.
Online System Services, Inc. Medical Education Collaborative, Inc.
By: /s/ Steve Adams By: /s/ Charles P. Spickert, MPH
------------------------ --------------------------------
Steve Adams, Charles P. Spickert, MPH,
President President/CEO
<PAGE>
SCHEDULE A
COMPONENTS OF MD GATEWAY
------------------------
Router Cisco 2501 (IOS IP software set, 2-Serial, I Ethernet)
Tylink T-1 CSU/DSU
Accton 10BaseT hub (16 Ports)
WebMaster Workstation (Pentium P5-133, 32MB RAM, 1.7 GB HD,
4X CD-ROM w speakers, 3.5 " FD, Intel Ethernet Express I OX card)
Microsoft Windows NT Workstation 4.0
Maxtech 14" monitor
Web Server - Physically located in the web server suite at OSS
Software necessary to support existing and planned web site features (as
currently exist in CME Gateway, MD Gateway and CAA), including but not limited
to database, statistics, e-commerce, broadcast e-mail (eg, Visual InterDev, SQL
Enterprise Manager)
<PAGE>
SCHEDULE B
TRADEMARK RIGHTS ASSOCIATED WITH MD GATEWAY
-------------------------------------------
MD GATEWAY/TM/
<PAGE>
SCHEDULE B
TRADEMARK RIGHTS ASSOCIATED WITH MD GATEWAY
-------------------------------------------
MD GATEWAY/TM/
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation 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 this Form 10-KSB,
into Online System Services, Inc.'s previously filed Registration Statement No.
333-13983 on Form S-8.
Arthur Andersen LLP
Denver, Colorado
March 31, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM ONLINE SYSTEM
SERVICES, INC. FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,680,282
<SECURITIES> 0
<RECEIVABLES> 759,389
<ALLOWANCES> 58,059
<INVENTORY> 235,441
<CURRENT-ASSETS> 5,087,478
<PP&E> 1,370,003
<DEPRECIATION> 354,371
<TOTAL-ASSETS> 6,326,491
<CURRENT-LIABILITIES> 1,219,306
<BONDS> 585
0
1,483,282
<COMMON> 8,635,075
<OTHER-SE> (5,011,757)
<TOTAL-LIABILITY-AND-EQUITY> 6,326,491
<SALES> 1,117,358
<TOTAL-REVENUES> 2,791,556
<CGS> 972,260
<TOTAL-COSTS> 1,993,521
<OTHER-EXPENSES> 4,341,612
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,375,279)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,375,279)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,375,279)
<EPS-PRIMARY> (1.05)
<EPS-DILUTED> (1.05)
</TABLE>
