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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, 1998 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, Suite 700, 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:
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
--- ---
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, 1998: $1,584,380
Aggregate market value of voting stock held by non-affiliates of registrant
as of April 1, 1999: Approximately $80,349,587.
Number of shares outstanding as of April 1, 1999: 5,600,465 shares of common
stock, no par value, and 1,268,300 common stock purchase warrants. The Warrants
expire on May 23, 1999 and represent the right to acquire 634,150 shares of
registrant's common stock at a purchase price of $9.00 per share.
Documents incorporated by reference: None
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PART I
Item 1. DESCRIPTION OF BUSINESS.
General
OSS develops, markets and supports products and services that enable
individuals and organizations to create and manage their own Internet Web
presence and online communities. We have developed a proprietary suite of Web
site development tools, known as WEBBbuilder and Portal Objects (formerly
marketed under the i2u brand), which enables individuals and organizations to
create their own personal/organizational portals. We have targeted the
following market opportunities:
. Community - Customized community and communication portals or start pages
for broadband operators who provide Internet access.
. Consumer - Personal portals for individual Internet users.
. Enterprise - Internet and Extranet services for businesses, associations
and government institutions.
. Education - Classroom applications for elementary and secondary schools,
including parent/teacher communications, virtual campuses for colleges and
universities and online classrooms for corporate training.
. Financial Services - Online banking services for banks, credit unions and
other financial institutions.
Prior to the third quarter of 1997, our 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. Each of these activities involved, to varying
degrees, the building of online communities and the development of tools and
services to allow for the building of strategic and customized Web sites. As an
outgrowth of these activities, since mid 1997, our business has evolved to the
development of online communities and more recently, the development of personal
and organizational portals.
Underpinning the evolution of our products and services is our belief that
the Internet is evolving from its origins as an information access and delivery
tool to one that supports communications and community interactivity. The
WEBBbuilder software includes sophisticated personal communications tools which
allow users to establish, maintain and enhance online communications with
others. These communications tools include:
. E-Mail services . Virtual communities
. Chat . Calendars
. Instant messaging . Conferencing
. Newsletters . Friends online
There are many portals available to Internet users today. These portals
categorize and organize the Internet to varying degrees, with the goal of
helping individuals and organizations find valuable information on the Internet.
We believe our personal/organizational portals can be differentiated from other
portals in three key respects:
. "Stay" not "start". Many traditional portals offer some level of
personalization in order to attract and retain membership. These portals,
or start pages, generally enable users to establish links to other Web
sites, thereby serving as a springboard, taking users out and away from
the portal site. Our products are designed to maximize personalization in
order to retain attention and keep users on our network of hosted sites.
. Easy personalization/customization. Our software allows users to select
from a list of Portal Objects as well as general Internet content to
create a personal Internet experience.
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. Interactive communications. Our software includes a full range of Internet
communications capabilities that supports communications and
interactivity.
As part of our product enhancement efforts, we have agreed to acquire Durand
Communications, Inc., a developer and marketer of Internet "community" building
tools and services which allow users to set up their own password-protected
virtual communities. DCI's CommunityWare product has been integrated into our
suite of products and services. In March 1999, we completed the acquisition of a
majority interest in NetIgnite 2, LLC. NetIgnite is applying emerging
technologies to develop private-label Web-based services that allow directory
publishers, search engines and ISPs to enhance end-user and advertiser value by
facilitating data-driven comparison shopping and the development of business Web
pages via telephone response systems. We expect NetIgnite's first products to be
available around mid 1999.
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's Discussion and Analysis of Financial Condition and Results of
Operations," and "Item 7 Financial Statements" before making an investment
decision with regard to our stock.
Certain statements made in this report in the sections referenced
above and elsewhere in this report constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). These statements are subject to the safe harbor provisions of
the Reform Act. Forward-looking statements may be identified by the use of the
terminology such as "may," "will," "expect," "anticipate," "intend," "believe,"
"estimate," "should," or "continue" or the negatives thereof or other variations
thereon or comparable terminology. To the extent that this report contains
forward-looking statements regarding our financial condition, operating results,
business prospects or any other aspect of our business, you should be aware that
our actual financial condition, operating results and business performance may
differ materially from that projected or estimated in the forward-looking
statements. We have attempted to identify, in context, certain of the factors
that we currently believe may cause actual future experience and results to
differ from their current expectations. These differences may be caused by a
variety of factors, including but not limited to adverse economic conditions,
intense competition, including entry of new competitors, ability to obtain
sufficient financing to support our operations, progress in research and
development activities, variations in costs that are beyond our control, adverse
federal, state and local government regulation, unexpected costs, lower sales
and net income (or higher net losses) than forecasted, price increases for
equipment, inability to raise prices, failure to obtain new customers, the
possible fluctuation and volatility of our operating results and financial
condition, inability to carry out marketing and sales plans, loss of key
employees, and other specific risks that may be alluded to in this report.
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. 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 for entertainment, communication, and the conduct of
business, creating new sources of revenue for ISPs, 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 28.8
Kbps. At these rates, to send an image filling a computer screen with a color
photograph requires about 16
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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 2002, 65% of U.S.
households will have PCs and 34% of U.S. households will be online. (See
eMarketer, March 1999 and Dataquest, February 1999.) 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.
[GRAPH APPEARS HERE]
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. 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"). 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
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"). The following table demonstrates
comparative data transmission speeds.
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Comparative Data Transmission Speeds
<TABLE>
<CAPTION>
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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
- ------------------------------------------------------------------------------------------------
</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
- ------------------------------------------------------------------------------------------------
</TABLE>
OSS Strategy
Our products and services are designed to enhance the online
experience by providing users with personalized web spaces and by enabling users
to set up their own virtual online communities. By providing the products and
services required for individuals, ISPs, businesses, educational institutions,
associations and governmental bodies to establish and maintain online
communities, we believe we can establish our products and services as unique
channels for the distribution of Internet products, advertising and services.
Our strategies to achieve our growth objectives include:
Gain Early Market Share. We believe technological convergence is
occurring rapidly in the areas of television, telecommunications, PC's 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 transmissions problem are developed, we believe that Internet users will
increasingly use ISPs that can deliver high data transmission speeds. Of the
various broadband operators, we believe 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 drive
high-speed Internet access at competitive rates. For this reason, we have
developed product and service offerings specifically for cable television
operators which permits the generation of Internet Web site content by
individuals, local merchants and others. This product and service offering is
intended to capitalize on the enhanced capabilities available through broadband
access to the Internet and provides the operators with a local content start
page and our software, including our personal and organizational portal
services.
Expand Product Offering. We believe that it is important to
continually expand the functionality and performance of our product and service
offerings. Underpinning the evolution of the WEBBbuilder platform is our belief
that the Web is evolving from its origins as an information access and delivery
tool to one that supports communication and community interactivity. By
developing premium products and services, we believe we can enhance the user's
online experience and foster loyalty among the user base. Product enhancements
currently planned include:
. Improved Communications Capabilities -- including Web-based e-mail,
calendar, file management and task list functionality.
. Settop Delivery -- modifications to enable users with settop
devices (e.g., digital settops and WebTV) with Internet capability
to display and interact with our portal services.
. Video-based Advertising -- short and long form interactive
advertising that can leverage consumer profile and Internet usage
data to present targeted product information to users.
. Premium Content -- developing product offerings such as archived
television programming, low latency (fast paced, interactive) games
and video conferencing which will be tailored to the high-speed
connection afforded by broadband operators.
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. Training and Education -- products designed to use multimedia
content to enhance computer-mediated learning.
As part of our product enhancement efforts, we have agreed to acquire
DCI, a developer and marketer of Internet "community" building tools and
services which allow users to set up their own password-protected virtual
communities. DCI's CommunityWare product has been integrated into our suite of
products and services. During March we also acquired a majority interest in
NetIgnite 2, LLC, a company developing private-label Web-based services that
allow directory publishers, search engines and ISPs to enhance end-user and
advertising value by facilitating data-driven comparison shopping and the
development of business Web pages via telephone response systems.
Leverage platform software. Our product development strategy also
includes leveraging our core community building software technology to develop
products for particular industries, companies, educational institutions,
governmental institutions, markets or consumer needs. We have utilized our
WEBBbuilder and Portal Object foundation software to develop products for our
targeted markets and expect to continue to develop additional online products
tailored to these markets.
Aggregate Subscribers. We believe that the interactive and computer-
based nature of the Internet makes it possible to offer highly sophisticated
target marketing to individuals or groups of Internet users. The geographic
areas served by ISP's, the community's online members, and the aggregation of
members with similar interests across multiple communities all represent
potential channels of distribution for Internet products, advertising and
services. We have planned upgrades to our software which will permit the
aggregation of community member profiles (collected as part of the registration
process) as well as track and analyze site usage. We intend to offer community
members the opportunity to receive product information (e-mail, electronic
brochures, videos, etc.) of specific interest to them. It is our belief that
these "addressable advertisements" will be an effective alternative to the
current environment which inundates the average American consumer with several
thousand media impressions per day, most of which are believed to be of little
or no interest.
Acquisitions. We intend to seek acquisition candidates that add
immediate revenue, provide product or technology enhancements in one or more of
our targeted markets or provide an existing customer base to increase
advertising or e-commerce opportunities.
Strategic Alliances. To enhance our products and services, accelerate our
speed to market and to provide additional revenue-generating opportunities, we
expect to enter into strategic agreements and partnerships with companies that
can provide additional technologies, such as IP telephony and IPMulticast.
Products and Services
Our WEBBbuilder product enables individuals and organizations to
create their own personal or organizational portals. Individual and business
users can begin with a defined template as a starting point. Then, by simply
clicking, dragging and dropping specific capabilities onto their portal page,
they can create their own personal or organizational portal. We are scheduled to
deliver two product upgrades during 1999. Features to be included or enhanced
in the June release include personal portals, commerce, Web-based e-mail, new
message forums and new portal objects. Incorporated into WEBBbuilder with the
product release scheduled for the fourth quarter of 1999 will be proprietary
technology that will enable users to share a specific object that has pre-
populated content. Essentially, the Shared WEBBspace technology will allow an
individual or organization to grant permission to someone else to drop an
already customized or populated object from one portal onto another, not as a
link but as embedded content. Additional improvements scheduled for the fourth
quarter release include enhanced personalization, customization and
private-label capabilities. We also expect to begin integrating the NetIgnite
technology with our WEBBbuilder technology during the fourth quarter of 1999
(see "Acquisition of NetIgnite").
We provide various services designed to facilitate development of
online communities and local/user-generated content. These services include:
. Providing onsite launch specialists before and at the time the
service is commenced;
. Providing in-market regional or city managers to support local
content development on an on-going basis for our Community products
and services;
. Developing and distributing marketing materials; and
. Developing incentive programs for online moderators and promotional
partners.
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We intend to expand existing services and to develop additional community-
building and support services.
Our products and services, all of which utilize our WEBBbuilder
software platform, are marketed under five product groupings: Community;
Consumer; Enterprise; Education; and Financial Services. Revenue sources for
each of these product groupings include license fees which may be based on a
percentage of revenues derived by our customers through the use of our licensed-
products and services; custom development and premium services fees;
advertising; and transaction fees and fees based on e-commerce activities. To
date, we have recognized application license fees for our Community products and
services and custom development and application license fees for our Enterprise,
Education and Financial products and services. In addition, for our Community
products and services grouping, we have recognized revenues for the sale of
equipment and for providing Internet access services for certain of our
broadband operator customers. With our increasing focus on software-based
products and services, we have elected to phase-out our Internet access products
and services and do not expect revenues from these sources to be significant in
the future. To date, we have not recognized any revenues in connection with our
Consumer product grouping, nor have we received any fees from advertising or e-
commerce activities. Generally, we do not expect to recognize any significant
revenues from these activities until our user base and the user base of our
business partners are large enough to attract advertisers and distribution
partners.
Community
Content Software. Our Community software enables broadband operators
and other communications companies to create complex Web sites where content
itself is generated and updated by the people who use the Community Web site.
Using very simple, on-screen templates, individuals and businesses can post
information about their interests and services. Furthermore, by allowing users
to participate in the development of the community, we believe 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 study by New York City-based FIND/SVP predicts that in 1998 more
than 24 million adults would use 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. Our
content products and services include:
Revenue Opportunities. We believe that high-value, useful local
content offers the opportunity for additional revenue streams for us
and our distribution partners. We and our ISP partners can obtain a
valuable database on users including their interests, purchasing
history and community Web site usage which can be used for highly-
targeted marketing campaigns. This information, with the consent of
the user, may be used by us and our ISP partners or sold to outside
organizations and advertisers for their use.
Our software ties the content of all of the user interactions within
the community sites into electronic commerce opportunities and
automatically serves banner advertising and direct purchasing
opportunities to users based upon the local content they are viewing.
In addition, areas within the site are available for sponsorship and
offer merchants the ability to obtain a unique commercial presence.
For example, a forum on commercial law and an accompanying weekly live
chat group could be sponsored by a local law office or a forum on car
repairs could be sponsored by an auto parts dealer. Sponsorship
opportunities of this nature provide businesses with the ability to
control both the media (content) and medium (advertising vehicle).
Our software enables ISPs to offer premium services for a fee.
Examples of such services include personalized URLs (Internet
addresses), enhanced business and consumer Web pages, integrated
personal communication tools and software and video content on a
subscription or pay-per-use basis.
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Local Content Development Areas. Our current software provides five
specific areas that generate local content:
. Personal home pages and communication tools;
. Business Web pages;
. Business directory listings;
. Community and events listings; and
. Online discussion forums.
To use the community 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. We believe 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 system provides businesses with a low-cost means for preparing a
business Web page while also providing new revenue streams. Business
owners need only fill out on-screen forms to self-create their Web page and
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 system.
Users can search for information on current and upcoming events while out-
of-date events are automatically deleted from the system.
Our software lets users communicate online about any subject. They can
share ideas and concerns with other members of the local community. The
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 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 of flowers where the user can
click and instantly order the bouquet for delivery from a local florist.
Core Business Support. Our software enables broadband operators or other
community members to promote their core business. In the case of cable
operators, we include a channel guide. The operator can promote pay-per-
view events and enhanced services such as pay channels. The software also
integrates content from national providers of interest to the local
communities.
National Content. Localized, national content includes weather, yellow
page listings and news and information. For example, we have established
an arrangement with InfoSpace, a Washington state aggregator of community
listings and information, whereby InfoSpace provides its content to us at
low cost in return for advertising. We believe that integrating content of
this nature extends the utility of the our offering, particularly in the
first months following installation, as user-generated information is being
developed.
Online Commerce. 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
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turn of the century. Planned upgrades to the system are expected to help
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.
We install and maintain our community-building and communications software
for each system within our operations center. We are exploring strategic
relationships with satellite companies and other vendors to multicast IP data to
ISPs and broadband operators. Satellites are expected to be used to deliver
popular Web sites to caching servers located at the cable system headend, and
are expected to serve as the primary delivery vehicle for high-bandwidth
content.
Consumer
As individuals continue to integrate the Internet into their daily lives,
we believe they will seek products that provide them with greater control and
flexibility. This is, by nature, a more localized, more personal and more
integrated culmination of their interest into their online space. With our
WEBBbuilder software, individuals can build their personal Internet, including
links to their favorite Web sites, community listings for their affiliated
groups and their favorite stores, all on one page. Individuals can build
communities, join communities and initiate chat or join chat. Their personal
portal can be changed over time and may grow in sophistication as they become
more knowledgeable. Our goal is to make this an individual's best of the Web,
their true personal portal. Our personal product offering, which currently is
included with our Community products and services, will also be offered direct
to consumers. Our goal is to aggregate all users of our personal portal products
and services, including those who access these products and services through the
Community product offering, to provide advertising and e-commerce opportunities.
In addition, we may license our community tools to high-traffic sites and may
charge consumers for premium services which will be available on a fee-for-use
basis.
Enterprise
Our Enterprise products and services enable businesses, associations, and
government institutions to create commerce-enabled Internet, Intranet, and
Extranet services. These Enterprise portals provide a place where people from
the business, association or government institution can meet and communicate in
real-time, use online discussions for information exchange and share files.
Standard features include:
. Communication tools, including instant messaging, conferencing, message
forums, newsletters and event calendars.
. Resource material management, including employee handbooks, policy
manuals, document templates, telephone listings and organization charts.
. Service bureau convenience of hosting, online billing and member
management.
. E-commerce and transactional services.
We are focusing the distribution of these products and services on vertical
market opportunities, distribution ventures, resellers, and direct customer
sales.
RE/MAX International, Inc., a large international real estate brokerage
company, is utilizing a customized version of the Enterprise software called
"RE/MAX Mainstreet" to link its real estate agents, management and approved
suppliers worldwide. Users can quickly gain access to RE/MAX's private community
with simple, online enrollment. The system makes it easy to transfer company
resource materials and forms, and for members to share ideas, information and
referrals in real-time. We intend to expand features for this product to include
online convention registration, electronic commerce with approved suppliers,
integrated product management software and online education and training. We
were paid a fee for the development of the system and receive ongoing revenues
based on the use of the system.
The American Society of Association Executives has 24,000 members
representing over 10,000 associations. The Union of International Association
estimates that there are over 44,000 associations worldwide. We believe that the
Enterprise software is well suited to bring together association members online,
in order to
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replace costly mailings or time consuming and expensive meetings. Utilizing this
software, member discussions could happen anytime, information could be
disseminated instantaneously and inexpensively and membership surveys could
happen in real-time.
Education
Our education market segments include K-12, higher education and
corporate training and career development. For the K-12 market, our software
provides schools the ability to create online communities that facilitate
communication and information exchange among teachers, administrators, parents
and students. Through our education products and services, we provide colleges
and universities with the following services:
. Virtual campuses-Our product provides a virtual campus, including
an academic center, classrooms, administration, counseling, library
services, student union, campus store and continuing education.
. Hosting services-We host the virtual campus and classroom and
provide all infrastructure and related technical services required
for an annual service fee.
. Marketing services-We provide colleges and universities with online
and print and other media marketing materials and services.
. Professional development and training services-We provide onsite
counseling and resources for faculty, administrators and staff to
help them take maximum advantage of our education products and
services.
During March 1999, we commenced a pilot project with Tele-
Communications, Inc.'s ("TCI") education project whereby we are deploying online
school community Web sites utilizing our software and hosted by us. This
product is designed to enable teachers, students and parents to more effectively
use Web technology by fostering parent-teacher interaction and educational
resources and information sharing.
We believe that our Education products and services are also well-
suited to facilitate distant learning for corporate training and career
development.
Financial Services
We have developed an online banking solution specifically targeted at
smaller financial institutions having less than $500 million in assets. As of
the end of 1997, there were over 10,000 FDIC-insured financial institutions in
the U.S., 90% of which are believed to have assets of $500 million or less. In
addition, there were over 11,000 federally and state chartered credit unions,
almost all of which are believed to have assets of $500 million or less. Our
financial services solution is based on transactional foundation software from
Edify Corporation. The Edify software has been chosen by many corporations and
financial institutions and is the foundation of the Web-banking systems of some
of the nation's largest banks.
We have taken a service bureau approach to e-banking, which enables us
to provide smaller community banks and credit unions with many of the
capabilities and services available to the larger banks without the cost
associated with the development of bank-specific systems. Our 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. We are currently 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 us whereby
we have developed the Internet solution with applications customized
specifically for the needs of RFCU membership, and have integrated Edify's
Electronic Banking System and CheckFree's bill payment system with RFCU's host
system. Under the terms of the agreement, we have received revenue for system
development and are receiving a monthly fee per member for providing the online
banking services.
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During February 1999, we entered into an agreement with CU Cooperative
Systems, Inc., a national co-operative association representing over 500 credit
unions, pursuant to which we are developing an Internet e-banking solution for
the co-op's members with applications customized for the needs of the co-op and
its members. Under terms of the agreement, we are receiving income for system
development and will receive fees from individual credit unions who belong to
the co-op and who elect to use our e-banking services and ongoing fees based on
these credit unions' members' use of the system. We do not expect any
significant fees from the use of the system until 2000.
Proposed Acquisition of DCI
On March 19, 1998 we executed an Agreement and Plan of Merger (the "DCI
Merger Agreement") pursuant to which we agreed to acquire Durand Communications,
Inc., a California corporation ("DCI"), via a merger of our wholly owned
subsidiary, Durand Acquisition Corporation, with DCI (the "DCI Merger"). We
anticipate that the DCI Merger will occur in the second quarter of 1999.
A significant element of our strategy to achieve our growth objective is to
seek acquisitions that add immediate revenue, provide product or technology
enhancements in one or more of our targeted markets or provide an existing
customer base to increase advertising or e-commerce opportunities. Our
acquisition of DCI will provide us with DCI's technology, including both
completed technology and technology in development, and product development
expertise.
Our product development strategy is based upon our belief that the Web is
evolving from an information access and delivery tool to a system that supports
communication and community interactivity. We believe that DCI's CommunityWare
technology, which enables users to organize themselves on the Internet in a
matter of minutes, and to thereafter manage and expand their own public and
private online community to facilitate and promote communications, information
sharing and commerce among the users that comprise the various constituent
communities, is particularly well suited for providing the communications
component for our software. Since the execution of the DCI Merger Agreement,
representatives of DCI and OSS have worked together to incorporate the
CommunityWare technology into our software. Following the DCI Merger, we intend
to fully integrate DCI's product development efforts with our own and we expect
to fully integrate DCI's products with our products and to market them as part
of our product offerings and not on a stand-alone basis. In the event that the
DCI Merger is not completed, DCI has agreed to grant us a license for
CommunityWare on as favorable terms as it licenses such technology to others.
We believe that the primary value of DCI to OSS is (i) DCI's proprietary
technology, particularly DCI's CommunityWare technology, (ii) DCI's software
development capabilities which we believe are important to our ability to
continue to develop state-of-the-art proprietary software products required to
maintain long-term relationships with our customers, and (iii) the ability the
DCI acquisition will give us to greatly reduce the time it will take us to
introduce new proprietary software products. Andre Durand, Chief Executive
Officer of DCI, has been elected Senior Vice President-Product Development of
OSS and will be responsible for our product development efforts. A condition to
the DCI Merger is that Mr. Durand enter into a three-year noncompete agreement
with OSS. We intend to continue to employ most of DCI's product development
personnel following the DCI Merger.
We also believe that DCI's Electronic University Network ("EUN") business,
which offers accredited online courses for colleges, universities and
corporations, represents a valuable business opportunity. We expect to continue
to develop this business both as a separate product offering and as an adjunct
to our product offerings.
The DCI Merger Agreement contemplates that we will acquire 100% of the
outstanding common stock of DCI. Based on the average closing price of our
common stock for the two days before and the two days after March 19, 1998, the
day that the transaction was announced, the total purchase price is estimated to
be approximately $13,100,000, consisting of (i) 955,649 shares of our common
stock to be issued to the stockholders of DCI, (ii) approximately 240,000 shares
of our common stock to be reserved for issuance upon the exercise of options and
warrants of DCI to be exchanged for similar securities of OSS at exercise prices
ranging from $4.31 to $20.33 per
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share; and (iii) approximately $400,000 of expenses to be incurred. In addition,
DCI will have approximately $1,200,000 of liabilities (including approximately
$381,000 of convertible securities which will be converted into similar
convertible securities of OSS) at the time of the DCI Merger, which will become
the liabilities of the consolidated entities upon consummation of the DCI
Merger. We will reserve approximately 40,000 shares of our common stock to be
issued upon the conversion of these convertible securities.
The DCI Merger will be accounted for under the purchase method of
accounting, with the purchase price allocated to the fair value of assets
acquired. A portion of such amount and liabilities assumed on a consolidated
basis has been identified as intangible assets. The portion of the purchase
price and liabilities assumed on a consolidated basis which is allocated to in-
process research and development will be recognized as expense in the period the
DCI Merger is consummated (currently expected to be the second quarter of 1999).
DCI completed the acquisition of CompuLearning Systems, d/b/a Electronic
University Network ("EUN") during January 1998. Based on preliminary financial
information provided by DCI and EUN, the combined revenues for DCI and EUN for
the year ended December 31, 1998 totaled $813,522, including $540,372 of
services provided to OSS and DCI's combined loss for the same period equaled
($1,564,160). In addition, DCI's accumulated deficit at December 31, 1998 was
($8,397,347) and DCI's shareholders' deficit at December 31, 1998 was
($1,492,548). We estimate that, on a pro forma basis, the acquisition of DCI
would have resulted in an increase to the net book value of our shares of common
stock as of December 31, 1998 from $0.43 (actual) to $2.20 (pro forma) and $2.48
(pro forma adjusted to reflect the subsequent conversions of 10% Preferred Stock
and Series A Preferred Stock, the subsequent issuance and conversions of the
Series A Preferred Stock, the subsequent exercise of the warrants to purchase
140,000 shares of common stock issued in connection with the issuance of the
Series A Preferred Stock, and the subsequent issuance and conversions of Series
C Preferred Stock).
The final determination of the value of consideration issued by OSS and the
liabilities assumed will be made at the effective time of the DCI Merger.
Accordingly, the determination of the total purchase price, liabilities assumed
and the allocations may change significantly from the amounts stated in this
report.
We expect that the DCI Merger will be completed in the second quarter of
1999. If, for some unanticipated reason, the DCI Merger was not completed, we
would be required to license the CommunityWare technology from DCI for a license
fee which would need to be negotiated. In addition, we would need to hire
additional software development engineers to replace those that would have
joined us had the DCI Merger been completed.
Acquisition of NetIgnite
On March 10, 1999, we acquired a controlling interest in a newly formed
company, NetIgnite 2, LLC ("NetIgnite"). NetIgnite is a development stage
company which we formed with a predecessor company by the name of NetIgnite,
Inc. ("NI"), the sole shareholder and founder of which was Perry Evans, the
founder and past President of MapQuest.com. In connection with the formation of
NetIgnite, NI contributed all of its rights to certain technology to NetIgnite
and we agreed to provide $1,500,000 of funding which it is believed will be
required to implement NetIgnite's business plan during the next 12 to 18 months.
We are entitled to 99.5% of NetIgnite's operating income and approximately 60%
of any proceeds upon the sale of NetIgnite. NI is entitled to .5% of
NetIgnite's operating income and approximately 40% of any proceeds upon the sale
of NetIgnite. We have entered into a Buy-Sell Agreement with NI pursuant to
which either we or NI could, subject to certain conditions, acquire all of the
other's interest in NetIgnite. In the event that we sold our interest to
NetIgnite in accordance with the Buy-Sell Agreement, we would be entitled to
retain a limited non-exclusive license to utilize the technology developed by
NetIgnite. Mr. Evans has entered into an Employment Agreement with OSS and
NetIgnite which has an initial term of two years, provides for a minimum annual
salary of $190,000 and the granting of stock options to purchase 80,000 shares
of our common stock at an exercise price of $12.25, one-third of such option
shares to vest annually during the next three years subject to Mr. Evans'
continuous employment by OSS.
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NetIgnite is applying emerging technologies to develop private-label Web-
based services designed to allow directory publishers, online search engines and
ISPs to enhance end-user and advertiser value by facilitating data-driven
comparison shopping. NetIgnite plans to employ XML, a next generation web
language that makes it possible to add database capability to information found
on a web page, to solve the following problems:
. Make it far easier for potential customers to find local business web sites by
searching the information presented within the web site, not just the domain
name or limited description fields of today's technology.
. Allow consumers to compare price, product offering, and other information of
their choosing among competing providers.
. Allow directory services, ISPs, and community start page providers to generate
advertising and e-commerce revenue from local web site owners who heretofore
have seen limited traffic from internal site promotions or general advertising
placements.
. Enhance the value of small and geographically-focused web sites by making them
easier to create and maintain, as well as by increasing targeted page views.
NetIgnite intends to provide its services on a hosted, private label basis,
earning an annual fee from its customers for each business web site its products
and services enable. We believe that NetIgnite's products and services may be
marketed directly to online directory publishers, online search engines and ISPs
as well as part of our Community product and service offering for broadband
operators and other ISPs. We expect NetIgnite's first products to be available
during the third quarter of 1999. However, there can be no assurance that
NetIgnite will be successful in developing its proposed products or that, if
developed, that they can be successfully introduced and marketed or that
NetIgnite's business will be profitable.
Marketing
We have a multi-faceted distribution strategy, including establishing
private-label distribution ventures and direct distribution through consumer
marketing designed to inform individual Internet users of our products'
capabilities and direct marketing to targeted businesses, educational
institutions, governmental bodies and associations. Our private-label
distribution arrangements to date have been primarily with broadband cable
Internet access providers. These distribution agreements generally provide for
the development of operator-branded local content pages which, using our
proprietary software, permit the generation of Internet Web site content by
ISPs, individuals, local merchants and others. Personal user home pages,
enhanced business Web pages, business directories, community events, online
discussion groups and forums and programming guides can all be developed and
updated by users, without the distribution partner's involvement. Also included
are our personal portal services which facilitate user interaction and community
"groupware" which enables any group to create a public or private community for
personal interaction and information exchange.
We are also seeking to partner with high traffic Internet web sites who are
seeking to add personalization and communication capabilities to their products.
For our Enterprise products and services, we offer customized products
incorporating our proprietary software to address particular customer or market
needs and are pursuing licensed resellers who desire to integrate our software
with their Web applications designed to meet specific market needs. In addition
to licensing our software to these resellers, we would also provide Web hosting
services. In the Education market, we have joined with TCI's Education Project
to develop and deploy online school community Web sites based on our WEBBbuilder
platform and hosted by us. The first of five pilot launches will occur in
March, 1999. If the pilot launches are successful, we expect to work with TCI
to market the product to the 20,000 schools in the TCI franchise areas. The
goal is to commence marketing of this product in time for the beginning of the
1999 fall school year. For our financial services, we have entered into a
development agreement with CU Cooperative Systems, Inc., a national co-operative
association including over 500 credit unions, pursuant to which we are
developing an e-banking product specifically designed for the co-op's member
credit unions.
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Our marketing activities include advertising in trade publications,
developing advertising campaigns and materials for use by our customers to
promote the use of the Internet to their customers, developing public relations
programs featuring us and our products and services and attendance at trade
shows.
A substantial portion of our sales have been derived from a limited number
of customers. During 1998, Starstream, Inc., American Telecasting, Inc.,
Rockwell Federal Credit Union, and Intermedia Partners accounted for 28%, 17%,
14% and 12%, respectively, of our sales for the period. During 1997, American
Telecasting, Inc. accounted for 26% of sales and FiberTel TCI2 S.A. accounted
for 14% of sales for the year. During 1996, EBI Securities, Inc. accounted for
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 our business.
Trademarks and Proprietary Protection
We do not believe that our or DCI's current products or services are
patentable. We and DCI plan to rely on a combination of copyright, trade
secret, trademark laws, and nondisclosure and other contractual provisions to
protect our respective proprietary rights. As a part of our confidentiality
procedures, we generally enter into written nondisclosure and nonsolicitation
agreements with our officers and employees which restrict the use and disclosure
of proprietary information and the solicitation of customers for the purpose of
selling competing products or services. We generally have not entered into
noncompetition agreements with our officers, directors or employees. Because
the policing of proprietary rights may be difficult and the ideas and other
aspects underlying our and DCI's products and services may not in all cases be
protectable under intellectual property laws, there can be no assurance that
either we or DCI could prevent competitors from marketing the same or similar
products and services. In addition, competitors may independently develop
products and services that compete with our and DCI's products and services.
Competition
Our and DCI's current and prospective competitors include many companies
that have substantially greater financial, technical, marketing, and other
resources. We attempt to distinguish our products primarily on the bases of:
. Customizability and personalization;
. Breadth and depth of communications capabilities;
. Ease of use; and
. Our willingness to permit other companies to incorporate/private label
our products with their products to support their applications or
market requirements.
We believe that competition will intensify in the future. 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 our and DCI's financial condition and operating results. There is no
assurance that we will be able to compete successfully against current and
future competitors or that competitive pressures faced by us and DCI will not
materially adversely affect our respective business financial condition, and
results of operations. We and DCI believe that the primary factors that will
impact competition are technical expertise and development, price, sales and
marketing abilities, customer support, reliability and security.
We are aware of a number of companies specializing in the creation of local
content and national companies such as GeoCities, Excite and Globe.com which
market products which enable users to set up their own Internet communities, but
do not believe that any of these companies also focus on creating communities
for broadband operators centered on geographic areas. 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., @Home Corporation,
RoadRunner, High Speed Access Corporation, and Softnet Systems, Inc. could also
develop products which compete with our community-building and local content
products and services. Further, the market for our
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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 we 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 our products and services noncompetitive or
obsolete.
DCI believes that its direct competitors include, HotOffice, Netscape's
NetCenter and Netopia's Virtual Office in the business market and University
Online and Real Education in the education and training markets. Management of
DCI believes that its products and services can be differentiated in the
following ways: (i) CommunityWare generally offers more sophisticated and
customizable public and private conferencing and group discussion capabilities;
(ii) CommunityWare offers more private, integrated and customizable live
services; (iii) CommunityWare allows users to engage their primary community in
addition to their other communities simultaneously; (iv) CommunityWare offers
full integration of group collaboration functionality (i.e. communications) and
content hosting services and management tools; and (v) DCI believes it is the
only company using its service as a platform to launch other companies (channel
partners) for specific markets such as business, education and virtual
tradeshows.
DCI believes that it indirectly competes with content-centric companies
(such as The Mining Company, the Globe, Tripod, iVillage and GeoCities),
community software tools companies (such as Throw, Netopia, PowWow, iChat,
eShare, and Well Engaged), and providers of client/server groupware software
(such as IBM, Netscape, Novell and Microsoft). DCI believes that content-
centric companies typically focus on hosting specific communities specially
created by them, and do not provide services or tools for others to build and
host their own communities. DCI believes that Internet tool companies typically
focus on providing one or two communications tools which can be integrated into
a Web page and do not provide an integrated solution which is obtainable at a
consumer level. DCI further believes that the major providers of groupware such
as Microsoft, Netscape, IBM, Lotus and Novell are focusing on dedicated, high-
end and high-dollar solutions to the corporate market, and do not provide
solutions for those groups who are either technically or financially unable to
implement these complex and expensive solutions.
Government Regulation
Our and DCI'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. Our broadband customers,
however, face significant uncertainty and possible changes as the markets in
which they operate are being deregulated or subject to changing regulation.
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 our business. We cannot predict the impact, if any, that
future regulation or regulatory changes may have on our business.
Employees
At March 22, 1998, we employed 53 full time employees, which included 9 in
management, 2 in sales and marketing, and 14 in development. In addition to
these Company personnel, we contract with other creative and production
resources, as required for peak load situations, to create Web pages. Our
employees are not represented by a labor union, and we consider our employee
relations to be good.
Factors That May Affect Future Results
Factors that may affect our 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 Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Item 7
Financial Statements Note 1 to the Financial Statements."
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Our limited operating history could affect our business. We were founded
in March 1994, commenced sales in February 1995, and were in the development
stage through December 31, 1995. DCI was founded in 1993. Accordingly, we have
a limited operating history upon which you may evaluate us. Our business is
subject to the risks, expenses and difficulties frequently encountered by
companies with a limited operating history including:
. Limited ability to respond to competitive developments,
. Exaggerated effect of unfavorable changes in general economic and
market conditions,
. Ability to attract qualified personnel, and
. Ability to develop and introduce new product and service offerings.
There is no assurance we will be successful in addressing these risks. If we
are unable to successfully address these risks our business could be
significantly affected.
We have accumulated losses since inception and we anticipate that we will
continue to accumulate losses for the foreseeable future. We have incurred net
losses since inception totaling $20,774,129 through December 31, 1998. DCI has
incurred net losses since its formation totaling $8,397,347 through December 31,
1998. In addition, we expect to incur additional substantial operating and net
losses in 1999 and for one or more years thereafter. We expect to incur these
additional losses because:
. We currently intend to increase our capital expenditures and operating
expenses to expand the functionality and performance of our
WEBBbuilder products and services, support additional subscribers of
our ISP customers in future markets, and market and provide our
products and services.
. We will be required to recognize as a loss in the fiscal period in
which the DCI acquisition is consummated that portion of the purchase
price for DCI which we allocate to in-process research and
development.
. We will be required to record goodwill and other intangible assets in
connection with the DCI acquisition which we will amortize over their
estimated useful lives of approximately three years. We currently
expect to allocate approximately $12.5 million to goodwill and other
intangible assets, however, this amount could change significantly
once the actual amount is determined after the consummation of the DCI
acquisition.
We expect to complete the DCI acquisition in the second quarter of 1999.
If we do not complete the DCI acquisition, it is likely that we would have to
record as a loss all or a portion of the note receivable from DCI of
approximately $1,005,500, including accrued interest, at March 29, 1999. DCI
would not have the ability to repay our advances without obtaining significant
additional working capital through the sale of its securities. There is no
assurance that DCI would be able to raise working capital in the amounts
required.
If we are unable to raise additional working capital funds, we may not be
able to sustain our operations. We believe that our present cash and cash
equivalents and working capital will be adequate to sustain our current level of
operations only through May 1999. If we cannot raise additional funds when
needed, we may be required to curtail or scale back our operations. These
actions could have a material adverse effect on our business, financial
condition, or results of operations. We estimate that we will need to raise
through equity, debt or other external financing at least $9 million to sustain
operations for the next 12 months and $1 million to pay DCI indebtedness which
would be assumed as part of the DCI acquisition. There is no assurance that we
will be able to raise additional funds in amounts required or upon acceptable
terms. In addition, we may discover that we have underestimated our working
capital needs, and we may need to obtain additional funds to sustain our
operations. In its report accompanying the audited financial statements for the
years ended December 31, 1998 and 1997, our auditor, Arthur Andersen LLP,
expressed substantial doubt about our ability to continue as a going concern.
See "Item 6 - Management's Discussion of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
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We may never become or remain profitable. We may never become or remain
profitable. Our ability to become profitable depends on the ability of our
WEBBbuilder products and services to generate revenues. The revenue model for
certain of our i2u/WEBBbuilder products and services assumes that our broadband
customers and other distribution partners will share with us a percentage of
their revenues generated by advertising and e-commerce conducted through our
WEBBbuilder products. The success of our revenue model will depend upon many
factors including:
. The success of broadband operators and other distribution partners in
marketing Internet services to subscribers in their local areas, and
. The extent to which consumers and businesses use our WEBBbuilder
products and conduct e-commerce transactions and advertising utilizing
our products.
Because of the new and evolving nature of the Internet, we cannot predict
whether our revenue model will prove to be viable, whether demand for our
products and services will materialize at the prices we expect to be charged, or
whether current or future pricing levels will be sustainable.
Our revenue model may not generate significant revenues, if any, until some
time in the future. We expect a significant portion of our revenues to come
from advertising revenues and in connection with e-commerce transactions
conducted using our products. However, we do not expect to realize these
revenues, if at all, until a significant time after we have licensed our
WEBBbuilder products and services. This expectation is based on the fact that we
believe that it may take broadband operators and other distribution partners
several months or more to:
. Market and sell Internet access to their subscribers, and
. Establish a significant enough user base to attract advertisers and
for users to conduct significant e-commerce transactions.
Our business depends on the growth of the Internet. Our business plan
assumes that the Internet will develop into a significant source of
communication and communication interactivity. However, the Internet market is
new and rapidly evolving and there is no assurance that the Internet will
develop in this manner. If the Internet does not develop in this manner, our
business, operating results, and financial condition would be materially
adversely effected. Numerous factors could prevent or inhibit the development
of the Internet in this manner, including:
. The failure of the Internet's infrastructure to support Internet usage
or electronic commerce,
. The failure of businesses developing and promoting Internet commerce
to adequately secure the confidential information, such as credit card
numbers, needed to carry out Internet commerce, and
. Regulation of Internet activity
Use of certain of our products and services may be dependent on broadband
operators. Because we have elected to partner with broadband operators for the
distribution of many of our products and services, many users of our WEBBbuilder
products and services are expected to subscribe through a broadband operator. As
a result, the broadband operator, and not us, will substantially control the
customer relationship with these users. If the business of broadband operators
with whom we partner is adversely affected in any manner, business, operating
results, and financial condition could be materially adversely effected. Many
factors may affect the business of broadband operators, including:
. General economic and market conditions,
. Competition among broadband operators,
. Costs associated with the renewal of operator licenses, and
. Costs associated with the operation and maintenance of an Internet
service provider business segment.
We may be unable to develop desirable products. Our products are subject
to rapid obsolescence and our future success will depend upon our ability to
develop new products and services that meet changing customer and marketplace
requirements. There is no assurance that we will be able to successfully:
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. Identify new product and service opportunities, or
. Develop and introduce new products and services to market in a timely
manner.
If we are unable to accomplish these items, our business, including the
business of DCI if the DCI acquisition is completed, operating results, and
financial condition could be materially adversely affected.
Our products and services may not be successful. Even if we are able to
successfully identify, develop, and introduce new products and services there is
no assurance that a market for these products and services will materialize to
the size and extent that we anticipate. If a market does not materialize as we
anticipate, our business, including the business of DCI if the DCI acquisition
is completed, operating results, and financial condition could be materially
adversely affected. The following factors could affect the success of our
products and services:
. The failure of our business plan to accurately predict the rate at
which the market for Internet products and services will grow,
. The failure of our business plan to accurately predict the types of
products and services the future Internet marketplace will demand,
. Our limited experience in marketing our products and services,
. The failure of our business plan to accurately predict our future
participation in the Internet marketplace,
. The failure of our business plan to accurately predict the estimated
sales cycle, price, and acceptance of our products and services,
. The development by others of products and services that renders our
and DCI's, products and services noncompetitive or obsolete, or
. Our failure to keep pace with the rapidly changing technology,
evolving industry standards, and frequent new product and service
introductions that characterize the Internet marketplace.
The intense competition that is prevalent in the Internet market could have
a material adverse effect on our business. DCI's and our current and
prospective competitors include many companies whose financial, technical,
marketing and other resources are substantially greater than ours. There is no
assurance that we will have the financial resources, technical expertise, or
marketing, sales and support capabilities to compete successfully. The presence
of these competitors in the Internet marketplace could have a material adverse
effect on our business, operating results, or financial condition by causing us
to:
. Reduce the average selling price of our products and services, or
. Increase our spending on marketing, sales, and product development.
There is no assurance that we would be able to offset the effects of any
such price reductions or increases in spending through an increase in the number
of our customers, higher sales from premium services, cost reductions or
otherwise. Further, our financial condition may put us at a competitive
disadvantage relative to our competitors. If we fail to, or cannot, meet
competitive challenges, our business, operating results and financial condition
could be materially adversely affected.
A limited number of our customers generates a significant portion of our
revenues. For the year ended December 31, 1998, four of our customers produced
approximately 71% of our revenues, including one customer, Starstream, Inc., who
produced approximately 28% of our revenues. There is no assurance that we will
be able to attract or retain major customers. The loss of, or reduction in
demand for products or related services from, any of these major customers could
have a material adverse effect on our business, operating results, cashflows,
and financial condition.
The sales cycle for our products and services is lengthy and unpredictable.
While our sales cycle varies from customer to customer, it typically has ranged
from one to six months for WEBBbuilder projects. Our pursuit of sales leads
typically involves an analysis of our prospective customer's needs, preparation
of a written proposal, one or more presentations and contract negotiations. We
often provide significant education to prospective customers regarding the use
and benefits of Internet technologies and products. Our sales cycle may also be
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affected by a prospective customer's budgetary constraints and internal
acceptance reviews, over which we have little or no control.
We may be unable to adjust our spending to account for potential
fluctuations in our quarterly results. As a result of our limited operating
history and the recent increased focus on our WEBBbuilder products and services,
we do not have historical financial data for a sufficient number of periods on
which to base planned operating expenses. Therefore, our expense levels are
based in part on our expectations as to future sales and to a large extent are
fixed. We typically operate with little backlog and the sales cycles for our
products and services may vary significantly. As a result, our quarterly sales
and operating results generally depend on the volume and timing of and the
ability to close customer contracts within the quarter, which are difficult to
forecast. We may be unable to adjust spending in a timely manner to compensate
for any unexpected sales shortfalls. If we were unable to so adjust, any
significant shortfall of demand for our products and services in relation to our
expectations would have an immediate adverse effect on our business, operating
results and financial condition. Further, we currently intend to increase our
capital expenditures and operating expenses to fund product development and
increase sales and marketing efforts. To the extent that such expenses precede
or are not subsequently followed by increased sales, our business, operating
results and financial condition will be materially adversely affected.
We may be unable to retain our key executives and research and development
personnel. We are highly dependent on the technical and management skills of
our key employees, including in particular R. Steven Adams, our founder,
President and Chief Executive Officer. The loss of Mr. Adams' services could
have a material adverse effect on our business and operating results. We have
not entered into employment agreements with Mr. Adams, or any of our other
officers or employees. We do not maintain key person insurance for Mr. Adams or
any other member of management. In addition, the success of the DCI acquisition
is highly dependent on the technical and management skills of Andre Durand, the
founder, President and Chief Executive Officer of DCI. The loss of Mr. Durand's
services could have a material adverse affect on the value of the DCI
acquisition.
Our future success also depends in part on our ability to identify, hire
and retain additional personnel, including key product development, sales,
marketing, financial and executive personnel. Competition for such personnel is
intense and there is no assurance that we can identify or hire additional
qualified personnel.
Executives and research and development personnel who leave us may compete
against us in the future. We generally enter into written nondisclosure and
nonsolicitation agreements with our officers and employees which restrict the
use and disclosure of proprietary information and the solicitation of customers
for the purpose of selling competing products or services. Other than Andre
Durand, who, as a condition to the acquisition of DCI, will be required to
execute a three-year non-compete agreement with us, we generally do not require
our employees to enter into non-competition agreements. Thus, if any of these
officers or key employees left, they could compete with us, so long as they did
not solicit our customers. Any such competition could have a material adverse
effect on our business.
We may be unable to manage our expected growth. If we are able to
implement our growth strategy, we will experience significant growth in the
number of our employees, the scope of our operating and financial systems, and
the geographic area of our operations. There is no assurance that we will be
able to implement in whole or in part our growth strategy or that our management
or other resources will be able to successfully manage any future growth in our
business. Any failure to do so could have a material adverse effect on our
operating results and financial condition.
We may be unable to protect our intellectual property rights. Intellectual
property rights are important to our success and our competitive position.
There is no assurance that the steps we take to protect our intellectual
property rights will be adequate to prevent the imitation or unauthorized use of
our intellectual property rights. Policing unauthorized use of proprietary
systems and products is difficult and, while we are unable to determine the
extent to which piracy of our software exists, we expect software piracy to be a
persistent problem. In addition, the laws of some foreign countries do not
protect software to the same extent as do the laws of the United States. Even
if the steps we take to protect our proprietary rights prove to be adequate, our
competitors may develop products or technologies that are both non-infringing
and substantially equivalent or superior to our products or technologies.
19
<PAGE>
Computer viruses and similar disruptive problems could have a material
adverse effect on our business. Our software and equipment may be vulnerable to
computer viruses or similar disruptive problems caused by our customers or other
Internet users. Our business, financial condition, or operating results could
be materially adversely effected by:
. Losses caused by the presence of a computer virus that causes us or
third parties with whom we do business to interrupt, delay or cease
service to our customers,
. Losses caused by the misappropriation of secured or confidential
information by a third party who, in spite of our security measures,
obtains illegal access to this information,
. Costs associated with efforts to protect against and remedy security
breaches, or
. Lost potential revenue caused by the refusal of consumers to use our
products and services due to concerns about the security of
transactions and commerce that they conduct on the Internet.
Future government regulation could materially adversely effect our
business. There are currently few laws or regulations directly applicable to
access to, communications on, or commerce on the Internet. Therefore, we are
not currently subject to direct regulation of our business operations by any
government agency, other than regulations applicable to businesses generally.
Due to the increasing popularity and use of the Internet, however, federal,
state, local, and foreign governmental organizations are currently considering a
number of legislative and regulatory proposals related to the Internet. The
adoption of any of these laws or regulations may decrease the growth in the use
of the Internet, which could, in turn:
. Decrease the demand for our products and services,
. Increase our cost of doing business, or
. Otherwise have a material adverse effect on our business, results of
operations and financial condition.
Moreover, the applicability to the Internet of existing laws governing
issues such as property ownership, copyright, trademark, trade secret,
obscenity, libel and personal privacy is uncertain and developing. Our
business, results of operations and financial condition could be materially
adversely effected by the application or interpretation of these existing laws
to the Internet.
Our systems may not be year 2000 compliant. We have reviewed our internal
software and hardware systems. Based on this review, we believe that our
internal software and hardware systems will function properly with respect to
dates in the year 2000 and thereafter. We expect to incur no significant costs
in the future for Year 2000 problems. Nonetheless, there is no assurance in this
regard until our internal software and hardware systems are operational in the
year 2000.
We are in the process of contacting all of our significant suppliers to
determine the extent to which our systems are vulnerable to those third parties'
failure to make their own systems Year 2000 compliant.
The failure to correct material Year 2000 problems by our suppliers and
vendors could result in an interruption in, or a failure of, certain of our
normal business activities or operations. Due to the general uncertainty
inherent in the Year 2000 problem, resulting from the uncertainty of the Year
2000 readiness of third-party suppliers and vendors and of our customers, we are
unable to determine at this time that consequences of Year 2000 failures will
not have a material impact on our results of operations, liquidity or financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Compliance Disclosures."
Our articles of incorporation and bylaws may discourage lawsuits and other
claims against our directors. Our articles of incorporation provide, as
permitted by Colorado law, that our directors shall have no personal liability
for certain breaches of their fiduciary duties to us. In addition, our bylaws
provide for mandatory
20
<PAGE>
indemnification of directors and officers to the fullest extent permitted by
Colorado law. These provisions may reduce the likelihood of derivative
litigation against directors and may discourage shareholders from bringing a
lawsuit against directors for a breach of their duty.
The completion of the DCI acquisition will have an immediate dilutive
effect on our current shareholders. If the DCI acquisition is consummated, we
will issue 955,649 shares of our common stock as consideration for DCI. The
issuance of these shares will have an immediate dilutive effect on our current
shareholders and will increase our outstanding common stock by approximately
17%. There is no assurance that our results of operations will improve enough,
if at all, as a result of the DCI acquisition, to offset this dilution.
On a pro forma basis, we estimate that the issuance of these shares would
have resulted in an increase to our net book value per share as of December 31,
1998 from $0.43 (actual) to $2.20 (pro forma) and $2.48 (pro forma adjusted to
reflect the subsequent conversions of 10% Preferred Stock and Series A Preferred
Stock, the subsequent exercise of the warrants to purchase 140,000 shares of
common stock issued in connection with the issuance of the Series A Preferred
Stock, and the subsequent issuance and conversions of Series C Preferred
Stock).
In addition to issuing these shares of common stock, in connection with the
DCI acquisition we will reserve for issuance shares that, when issued, may have
a dilutive effect on our shareholders. There is no assurance that our results
of operations will improve enough, if at all, as a result of the DCI
acquisition, to offset this possible future dilution. These shares consist of
approximately:
. 240,000 shares of our common stock for issuance upon exercise of
outstanding options and warrants that will be issued in connection
with the DCI acquisition, and
. 40,000 shares of our common stock for issuance upon conversion of
convertible securities of DCI that we will assume in connection with
the DCI acquisition.
The price of our common stock has been highly volatile due to factors that
will continue to effect the price of our stock. Our common stock traded as high
as $15.25 per share and as low as $3.75 per share during the year ended December
31, 1998. Historically, the over-the-counter markets for securities such as our
common stock have experienced extreme price and volume fluctuations. Some of
the factors leading to this volatility include:
. Price and volume fluctuations in the stock market at large that do not
relate to our operating performance,
. Fluctuations in our quarterly operating results,
. Announcements of product releases by us or our competitors, and
. Announcements of acquisitions and/or partnerships by us or our
competitors,
. Increases in outstanding shares of common stock upon exercise or
conversion of derivative securities. (See "We have issued numerous
options, warrants and convertible securities to acquire our common
stock that could have a dilutive effect on our shareholders.")
The trading volume of our common stock may diminish significantly if our
common stock is prohibited from being traded on the Nasdaq SmallCap Market.
Although our shares are currently traded on The Nasdaq SmallCap Market, there is
no assurance that we will remain eligible to be included on Nasdaq. If our
common stock was no longer eligible for quotation on Nasdaq, it could become
subject to rules adopted by the Securities and Exchange Commission regulating
broker-dealer practices in connection with transactions in "penny stocks." If
our common stock became subject to the penny stock rules, many brokers may be
unwilling to engage in transactions in our common stock because of the added
regulation, thereby making it more difficult for purchasers of our common stock
to dispose of their shares.
We have issued numerous options, warrants, and convertible securities to
acquire our common stock that could have a dilutive effect on our shareholders.
We have issued numerous options, warrants, and convertible securities to acquire
our common stock. During the terms of these outstanding options, warrants, and
convertible securities, the holders these securities will have the opportunity
to profit from an increase in the market price of our
21
<PAGE>
common stock with resulting dilution to the holders of shares who purchased
shares for a price higher than the respective exercise or conversion price. The
existence of such stock options, warrants and convertible securities may
adversely affect the terms on which we can obtain additional financing, and you
should expect the holders of such options or warrants to exercise or convert
those securities at a time when we, in all likelihood, would be able to obtain
additional capital by offering securities on terms more favorable to us than
those provided by the exercise or conversion of such options or warrants.
As of March 22, 1999, we have issued the following warrants and options to
acquire shares of our common stock:
. Options and warrants to purchase 1,772,382 shares of common stock upon
exercise of such options and warrants, exercisable at prices ranging
from $0.50 to $18.25 per share, with a weighted average exercise price
of approximately $7.11 per share.
. Warrants issued in connection with our initial public offering on May
23, 1996 (the "IPO Warrants") to purchase 634,150 shares upon exercise
of the IPO Warrants at an exercise price of $9.00 per share.
. Options issued to EBI Securities Corporation, the representative of
the underwriters involved in such initial public offering (the
"Representative's Option"), to purchase 106,700 shares upon exercise
of the Representative's Option at a purchase price of $8.10 per share.
. The Representative's Option to purchase 106,700 IPO Warrants issuable
upon exercise of the Representative's Option at a purchase price of
$.001 per IPO Warrant. These IPO Warrants entitle the holder to
purchase up to 53,350 shares upon exercise of such IPO Warrants at an
exercise price of $9.00 per share.
. Warrants issued in connection with the issuance of the 10% Preferred
Stock to purchase 53,500 shares of common stock upon exercise of such
warrants, exercisable at $15.00 per share.
. Warrants issued in connection with the issuance of the 5% Preferred
Stock to purchase 100,000 shares of common stock upon exercise of such
warrants, exercisable at $16.33 per share.
. Warrants issued in connection with the issuance of the Series A
Preferred Stock to purchase 20,000 shares of common stock upon
exercise of such warrants, exercisable at $5.71 per share.
In addition to these warrants and options, we:
. Will issue 955,649 shares of our common stock upon the completion of
the DCI acquisition,
. Will reserve approximately 240,000 shares of common stock for issuance
upon exercise of options and warrants to be issued in connection with
the DCI acquisition,
. Will reserve approximately 40,000 shares of our common stock for
issuance upon conversion of convertible securities of DCI that will be
assumed by OSS in connection with the DCI acquisition, and
. Have reserved an indeterminate number of shares of common stock for
issuance upon conversion of outstanding shares of our 10% and Series C
Preferred Stock.
Based on the market value for the common stock as of March 22, 1999, the
then outstanding 10% Preferred Stock and Series C Preferred Stock were
convertible into approximately 95,813 shares and 129,757 shares, respectfully,
of common stock. The number of shares of common stock issuable upon conversion
of the 10% Preferred Stock and the Series C Preferred Stock could increase
significantly if the market value for our common stock decreases in the future.
Further, there could be issuances of additional similar securities in connection
with our need to raise additional working capital.
Future sales of our common stock in the public market could adversely
affect the price of our common stock. Sales of substantial amounts of common
stock in the public market that is not currently freely tradable, or even the
potential for such sales, could have an adverse effect on the market price for
shares of our common stock and could impair the ability of purchasers of our
common stock recoup their investment or make a profit. As of March 22, 1999,
these shares consist of:
. Approximately 1,300,000 shares issued without registration under the
securities laws ("Restricted Shares"),
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<PAGE>
. Approximately 60,000 shares owned by our officers, directors and
holders of 10% of our outstanding common stock ("Affiliate Shares"),
and
. 955,469 shares to be issued upon consummation of the DCI acquisition.
Unless the Restricted Shares and the Affiliate Shares are further
registered under the securities laws, they may not be resold except in
compliance with Rule 144 promulgated by the SEC, or some other exemption from
registration. Rule 144 does not prohibit the sale of these shares but does
place conditions on their resale which must be complied with before they can be
resold. Before September 30, 1999, the shares of the common stock to be issued
to the shareholders of DCI in connection with the DCI acquisition will be
subject to contractual limitations on their transfer, however, such shares or a
portion of them could be sold before September 30, 1999.
Future sales of our common stock in the public market could limit our
ability to raise capital. Sales of substantial amounts of common stock in the
public market pursuant to Rule 144, upon exercise or conversion of derivative
securities or otherwise, or even the potential for such sales, could affect our
ability to raise capital through the sale of equity securities. (See "We have
issued numerous options, warrants, and convertible securities to acquire our
common stock that could have a dilutive effect on our shareholders" and "Future
sales of our common stock in the public market could adversely affect the price
of our common stock.")
Provisions in our articles of incorporation allow us to issue shares of
stock that could make a third party acquisition of us difficult. Our Articles
of Incorporation authorize our Board of Directors to issue up to 20,000,000
shares of common stock and 5,000,000 shares of preferred stock in one or more
series, the terms of which may be determined at the time of issuance by the
Board of Directors, without further action by our shareholders. Preferred stock
authorized by the Board of Directors may include voting rights, preferences as
to dividends and liquidation, conversion and redemptive rights and sinking fund
provisions. If the Board of Directors authorizes the issuance of preferred
stock in the future, this authorization could affect the rights of the holders
of common stock, thereby reducing the value of the common stock, and could make
it more difficult for a third party to acquire us, even if a majority of the
holders of our common stock approved of an acquisition. Other than the 2,000
shares of Series C Preferred Stock that will be issued if the warrant to
purchase such shares is exercised, our Board of Directors has no present plans
to issue any shares of preferred stock.
Our issuance of our Series C Preferred Stock will require us to record a
non-operating expense which will, in turn, increase our net loss available to
shareholders. Based on current accounting standards, we will be required to
record a non-operating expense of approximately $4,200,000 for the quarter
ending March 31, 1999 as a result of the issuance of the Series C Preferred
Stock. While these charges will not affect our operating loss or working
capital during such period, they are expected to result in an increase of
approximately $4,200,000 in the net loss available to our holders of common
stock for the quarter ending March 31, 1999. In addition, to the extent that we
exercise our right to issue or the investor exercises its right to acquire up to
$2,000,000 additional principal amount of the Series C Preferred Stock, we may
incur similar non-operating expenses in excess of $2,000,000 at the time that
any such additional shares of Series C Preferred Stock are issued.
We do not anticipate paying dividends on our common stock for the
foreseeable future. We have never paid dividends on our common stock and do not
intend to pay any dividends on our common stock in the foreseeable future. Any
decision by us to pay dividends on our common stock will depend upon our
profitability at the time, cash available therefor, and other factors. We
anticipate that we will devote profits, if any, to our future operations.
Item 2. DESCRIPTION OF PROPERTY.
Our 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.
23
<PAGE>
Item 3. LEGAL PROCEEDINGS.
Not Applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
24
<PAGE>
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The number of record holders of our common stock and publicly traded
common stock warrants on March 22, 1999 was 72 and 7, respectfully. Based on
information provided by nominee holders of our common stock, we believe that the
number of beneficial holders of our common stock is in excess of 3,706. The
table below sets forth the high and low bid prices for the common stock and the
warrants as reported on the Nasdaq Small Cap Market during the last two years.
The information shown is 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
- ------------- --------- -------- ---- ---
1997
- ----
<S> <C> <C> <C> <C>
March 31 $ 5.00 $3.25 $0.78 $0.50
June 30 $ 4.00 $1.25 $0.56 $0.19
September 30 $10.88 $2.06 $2.13 $0.50
December 31 $12.50 $6.13 $2.63 $1.00
1998
- ----
March 31 $10.38 $6.50 $1.81 $1.00
June 30 $15.63 $8.50 $3.94 $1.50
September 30 $15.69 $4.88 $4.00 $1.00
December 31 $14.75 $3.25 $3.75 $0.44
</TABLE>
We have never paid a cash dividend on our common stock. The payment of
dividends, if any, in the future rests within the discretion of our Board of
Directors and will depend, among other things, upon our earnings, capital
requirements and financial condition. Dividends on our 10% Preferred Stock and
our Series C Preferred Stock must be declared and paid before dividends can be
paid on our common stock.
On November 9, 1998, we entered into a Securities Purchase Agreement
with Archer Investors LLC ("Archer") pursuant to which Archer acquired 1,400
shares of our Series A Convertible Preferred Stock for an aggregate purchase
price of $1,400,000. In connection with their acquisition of the Series A
Convertible Preferred Stock, Archer also acquired a warrant pursuant to purchase
140,000 shares of our common stock at any time prior to November 9, 2003 at a
per share exercise price of $5.71 (the "Archer Warrant"). EBI Securities
Corporation served as placement agent for the offering and received a commission
equal to 7% of the gross proceeds of the offering and a warrant to purchase
20,000 shares of our common stock at any time prior to November 9, 2001 at a per
share exercise price of $5.71. Archer exercised the Archer Warrant in full in
January 1999. Each share of Series A Preferred Stock was convertible, at the
option of the holder thereof, at any time and from time to time, into such
number of fully paid and nonassessable shares of common stock determined by
dividing $1,000, plus the amount of any accrued and unpaid dividends we elect to
pay in common stock, by the lower of (i) $5.71 or (ii) 80% of the average
closing bid price of our shares of common stock for the lowest five consecutive
trading days within the 20 days immediately preceding the Series A Preferred
Stock conversion date. The Series A Preferred Stock, including dividends, has
been converted into 247, 366 shares of common stock. We agreed to file, and did
file on December 22, 1998, a registration statement pursuant to the Securities
Act of 1933 for the common stock issuable upon conversion of the Series A
Convertible Preferred Stock and the common stock issuable upon the exercise of
the Archer Warrant. The Series A Convertible Preferred Stock was issued to
Archer without registration under the Securities Act of 1933 in reliance upon
the exemptions from registration provided in Section 4(2) and Regulation D of
the Act.
25
<PAGE>
On January 11, 1999, we entered into a Securities Purchase Agreement
with Arrow Investors II LLC ("Arrow") pursuant to which Arrow acquired 3,000
shares of our Series C Convertible Preferred Stock for an aggregate purchase
price of $3,000,000. Arrow also acquired for $1,000 a "Mandatory Warrant"
pursuant to which Arrow has the right and commitment, subject to certain
conditions set forth in the Mandatory Warrant, to purchase an additional 2,000
shares of our Series C Convertible Preferred Stock prior to June 30, 1999. None
of the additional 2,000 shares had been used as of March 22, 1999. The Series C
Convertible Preferred Stock is convertible into our common stock at a variable
conversion price equal to the lesser of the Maximum Conversion Price (as defined
in the terms of the Series C Preferred Stock), initially $20.65, or the market
price for our common stock at the time of conversion. The terms of the Series C
Preferred Stock define market price as the average of the five lowest closing
bid prices for our common stock during the 44 consecutive trading days
immediately preceding the conversion of the Series C Convertible Preferred
Stock. As of March 22, 1999, 2,500 shares of the Series C Preferred Stock,
including dividends, had been converted into 232,564 shares of common stock and
500 shares of Series C Preferred Stock remained outstanding. We agreed to file,
and did file on January 29, 1999, a registration statement pursuant to the
Securities Act of 1933 for the common stock issuable upon conversion of the
Series C Convertible Preferred Stock. The Series C Preferred Stock was issued to
Arrow without registration under the Securities Act of 1933 in reliance upon the
exemptions from registration provided in Section 4(2) and Regulation D of the
Act.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
To date, we have generated revenues through the sale of design and
consulting services for Web site development and network engineering services,
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 our products
and services, training course fees, and monthly fees paid by customers for
Internet access which we have provided. We commenced sales in February 1995, and
were in the development stage through December 31, 1995. We have incurred losses
from operations since inception. At December 31, 1998, we had an accumulated
deficit of $20,774,129. The reports of our independent public accountants for
the years ended December 31, 1998 and 1997 contained a paragraph noting
substantial doubt regarding our ability to continue as a going concern.
Prior to the quarter ended September 30, 1997, our focus was generally
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 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.
As an outgrowth of our BRG and CAA activities, and in recognition of
the need to increase the availability of high-speed Internet access, our focus
since mid-1997, our business has evolved to the development of online
communities, particularly for broadband (high bandwidth or high data
transmission capabilities) operators such as cable TV operators (wired and
wireless), and on personal and organizational portals. This focus has resulted
in the introduction of community-building products and services which include a
wide range of online services that enable broadband operators' customers and
others to generate online local content, create Web pages and conduct online
commerce. Our revenues for these products and services include payments for
hardware, software licenses, training and other implementation services and a
percentage of advertising revenues as well as a percentage of fees paid by
subscribers of our broadband operator customers in connection with e-commerce
transactions which these subscribers conduct on the broadband operator's
systems. We intend to focus our future efforts primarily on our community-
building products and services for broadband operators and other ISPs; our
consumer/personal portal products and services; our enterprise products and
services for companies and organizations with dispersed operations, vendors or
constituents; our online educational products and services; and our financial
services for financial institutions having less than $500 million in assets.
26
<PAGE>
During November 1997, we announced to certain of our customers that we
were terminating specific types of Web site development, maintenance and hosting
activities and began to transition this business to other companies. We have
ceased Web site development activities which are not related to the development
of products for our community, consumer, enterprise, education and financial
products and services. In addition, during October 1997, we licensed our MD
Gateway Web site to Medical Education Collaborative ("MEC") and are 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 products and services
that we are no longer offering represented $905,649 of our revenues during the
year ended December 31, 1997, representing 32% of the total revenues for such
period. For the year ended December 31, 1998, revenues from these activities
were insignificant.
During 1998, we implemented a new pricing structure for our broadband
community-building products and services whereby we supply our content and
community-building products and services and the operator provides the
infrastructure and channel for distribution of high-speed Internet access
services. This new structure results in a lower front-end cost for the
operator, in consideration for which we expect to receive a higher percentage of
advertising and transaction fees received from the broadband operator's
subscribers. We will require additional working capital and will realize
substantially lower initial revenues in connection with the sale of our
broadband community-building products and services, as we will, under this
structure, be providing our products and services primarily for a percentage of
future revenues rather than license and service fees. We expect that this
pricing strategy will result in higher revenues in the future as broadband
operators' Internet subscriber bases grow. In addition, we intend to continue
to incur significant capital expenditures and operating expenses in order to
continue development and expansion of our products and services and to market
our products and services to an expanding base of potential customers. As a
result, we expect to incur additional substantial operating and net losses
during 1999 and for one or more years thereafter. There can be no assurance
that such expenditures will result in increased revenue and/or customers. In
addition, we expect that our net revenues will decrease during the first six to
nine months of 1999 compared to the similar periods in 1998 as we continue to
transition our business and to develop the customer base required to attract
paid advertising and e-commerce opportunities.
Based on applicable current accounting standards, we estimate that we
will be required to record a non-operating expense of approximately $4,200,000
during the first quarter of 1999 in connection with the private placement of
$3,000,000 principal amount of our Series C preferred stock. In addition, if we
exercise our option to sell an additional $2,000,000 principal amount of our
Series C preferred stock, we may incur similar non-operating expense in excess
of $2,000,000 at the time of the sale. Non-operating expenses of approximately
$4,800,000 were charged to earnings in connection with the private placement of
preferred stock during 1998. While these charges do not affect our operating
losses or working capital, they do result in a decrease in our net income
available to common stockholders. Additionally, we recorded a non-cash charge
for preferred stock dividends during 1998 of approximately $329,000.
27
<PAGE>
Results of Operations
We have revised certain factors used in determining the amounts to be
accreted related to issuances of our 10% and 5% Preferred Stock as well as the
period for the accretion of the 5% Preferred Stock. These revisions and their
impact on unaudited quarterly amounts are presented below.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
As Reported As Revised
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
Net loss (1,488,709) (1,488,709)
Preferred stock dividends 62,399 62,399
Accretion of preferred stock to redemption value 145,334 418,696 (a)
------------ ------------
Net loss available to common stockholders $ (1,696,442) $ (1,969,804)
============ ============
Loss per share, basic and diluted $ (0.51) $ (O.59)
============ ============
Weighted average shares outstanding 3,335,687 3,335,687
============ ============
</TABLE>
(a) Increase in accretion of preferred stock to redemption value is due to the
revision of discounts applied to common stock and common stock warrants issued
in connection with the preferred stock private placements.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- ---------------------------------
As Reported As Revised As Reported As Revised
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss (1,638,472) (1,638,472) (3,127,181) (3,127,181)
Preferred stock dividends 80,585 80,585 142,984 142,984
Accretion of preferred stock to
redemption value 848,646 1,818,564 (b) 993,980 2,237,260(b)
------------- ------------ ------------ ------------
Net loss, available to common
stockholders $ (2,567,703) $ (3,537,621) $ (4,264,145) $ (5,507,425)
============= ============ ============ ============
Loss per share, basic and diluted $ (0.75) $ (1.03) $ (1.26) $ (1.62)
============= ============ ============ ============
Weighted average shares outstanding 3,446,131 3,446,131 3,390,909 3,390,909
============= ============ ============ ============
</TABLE>
(b) Increase in accretion of preferred stock to redemption value due to the
revision of discounts applied to common stock and common stock warrants issued
in connection with preferred stock private placements and the revision of the
accretion period for the preferred stock.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
As Reported As Revised As Reported As Revised
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
Net loss (2,091,211) (2,091,211) (5,218,392) (5,218,392)
Preferred stock dividends 100,635 100,635 243,619 243,619
Accretion of preferred stock to
redemption value 1,691,209 472,800 (c) 2,685,189 2,710,060 (c)
------------ ----------- ------------- -----------
Net loss available to common
stockholders $ (3,883,055) $(2,664,646) $ (8,147,200) $(8,172,071)
============ =========== ============= ===========
Loss per share, basic and diluted $ (1.09) $ (0.75) $ (2.37) $ (2.38)
============ =========== ============= ===========
Weighted average shares outstanding 3,566,951 3,566,951 3,436,922 3,436,922
============ =========== ============= ===========
</TABLE>
(c) Increase in accretion of preferred stock to redemption value due to the
revision of discounts applied to common stock and common stock warrants issued
in connection with preferred stock private placements and the revision of the
accretion period for the preferred stock.
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 and software which are calculated as a percentage
of service sales and hardware and software sales, respectively.
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------------------
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Net sales:
Service sales 30.6% 60.0% 77.9%
Hardware and software sales 69.4% 40.0% 22.1%
-------------- ------------- -------------
Total net sales 100.0% 100.0% 100.0%
Cost of sales:
Cost of services
(as percentage of service sales) 79.5% 61.0% 63.7%
Cost of hardware and software
(as percentage of hardware and software sales) 82.0% 87.0% 72.8%
-------------- ------------- -------------
Total cost of sales 81.3% 71.4% 65.7%
Gross margin 18.7% 28.6% 34.3%
-------------- ------------- -------------
Operating expenses:
Sales and marketing expenses 156.0% 42.9% 43.8%
Product development expenses 79.5% 39.7% 32.0%
General and administrative expenses 410.2% 65.8% 61.8%
Depreciation and amortization expenses 49.8% 7.1% 7.4%
-------------- ------------- -------------
Total operating expenses 695.5% 155.5% 145.0%
Loss from operations (676.8)% (126.9)% (110.7)%
-------------- ------------- -------------
Net loss (668.0)% (120.9)% (98.3)%
Preferred stock dividends (20.7)% - -
Accretion of preferred stock to redemption value (258.6)% - -
Accretion of preferred stock for guaranteed return
in excess of redemption value (44.5)% - -
-------------- ------------- -------------
Net loss available to common stockholders (991.8)% (120.9)% (98.3)%
============= ============= =============
</TABLE>
Twelve Months Ended December 31, 1998 and 1997.
Net sales for the twelve months ended December 31, 1998 totaled $1,589,380,
including $485,663 for service sales and $1,103,717 for hardware and software
sales. This represents a decrease of 43% below 1997 net sales of $2,791,556,
which consisted of $1,674,198 for service sales and $1,117,358 for hardware and
software sales. We had four customers representing 71% of sales and four
customers representing 47% of sales for the years ended December 31, 1998 and
1997, respectively. The decrease in sales for the 1998 period compared to the
1997 period was due to the reduction of certain of our Web site development,
maintenance and hosting activities during the fourth quarter of 1997 and due to
a new revenue-based pricing structure for our products and services for
broadband operators. During the second quarter of 1998, we implemented a new
pricing structure for these products and services whereby we supply any required
equipment and the products and services and the customer is not required to pay
any significant fees upon the delivery of such items. This structure results in
a lower front-end cost for the operator and lower initial revenues for us, in
consideration for which we expect to receive a higher percentage of advertising
and transaction fees received from the broadband operators' subscribers. We
anticipate
28
<PAGE>
that our near-term revenues will be less as a result of the implementation of
this new pricing strategy, but that our future revenues will be higher as the
subscriber base for Internet access for our broadband operator customers grows.
Cost of sales as a percentage of net sales was 81.3% for the twelve month
1998 period and 71.4% for the comparable 1997 period.
Service Sales - Cost of service sales increased in the 1998 period as
a percentage of service sales as the mix of sales changed from custom Web
page development, hosting and maintenance activities, which were at higher
margins, to transactional services, such as e-banking, our Re/MAX Main
Street product, and our i2u/WEBBbuilder products, which were at lower
margins. We incurred development expenses to assist our i2u/WEBBbuilder
customers in enabling and launching their sites, which included charges
such as help desk set-up fees, credit card processing set-up fees, and
costs associated with integrating the billing system through the Internet,
totaling $49,100 related to the Re/Max Main Street product, and also
provided programming services to our e-banking customer at discounts, which
contributed to lower gross margins on service sales. In addition, the
increase in cost of service sales in the 1998 period reflect an increase in
direct costs, such as telephone line costs (on a per customer basis)
related to the our Internet connectivity business coupled with decreasing
revenues from that activity as we are selling these services to fewer
customers as a result of our decision to emphasize our Internet content
services.
Hardware and Software Sales - Cost of hardware and software sales
increased in the 1998 period as a percentage of hardware sales because we
sold equipment to existing customers at lower margins.
Sales and marketing expenses were $2,479,029 for the twelve months ended
December 31, 1998, compared to $1,197,038 for the 1997 period. Sales and
marketing expenses as a percentage of net sales increased from 42.9% in 1997 to
156.0% in 1998. During the 1998 period, we incurred new market development
costs associated with developing our i2u/WEBBbuilder business. These costs
consist of expenses incurred by us, principally labor, travel and other third-
party costs such as software licenses, in connection with getting our customer's
ISP presence established, including design and branding of the customer's
Internet start page, developing local area content, and assisting our customers
in developing our Internet business presence. We also incurred costs in the
1998 period associated with opening international markets, principally in Mexico
and Argentina, costs associated with developing sales collateral materials,
including brochures and PC based presentation software as well as additional
compensation expense as a result of employing more experienced sales people.
Product development expenses were $1,264,287 for the twelve months ended
December 31, 1998, compared to $1,108,456 for the 1997 period. Product
development expense as a percentage of net sales increased from 39.7% in 1997 to
79.5% in 1998. We capitalized $281,776 of development costs during 1998 and
$124,097 during 1997 related to the development of our i2u/WEBBbuilder product
offerings. (See discussion below regarding depreciation and amortization.)
During 1998, we continued developing our i2u/WEBBbuilder products and services,
reflected by our release of i2u/WEBBbuilder software versions through 2.0,
including the development of e-commerce and the integration of DCI's
CommunityWare(R) with our i2u/WEBBbuilder software. During 1997, we developed
our initial i2u product, wireless cable capabilities, and initial product
offerings targeted at the CME segment of the healthcare market. We expect
product development expenses to continue to increase during 1999 as we continue
to develop our products and services.
General and administrative expenses were $6,519,441 for the twelve
months ended December 31, 1998, compared to $1,837,330 for the 1997 period.
General and administrative expenses as a percentage of net sales increased from
65.8% in 1997 to 410.2% in 1998. During the 1998 period, we recorded non-cash
charges of $2,870,628 for grants of common stock and options and warrants to
purchase common stock to non-employees in exchange for services, including
$1,925,000, which we incurred during the fourth quarter of the year to enhance
our
29
<PAGE>
activities in corporate finance, mergers and acquisitions, and public and
investor relations. We also added (in the aggregate) nine individuals in 1998
in the finance, strategic development, and network operations areas to support
our business segments, and we incurred costs in connection with the
administration of our operating segments, including additional personnel costs,
particularly for our Chief Operating Officer, as well as administration of our
financial services business segment. Additionally, in the 1998 period we
incurred costs of $179,562 in connection with unsuccessful business acquisition
efforts and accounting, legal and other expenses associated with capital raising
activities.
Depreciation and amortization was $791,155 for the twelve months ended
December 31, 1998, compared to $198,788 for the 1997 period. During the 1998
period, we fully amortized our i2u/WEBBbuilder software costs and recorded
$401,737 of amortization expense. (See Note 5 of the Notes to Financial
Statements.) We also recorded more depreciation expense as a result of an
increase in fixed assets, including our e-banking service bureau based solution,
and equipment and software to support our i2u/WEBBbuilder development and
testing.
Interest income was $139,806 during the twelve-month period ended
December 31, 1998, compared to $168,298 for the 1997 period. During the 1998
period, we utilized more of our cash reserves to fund our operations, which
resulted in less cash available for investment in interest bearing securities.
We also recorded interest income on the note receivable to DCI, which partially
offset the decrease in interest income from our cash investments. Our
investments consist of corporate bonds and cash equivalents.
Net losses allocable to common stockholders were $15,762,372 for the
twelve-month period ended December 31, 1998 compared to $3,375,279 for the 1997
period. During the 1998 period, we recorded non-operating expenses for preferred
stock dividends and accretion of preferred stock to redemption value of $329,120
and $4,110,060, respectively. In addition, during 1998 we recorded $706,929 of
accretion of preferred stock for the guaranteed return in excess of the
redemption value. Additionally, the increase in losses reflect expenses in sales
and marketing, 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 our products and services. We expect to continue to
experience increased operating expenses and capital investments during 1999, as
we continue to develop new product offerings and the infrastructure required to
support our anticipated growth. We believe that, initially, these expenses will
be greater than increases in net sales. We expect to report operating and net
losses for 1999 and for one or more years thereafter.
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. We 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. The increase in
sales for the 1997 period compared to 1996, was due to the expanded development
of our 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, our 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
30
<PAGE>
twelve-month period was due to the hiring of new sales and marketing personnel
and associated expenditures. We also developed initial marketing materials,
began lead generation activity, and began to sell our i2u and CME products and
services. In addition, we entered into an agreement with Telemedical Systems
Integration, Inc. (TMED) during the fourth quarter of 1996 to serve as our
primary sales group for our healthcare products. We 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, we incurred expenses associated with
marketing and trade shows directed towards the wireless cable market and began
to market our 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 our products and services. Product development expenses during
the 1997 period included the completion of the initial development of our 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 our WebQuest process.
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 our 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, we incurred
expenses and developed capabilities to enter into the international market for
our i2u products and services.
Depreciation and amortization was $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
our initial public offering, we paid a portion of our outstanding debt resulting
in a reduction of future interest expense and began earning interest income on
the invested net proceeds.
Net losses available to common stockholders 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 our products and services.
Liquidity and Capital Resources
As of December 31, 1998, we had cash and cash equivalents of $698,339
and working capital of $877,091, and a working capital deficit of $(249,100)
excluding the note receivable from DCI and deferred acquisition costs. We
financed our operations and capital equipment expenditures in 1998 primarily
through private sales of preferred stock resulting in net proceeds of
$4,164,286. See Note 7 of Notes to Financial Statements for information
regarding these sales of securities.
During January 1999, we sold 3,000 shares of Series C Preferred Stock
with a stated value of $1,000 per share, which resulted in net proceeds of
$2,755,000. In connection with that transaction, we also have the right (subject
to a related registration statement being declared effective by the Securities
and Exchange Commission) to exercise a warrant to require the investor to
purchase 2,000 additional shares of the Series C Preferred Stock, which would
result in additional net proceeds of approximately $2,000,000. To date, we have
not exercised this warrant.
31
<PAGE>
In addition, during January 1999, an investor exercised the warrant to purchase
common stock we issued in connection with the Series A Preferred Stock, which
resulted in proceeds of $799,400.
During the twelve months ended December 31, 1998, we purchased
$481,427 of property and equipment. These purchases were primarily computer
equipment, communications equipment, and software necessary to develop and
demonstrate the recently introduced i2u/WEBBbuilder products as well as office
furniture, the installation of a new accounting software system, and software
for a second online banking service. In anticipation of future growth,
including the implementation of our new pricing structure, we expect to invest a
minimum of $1,000,000 during 1999 to purchase additional computer equipment,
software and office equipment.
Accounts receivable balances decreased from $701,330 at December 31,
1997 to $147,837 at December 31, 1998, due to in part to the implementation of
our new pricing structure for our i2u/WEBBbuilder products and services for
broadband operators and the collection of receivables from sales recorded in the
fourth quarter of 1997. We use the percentage of completion method of revenue
recognition for certain of our Web development services in which we record an
asset for revenue earned but not billed. During the year ended December 31,
1998, we billed the remaining accrued revenue receivable resulting in a
reduction of $143,543 from the December 31, 1997 balance. In connection with
using the percentage of completion method, we record deferred revenue for
amounts we receive from our customers for work we have yet to complete. As of
December 31, 1998, our customers have paid us $100,600 for work we have yet to
complete and which was recorded as a deferred revenue liability. Our hardware
and software inventory consists of software licenses and computer hardware
purchased by us for resale, which decreased from $235,441 at December 31, 1997
to $55,126 at December 31, 1998.
Prepaid expenses decreased to $74,179 at December 31, 1998, from $249,510
at December 31, 1997, primarily due to receipt of items that we prepaid during
December 1997 and the realization of a prepayment for a software license. The
major portion of the remaining balance consists of prepaid insurance and January
1999 expenses that we paid in 1998. Deferred acquisition costs represent costs
we incurred in connection with our proposed merger with DCI. Trade accounts
payable and accrued liabilities at December 31, 1998, decreased to $873,901 from
$969,937 at December 31, 1997, primarily due to a reduction in payables for
equipment purchases to support inventory requirements for sales at the end of
1997 and sales that we anticipated for the early part of 1998.
We believe that our cash and cash equivalents and working capital at
December 31, 1998, plus the net proceeds of the offering of preferred stock that
we completed during January 1999 will be adequate to sustain our operations
through at least May 1999. In order to continue to finance our operations, we
are pursing several funding possibilities. These funding activities are intended
to raise the approximately $10 million of net proceeds we estimate will be
required to sustain operations for the next twelve months and the additional
approximately $15 million we estimate will be required to implement our business
plan. First, we are pursuing various potential strategic relationships which, if
consummated, could result in one or more significant investments by strategic
partners. Second, in connection with our initial public offering during May
1996, warrants representing the right to acquire 632,500 shares of our common
stock at $9.00 per share were issued to investors. These warrants expire on May
23, 1999, if not exercised prior thereto. In the event that all of the warrants
were exercised for cash, we would receive in excess of $5.6 million in net
proceeds. In lieu of exercising the warrants for cash, holders may utilize a
"cashless exercise" option whereby they may apply the value of a portion of
their warrants (i.e., the difference between the market value for our common
stock and $9.00, the exercise price of the warrants) to pay the exercise price
for the balance of the warrants to be exercised. Therefore, we are unable to
predict the amount of net proceeds, if any, which we may receive upon exercise
of the warrants. We have also initiated discussions with various potential
private investors which could result in additional debt or equity investments
and have begun discussions regarding a possible secondary offering of our
securities during the fall of 1999. There can be no assurance that we will be
successful in obtaining any additional equity or debt capital or that if such
capital is available, that it will be available on acceptable terms. If we are
unable to obtain the capital required to sustain our operations, we will be
required to reduce or terminate certain of our operations which could have a
material adverse affect on our operating results and financial condition. In its
reports accompanying the audited financial statements for the years ended
December 31, 1998 and 1997, our auditors, Arthur Andersen LLP, expressed
substantial doubt about our ability to continue as a going concern.
32
<PAGE>
Year 2000 Compliance Disclosure
The Year 2000 issue involves the potential for system and processing
failures of date-related data resulting from computer-controlled systems using
two digits rather than four to define the applicable year. For example,
computer programs that contain time-sensitive software may recognize a date
using two digits of "00" as the year 1900 rather than the year 2000. This could
result in system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar ordinary business activities.
We have reviewed our internal software and hardware systems and believe
they will function properly with respect to dates in the year 2000 and
thereafter. We expect to incur no significant costs in the future for Year 2000
problems. Nonetheless, there can be no assurance in this regard until such
systems are operational in the Year 2000. We are in the process of contacting
all of our significant suppliers to determine the extent to which our systems
are vulnerable to those third parties' failure to make their own systems Year
2000 compliant. As of the date of this report, we have completed a significant
portion of this review and expect to complete it by the end of the second
quarter of 1999. Based on the review to date, we believe our significant
suppliers and vendors are Year 2000 compliant and that should any of them prove
not to be Year 2000 compliant, we believe that it could find a replacement
vendor or supplier which is Year 2000 compliant without significant delay or
expense. However, the failure to correct material Year 2000 problems by our
suppliers and vendors could result in an interruption in, or a failure of,
certain of our normal business activities or operations. While our review has
not identified any Year 2000 problems that will have a material impact on our
business, due to the general uncertainty inherent in the Year 2000 problem,
resulting from the uncertainty of the Year 2000 readiness of third-party
suppliers and vendors and of our customers, we are unable to determine at this
time that the consequences of Year 2000 failures will not have a material impact
on our results of operations, liquidity or financial condition.
Of our product offerings, the one that may be most impacted by Year 2000
problems or peoples' concern about potential Year 2000 problems, is our
Financial Services product offering. We have recently entered into an agreement
with CU Cooperative Systems, Inc., a national cooperative association
representing over 500 credit unions. The services to be provided to the
Cooperative's members are scheduled for introduction during the second half of
1999. Our Financial Services products are Year 2000 compliant, however, concerns
about Year 2000 problems may cause individual cooperatives or their members to
be reluctant to offer or to engage in e-banking transactions prior to the end
of 1999. While we have not anticipated any significant income from the use of
this prior to 2000, a delay in the implementation of the system by the
Cooperative's members could result in a decrease in anticipated revenues for the
product offering in 2000, particularly during the first six months of the year.
Item 7. FINANCIAL STATEMENTS.
See Financial Statements beginning on page F-1.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
33
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Directors and Officers
The directors and officers of OSS as of March 22, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Director Position
- ----- --- -------- --------
Since
-----
<S> <C> <C> <C>
R. Steven Adams............... 46 1994 Chairman of the Board, President and Chief Executive
Officer and a Director
William R. Cullen............. 57 1998 Chief Operating Officer and a Director
Thomas S. Plunkett............ 45 --- Chief Financial Officer
Paul E. Beckelheimer.......... 52 --- Senior Vice President-Business Development
Gwenael S. Hagan.............. 38 --- Senior Vice President-Strategic Development
Paul H. Spieker............... 55 1995 Vice President-Technical Operations and a Director
Andre Durand.................. 31 --- Senior Vice President-Product Development
Robert J. Lewis............... 68 1995 Director
Richard C. Jennewine.......... 60 1996 Director
</TABLE>
R. Steven Adams, founder of OSS, has served as President, Chief
Executive Officer and a director since our 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 Chief Operating Officer and a
director since March 1998. From May 1997 to March 1998, Mr. Cullen worked as a
consultant to businesses in the cable industry. From April 1994 to May 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 January 1992 to March 1994, Mr. Cullen was President and CEO of California
News Channel, a programming project of Cox Cable Communications. From July 1984
to December 1991, Mr. Cullen was employed by United Artist Cable Corporation
(and its predecessor United Cable Television Corporation) as Vice President of
Operations and President of its subsidiary United Cable of Los Angeles, Inc.,
and as its Senior Vice President of the Southwest Division. Prior to joining
United Artist Cable Corporation, Mr. Cullen was President of Tribune Company
Cable of California, Inc. and CEO of its United-Tribune Cable of Sacramento
joint venture, served as a top financial officer of three companies, and worked
in banking.
Thomas S. Plunkett, has served as Vice President-Chief Financial
Officer of OSS 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.
Paul E. Beckelheimer, joined OSS in June 1998 as Senior Vice
President-Business Development. From September 1994 to June 1998, Mr.
Beckelheimer served in various positions, most recently as Vice President-
Operations, at American Telecasting, Inc., a wireless cable television systems
operator. From October 1993 to September 1994, Mr. Beckelheimer served as
General Manager-Houston Central for DCI Cablevision of Houston, Inc., a cable
television systems operator. From November 1990 to August 1993, Mr.
Beckelheimer served as Vice
34
<PAGE>
President-Western Region of The Monitor Channel, a cable television channel
company. Prior to joining The Monitor Channel, Mr. Beckelheimer was President
and co-founder of Sterling Communications Incorporated, a cable television
system operator, and worked in various operations positions for Rifkin and
Associates, Communicom Cable Television, and United Cable Television
Corporation.
Gwenael S. Hagan, joined OSS in January 1998 as Senior Vice President
of Strategic Development. From June 1996 to January 1998, Mr. Hagan served as
Vice President of New Business Development with International Channel, a cable
television network, where he was responsible for new revenue opportunities, both
domestically and internationally, and developing and implementing strategies to
increase revenue and position International Channel for growth via evolving
digital cable and satellite platforms. From December 1994 to June 1996, Mr.
Hagan served as the Internet Marketing Manager for Microsoft's western region.
His work with Microsoft encompassed competitive strategy development, sales
resource allocation, presentations and public relations. From March 1994 to
December 1994, Mr. Hagan worked with Missing Link Communications, Inc., a
developer of television programs to assist computers in buying personal
computers. At Missing Link, Mr. Hagan was responsible for programming concepts
and establishing alliances. Prior to that time, Mr. Hagan spent 11 years with
Jones International, Ltd., a cable television operator and television network
development company.
Paul H. Spieker, has been Vice President-Technical Operations and a
director of OSS 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 US 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.
Andre Durand, pending completion of the DCI Merger, Mr. Durand has
been elected Senior Vice President-Product Development of OSS. Mr. Durand is
the founder, President, Chief Executive Officer, Secretary and a Director of
DCI. Mr. Durand is a regular guest speaker at computer fairs, conferences and
expositions, and regularly contributes articles to trade publications discussing
Internet technologies, trends and predictions. From January 1991 to January
1993, Mr. Durand was an auditor with KPMG Peat Marwick in Los Angeles,
California. Mr. Durand holds two degrees from the University of California at
Santa Barbara, one in Biology and one in Economics/Accounting.
Robert J. Lewis, has been a director of OSS 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. Beginning in March 1997,
however, and continuing through the present, Mr. Lewis has been the General
Partner and Chief Executive Officer of InterMedia Partners, an operator of cable
systems in Kentucky, Tennessee, North Carolina, South Carolina, and Georgia.
From 1987 until his retirement in 1995, Mr. Lewis was employed by Western Tele-
Communications, 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 in 1995.
Richard C. Jennewine, has been a director of OSS 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
35
<PAGE>
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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires OSS'
directors and executive officers, and persons who own more than ten percent of a
registered class of OSS' equity securities, to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of our common stock and other equity securities. Officers, directors
and greater than ten-percent shareholders are also required by SEC regulation to
furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based solely on review of the copies of such reports
furnished to us and written representations that no other reports were required,
during the year ended December 31, 1997, all Section 16(a) filing requirements
applicable to our officers, directors and greater than ten-percent beneficial
owners were timely complied with except for the following:
<TABLE>
<CAPTION>
Name of Individual Form Number of Late Reports Transactions Not Timely Reported
- ------------------ ---- ---------------------- --------------------------------
<S> <C> <C> <C>
R. Steven Adams 5 1 6
William R. Cullen 3 1 2
5 1 1
Thomas S. Plunkett 5 1 5
Paul E. Beckelheimer 3 1 1
5 1 1
Gwenael S. Hagan 3 1 2
5 1 4
Paul H. Spieker 5 1 5
Andre Durand 3 1 1
Robert J. Lewis 5 1 2
Richard C. Jennewine 5 1 1
</TABLE>
36
<PAGE>
Item 10. EXECUTIVE COMPENSATION.
The following table summarizes the annual compensation paid by OSS
during years ended December 31, 1996, 1997, and 1998 to R. Steven Adams, the
Chief Executive Officer of OSS as of December 31, 1998 and the officers of OSS,
other than Mr. Adams, whose total annual salary and bonus exceeded $100,000 for
the year ended December 31, 1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
-------------------------------------------------------------------------------
Salary Bonus Other Securities
Name and Principal Position Year $ $ $ Underlying Options
- --------------------------- ---- ------ ----- ------ -------------------
<S> <C> <C> <C> <C> <C>
R. Steven Adams 1998 $155,203 -- -- 175,250 shs. (1)
President, Chief Executive Officer 1997 $120,217 -- -- --
and Director 1996 $110,217 -- -- --
William R. Cullen (2) 1998 $165,000 -- $271,494 (3) 160,000 shs.
Chief Operating Officer 1997 -- -- -- --
1996 -- -- -- --
Thomas S. Plunkett 1998 $128,798 $25,000 -- 65,250 shs. (4)
Chief Financial Officer 1997 $103,642 -- -- 90,000 shs. (5)
1996 $ 17,641 -- -- 60,000 shs.
Gwenael Hagan (6) 1998 $ 91,549 $13,800 -- 70,000 shs. (7)
Senior Vice President-Product and 1997 -- -- -- --
Business Development 1996 -- -- -- --
Michael Murphy 1998 $100,203 $15,000 -- 250 shs. (8)
Vice President and General Manager 1997 $ 63,758 -- -- 75,000 shs.
Financial Services 1996 -- -- -- --
Edward Robinson 1998 $ 99,842 $ 3,450 -- 4,250 shs. (9)
Vice President Market Development 1997 $ 81,667 -- -- 50,000 shs.
1996 -- -- -- --
</TABLE>
_______________
(1) Includes options for the purchase of 25,000 and 250 shares of common stock
initially granted to Mr. Adams on June 3, 1998 and June 7, 1998,
respectively, but repriced on November 20, 1998.
(2) Mr. Cullen was hired as Chief Operating Officer in March, 1998.
(3) Includes 24,000 shares of common stock issued instead of cash compensation.
These shares have an aggregate dollar value of $228,556 (determined by
multiplying the last sale price of our common stock by the amount of common
stock on the dates such shares were earned). Also includes amounts paid to
Mr. Cullen for reimbursement of airfare expenses ($17,730) and other
commuting expenses ($15,510).
(4) Includes options for the purchase of 250 shares of common stock initially
granted to Mr. Plunkett on June 7, 1998 but repriced on November 20, 1998.
(5) Includes options for the purchase of 60,000 and 15,000 shares of common
stock initially granted to Mr. Plunkett on October 4, 1996 and January 9,
1997, respectively, but repriced on May 20, 1997.
(6) Mr. Hagan was hired as Senior Vice President-Product and Business
Development in January 1998.
(7) Includes options for the purchase of 250 shares of common stock initially
granted to Mr. Hagan on June 7, 1998 but repriced on November 20, 1998.
(8) Represents options for the purchase of 250 shares of common stock initially
granted to Mr. Murphy on June 7, 1998 but repriced on November 20, 1998.
(9) Includes options for the purchase of 250 shares of common stock initially
granted to Mr. Robinson on June 7, 1998 but repriced on November 20, 1998.
37
<PAGE>
OSS Stock Options
The following tables summarize the stock option grants and exercises during
1998 to or by the named officers and the value of all options held by the named
officers as of December 31, 1998. Unless otherwise noted, each of these stock
options is exercisable in one-third increments on the 12th, 24th, and 36th month
after the date of grant.
<TABLE>
<CAPTION>
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1998
Percent of Total Options
Number of Securities Granted to Employees Exercise
Underlying Options During Year Ended Price Expiration
Name Granted December 31, 1998 ($/Share) Date
- ----- ------- ----------------- --------- ----
<S> <C> <C> <C> <C>
R. Steven Adams 100,000 $8.50 2/18/05
25,000 (1)(3) $8.50 6/3/05
250 (2) $8.50 6/7/03
50,000 $7.63 11/24/05
---------
Total 175,250 12.4%
William R. Cullen 30,000 $6.81 2/9/05
100,000 $8.25 3/10/05
30,000 $7.63 11/24/05
---------
Total 160,000 11.3%
Thomas S. Plunkett 30,000 $8.50 2/18/05
35,000 $4.00 10/8/05
250 (2) $8.50 6/7/03
---------
Total 65,250 4.6%
Gwenael Hagan 30,000 $8.50 2/18/05
39,750 $4.00 10/8/05
250 (2) $8.50 6/7/03
---------
70,000
Michael Murphy 250 (2) * $8.50 6/7/03
Edward Robinson 250 (2) $8.50 6/7/03
4,000 $7.63 11/24/05
---------
Total 4,250 *
</TABLE>
- --------------------------------------------------------------------------------
* Less than 1%.
(1) This option was originally granted on June 3, 1998 at an exercise price of
$13.375 per share. This option was repriced to an exercise price of $8.50
per share on November 20, 1998.
(2) These options were originally granted on June 7, 1998 at an exercise price
of $14.00 per share. These options were repriced to an exercise price of
$8.50 per share on November 20, 1998.
(3) This option was exercisable in full immediately upon grant.
38
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES DURING YEAR ENDED DECEMBER 31, 1998 AND OPTION
VALUES AT DECEMBER 31, 1998
Number of Securities Value of Unexercised
Shares Underlying Options at In-The-Money Options at
Acquired Value December 31, 1998 December 31, 1998 (2)
Name on Exercise Realized (1) Exercisable / Unexercisable Exercisable / Unexercisable
- ---- ----------- ------------- ----------------------------- -----------------------------
<S> <C> <C> <C> <C>
R. Steven Adams 0 $0 25,000 / 150,250 $112,250 / $719,875
William R. Cullen 0 $0 0 / 160,000 $0 / $821,950
Thomas S. Plunkett 5,000 $35,600 35,000 / 115,250 $682,200 / $735,375
Gwenael Hagan 0 $0 10,000 / 90,000 $65,000 / $623,875
Michael Murphy 25,000 $278,000 0 / 50,250 $0 / $569,625
Edward Robinson 16,667 $162,170 0 / 37,583 $0 / $401,621
</TABLE>
_______________
(1) The value realized was determined by multiplying the number of shares
exercised by the favorable difference between the exercise price per share
and the closing bid price per share on the date of exercise.
(2) The value of unexercised in-the-money options was determined by multiplying
the number of shares subject to such options by the favorable difference
between the exercise price per share and $13.00, the closing bid price per
share on December 31, 1998.
Board of Director Compensation
The Board of Directors of OSS do not receive cash compensation for their
services as directors of OSS, but they are reimbursed for their reasonable
expenses in attending meetings of the Board of Directors. During 1998, we
compensated Robert J. Lewis and Richard C. Jennewine for their services as
consultants and issued to them options to purchase 42,500 and 32,5000 shares,
respectively, of our common stock.
Change of Control Agreements
We have entered into employment agreements with R. Steven Adams, William R.
Cullen, Thomas S. Plunkett, and Gwenael Hagan which take effect only if a change
of control of 30% or more of our outstanding voting stock occurs. If a change
of control occurs, these agreements provide for the continued employment (at
similar responsibility and salary levels) of the employee for a period of three
years after the change of control. During this three year period, if OSS (or a
successor entity) terminates the employee's employment without cause or if the
employee terminates his employment for good reason, then OSS (or the successor
entity) must pay a lump sum severance to the employee equal to three years
salary (including bonus), accelerate the vesting of all outstanding options held
by the employee and allow the employee to continue to participate in the benefit
and welfare plans of OSS (or the successor entity) for a period of three years
after the employment terminates.
39
<PAGE>
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information as to the name, address and stock holdings of each person known
by OSS to be a beneficial owner of more than 5% of our common stock, its 10%
Preferred Stock, or its Series C Preferred Stock as of and as to the name,
address and stock holdings of certain officers, each director and nominee for
election to the Board of Directors and by all executive officers, directors, and
nominees, as a group, as of March 22, 1999 is set forth below. On March 29,
1999, we had 5,595,273 shares of our common stock outstanding. Except as
indicated below, we believe that each such person has the sole (or joint with
spouse) voting and investment powers with respect to such shares.
<TABLE>
<CAPTION>
Common Stock 10% Preferred Stock Series C Preferred Stock
------------------------------------------------------------------------------------------
Name/Address Amount Percent Amount Percent Amount Percent
of Beneficially of Beneficially of Beneficially of
Shareholder/Director Owned Class (1) Owned Class (1) Owned Class (1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
R. Steven Adams 555,334 (2) 9.8% None -- None --
1800 Glenarm Place, Suite 700
Denver, Colorado 80202
Lee E. Schlessman 91,633 (3) 1.6% 60,000 (4) 70.6% None --
1301 Pennsylvania Street, Suite 800
Denver, Colorado 80203
Susan M. Duncan 22,908 (5) * 15,000 (6) 17.6% None --
2651 South Wadsworth Circle
Lakewood, Colorado 80227
Cal J. and Amanda Mae Rickel 7,636 (7) * 5,000 5.9% None --
P.O. Box 1076
Cortez, Colorado 81321
Southwest Contracting, Inc. 7,636 (8) * 5,000 5.9% None --
P.O. Box 719
Cortez, Colorado 81321
Arrow Investors II LLC 462,321 (9) 8.3% None -- 500 100%
One World Trade Center
Suite 4563
New York, New York 10048
John M. Liviakis 362,850 (10) 6.5% None -- None --
2420 K Street
Suite 220
Sacramento, California 95816
Paul H. Spieker 193,000 (11) 3.4% None -- None --
1800 Glenarm Place, Suite 700
Denver, Colorado 80202
Thomas S. Plunkett 65,250 (12) 1.2% None -- None --
1800 Glenarm Place, Suite 700
Denver, Colorado 80202
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
William R. Cullen 67,333 (13) 1.2% None -- None --
1800 Glenarm Place, Suite 700
Denver, Colorado 80202
Gwenael Hagan 20,250 (14) * None -- None --
1800 Glenarm Place, Suite 700
Denver, Colorado 80202
Michael Murphy 25,250 (15) * None -- None --
1800 Glenarm Place, Suite 700
Denver, Colorado 80202
Edward Robinson 16,916 (16) * None -- None --
1800 Glenarm Place, Suite 700
Denver, Colorado 80202
Robert J. Lewis 85,703 (17) 1.5% None -- None --
1800 Glenarm Place, Suite 700
Denver, Colorado 80202
Richard C. Jennewine 50,000 (18) * None -- None --
1800 Glenarm Place, Suite 700
Denver, Colorado 80202
Directors and Executive Officers as a 1,039,370 (19) 17.5% None -- None --
Group (8 persons)
</TABLE>
-----------------------
* Less than one percent of shares outstanding.
(1) In calculating percentage ownership, all shares of Common stock which a
named shareholder has the right to acquire within 60 days from the date
of this report upon exercise of options or warrants are deemed to be
outstanding for the purpose of computing the percentage of common stock
owned by that shareholder, but are not deemed to be outstanding for the
purpose of computing the percentage of common stock owned by any other
shareholders. No options or warrants to acquire either the 10% Preferred
Stock or Series A Preferred Stock are outstanding.
(2) Includes options for the purchase of 58,334 shares of common stock, but
excludes options for the purchase of 116,916 shares of common stock that
are not exercisable during the next 60 days.
(3) Includes 67,633 shares of common stock issuable upon the conversion of
shares of 10% Preferred Stock, including accrued but unpaid dividends
thereon, if such conversion occurred as of the close of business on
March 22, 1999 plus 24,000 shares issuable upon the exercise of warrants
to purchase shares of common stock at a per share exercise price of
$15.00. Upon the actual conversion of the 10% Preferred Stock, the
number of shares into which the 10% Preferred Stock is convertible may
be more or less than 67,633 shares, but in no event will be less than
60,000 shares. Pursuant to the terms of the 10% Preferred Stock, on
March 22, 1999 the conversion price was approximately $9.95. Also
includes shares of common stock beneficially owned by (i) The Schlessman
Family Foundation and (ii) persons who have granted Mr. Schlessman a
power of attorney with respect to such shares.
(4) Includes 5,000 shares of 10% Preferred Stock owned by The Schlessman
Family Foundation. Also includes 15,000 shares of 10% Preferred Stock
owned by persons who have granted Mr. Schlessman a power of attorney
with respect to such shares.
(5) Includes 16,908 shares of common stock issuable upon the conversion of
shares of 10% Preferred Stock, including accrued but unpaid dividends
thereon, if such conversion occurred as of the close of business on
March 22, 1999 plus 6,000 shares issuable upon the exercise of warrants
to purchase shares of common stock at a per share exercise price of
$15.00. Upon the actual conversion of the 10% Preferred Stock, the
number of shares into which the 10% Preferred Stock is convertible may
be more or less than 16,908 shares, but in no event will be less than
15,000 shares. Pursuant to the terms of the 10% Preferred Stock, on
March 22, 1999
41
<PAGE>
the conversion price was approximately $9.95. Also includes shares of
common stock beneficially owned by the Susan M. Duncan Irrevocable Gift
Trust.
(6) Includes 10,000 shares of 10% Preferred Stock owned by the Susan M.
Duncan Irrevocable Gift Trust.
(7) Includes 5,636 shares of common stock issuable upon the conversion of
shares of 10% Preferred Stock, including accrued but unpaid dividends
thereon, if such conversion occurred as of the close of business on
March 22, 1999 plus 2,000 shares issuable upon the exercise of a warrant
to purchase shares of common stock at a per share exercise price of
$15.00. Upon the actual conversion of the 10% Preferred Stock, the
number of shares into which the 10% Preferred Stock is convertible may
be more or less than 5,636 shares, but in no event will be less than
5,000 shares. Pursuant to the terms of the 10% Preferred Stock, on March
22, 1999 the conversion price was approximately $9.95.
(8) Includes 5,636 shares of common stock issuable upon the conversion of
shares of 10% Preferred Stock, including accrued but unpaid dividends
thereon, if such conversion occurred as of the close of business on
March 22, 1999 plus 2,000 shares issuable upon the exercise of a warrant
to purchase shares of common stock at a per share exercise price of
$15.00. Upon the actual conversion of the 10% Preferred Stock, the
number of shares into which the 10% Preferred Stock is convertible may
be more or less than 5,636 shares, but in no event will be less than
5,000 shares. Pursuant to the terms of the 10% Preferred Stock, on March
22, 1999 the conversion price was approximately $9.95.
(9) Includes 129,757 shares issuable upon the conversion of the Series C
Preferred Stock if such conversion occurred as of the close of business
on March 22, 1999. Upon the actual conversion of the Series C Preferred
Stock, the number of shares into which the Series C Preferred Stock is
convertible may be more or less than 129,757 shares, but in no event
will be less than 24,213 shares. Pursuant to the terms of the Series C
Preferred Stock, on March 22, 1999 the conversion price was
approximately $11.65. Also includes 100,000 shares issuable to
affiliates of Arrow Investors II LLC upon the exercise of warrants to
purchase shares at a per share exercise price of $16.33.
(10) Includes 352,850 shares owned by Liviakis Financial Communications, Inc.
Mr. Liviakis, together with his spouse, owns all of the outstanding
securities of Liviakis Financial Communications, Inc.
(11) Includes options for the purchase of 50,000 shares of common stock, but
excludes options for the purchase of 40,250 shares of common stock that
are not exercisable during the next 60 days.
(12) Includes options for the purchase of 65,250 shares of common stock, but
excludes options for the purchase of 105,250 shares of common stock that
are not exercisable during the next 60 days.
(13) Includes options for the purchase of 43,333 shares of common stock, but
excludes options for the purchase of 116,667 shares of common stock that
are not exercisable during the next 60 days.
(14) Includes options for the purchase of 20,250 shares of common stock, but
excludes options for the purchase of 80,000 shares of common stock that
are not exercisable during the next 60 days.
(15) Includes options for the purchase of 25,250 shares of common stock, but
excludes options for the purchase of 25,000 shares of common stock that
are not exercisable during the next 60 days.
(16) Includes options for the purchase of 16,916 shares of common stock, but
excludes options for the purchase of 20,667 shares of common stock that
are not exercisable during the next 60 days.
(17) Includes options and warrants for the purchase of 58,333 shares of
common stock, but excludes options for the purchase of 19,167 shares of
common stock that are not exercisable during the next 60 days.
(18) Includes options for the purchase of 50,000 shares of common stock, but
excludes options for the purchase of 32,500 shares of common stock that
(19) Includes options and warrants for the purchase of 345,750 shares of
common stock, but excludes options for the purchase of 570,750 shares of
common stock that are not exercisable during the next 60 days.
42
<PAGE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During November 1997, we licensed our MD Gateway Web site and related
equipment and software to Medical Education Collaborative, a nonprofit company
formed by Charles P. Spickert, a former director of OSS. We licensed MD Gateway
to MEC in connection with our strategic decision to focus our activities on non-
healthcare related activities. The license agreement provides that MEC will pay
us a license fee of 35% of revenues in excess of certain MEC expenses related to
MD Gateway services.
Our principal offices are located in a building managed by Sheridan
Management Company prior to July 7, 1998 and owned by one of its affiliates. R.
Steven Adams' spouse is a vice president of Sheridan Management Company. The
current base monthly rental is $18,209.
Robert J. Lewis, one of our directors, is the general partner and chief
executive officer of, InterMedia Partners, one of our broadband customers.
InterMedia is an operator of cable systems in Kentucky, Tennessee, North
Carolina, South Carolina, and Georgia. We entered into a contract during
August 1997, as amended, pursuant to which we provide our products and services
to several of InterMedia's markets. The expiration dates of the contracts and
related amendments range from August 1999 to July 2000. We earn revenue from
the sale of computer hardware and third party software, engineering fees,
equipment installation fees, and royalties from subscriber Internet access and
content fees. We recognized revenue in connection with these contracts totaling
$185,768 and $47,092 for the years ended December 31, 1998 and 1997,
respectively. Included in accounts receivable at December 31, 1998 and 1997 are
amounts due from InterMedia totaling $22,925 and $2,052, respectively.
We believe that the transactions summarized above are on terms no less
favorable than could be obtained from unaffiliated third parties. The Board of
Directors has determined that any transactions with officers, directors or
principal shareholders will be approved by the disinterested directors and will
be on terms no less favorable than could be obtained from an unaffiliated third
party. The Board of Directors will obtain independent counsel or other
independent advice to assist in that determination.
43
<PAGE>
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 page following
Audited Financial Statements and Notes thereto.
(b) During the last quarter of the period covered by this Report, we did not
file any reports on Form 8-K.
44
<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 9, 1999 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 9, 1999
- ------------------------------------------------
R. Steven Adams,
(President, Chief Executive Officer and a Director)
/s/ Thomas Plunkett April 9, 1999
- ------------------------------------------------
Thomas Plunkett
(Chief Financial Officer)
/s/ Stuart Lucko April 9, 1999
- ------------------------------------------------
Stuart Lucko
(Controller)
/s/ William R. Cullen April 9, 1999
- ------------------------------------------------
William R. Cullen
(Director)
/s/ Robert J. Lewis April 9, 1999
- ------------------------------------------------
Robert J. Lewis
(Director)
/s/ Richard C. Jennewine April 9, 1999
- ------------------------------------------------
Richard C. Jennewine
(Director)
45
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
ONLINE SYSTEM SERVICES, INC.
----------------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants F-2
Balance Sheets as of December 31, 1998 and 1997 F-3
Statements of Operations for the Years Ended December 31, 1998 and 1997 F-4
Statements of Stockholders' Equity for the Years Ended December 31, 1998 and 1997 F-5
Statements of Cash Flows for the Years Ended December 31, 1998 and 1997 F-6
Notes to Financial Statements F-8
</TABLE>
F-1
<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, 1998 and 1997, and the related
statements of operations, stockholders' equity 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, 1998 and 1997, 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,
March 10, 1999.
F-2
<PAGE>
ONLINE SYSTEM SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1998 1997
-------------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 698,339 $ 3,680,282
Accounts receivable, net (Note 2) 147,837 701,330
Accrued revenue receivables - 143,543
Note and accrued interest receivable (Note 3) 896,787 -
Inventory, net 55,126 235,441
Prepaid expenses 74,179 249,510
Deferred acquisition costs 229,404 -
Short-term deposits 101,441 77,372
-------------------- -------------------
Total current assets 2,203,113 5,087,478
Property and equipment, net (Note 4) 1,178,628 1,015,632
Capitalized software costs, net (Note 5) - 122,029
Other assets 3,535 101,352
-------------------- -------------------
Total assets $ 3,385,276 $ 6,326,491
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 873,901 $ 969,937
Accrued salaries and payroll taxes payable 329,755 216,493
Current portion of capital leases payable (Note 6) 21,766 23,555
Customer deposits and deferred revenue 100,600 9,321
-------------------- -------------------
Total current liabilities 1,326,022 1,219,306
Capital leases payable (Notes 6 and 12 ) 39,915 585
Commitments and contingencies (Notes 1 and 12)
Stockholders' equity (Note 7):
Preferred stock, no par value, 5,000,000 shares authorized:
10% redeemable, convertible preferred stock, 10% cumulative
return; 245,000 shares issued and outstanding, including dividends
payable of $241,172 and none, respectively 2,691,172 1,226,376
Series A redeemable, convertible preferred stock, 5% cumulative
return; 1,400 and none issued and outstanding, respectively,
including dividends payable of $10,164 and none, respectively 1,410,164 -
Common stock, no par value, 20,000,000 shares authorized,
4,642,888 and 3,315,494 shares issued and outstanding, 16,410,300 8,726,554
respectively
Warrants and options 2,281,832 165,427
Accumulated deficit (20,774,129) (5,011,757)
-------------------- -------------------
Total stockholders' equity 2,019,339 5,106,600
-------------------- -------------------
Total liabilities and stockholders' equity $ 3,385,276 $ 6,326,491
==================== ===================
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
<PAGE>
ONLINE SYSTEM SERVICES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------------------
1998 1997
-------------------- -----------------
<S> <C> <C>
Net sales:
Service sales $ 485,663 $ 1,674,198
Hardware and software sales 1,103,717 1,117,358
------------------- -----------------
1,589,380 2,791,556
------------------- -----------------
Cost of sales:
Cost of services 386,303 1,021,261
Cost of hardware and software 905,234 972,260
------------------- -----------------
1,291,537 1,993,521
------------------- -----------------
Gross margin 297,843 798,035
------------------- -----------------
Operating expenses:
Sales and marketing expenses 2,479,029 1,197,038
Product development expenses 1,264,287 1,108,456
General and administrative expenses 6,519,441 1,837,330
Depreciation and amortization 791,155 198,788
------------------- -----------------
11,053,912 4,341,612
------------------- -----------------
Loss from operations (10,756,069) (3,543,577)
Interest income, net 139,806 168,298
------------------- -----------------
Net loss (10,616,263) (3,375,279)
Preferred stock dividends (Note 7) 329,120 -
Accretion of preferred stock to redemption value (Note 7) 4,110,060 -
Accretion of preferred stock for guaranteed return in
excess of redemption value (Note 7) 706,929 -
------------------- -----------------
Net loss available to common stockholders $ (15,762,372) $ (3,375,279)
=================== =================
Loss per share, basic and diluted $ (4.35) $ (1.05)
=================== =================
Weighted average shares outstanding 3,621,585 3,200,474
=================== =================
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
ONLINE SYSTEM SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
10% Preferred Stock 5% Preferred Stock Series A Preferred Stock
---------------------------- ----------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------- ------------- ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 - $ - - $ - - $ -
Stock issued in conjunction with private
placement-
10% Preferred Stock 245,000 1,904,385 - - - -
Common stock - - - - - -
Common stock warrants - - - - - -
Offering costs - (243,045) - - - -
Guaranteed return on 10% Preferred Stock - (434,964) - - - -
Exercises of stock options and warrants - - - - - -
Repurchase of options to buy common stock - - - - - -
Stock options issued for services - - - - - -
Stock subscriptions receivable - - - - - -
Net loss available to common stockholders - - - - - -
------------- ------------- ----------- ------------ ------------ --------------
Balances, December 31, 1997 245,000 1,226,376 - - - -
Stock issued in conjunction with private
placement-
10% Preferred Stock 22,500 159,559 - - - -
Common stock - - - - - -
Common stock warrants - - - - - -
Offering costs - (18,980) - - - -
Guaranteed return on 10% Preferred Stock - (56,250) - - - -
Stock issued in conjunction with private
placement-
5% Preferred Stock - - 3,000 2,597,500 - -
Common stock warrants - - - - - -
Offering costs - - - (626,855) - -
Warrants issued for placement fee - - - - - -
Guaranteed return on 5% Preferred Stock - - - (316,410) - -
Stock issued in conjunction with private
placement-
Series A Preferred Stock - - - - 1,400 764,400
Common stock warrants - - - - - -
Offering costs - - - - - (103,001)
Warrants issued for placement fee - - - - - -
Guaranteed return on 5% Preferred Stock - - - - - (1,368,328)
Preferred stock dividends payable - 241,172 - - - 10,164
Preferred stock and dividends converted to
common stock (22,500) (225,000) (3,000) (3,000,000) - -
Exercises of stock options and warrants - - - - - -
Accretion of preferred stock to redemption value - 1,364,295 - 1,345,765 - 1,400,000
Accretion of preferred stock for guaranteed
return in excess of redemption value - - - - - 706,929
Stock and stock options issued for services and
to customer - - - - - -
Net loss available to common stockholders - - - - - -
------------- ------------- ----------- ------------ ------------ --------------
Balances, December 31, 1998 245,000 $2,691,172 - $ - 1,400 $1,410,164
============= ============= =========== ============ ============ =============
<CAPTION>
Common Stock Warrants Stock
---------------------------- and Subscriptions Accumulated Stockholders
Shares Amount Options Recievable Deficit Equity
------------- ------------ --------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 3,162,545 $ 7,953,665 $ - $ (586) $ (1,636,478) $ 6,316,601
Stock issued in conjunction with private
placement-
10% Preferred Stock - - - - - 1,904,385
Common stock 61,250 398,125 - - - 398,125
Common stock warrants - - 147,490 - - 147,490
Offering costs - (50,811) (18,823) - - (312,679)
Guaranteed return on 10% Preferred Stock - 434,964 - - - -
Exercises of stock options and warrants 91,699 65,611 - - - 65,611
Repurchase of options to buy common stock - (75,000) - - - (75,000)
Stock options issued for services - - 36,760 - - 36,760
Stock subscriptions receivable - - - 586 - 586
Net loss available to common stockholders - - - - (3,375,279) (3,375,279)
------------- ----------- ----------- ------ ----------- ----------
Balances, December 31, 1997 3,315,494 8,726,554 165,427 - (5,011,757) 5,106,600
Stock issued in conjunction with private
placement-
10% Preferred Stock - - - - - 159,559
Common stock 5,625 46,406 - - - 46,406
Common stock warrants - - 19,035 19,035
Offering costs - (5,520) (2,264) - - (26,764)
Guaranteed return on 10% Preferred Stock - 56,250 - - - -
Stock issued in conjunction with private
placement-
5% Preferred Stock - - - - - 2,597,500
Common stock warrants - - 402,500 - - 402,500
Offering costs - - (96,895) - - (723,750)
Warrants issued for placement fee - - 402,500 - - 402,500
Guaranteed return on 5% Preferred Stock - 316,410 - - - -
Stock issued in conjunction with private
placement-
Series A Preferred Stock - - - - - 764,400
Common stock warrants - - 635,600 - - 635,600
Offering costs - - (85,647) - - (188,648)
Warrants issued for placement fee - - 75,948 - - 75,948
Guaranteed return on 5% Preferred Stock - 1,368,328 - - - -
Preferred stock dividends payable - - - - - 251,336
Preferred stock and dividends converted to
common stock 685,538 3,302,784 - - - 77,784
Exercises of stock options and warrants 262,231 494,088 - - - 494,088
Accretion of preferred stock to redemption value - - - - - 4,110,060
Accretion of preferred stock for guaranteed
return in excess of redemption value - - - - - 706,929
Stock and stock options issued for services and
to customer 374,000 2,105,000 765,628 - - 2,870,628
Net loss available to common stockholders - - - - (15,762,372) (15,762,372)
--------------- ------------ ------------- ---------- ------------- ------------
Balances, December 31, 1998 4,642,888 $16,410,300 $ 2,281,832 - $(20,774,129) $ 2,019,339
=============== ============ ============= ========== ============= ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
ONLINE SYSTEM SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------------------
1998 1997
------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(10,616,263) $(3,375,279)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 791,155 198,788
Gain on sale of equipment - (1,535)
Accrued interest income on advances to DCI (49,304) -
Reduction in note receivable for services received from DCI 540,372 -
Stock and stock options issued for services and to customer 2,870,628 37,346
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 553,493 (471,980)
(Increase) decrease in accrued revenue receivables 143,543 (53,206)
(Increase) decrease in inventory 180,315 (39,500)
(Increase) decrease in prepaid expenses 175,331 (116,966)
Decrease in short-term deposits and other assets 73,579 46,907
Increase (decrease) in accounts payable and accrued liabilities (96,036) 620,444
Increase in accrued salaries and payroll taxes payable 113,262 133,687
Increase (decrease) in customer deposits and deferred revenue 91,279 (39,348)
------------------- -------------------
Net cash used in operating activities (5,228,646) (3,060,642)
------------------- -------------------
Cash flows from investing activities:
Redemption of short-term investments - 3,855,343
Purchase of property and equipment (481,427) (727,094)
Capitalized software development costs (281,776) (124,097)
Cash advances to DCI (1,387,855) -
Payment of acquisition costs (229,404) -
Proceeds from sale of property and equipment - 2,621
------------------- -------------------
Net cash (used in) provided by investing activities (2,380,462) 3,006,773
------------------- -------------------
Cash flows from financing activities:
Payments on capital leases and notes payable (31,209) (38,944)
Proceeds from issuance of common stock and warrants 65,441 545,615
Proceeds from exercise of stock options and warrants 494,088 65,611
Re-purchase of option to buy common stock - (75,000)
Proceeds from issuance of 10% Preferred Stock 159,559 1,904,385
Proceeds from issuance of 5% Preferred Stock and warrants 3,000,000 -
Proceeds from issuance of Series A Preferred Stock and warrants 1,400,000 -
Stock offering costs (460,714) (312,679)
------------------- -------------------
Net cash provided by financing activities 4,627,165 2,088,988
------------------- -------------------
Net increase (decrease) in cash and cash equivalents (2,981,943) 2,035,119
Cash and cash equivalents, beginning of period 3,680,282 1,645,163
------------------- -------------------
Cash and cash equivalents, end of period $ 698,339 $ 3,680,282
=================== ===================
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE>
ONLINE SYSTEM SERVICES, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $ 7,024 $ 5,987
Supplemental schedule of non-cash investing and financing activities:
Accretion of preferred stock to redemption value $4,110,060 $ -
Accretion of preferred stock for guaranteed return in excess
of redemption value 706,929 -
Preferred stock dividends paid or to be paid in common stock 329,120 -
Preferred stock and dividends converted to common stock 3,302,784 -
Stock and stock options issued for services and value to customer 2,870,628 37,346
Common stock warrants issued for offering costs 478,448 -
Capital leases for equipment 68,750 -
Reduction of note receivable in exchange for services received 540,372 -
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-7
<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 i2u/WEBBbuilder (formally
marketed under the i2u brand) family of 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.
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 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.
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 since mid-1997 has evolved to the development of online
communities, particularly for broadband (high bandwidth or high data
transmission capabilities) operators such as cable TV operators (wired and
wireless), and on personal and organizational portals. This focus has resulted
in the introduction of community-building products and services which include a
wide range of online services that enable broadband operators' customers and
others to generate online local content, create Web pages and conduct online
commerce. The Company intends to focus its future efforts primarily on its
community-building products and services for broadband operators and other
ISPs, consumer/personal portal products and services, enterprise products and
services for companies and organizations with dispersed operations, vendors or
constituents, online educational products and services, and financial services
for financial institutions having less than $500 million in assets.
The Company earns revenue through the sale of computer hardware and third
party software, software license fees, network engineering services, consulting
services, other implementation services and license fees based on a percentage
(royalties) of advertising revenues as well as a percentage of fees paid by
subscribers of our broadband operator customers in connection with e-commerce
transactions which these subscribers conduct on the broadband operator's systems
from our products and services, training course fees, and monthly fees paid by
customers for Internet access which we have provided. To date, royalties earned
by the Company from this revenue model have not been significant. The Company
has also 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 1998, the Company implemented a new pricing structure for its
broadband community-building products and services whereby the Company supplies
its content and community-building products and services and the operator
provides the infrastructure and channel for distribution of high-speed Internet
access services. This new structure results in a lower front-end cost for the
operator, in consideration for which the Company expects to receive a higher
percentage of advertising and transaction fees received from the broadband
operator's subscribers.
During November 1997, the Company announced to certain customers that it
was terminating specific types of Web site development, maintenance and hosting
activities and began to transition this business to other companies. The Company
transitioned Web site development activities which were not related to the
development of products for its i2u/WEBBbuilder products and services or did 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.
The Company has not been profitable since inception. The Company had at
December 31, 1998, $698,339 in cash and cash equivalents and $877,091 in working
capital, and a working capital deficit of $249,100 excluding the note
receivable and accrued interest receivable and the deferred acquisition costs.
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 an ever-changing marketplace.
The Company has expended significant funds to develop its current product
offerings. During 1999, the Company anticipates increased operating expenses
and research and development expenditures,
F-8
<PAGE>
(1) ORGANIZATION AND BUSINESS (CONTINUED)
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 future revenues are
highly dependent upon the use of its products by the customers of the broadband
operators who have entered into business relationships with the Company, as the
Company receives a portion of the proceeds generated by the broadband operator
for such services as Internet access and electronic commerce. The Company's
cash expenditures have been, and are expected to continue to be, increased due
to the expected acquisition of Durand Communications, Inc. ("DCI") (See Note
14). There can be no guarantee that the Company will be successful in
marketing its products or that it will be able 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 January 1999 (See Note 15) will be
adequate to sustain operations through May 1999. The Company estimates that it
will need to raise approximately $25,000,000 through equity, debt or other
external financings, to implement its business development plan (approximately
$8,000,000 of which is required to sustain operations for 1999). The Company's
plan to fund its operations for the next twelve months is to obtain equity
financing through a combination of strategic partner investments, proceeds from
the exercise of initial public offering ("IPO") common stock warrants (if any,
see below), additional private placements of its securities, and may include a
secondary public offering of its common stock. The Company is engaged in ongoing
discussions with certain potential strategic partners, which if successful,
could result in significant additional equity funding for the Company. In
connection with the Company's IPO during May 1996, warrants representing the
right to acquire 632,500 shares of common stock at $9.00 per share were issued
to investors. These warrants expire on May 23, 1999, if not exercised prior
thereto. In the event that all of the warrants were exercised for cash, the
Company would receive in excess of $5.6 million in net proceeds. In lieu of
exercising the warrants for cash, holders may utilize a "cashless exercise"
option whereby they may apply the value of a portion of their warrants (i.e.,
the difference between the market value for our common stock and $9.00, the
exercise price of the warrants) to pay the exercise price for the balance of the
warrants to be exercised. Therefore, the Company is unable to predict the amount
of net proceeds, if any, which it may receive upon exercise of the warrants.
Further, the Company believes that it would be possible to continue to raise
additional working capital through the sale of securities similar to the
transactions described in Note 7 and has initiated discussions with various
potential private investors which could result in additional debt or
equity investments. The Company has begun discussions regarding a possible
secondary offering of its securities during the fall of 1999. However, the
Company has no commitments for any such funding and there can be no assurances
that these discussions will be successful, or if successful, that the terms of
any such fundings will be acceptable to the Company. If the Company is not
successful in obtaining funding in appropriate amounts or at appropriate terms,
management would consider significant reductions in activity and operations.
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.
The Company has revised certain factors used in determining the amounts to
be accreted related to issuances of its 10% and 5% Preferred Stock as well as
the period for the accretion of the 5% Preferred Stock. See Note 16 for these
revisions and their impact on unaudited quarterly amounts.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments, note receivable, and accounts receivable. The Company
has no significant off balance-sheet concentrations of credit risk such as
foreign exchange contracts, option contracts or other foreign hedging
arrangements. 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. The Company believes such financial institutions
are of high credit quality.
The Company performs ongoing evaluations of its customers' financial
condition and generally does not require collateral, except for billings in
advance of work performed, and maintains reserves for potential credit
F-9
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
losses. Its accounts receivable balances are primarily domestic. Accounts
receivable are shown net of allowance for doubtful accounts of $18,000 and
$58,059 at December 31, 1998 and 1997, respectively.
As discussed in Note 9, the Company has five and four customers that
accounted for more than 10% of 1998 and 1997 revenues, respectively, and three
customers that accounted for more than 10% of accounts receivable as of December
31, 1998 and 1997.
The Company's pricing structure is highly dependent on the broadband
operator's success in generating revenue from the use of the Company's products.
Deferred Acquisition Costs
Costs incurred related to the Company's anticipated acquisition, discussed
in Note 14, are being deferred and will be included in the acquisition price if
successful, or to expense if unsuccessful.
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.
Property and Equipment
Property and 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.
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.
Capitalized Software Development Costs and Research and Development Costs
The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed" (SFAS 86).
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.
At each balance sheet date, the Company evaluates the unamortized
capitalized costs of its i2u/WEBBbuilder software product and compares it to the
net realizable value of the product. Amortization of capitalized software
development costs is computed using the greater of the straight-line method or
the product's estimated useful life, generally one year, or based on relative
current revenue. Net realizable value is measured by estimating the royalties to
be derived under the Company's current arrangements. The amount by which the
unamortized i2u/WEBBbuilder software costs exceeds the net realizable value are
recorded as period expenses. During the fourth quarter of 1998, the Company
performed this evaluation and determined that based on the increasingly short
product life of Internet software, its i2u/WEBBbuilder software product life was
much shorter than originally anticipated and, accordingly, the carrying amount
was no longer realizable. The Company also determined that the time between
technological feasibility and general release has become increasingly short,
consequently, as of December 31, 1998, all capitalized software costs have been
fully amortized. Product development costs relating principally to the design
and
F-10
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
short-term trade receivables and payables, note receivable, and notes payable.
As of December 31, 1998 and 1997, the carrying values of such instruments
approximated their fair value.
Revenue Recognition
Revenue from hardware and licenses for software is generally recognized
upon shipment, or when title passes to the customer, provided that the Company
has no significant remaining obligations, evidence of an agreement exists, the
fee is fixed or determinable, and collectibility is probable. Revenue from
maintenance fees, training courses and Internet access fees is recognized as the
services are performed. For consulting arrangements of short durations, the
Company recognizes revenue as the services are performed based on hourly or
daily rates, or upon completion of the services. Amounts invoiced but not earned
are shown as deferred revenue in the accompanying balance sheets.
During 1998, the Company changed its business model to become more reliant
on royalty revenue from the use of its products and services. In general, the
Company will be paid a royalty when the subscriber of a customer (generally a
broadband operator) of the Company's i2u/WEBBbuilder software and hardware
product accesses such products. Revenue sharing and other transactional royalty
revenue is recorded as earned by the Company, and to date has not been
significant.
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.
Estimates of returns and allowances are recorded in the period of the sale
based on the Company's historical experience and the terms of individual
transactions.
Income Taxes
The current provision for income taxes represents actual or estimated
amounts payable on tax return filings each year. Deferred tax assets and
liabilities are recorded for the estimated future tax effects of temporary
differences between the tax basis of assets and liabilities and amounts reported
in the accompanying balance sheets, and for operating loss and tax credit
carryforwards. The change in deferred tax assets and liabilities for the period
measures the deferred tax provision or benefit for the period. Effects of
changes in enacted tax laws on deferred tax assets and liabilities are reflected
as adjustments to the tax provision or benefit in the period of enactment. The
Company's deferred tax assets have been reduced by a valuation allowance to the
extent it is more likely than not, that some or all of the deferred tax assets
will not be realized (See Note 10).
Stock-Based Compensation
The Company accounts for its employee stock option plans and other stock-
based compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB Opinion No. 25") and related interpretations. As such, compensation
expense related to employee stock options is recorded if, on the date of grant,
the fair value of the underlying stock exceeds the stock option exercise price.
The Company adopted the disclosure-only provisions of SFAS No. 123 "Accounting
F-11
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for Stock-Based Compensation" ("SFAS 123"), which allows entities to continue to
apply the provisions of APB Opinion No. 25 for transactions with employees and
provide pro forma disclosures for employee stock grants made in 1996 and future
years as if the fair-value-based method of accounting in SFAS 123 had been
applied to these transactions. The Company accounts for equity instruments
issued to non-employees in accordance with the provisions of SFAS 123.
Net Loss Per Share
Net loss per share is calculated in accordance with SFAS No. 128, "Earnings
Per Share" ("SFAS 128"), and Securities and Exchange Commission Staff Accounting
Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS 128 and SAB 98, basic
net loss per share is computed by dividing net loss available to common
shareholders for the period by the weighted average number of common shares
outstanding for the period. Diluted net loss per share is computed by dividing
the net loss for the period by the weighted average number of common and
potential common shares outstanding during the period if the effect of the
potential common shares is dilutive. As a result of the Company's net losses,
all potentially dilutive securities, as indicated in the table below, would be
anti-dilutive and are excluded from the computation of diluted loss per share.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
Stock options 1,758,665 1,002,910
Warrants and underwriter options 1,190,612 879,500
10% Preferred Stock 300,401 471,154
Series A Preferred Stock 246,964 -
---------------- ---------------
Total 3,496,642 2,353,564
================ ===============
</TABLE>
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for reporting comprehensive income and its components in financial
statements. Comprehensive income, as defined, includes all changes in equity
(net assets) during a period from non-owner sources. From its inception through
December 31, 1998, the Company has not had any material transactions that are
required to be reported in comprehensive income as compared to its net loss.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information" ("SFAS 131"). This statement changes the
manner in which companies report information about their operating segments.
SFAS 131, which is based on the management approach to segment reporting,
establishes requirements to report selected segment information quarterly and to
report entity-wide disclosures about products and services, major customers, and
the geographic locations in which the entity holds assets and reports revenue.
The Company adopted the provisions of SFAS 131 during 1998, resulting in
additional disclosures which are reflected in Note 13.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Development or Obtained for Internal Use" ("SOP 98-1"). This
statement establishes standards for the capitalization of costs related to
internal use software. In general, costs incurred during the development stage
are capitalized, while the costs incurred during the preliminary project and
post-implementation stages are expensed. The provisions of SOP 98-1 are
effective for all fiscal years beginning after December 15, 1998. Management
believes the adoption of SOP 98-1 will not have a material impact on its
financial statements.
F-12
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-
Up Activities" ("SOP 98-5"). In general, SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred and specifies that
initial application of SOP 98-5 should be reported as the cumulative effect of a
change in accounting principle. The provisions of SOP 98-5 are effective for
fiscal years beginning after December 15, 1998 and will be adopted by the
Company during the year ended December 31, 1999. The Company believes the
adoption of SOP 98-5 will have no material impact on the financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). The Company is required to
adopt SFAS 133 in the year ended December 31, 2000. SFAS 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities. To
date, the Company has not entered into any derivative financial instruments or
hedging activities.
Reclassifications
Certain reclassifications to prior year financial statements have been made
to conform to the current year's presentation.
(3) NOTE RECEIVABLE
In connection with the Merger Agreement (See Note 14) between the Company
and DCI, the Company agreed to fund DCI's working capital requirements through
the consummation of the merger and executed an unsecured working capital note
with a stated interest rate of 10%. As of December 31, 1998, the Company had
loaned DCI $1,387,855 and recorded $49,304 of accrued interest receivable. In
addition, the Company paid DCI $540,372 for services rendered in connection with
the integration of DCI's CommunityWare(R) with the Company's i2u/WEBBbuilder
product offerings, the payment for such services was effected as a reduction in
the note receivable and as product development expenses in the accompanying 1998
statement of operations. The Company believes that it is probable that the
merger will be consummated. If the merger is not approved by the stockholders,
or is otherwise not completed, no assurances can be made that any amounts due
from DCI will be collected. It is the Company's intent to continue to fund DCI
until the business combination is complete.
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Computer equipment $ 1,238,966 $ 1,082,097
Office furniture and equipment 207,639 131,121
Purchased software 243,492 85,850
Leasehold improvements 66,657 58,410
Assets under construction 163,426 12,525
------------------- -------------------
1,920,180 1,370,003
Less accumulated depreciation (741,552) (354,371)
------------------- -------------------
Net property and equipment $ 1,178,628 $ 1,015,632
=================== ===================
</TABLE>
Certain office equipment is pledged as collateral for capital leases
payable (See Note 6).
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 $387,181 and $196,720 for
the years ended December 31, 1998 and 1997, respectively.
F-13
<PAGE>
(5) CAPITALIZED SOFTWARE COSTS
Capitalized software costs consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Capitalized i2u/WEBBbuilder software $ 403,805 $ 124,097
Less accumulated amortization (403,805) (2,068)
------------------- -------------------
Net capitalized software costs $ - $ 122,029
=================== ===================
</TABLE>
The Company amortizes the i2u/WEBBbuilder software over its estimated
useful life of one year or relative revenues, whichever is greater.
Amortization expense was $401,737 and $2,068 for the years ended December
31, 1998 and 1997, respectively.
During the fourth quarter of 1998, the Company determined that, based on
the increasingly short product life cycle of Internet software, its
i2u/WEBBbuilder software product life cycle was much shorter than originally
anticipated and, accordingly, the carrying amount was no longer realizable. The
Company also determined that the time between technological feasibility and
general release has become increasingly short. As of December 31, 1998, the
Company had fully amortized all capitalized software costs (See Note 1).
The effect of the change in the estimated useful life of the capitalized
software costs resulted in the Company recording an additional $354,709 in
amortization expense in 1998, or $0.10 per share.
(6) CAPITAL LEASES PAYABLE
Capital leases payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1998 1997
------------------- --------------------
<S> <C> <C>
Capital lease payable in monthly principal and interest payments of $1,627,
for thirty-six months beginning November 1, 1998, effective interest rate of
16%, secured by software $ 47,393 $ -
Capital lease payable in monthly principal and interest payments of $624, for
twenty-four months beginning May 1, 1998, effective interest rate of 12.3%,
secured by computer equipment 9,684 -
Capital lease payable in monthly principal and interest payments of $195, for
thirty-six months beginning March 10, 1998, effective interest rate of 22%,
secured by office equipment 4,016 -
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
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
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 588 2,676
-------------- -------------
61,681 24,140
Less current portion (21,766) (23,555)
-------------- -------------
$ 39,915 $ 585
============== =============
</TABLE>
F-14
<PAGE>
(6) CAPITAL LEASES PAYABLE (CONTINUED)
Future minimum lease payments under capital leases as of December 31, 1998
are as follows:
<TABLE>
<S> <C>
1999 $ 30,586
2000 24,367
2001 21,663
--------
Total minimum lease payments 76,616
Less amount representing interest (14,935)
--------
$ 61,681
========
</TABLE>
(7) STOCKHOLDERS' EQUITY
10% Preferred Stock
On December 31, 1997, the Company completed a private placement for gross
proceeds of $2,450,000. The Company sold 24.5 units, consisting of an aggregate
of 245,000 shares of 10% cumulative, convertible, redeemable preferred stock
(the "10% 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.
On March 12, 1998, the Company sold an additional 2.25 units for gross
proceeds of $225,000, consisting of an aggregate of 22,500 shares of 10%
Preferred Stock, 5,625 shares of common stock, and warrants to purchase 4,500
shares of common stock. Net proceeds to the Company were $198,236 after
deducting $26,764 in offering costs.
The 10% Preferred Stock entitles the holder to voting rights of one vote
per share and specifies a 10% per annum cumulative, non-compounding dividend
based on the stated value of $10 per share. The Company may redeem the 10%
Preferred Stock at any time for $10 per share.
Each share of 10% Preferred Stock is convertible at any time after
September 30, 1998, at the election of the holder thereof, into the number of
shares of common stock of the Company equal to $10 divided by the lesser of (i)
$10 or (ii) 80% of the average per share closing bid price of the Company's
common stock for the five trading days immediately preceding the 10% Preferred
Stock conversion date.
The beneficial conversion feature (a "Guaranteed Return") of the 10%
Preferred Stock is considered to be an additional preferred stock dividend. The
computed value of the Guaranteed Return of $434,964 and $56,250 from the
December 1997 closing and the March 1998 closing, respectively, is initially
recorded as a reduction of the 10% Preferred Stock and an increase to additional
paid-in capital. The Guaranteed Return reduction to the 10% Preferred Stock was
accreted, as additional dividends, by recording a charge to income available to
common stockholders during 1998 from the date of issuance to the earliest date
of conversion. The Company will also record annual dividends of $1 per share as
a reduction of income available to common stockholders, whether or not declared
by the Board of Directors, which totaled $259,822 for the year ended December
31, 1998. The Company has the option to pay the dividends either in cash or in
common stock upon conversion. It is the Company's intention to pay the accrued
dividends on the 10% Preferred Stock through the issuance of its common stock at
the time the 10% Preferred Stock is converted. Consequently, the Company has
recorded the dividends payable within the preferred stock balance in the
accompanying balance sheets, which totaled $241,172 as of December 31, 1998.
F-15
<PAGE>
(7) STOCKHOLDERS' EQUITY (CONTINUED)
The difference between the stated redemption value of $10 per share and the
recorded value in the December 31, 1997 and March 12, 1998 sales, totaling
$1,364,295, was accreted as a charge to income available to common stockholders
during 1998 and was comprised of the following:
<TABLE>
<CAPTION>
Closings
-----------------------------------------------------
March 12, 1998 December 31, 1997
----------------------- -----------------------
<S> <C> <C>
Guaranteed return $ 56,250 $ 434,964
Value of common stock 46,406 398,125
Value of common stock warrants 19,035 147,490
10% Preferred Stock offering costs 18,980 243,045
----------------------- -----------------------
Total accretion recorded $ 140,671 $ 1,223,624
======================= =======================
</TABLE>
The common stock was valued based on the closing price of the Company's
common stock on December 31, 1997 and March 12, 1998 of $6.50 and $8.25,
respectively. The 53,500 common stock warrants issued with the 10% Preferred
Stock, valued at $166,525, entitle the holder to purchase one share of the
Company's common stock for a purchase price of $15 per share at any time
during the three-year period commencing on the closing date.
The warrants were valued utilizing the Black-Scholes option pricing model
using the following assumptions:
<TABLE>
<CAPTION>
Closings
------------------------------------------------------
March 12, 1998 December 31, 1997
----------------------- -----------------------
<S> <C> <C>
Exercise price $15.00 $15.00
Fair market value of common stock on grant date $ 8.25 $ 6.50
Option life 3 years 3 years
Volatility rate 98% 98%
Risk free rate of return 5.13% 5.13%
Dividend rate 0% 0%
</TABLE>
During 1998, 22,500 shares of the Company's 10% Preferred Stock, including
accrued dividends payable of $18,650, were converted into 58,242 shares of the
Company's common stock with conversion prices per share ranging from
approximately $3.64 to $5.14 as summarized in the following table:
<TABLE>
<CAPTION>
NUMBER OF SHARES
---------------------------------------------
10% COMMON STOCK
PREFERRED COMMON CONVERSION
CONVERSION DATE STOCK STOCK PRICE PER SHARE
---------------------- ------------------- ------------------- ---------------------
<S> <C> <C> <C>
November 4, 1998 10,000 29,321 $ 3.64
November 10, 1998 10,000 23,798 4.49
November 11, 1998 2,500 5,123 5.14
------------------- -------------------
Total 22,500 58,242
=================== ===================
</TABLE>
During January and February of 1999, 160,000 shares of the 10% Preferred
Stock were converted into 177,106 shares of the Company's common stock (See Note
15).
F-16
<PAGE>
(7) STOCKHOLDERS' EQUITY (CONTINUED)
5% Preferred Stock
On May 22, 1998, the Company completed a private placement for gross
proceeds of $3,000,000. The Company sold 3,000 shares of 5% cumulative,
convertible, redeemable preferred stock (the "5% Preferred Stock") and warrants
to purchase 50,000 shares of common stock. Net proceeds to the Company were
$2,678,750 after deducting $321,250 in offering costs.
The 5% Preferred Stock entitles the holder to voting rights equal to the
number of shares of common stock into which the shares of the 5% Preferred Stock
are convertible. The 5% Preferred Stock specifies a 5% per annum cumulative
non-compounding dividend based on the stated value of $1,000 per share.
Each share of 5% Preferred Stock is convertible, at the option of the
holder thereof, into such number of shares of common stock equal to $1,000, plus
the amount of any accrued and unpaid dividends the Company elects to pay in
common stock, divided by the lesser of (i) $16.33 or (ii) 86% of the average
closing bid price of the Company's common stock for the five trading days
immediately preceding the 5% Preferred Stock conversion date.
The beneficial conversion feature (a "Guaranteed Return") of the 5%
Preferred Stock is considered to be an additional preferred stock dividend. The
computed value of the Guaranteed Return of $316,410 is initially recorded as a
reduction of the 5% Preferred Stock and an increase to additional paid-in
capital. The Guaranteed Return reduction to the 5% Preferred Stock was
accreted, as additional dividends, by recording a charge to income available to
common stockholders from the date of issuance to the earliest date of
conversion. The Company also recorded annual dividends of $50 per share as a
reduction of income available to common stockholders, whether or not declared by
the Board of Directors, which totaled $59,134 for the year ended December 31,
1998.
The difference between the stated redemption value of $1,000 per share and
the recorded value on May 22, 1998, totaling $1,345,765, was accreted as a
charge to income available to common stockholders during 1998 and was comprised
of the following:
<TABLE>
<S> <C>
Guaranteed return $ 316,410
Value of common stock warrants 402,500
5% Preferred Stock offering costs 626,855
-------------------
Total accretion recorded $ 1,345,765
===================
</TABLE>
The 50,000 common stock purchase warrants issued with the 5% Preferred
Stock, valued at $402,500, entitle the holder to purchase one share of the
Company's common stock for a purchase price of $16.33 per share at any time
during the three-year period commencing on May 22, 1998. In addition, the
Company also issued 50,000 common stock purchase warrants, valued at $402,500,
to the placement agent as offering costs with the same terms. The warrants were
valued utilizing the Black-Scholes option pricing model using the following
assumptions:
<TABLE>
<S> <C>
Exercise price $ 16.33
Fair market value of common stock on grant date $ 13.50
Option life 3 years
Volatility rate 98%
Risk free rate of return 5.13%
Discount rate 0%
</TABLE>
F-17
<PAGE>
(7) STOCKHOLDERS' EQUITY (CONTINUED)
During 1998, all 3,000 shares of the 5% Preferred Stock, including accrued
dividends payable of $59,134, were converted into 627,296 shares of the
Company's common stock at conversion prices per share ranging from approximately
$3.28 to $8.87 as summarized in the following table:
<TABLE>
<CAPTION>
NUMBER OF SHARES
--------------------------------------------- COMMON STOCK
5% PREFERRED COMMON CONVERSION
CONVERSION DATE STOCK STOCK PRICE PER SHARE
---------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C>
July 30, 1998 500 56,907 $ 8.87
September 16, 1998 250 54,950 4.62
September 25, 1998 325 74,646 4.43
October 30, 1998 75 23,379 3.28
November 3, 1998 100 29,722 3.44
November 5, 1998 500 122,617 4.17
November 10, 1998 1,250 265,075 4.83
------------ ------------
Total 3,000 627,296
============ ============
</TABLE>
Series A Preferred Stock
On November 9, 1998, the Company completed a private placement for gross
proceeds of $1,400,000. The Company sold 1,400 shares of Series A cumulative,
convertible, redeemable preferred stock (the "Series A Preferred Stock") and
warrants to purchase 140,000 shares of common stock. Net proceeds to the
Company were $1,287,300 after deducting $112,700 in offering costs.
The Series A Preferred Stock entitles the holder to voting rights equal to
the number of shares of common stock into which the shares of the Series A
Preferred Stock are convertible. The Series A Preferred Stock specifies a 5%
per annum cumulative, non-compounding dividend based on the stated value of
$1,000 per share.
Each share of Series A Preferred Stock is convertible, at the option of the
holder thereof, into such number of shares of common stock of the Company equal
to $1,000, plus the amount of any accrued and unpaid dividends the Company
elects to pay in common stock, divided by the lesser of (i) $5.71 or (ii) 80% of
the average closing bid price of the shares of common stock for the lowest five
consecutive trading days within the 20 days immediately preceding the Series A
Preferred Stock conversion date.
The beneficial conversion feature (a "Guaranteed Return") of the Series A
Preferred Stock is considered to be an additional preferred stock dividend. The
computed value of the Guaranteed Return of $1,368,328 is initially recorded as
a reduction of the Series A Preferred Stock and an increase to additional paid-
in capital. The Guaranteed Return reduction to the Series A Preferred Stock was
accreted, as additional dividends, by recording a charge to income available to
common stockholders on the date of issuance. The Company will also record annual
dividends of $50 per share as a reduction of income available to common
stockholders, whether or not declared by the Board of Directors, which totaled
$10,164 for the year ended December 31, 1998. The Company has the option to pay
the dividends either in cash or in common stock upon conversion. It is the
Company's intention to pay the accrued dividends on the Series A Preferred Stock
through the issuance of its common stock at the time the Series A Preferred
Stock is converted. Consequently, the Company has recorded the dividends payable
within the preferred stock balance in the accompanying balance sheets, which
totaled $10,164 as of December 31, 1998.
F-18
<PAGE>
(7) STOCKHOLDERS' EQUITY (CONTINUED)
The difference between the stated redemption value of $1,000 per share and
the recorded value on November 9, 1998, totaling $2,106,929 (which includes
$706,929 of accretion of preferred stock for the Guaranteed Return in excess of
the redemption value), was accreted as a charge to income available to common
stockholders during 1998 and was comprised of the following:
<TABLE>
<S> <C>
Guaranteed return $ 1,368,328
Value of common stock warrants 635,600
Series A Preferred Stock offering costs 103,001
-----------
Total accretion recorded $ 2,106,929
===========
</TABLE>
The 140,000 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 $5.71 per share at any time during the five-year period
commencing on November 9, 1998. The warrants were valued utilizing the Black-
Scholes option pricing model using the following assumptions:
<TABLE>
<S> <C>
Exercise price $ 5.71
Fair market value of common stock on grant date $ 6.03
Option life 5 years
Volatility rate 94.7%
Risk free rate of return 5.13%
Dividend rate 0%
</TABLE>
During January 1999, the holder converted all 1,400 shares of the Series A
Preferred Stock into 247,366 shares of the Company's common stock and exercised
the warrants to purchase 140,000 shares of the Company's common stock, resulting
in proceeds to the Company of $799,400 (See Note 15).
In connection with services provided with the issuance of the Series A
Preferred Stock, the Company also issued to the placement agent, warrants to
purchase 20,000 shares of the Company's common stock for a purchase price of
$5.71 per share. The warrants can be exercised at any time during the three-
year period commencing November 1998. The Company recorded $75,948 in offering
costs related to the warrants, which were valued utilizing the Black-Scholes
option pricing model using the following assumptions:
<TABLE>
<S> <C>
Exercise price $ 5.71
Fair market value of common stock on grant date $ 6.03
Option life 3 years
Volatility rate 94.7%
Risk free rate of return 5.13%
Dividend rate 0%
</TABLE>
Liquidation Preference of Preferred Stock
The Company's 10% Preferred Stock and Series A Preferred Stock have equal
preference in involuntary liquidation before any distribution to the holders of
the Company's common stock as follows:
10% Preferred Stock - Holders of the 10% Preferred Stock are entitled to
receive from the Company's remaining net assets (after payment of the Company's
debts and other liabilities) the amount of $10 per share of 10% Preferred Stock
in cash plus payment of all accrued but unpaid cumulative dividends. Holders of
the 10% Preferred Stock are not entitled to receive any other payments if the
Company liquidates, dissolves or winds-up its business.
Series A Preferred Stock - Holders of the Series A Preferred Stock are
entitled to receive from the Company's remaining net assets (after payment of
the Company's debts and other liabilities) the amount of $1,000 per share of
Series A Preferred Stock in cash plus payment of all accrued but unpaid
cumulative dividends.
F-19
<PAGE>
(7) STOCKHOLDERS' EQUITY (CONTINUED)
Thereafter, the holders of the Series A Preferred Stock are entitled to share in
any distributions made to the holders of the Company's common stock as if each
share of Series A Preferred Stock was converted (as defined) into the number of
shares of common stock into which it is convertible immediately prior to the
close of business on the business day fixed for such distribution.
During January 1999, the Company also sold 3,000 shares of its Series C
Preferred Stock (See Note 15), which also has preference in involuntary
liquidation before any distribution to the holders of the Company's common stock
as follows:
Series C Preferred Stock - Holders of the Series C Preferred Stock are
entitled to receive from the Company's remaining net assets (after payment of
the Company's debts and other liabilities) the amount of $1,000 per share of
Series C Preferred Stock in cash plus payment of all accrued but unpaid
cumulative dividends. The liquidation preference on the Series C Preferred
Stock is equal in preference to the liquidation preference on the 10% Preferred
Stock and the Series A Preferred Stock. Thereafter, the holders of the Series C
Preferred Stock are entitled to share in any distributions made to the holders
of the Company's common stock as if each share of Series C Preferred Stock was
converted (as defined) into the number of shares of common stock into which it
is convertible immediately prior to the close of business on the business day
fixed for such distribution.
Common Stock
On November 5, 1998, the Company executed a one-year consulting agreement
with a financial consulting firm to enhance Company activities in corporate
finance, mergers and acquisitions, and public and investor relations. If the
consulting firm introduces the Company to a lender or equity purchaser, the
Company is required to pay the consultant a cash fee at the time of closing. In
connection with the agreement, the Company issued 350,000 restricted shares of
its common stock for a commencement bonus valued at $1,925,000, which was
calculated based on $5.50 per share, the closing price of the Company's common
stock on November 5, 1998. The shares are not refundable to the Company, even if
the agreement is terminated by either party.
In February 1998, the Company entered into two consecutive six month
agreements with an individual to provide the Company consulting services in his
capacity as the Company's Chief Operating Officer. Pursuant to the terms of the
agreement, the consultant was paid $30,000 per month, each month, which was
comprised of $15,000 in cash payments and 2,000 shares of the Company's common
stock. As of December 31, 1998, the Company had issued 24,000 shares of common
stock under this agreement.
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 2,800,000
shares, at exercise prices equal to the stock's fair market value on the date of
grant. The options vest over various terms with a maximum vesting period of 42
months and expire after a maximum of ten years. As of December 31, 1998, the
Company had options outstanding for 1,758,665 shares.
A summary of the status of the Plan at December 31, 1998 and 1997 and
changes during the years then ended is presented in the tables and narrative
below:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------- -----------------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------------------- ------------------- ----------------- ----------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,002,910 $ 2.26 719,258 $ 1.87
Granted 1,416,350 8.09 924,200 3.24
Exercised (240,331) 1.89 (86,249) 0.72
Forfeited and canceled (420,264) 6.76 (554,299) 3.62
--------- ---------
Outstanding at end of year 1,758,665 $ 5.92 1,002,910 $ 2.26
========= ======= ========= =======
Exercisable at end of year 346,401 $ 2.50 246,998 $ 1.18
========= ======= ========= =======
Weighted average fair value of options
granted during year $ 5.34 $ 1.64
========= =========
</TABLE>
F-20
<PAGE>
(7) STOCKHOLDERS' EQUITY (CONTINUED)
The status of total stock options outstanding and exercisable under the
Plan as of December 31, 1998 is as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
------------------------------------------- ------------------------------------
Weighted Weighted
Weighted Average Weighted Average
Range of Average Remaining Average Remaining
Exercise Number of Exercise Contractual Number of Exercise Contractual
Prices Shares Price Life (Years) Shares Price Life (Years)
- ----------------- ------------ --------- ------------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
$0.50 - 1.25 149,000 $ 0.63 0.6 149,000 $ 0.63 0.6
1.26 - 3.15 281,998 1.71 4.5 95,667 1.85 4.2
3.16 - 7.90 837,817 6.79 6.4 101,734 5.86 5.8
7.91 - 8.50 489,850 8.45 6.1 - - -
---------- -------
$0.50 - 8.50 1,758,665 $ 5.92 5.5 346,401 $ 2.50 3.1
========== ====== ======= ======= ======= =======
</TABLE>
Pro Forma Fair Value Disclosures
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 1998 and 1997, respectively: risk-free interest
rate of 5.01 and 6.21 percent, no expected dividend yields, expected lives of
3.0 years, and expected volatility ranging from 104 and 98 percent. Fair value
computations are highly sensitive to the volatility factor assumed; the greater
the volatility, the higher the computed fair value of options granted.
Cumulative compensation costs recognized in pro forma net loss available to
common stockholders with respect to options that are forfeited prior to vesting
are adjusted as a reduction of pro forma compensation expense in the period of
forfeiture.
Had compensation cost for options granted been determined consistent with
SFAS 123, the Company's net loss available to common stockholders and net loss
available to common stockholders per common and common equivalent share would
have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------- ------------------------------------------
As Reported Pro Forma As Reported Pro Forma
------------------- ------------------ ------------------- -----------------
<S> <C> <C> <C> <C>
Net loss available to common
stockholders $ (15,762,372) $ (17,124,629) $ (3,375,279) $ (3,730,827)
============== ============== =============== =============
Net loss available to common
stockholders per share-basic
and diluted $ (4.35) $ (4.73) $ (1.05) $ (1.17)
============== ============== =============== =============
</TABLE>
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.
F-21
<PAGE>
(7) STOCKHOLDERS' EQUITY (CONTINUED)
Common Stock Options/Warrants
During 1998, the Company granted stock options under the Plan to several
consultants in connection with agreements to provide the Company with services
related to developing financing sources and strategic alliances as well as
investor relations. The terms of the agreements range from approximately six
months to three years. The Company issued in the aggregate 89,000 shares of its
common stock at exercise prices ranging from $5.50 to $8.50 and valued these
options utilizing the Black-Scholes option pricing model using the following
assumptions:
<TABLE>
<S> <C>
Exercise price $5.50 to $8.50
Fair market value of common stock on grant date $5.50 to $11.00
Option life 2 to 7 years
Volatility rate 95% to 98%
Risk free rate of return 4.52% to 5.81%
Dividend rate 0%
Vesting period Date of grant to 3 years
</TABLE>
The Company recorded expense for these options totaling $160,328 for the
year ended December 31, 1998, and will record additional aggregate expense of
approximately $306,000 in years 1999 through 2001.
On November 24, 1998, in connection with the proposed merger with DCI (See
Note 14), the Company granted stock options to the employees of DCI under the
Plan to purchase an aggregate of 83,000 shares of the Company's common stock at
an exercise price of $7.63 per share. The options vest over a three-year period
and can be exercised over a seven-year period. The Company valued these options
utilizing the Black-Scholes option pricing model using the following
assumptions:
<TABLE>
<S> <C>
Exercise price $ 7.63
Fair market value of common stock on grant date $ 7.63
Option life 3 years
Volatility rate 98%
Risk free rate of return 5.13%
Dividend rate 0%
</TABLE>
The Company recorded expense for these options totaling $13,549 for the
year ended December 31, 1998 and expects to record additional expense of
approximately $135,000 in 1999 and 2000, and approximately $120,000 in 2001.
In December 1998, the Company granted a warrant to a single customer to
purchase 70,162 shares of the Company's common stock at an exercise price of
$8.77 per share, which vest one year from the date of the executed contract and
are exercisable for two years. The Company recorded deferred customer
acquisition costs of $560,824 for the value of these warrants, which was
expensed during 1998. The Company's policy with regard to customer acquisition
costs is to capitalize costs to acquire customers if the contract contains
guarantees of minimum revenue which supports the amount paid. Because the
agreement does not contain minimum guaranteed revenue and due to the start-up
nature of this service and other uncertainties regarding this arrangement, the
Company has expensed the amount during 1998. The Company valued these options
utilizing the Black-Scholes option pricing model using the following
assumptions:
<TABLE>
<S> <C>
Exercise price $ 8.77
Fair market value of common stock on grant date $ 11.69
Option life 3 years
Volatility rate 98%
Risk free rate of return 4.52%
Dividend rate 0%
</TABLE>
In September 1995, in connection with a consulting agreement entered into
by the Company with Creative Business Strategies ("CBS") (See Note 12), 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.
F-22
<PAGE>
(7) STOCKHOLDERS' EQUITY (CONTINUED)
In December 1995, in connection with a business relationship entered into
among Charlie Spickert, Medical Education Collaborative ("MEC") and the Company
(See Note 12), 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, which are fully vested. At the issuance date, the Company determined the
stock options had a nominal value. During 1998, 11,000 options were exercised
and as of December 31, 1998, 39,000 options were outstanding.
During December 1995, in connection with the acquisition of the equipment
described in Note 11, 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. As of December 31, 1997,
15,000 warrants were outstanding. During 1998, the 15,000 warrants were
exercised and as of December 31, 1998, no warrants remain outstanding.
In connection with a private placement of the Company's 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 1998 and 1997, 3,600
and 450 warrants were exercised, respectively, and as of December 31, 1998,
14,400 warrants were outstanding.
In connection 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 holders to purchase one share of
common stock at a price of $9.00 per share 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 its redemption right, holders of warrants may
either exercise their warrants, or their warrants will be redeemed. As of
December 31, 1998, 1,265,000 of the warrants remain outstanding.
In connection with the initial public offering in May 1996, 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 entitle the
holder thereof to purchase one share of common stock at a price of $9.00 per
share) (the "Representative's Securities"). Beginning May 1997, 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, 1998, 3,300 units had been exercised.
F-23
<PAGE>
(7) STOCKHOLDERS' EQUITY (CONTINUED)
Summary of Outstanding Warrants and Options for Common Stock Issued
Outside the Plan
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------------------ ------------------------------------
Underwriter Underwriter
Options and Common Options and Common
Conversion Warrants Share Warrants Share
Description Ratio Outstanding Equivalents Outstanding Equivalents
- --------------------------------- ----------------- ---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Common stock warrants
issued in IPO 2:1 1,265,000 632,500 1,265,000 632,500
Option to purchase common
stock issued to underwriter 1:1 106,700 106,700 110,000 110,000
in IPO
Option to purchase common
stock warrants issued to
underwriter in IPO 2:1 106,700 53,350 110,000 55,000
Common stock warrants issued
in common stock private
placement 1:1 14,400 14,400 18,000 18,000
Common stock warrants issued
in connection with 10%
Preferred Stock 1:1 53,500 53,500 49,000 49,000
Common stock warrants issued
in connection with
equipment financing 1:1 - - 15,000 15,000
Common stock warrants issued
in connection with 5%
Preferred Stock 1:1 100,000 100,000 - -
Common stock warrants issued
in connection with Series A
Preferred Stock
(See Note 15) 1:1 140,000 140,000 - -
Common stock warrants issued
to placement agent in Series A
Preferred Stock 1:1 20,000 20,000 - -
Common stock warrants issued
to customer 1:1 70,162 70,162 - -
---------------- --------------- ---------------- ---------------
Total 1,876,462 1,190,612 1,567,000 879,500
================ =============== ================ ===============
</TABLE>
(8) STOCK SUBSCRIPTIONS RECEIVABLE
During 1996, the Company entered into two stock subscription
agreements. The first agreement stipulated 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.
F-24
<PAGE>
(9) 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, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
<S> <C> <C>
Customer A $440,109 $ -
Customer B 277,301 738,460
Customer C 227,098 141,498
Customer D 185,768 47,092
Customer E 28,033 382,441
</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, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Customer A $72,821 $ -
Customer B - 386,233
Customer C 18,350 4,436
Customer D 22,925 2,052
</TABLE>
Customer E operates in Buenos Aries, Argentina; however, all 1998 revenue
transactions with this customer were denominated in U.S. Dollars.
(10) INCOME TAXES
At December 31, 1998, for income tax return purposes, the Company has
approximately $16,900,000 of net operating loss carryforwards that expire at
various dates through the year 2013. 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.
No provision or benefit has been recorded for any period presented due to
the Company's history of net losses.
The Company has determined that deferred tax assets resulting from the net
operating loss carryforwards, as of December 31, 1998 and 1997, respectively,
did not satisfy the realization criteria set forth in SFAS No. 109, "Accounting
for Income Taxes." Accordingly, a valuation allowance was recorded against the
entire deferred tax asset. No other significant deferred tax assets or
liabilities existed at December 31, 1998 or 1997.
The difference between the expected statutory rate and the effective rate
is primarily a result of the increase in the valuation allowance.
(11) RELATED PARTY TRANSACTIONS
Customer
A director of the Company is also the general partner and chief executive
officer for one of the Company's i2u/WEBBbuilder broadband customers. The
Company entered into a contract during August 1997, as amended, whereby the
Company provides its i2u/WEBBbuilder products and services to the customer for
several markets. The expiration dates of the contract and related amendments
range from August 1999 to July 2000. The Company earns revenue from the sale of
computer hardware and third party software, engineering fees, equipment
installation fees, and royalties from subscriber Internet access and content
fees. The Company recognized revenue totaling $185,768 and $47,092 for the years
ended December 31, 1998 and 1997, respectively. Included in accounts receivable
at December 31, 1998 and 1997 are amounts due from the customer totaling $22,925
and $2,052, respectively.
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 6). During
1998, the Company paid the balance of the capital lease totaling $19,203, which
was outstanding at December 31, 1997.
F-25
<PAGE>
(11) RELATED PARTY TRANSACTIONS (CONTINUED)
Office Lease
Prior to July 7, 1998, the Company leased its principal offices in a
building managed by an affiliate, in that an officer of the Company is related
to the vice president of the management company. On July 7, 1998, the affiliated
management sold the building to an unrelated third party. Total rent expense
paid to the affiliated management company totaled $95,595 and $160,675 in 1998
and 1997, respectively.
(12) COMMITMENTS AND CONTINGENCIES
Minimum future annual lease payments as of December 31, 1998, including
amounts committed to related parties, are as follows:
<TABLE>
<S> <C>
1999 $377,438
2000 113,600
2001 35,541
-----------------
$526,579
=================
</TABLE>
In connection 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. The Company has $100,663 remaining
on deposit as of December 31, 1998, which is included in short-term deposits in
the accompanying balance sheets.
The total lease expense for the years ended December 31, 1998 and 1997, was
$363,709 and $339,456, respectively.
On December 31, 1998, the Company entered into a twelve month facilities
lease agreement to house and operate its computer equipment. The lease commences
March 31, 1999 and specifies monthly lease payments of $7,451.
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 7). To date, revenue from these services has not been significant. 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.
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 7), 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 7) and
prepaid $74,663 for the consulting agreement. The Company amortized the
prepayment over 20 months and recorded expense of $48,531 and $26,132 for the
years ended December 31, 1998 and 1997, respectively.
F-26
<PAGE>
(13) BUSINESS SEGMENT INFORMATION
The Company supports products and services that enable individuals to
create and manage their own Internet Web presence, create public or private
online communities and manage their own interactions. The Company's
i2u/WEBBbuilder foundation software provides users with the ability to create
their own home pages using simple, on-screen templates, as well as integrated
online communications, e-commerce and publishing tools.
The Company has two business segments: Community and Web Services and
Financial Services. Each of these is a business segment, with its respective
financial performance detailed herein.
Community and Web Services consists of customized community and
communication portals or start pages for broadband (high bandwidth or high data
transmission capabilities) operators who provide Internet access and products
and services which enable businesses, associations, and government institutions
to create a "virtual office" on the Internet.
Financial Services consists of an online banking solution, marketed to
financial institutions having less than $500 million in assets, using a service
bureau approach to e-banking, which enables them to provide smaller community
banks and credit unions with many of the capabilities and services available to
the larger banks without the cost associated with the development of bank
specific systems.
Custom Web Page Development consists of custom Web site development,
maintenance and hosting activities for enterprises. During the fourth quarter of
1997, this business was incorporated into other segments of the Company's
operations or transitioned to third parties.
Corporate Activities consists of general corporate expenses, including
capitalized costs that are not allocated to specific business segments. Assets
of corporate activities include unallocated cash, receivables, prepaid expenses,
note receivable, deferred acquisition costs, deposits and corporate use of
property and equipment.
<TABLE>
<CAPTION>
NET SALES
-----------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
---------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Community and Web services $1,362,282 $1,671,365
Financial services 227,098 29,818
Custom Web page development - 1,090,373
------------------- -------------------
Total net sales $1,589,380 $2,791,556
=================== ===================
</TABLE>
<TABLE>
<CAPTION>
NET LOSS
-----------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
---------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Community and Web services $ (4,578,160) $ (987,436)
Financial services (309,523) (38,639)
Custom Web page development - (1,121,178)
Corporate activities (5,728,580) (1,228,026)
------------------- -------------------
Net loss $(10,616,263) $(3,375,279)
=================== ===================
</TABLE>
F-27
<PAGE>
(13) BUSINESS SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
ASSETS
-----------------------------------------------------------------------------------------
DECEMBER 31,
---------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Community and Web services $ 696,219 $1,253,364
Financial services 416,071 493,266
Custom Web page development - 233,117
Corporate activities 2,272,986 4,346,744
------------------- -------------------
Total $3,385,276 $6,326,491
=================== ===================
</TABLE>
<TABLE>
<CAPTION>
PROPERTY AND EQUIPMENT
-----------------------------------------------------------------------------------------
DECEMBER 31,
---------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Community and Web services $ 516,918 $ 181,314
Financial services 397,721 422,315
Custom Web page development - -
Corporate activities 263,989 412,003
------------------- -------------------
Total $1,178,628 $1,015,632
=================== ===================
</TABLE>
<TABLE>
<CAPTION>
DEPRECIATION AND AMORTIZATION
-----------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
---------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Community and Web services $ 546,824 $ 63,405
Financial services 140,953 35,193
Custom Web page development - 39,694
Corporate activities 103,378 60,496
------------------- -------------------
Total $ 791,155 $ 198,788
=================== ===================
</TABLE>
<TABLE>
<CAPTION>
PROPERTY AND EQUIPMENT ADDITIONS
-----------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
---------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Community and Web services $ 221,672 $ 181,314
Financial services 124,652 422,315
Custom Web page development - 66,010
Corporate activities 135,103 57,455
------------------- -------------------
Total $ 481,427 $ 727,094
=================== ===================
</TABLE>
F-28
<PAGE>
(14) PROPOSED BUSINESS COMBINATION
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. ("DCI"). The Merger Agreement contemplates that
the Company will acquire 100% of the outstanding common stock of DCI and in
consideration therefore (i) will issue approximately 956,000 shares of the
Company's common stock to the stockholders of DCI, (ii) reserve approximately
240,000 shares of common stock for issuance upon exercise of outstanding options
and warrants of the Company that will be issued in connection with the DCI
Merger, and will reserve approximately 40,000 shares of common stock for
issuance upon conversion of convertible securities of DCI that will be assumed
by the Company in connection with the DCI Merger, and (iii) will assume
approximately $2,300,000 of liabilities of DCI. Located in Santa Barbara,
California, DCI is a privately held company that develops and markets Internet
"community" building tools and services, training in the use of these tools and
services and on-line service for hosting these communities. DCI reported
revenues of $813,522 (unaudited), of which $540,371 (unaudited) were sales to
the Company, and incurred a net loss of $(1,564,160) (unaudited) for the twelve
months ended December 31, 1998. For the twelve months ended December 31, 1997,
DCI and an acquired company reported net sales of $740,739 (unaudited) and
incurred net losses of $(2,867,973) (unaudited). At December 31, 1998, DCI had
an accumulated deficit of (8,397,347) (unaudited).
(15) SUBSEQUENT EVENTS
Series C Preferred Stock
On January 11, 1999, the Company completed a private placement for gross
proceeds of $3,000,000. The Company sold 3,000 shares of Series C cumulative,
convertible, redeemable preferred stock (the "Series C Preferred Stock"). Net
proceeds to the Company were approximately $2,755,000 after deducting
approximately $245,000 in offering costs.
The Series C Preferred Stock entitles the holder to voting rights equal to
the number of shares of common stock into which the shares of the Series C
Preferred Stock are convertible. The Series C Preferred Stock specifies a 4% per
annum cumulative, non-compounding dividend based on the stated value of $1,000
per share. The Company may redeem the Series C Preferred Stock at any time at a
redemption price per share equal to $1,200 plus any accrued but unpaid dividends
plus a warrant to purchase a number of shares equal to each holder of Series C
Preferred Stock pro-rata allocation of 100,000 shares (based on the number of
shares of Series C Preferred Stock held by such holder in relation to the total
authorized shares of Series C Preferred Stock). Such warrant has a term of three
years from the date of issuance and a per share exercise price equal to the
applicable Maximum Conversion Price (as defined) for the Series C Preferred
Stock being redeemed. In addition, the Company may redeem the Series C Preferred
Stock upon the receipt of a notice of conversion with respect to the Series C
Preferred Stock for which the Conversion Price (as defined) is less than $5.40
per share for a per share price equal to the product of (i) the number of shares
of common stock otherwise issuable upon conversion of such shares of Series C
Preferred Stock on the date of conversion and (ii) the closing bid price of
common stock on the date of conversion.
Each share of Series C Preferred Stock is convertible, at the option of the
holder, at any time after February 1, 1999, into the number of shares of common
stock equal to $1,000 divided by the lesser of (i) 140% of the closing bid price
of the common stock on the date of the issuance of the Series C Preferred Stock
being converted (initially $20.65), or, if less and if the conversion is
occurring at least 120 days after the issuance of the Series C Preferred Stock
being converted, 100% of the closing bid price of the Company's common stock on
the trading day closest to the date that is 120 days after the Series C
Preferred Stock that is being converted was issued or (ii) the average of the
five lowest closing bid prices of common stock during the 44 consecutive trading
days immediately preceding the conversion of the Series C Preferred Stock
conversion date.
In addition, the Company may require the conversion of the Series C
Preferred Stock at any time during the 20 day period immediately following 20
consecutive trading days during which the closing bid price of common stock is
not less than 200% of the Maximum Conversion Price of the Series C Preferred
Stock being converted. The Series C Preferred Stock must be converted on the
date which is five years after the date on which the Series C Preferred Stock
being converted was issued.
F-29
<PAGE>
(15) SUBSEQUENT EVENTS (CONTINUED)
The beneficial conversion feature (a "Guaranteed Return") of the Series C
Preferred Stock is considered to be an additional preferred stock dividend. The
computed value of the Guaranteed Return of $3,914,063 is initially recorded as a
reduction of the Series C 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 from the date of issuance to the earliest date of conversion. The
Company will also record annual dividends of $40 per share as a reduction of
income available to common stockholders, whether or not declared by the Board of
Directors.
The difference between the stated redemption value of $1,000 per share and
the recorded value on January 11, 1999, totaling $4,158,563 (which includes
$1,158,563 of accretion of preferred stock for the Guaranteed Return in excess
of the redemption value), will be accreted as a charge to income available to
common stockholders during the first quarter of 1999 and is comprised of the
following:
<TABLE>
<S> <C>
Guaranteed return $3,914,063
Series C Preferred Stock offering costs 244,500
--------------
Total accretion recorded $4,158,563
==============
</TABLE>
In addition, the Company also issued a warrant that expires June 30, 1999,
which entitles the holder to purchase, at a price of $1,000 per share, up to
2,000 shares of the Company's Series C Preferred Stock. This warrant also grants
the Company the right to require the holder to exercise such warrants on or
before June 30, 1999.
During February 1999, the investor converted 2,500 shares of the Series C
Preferred Stock, including accrued dividends payable of $9,149, into 232,564
shares of the Company's common stock at a conversion price per share ranging
from approximately $10.74 to $11.00 as summarized in the following table:
<TABLE>
<CAPTION>
NUMBER OF SHARES
---------------------------------------------
SERIES C COMMON STOCK
PREFERRED COMMON CONVERSION
CONVERSION DATE STOCK STOCK PRICE PER SHARE
---------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C>
February 10, 1999 1,500 140,157 $10.74
February 11, 1999 500 46,724 10.74
February 26, 1999 500 45,683 11.00
------------------- -------------------
Total 2,500 232,564
=================== ===================
</TABLE>
Conversion of Series A Preferred Stock and Exercise of Common Stock Warrant
On January 13, 1999, all 1,400 outstanding shares of the Series A Preferred
Stock, including accrued dividends payable of $12,465, were converted into
247,366 shares of the Company's common stock at a conversion price per share of
$5.71.
In connection with the issuance of the Series A Preferred Stock (See Note
7), the Company issued a warrant to the investor to purchase 140,000 shares of
the Company's common stock for a purchase price of $5.71 per share. During
January 1999, the investor exercised the warrant to purchase 140,000 shares of
the Company's common stock, whereby proceeds to the Company totaled $799,400.
F-30
<PAGE>
(15) SUBSEQUENT EVENTS (CONTINUED)
Conversion of 10% Preferred Stock
During January and February 1999, 160,000 shares of the 10% Preferred
Stock, including accrued dividends payable of $165,093, were converted into
177,106 shares of the Company's common stock at conversion prices ranging from
$9.46 to $10.00 as summarized in the following table:
<TABLE>
<CAPTION>
NUMBER OF SHARES
---------------------------------------------
10% COMMON STOCK
PREFERRED COMMON CONVERSION
CONVERSION DATE STOCK STOCK PRICE PER SHARE
---------------------- ------------------- ------------------- ---------------------
<S> <C> <C> <C>
January 5, 1999 10,000 11,590 $ 9.46
January 7, 1999 10,000 11,039 9.98
January 14, 1999 5,000 5,422 10.00
January 15, 1999 60,000 66,248 10.00
January 19, 1999 10,000 10,858 10.00
January 20, 1999 25,000 27,636 10.00
January 28, 1999 10,000 11,077 10.00
February 2, 1999 20,000 22,083 10.00
February 25, 1999 10,000 11,153 10.00
------------------- -------------------
Total 160,000 177,106
=================== ===================
</TABLE>
Capital Leases
In January 1999, the Company entered into a capital lease for e-commerce
software with a total purchase price of $35,000. Under the terms of the lease,
the Company will make 35 monthly principal and interest payments of $1,201.
Total lease payments, including interest, will be $42,018.
Note Receivable
During January and February 1999, the Company advanced DCI an additional
$162,580 for working capital purposes under terms pursuant to the working
capital note (See Note 3). It is the Company's intent to continue to fund DCI
until the business combination is complete.
Business Acquisition
On March 10, 1999, the Company acquired a controlling interest in a newly
formed company, NetIgnite 2, LLC ("NetIgnite"). NetIgnite is a development stage
company which the Company formed with a predecessor company by the name of
NetIgnite, Inc. ("NI"), the sole shareholder and founder of which was Perry
Evans, the founder and past President of MapQuest.com. In connection with the
formation of NetIgnite, NI contributed all of its rights to certain technology
to NetIgnite and the Company agreed to provide $1,500,000 of funding which it is
believed will be required to implement NetIgnite's business plan during the next
12 to 18 months. The Company is entitled to 99.5% of NetIgnite's operating
income and approximately 60% of any proceeds upon the sale of NetIgnite. NI is
entitled to .5% of NetIgnite's operating income and approximately 40% of any
proceeds upon the sale of NetIgnite. The Company has entered into a Buy-Sell
Agreement with NI pursuant to which either the Company of NI could, subject to
certain conditions, acquire all of the other's interest in NetIgnite. In the
event that the Company sold its interest to NetIgnite in accordance with the
Buy-Sell Agreement, the Company would be entitled to retain a limited
non-exclusive license to utilize the technology developed by NetIgnite. Mr.
Evans has entered into an Employment Agreement with the Company and NetIgnite
which has an initial term of two years, provides for a minimum annual salary of
$190,000 and the granting of stock options to purchase 80,000 shares of common
stock at an exercise price of $12.25, one-third of such option shares to vest
annually during the next three years subject to Mr. Evans' continuous employment
by the Company.
F-31
<PAGE>
(16) UNAUDITED QUARTERLY INFORMATION
The Company has revised certain factors used in determining the amounts to
be accreted related to issuances of its 10% and 5% Preferred Stock as well
as the period for the accretion of the 5% Preferred Stock. These revisions
and their impact on unaudited quarterly amounts are presented below.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
As Reported As Revised
(Unaudited) (Unaudited)
------------- ------------
<S> <C> <C>
Net sales:
Service sales $ 107,572 $ 107,572
Hardware and software sales 619,667 619,667
------------- ------------
727,239 727,239
------------- ------------
Cost of sales:
Cost of services 88,519 88,519
Cost of hardware and software 473,034 473,034
------------- ------------
561,553 561,553
------------- ------------
Gross margin 165,686 165,686
------------- ------------
Operating expenses:
Sales and marketing expenses 514,315 514,315
Product development expenses 222,368 222,368
General and administrative expenses 851,474 851,474
Depreciation and amortization 95,377 95,377
------------- ------------
1,683,534 1,683,534
------------- ------------
Loss from operations (1,517,848) (1,517,848)
Interest income, net 29,139 29,139
------------- ------------
Net loss (1,488,709) (1,488,709)
Preferred stock dividends 62,399 62,399
Accretion of preferred stock to redemption value 145,334 418,696(a)
------------- ------------
Net loss available to common stockholders $(1,696,442) $(1,969,804)
============= ============
Loss per share, basic and diluted $ (0.51) $ (0.59)
============= ============
Weighted average shares outstanding 3,335,687 3,335,687
============= ============
</TABLE>
(a) Increase in accretion of preferred stock to redemption value is due to the
revision of discounts applied to common stock and common stock warrants issued
in connection with the preferred stock private placements.
F-32
<PAGE>
<TABLE>
<CAPTION>
(16) UNAUDITED QUARTERLY INFORMATION (Continued)
Three Months Ended Six Months Ended
June 30, June 30,
- -------------------------------------------------------------- -------------------------
As Reported As Revised As Reported As Revised
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales:
Service sales $ 90,820 $ 90,820 $ 198,392 $ 198,392
Hardware and software 209,988 209,988 829,655 829,655
----------- ----------- ----------- -----------
300,808 300,808 1,028,047 1,028,047
----------- ----------- ----------- -----------
Cost of sales:
Cost of services 58,919 58,919 147,438 147,438
Cost of hardware and software 207,901 207,901 680,935 680,935
----------- ----------- ----------- -----------
266,820 266,820 828,373 828,373
----------- ----------- ----------- -----------
Gross margin 33,988 33,988 199,674 199,674
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing expenses 611,451 611,451 1,125,767 1,125,767
Product development expenses 131,202 131,202 353,570 353,570
General and administrative
expenses 857,062 857,062 1,708,585 1,708,585
Depreciation and amortization 105,970 105,970 201,347 201,347
----------- ----------- ----------- -----------
1,705,685 1,705,685 3,389,269 3,389,269
----------- ----------- ----------- -----------
Loss from operations (1,671,697) (1,671,697) (3,189,595) (3,189,595)
Interest income, net 33,225 33,225 62,414 62,414
----------- ----------- ----------- -----------
Net loss (1,638,472) (1,638,472) (3,127,181) (3,127,181)
Preferred stock dividends 80,585 80,585 142,984 142,984
Accretion of preferred stock to
redemption value 848,646 1,818,564 (b) 993,980 2,237,260 (b)
----------- ----------- ----------- -----------
Net loss available to common
stockholders $(2,567,703) $(3,537,621) $(4,264,145) $(5,507,425)
=========== =========== =========== ===========
Loss per share, basic and diluted $ (0.75) $ (1.03) $ (1.26) $ (1.62)
=========== =========== =========== ===========
Weighted average shares outstanding 3,446,131 3,446,131 3,390,909 3,390,909
=========== =========== =========== ===========
</TABLE>
(b) Increase in accretion of preferred stock to redemption value due to the
revision of discounts applied to common stock and common stock warrants issued
in connection with preferred stock private placements and the revision of the
accretion period for the preferred stock.
F-33
<PAGE>
<TABLE>
<CAPTION>
(16) UNAUDITED QUARTERLY INFORMATION (Continued)
Three Months Ended Nine Months Ended
September 30, September 30,
- -------------------------------------------------------------- -------------------------
As Reported As Revised As Reported As Revised
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales:
Service sales $ 120,409 $ 120,409 $ 318,800 $ 318,800
Hardware and software 87,434 87,434 917,090 917,090
----------- ----------- ----------- -----------
207,843 207,843 1,235,890 1,235,890
----------- ----------- ----------- -----------
Cost of sales:
Cost of services 103,034 103,034 250,472 250,472
Cost of hardware and software 74,541 74,541 755,476 755,476
----------- ----------- ----------- -----------
177,575 177,575 1,005,948 1,005,948
----------- ----------- ----------- -----------
Gross margin 30,268 30,268 229,942 229,942
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing expenses 665,616 665,616 1,796,134 1,796,134
Product development expenses 484,017 484,017 837,587 837,587
General and administrative
expenses 903,710 903,710 2,607,544 2,607,544
Depreciation and amortization 111,478 111,478 312,825 312,825
----------- ----------- ----------- -----------
2,164,821 2,164,821 5,554,090 5,554,090
----------- ----------- ----------- -----------
Loss from operations (2,134,553) (2,134,553) (5,324,148) (5,324,148)
Interest income, net 43,342 43,342 105,756 105,756
----------- ----------- ----------- -----------
Net loss (2,091,211) (2,091,211) (5,218,392) (5,218,392)
Preferred stock dividends 100,635 100,635 243,619 243,619
Accretion of preferred stock to
redemption value 1,691,209 472,800 (c) 2,685,189 2,710,060 (c)
----------- ----------- ----------- -----------
Net loss available to common
stockholders $(3,883,055) $(2,664,646) $(8,147,200) $(8,172,071)
=========== =========== =========== ===========
Loss per share, basic and diluted $ (1.09) $ (0.75) $ (2.37) $ (2.38)
=========== =========== =========== ===========
Weighted average shares outstanding 3,566,951 3,566,951 3,436,922 3,436,922
=========== =========== =========== ===========
</TABLE>
(c) Increase in accretion of preferred stock to redemption value due to the
revision of discounts applied to common stock and common stock warrants issued
in connection with preferred stock private placements and the revision of the
accretion period for the preferred stock.
F-34
<PAGE>
ONLINE SYSTEM SERVICES, INC.
INDEX TO EXHIBITS
FORM 10-KSB (For Year Ended December 31, 1998)
<TABLE>
<CAPTION>
(a) Listing of Exhibits:
<S> <C>
2.1 Agreement and Plan of Merger dated March 19, 1998 among OSS, Durand
Acquisition Corporation and Durand Communications, Inc. (3)
3.1 Articles of Incorporation, as amended, of OSS (5)
3.2 Bylaws of OSS (1)
4.1 Specimen form of OSS' Common Stock certificate (2)
4.2 Form of Warrant Agreement dated May 23, 1996 between Corporate Stock
Transfer and OSS, 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 Form of Warrant issued in connection with Sale-Leaseback of Equipment
(1)
4.7 Form of Warrant issued in 1996 to private investors (1)
4.8 Specimen of Warrant Certificate--See Exhibit A filed with Exhibit 4.2
4.9 Form of Warrant Agreement issued in 1997 and 1998 to private investors
(3)
4.10 Form of Warrant Agreement issued in connection with issuance of Series
A Preferred Stock (4)
4.11 Form of Warrant Agreement issued in connection with issuance of Series
C Preferred Stock--See Exhibit B filed with Exhibit 10.8
10.1 Equipment Lease Agreement dated December 15, 1995 between OSS and OSS
Equipment Leasing General Partnership (1)
10.2 Form of Nondisclosure and Nonsolicitation Agreement between OSS and
its employees (2)
10.3 Office Lease for OSS' principal offices (2)
10.4 Long-Term Equipment Sale and Software License Agreement dated October
7, 1997 between OSS and FiberTel TCI2 S.A. (3)
10.5 Agreement dated October 7, 1997 between OSS and Medical Education
Collaborative, Inc. (3)
10.6 Form of Change of Control Agreement between OSS and certain employees*
10.7 Securities Purchase Agreement and Exhibits thereto dated January 11,
1999 between OSS and Archer Investors, LLC (6)
10.8 Operating and Member Control Agreement dated March 10, 1999, among
NetIgnite2, LLC, OSS and NetIgnite, Inc., Buy-Sell Agreement dated
March 10, 1999, among NetIgnite2, LLC, OSS and NetIgnite, Inc. and
Employment Agreement dated March 10, 1999, among OSS, NetIgnite2, LLC
and Perry Evans*
10.9 Electronic Banking Service Contract dated May 28, 1997 between OSS and
Rockwell Federal Credit Union*
10.10 Online Banking Service Agreement dated February 10, 1999 between OSS
and CU Cooperative Systems, Inc.*
10.11 Internet/Business Site Development & Host Agreement dated November
12, 1997 between OSS and ReMax International, Inc.*
10.12 Long-Term Equipment Sale and Software License Agreement dated
February 16, 1998 between OSS and Boulder Ridge Cable TV Inc. dba
Starstream Communications*
10.13 Agreement for the Provision of Internet Services, Equipment, and
Software Licenses dated November 26, 1997 between OSS and American
Telecasting, Inc.*
10.14 Equipment Sale and Software License Agreement dated August 4, 1997,
as amended May 26, 1998, between OSS and Intermedia Partners
Southeast*
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
21 Subsidiaries of Online System Services, Inc.
23.1 Consent of Arthur Andersen LLP*
27 Financial Data Schedule*
</TABLE>
<PAGE>
- ------------------------
* 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 10-KSB Annual Report for the year ended December 31,
1997, Commission File No. 0-28462.
(4) Filed with the Registration Statement on Form S-3, filed December 22,
1998, Commission File No. 333-69477.
(5) Filed with the Registration Statement on Form S-3, filed January 29,
1999, Commission File No. 333-71503.
(6) Filed with the Form 8-K Current Report dated January 11, 1999, as
amended, Commission File No. 0-28462.
<PAGE>
EXHIBIT 10.6
ONLINE SYSTEM SERVICES, INC.
EMPLOYMENT AGREEMENT
AGREEMENT by and between Online System Services, Inc., a Colorado
Corporation (the "Company"), and ___________________ (the "Executive"), dated as
of the ____ day of __________ 1998.
The Board of Directors of the Company (the "Board"), has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below) of
the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date" shall mean the first
date during the Change of Control Period (as defined in Section 1(b)) on which a
Change of Control (as defined in Section 2) occurs. Anything in this Agreement
to the Contrary notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated prior to the date on which
the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control or
(ii) otherwise arose in connection with or anticipation of a Change of Control,
then for all purposes of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on the
date hereof and ending on the third anniversary of the date hereof; provided,
however, that commencing on the date one year after the date hereof, and on each
annual anniversary of such date hereof, and on each annual anniversary of such
date (such date and each annual anniversary thereof shall be hereinafter
referred to as the "Renewal Date"), unless previously terminated, the Change of
Control Period shall be automatically extended so as to terminate three years
from such Renewal Date, unless at least 60 days prior to the Renewal Date the
Company shall give notice to the Executive that the Change of Control Period
shall not be so extended.
2. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of
either (i) the then-outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then-outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition by
the Company, (ii) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation controlled by
the Company, or (iii) any acquisition by any corporation pursuant to a
transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of
this Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was
<PAGE>
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of an actual or threatened
election contest with respect to the election or removal of directors or other
actual or threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation, joint
venture or strategic partner transaction or sale or other disposition of all or
substantially all of the assets of the Company (a "Business Combination"), in
each case, unless, following such Business Combination, (i) all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Common Stock and Outstanding Company
Voting Securities immediately prior to such Business Combination beneficially
own, directly or indirectly, more than 50% of, respectively, the then-
outstanding shares of common stock and the combined voting power of the then-
outstanding voting securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as a result of
such transaction owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in substantially the
same proportions as their ownership, immediately prior to such Business
Combination of the Outstanding Company Common Stock and Outstanding Company
Voting Securities, as the case may be, (ii) no Person (excluding any corporation
resulting from such Business Combination or any employee benefit plan (or
related trust) of the Company or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 30% or more of,
respectively, the then-outstanding shares of common stock of the corporation
resulting from such Business Combination, or the combined voting power of the
then-outstanding voting securities of such corporation except to the extent that
such ownership existed prior to the Business Combination and (iii) at least a
majority of the members of the board of directors of the corporation resulting
from such Business Combination were members of the Incumbent Board at the time
of the execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a complete liquidation
or dissolution of the Company.
3. Employment Period. The Company hereby agrees to continue the Executive
in its employ, and the Executive hereby agrees to remain in the employ of the
Company subject to the terms and conditions of this Agreement, for the period
commencing on the Effective Date and ending on the third anniversary of such
date (the "Employment Period").
4. Terms of Employment. (a) Position and Duties. (i) During the
Employment Period, (A) the Executive's position (including status, offices,
titles and reporting requirements), authority, duties and responsibilities shall
be at least commensurate in all material respects with the most significant of
those held, exercised and assigned at any time during the 120-day period
immediately preceding the Effective Date and (B) the Executive's services shall
be performed at the location where the Executive was employed immediately
preceding the Effective Date or any office or location less than 30 miles from
such location.
(ii) During the Employment Period, and excluding any periods of vacation
and sick leave to which the Executive is entitled, the Executive agrees to
devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions, and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
-2-
<PAGE>
(b) Compensation. (i) Base Salary. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times the highest
monthly base salary paid or payable, including any base salary which has been
earned but deferred, to the Executive by the Company and its affiliated
companies in respect of the twelve-month period immediately preceding the month
in which the Effective Date occurs. During the Employment Period, the Annual
Base Salary shall be reviewed no more than twelve months after the last salary
increase awarded to the Executive prior to the Effective Date and thereafter at
least annually. Any increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this Agreement. Annual Base
Salary shall not be reduced after any such increase and the term Annual Base
Salary as utilized in this Agreement shall refer to Annual Base Salary as so
increased. As used in this Agreement, the term "affiliated companies" shall
include any company controlled by, controlling or under common control with the
Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall
be awarded, for each fiscal year ending during the Employment Period, an annual
bonus (the "Annual Bonus") in cash at least equal to the Executive's highest
bonus under the Company's incentive plans for the last three full fiscal years
prior to the Effective Date (annualized in the event that the Executive was not
employed by the Company for the whole of such fiscal year) (the "Recent Annual
Bonus"). Each such Annual Bonus shall be paid no later than the end of the third
month of the fiscal year next following the fiscal year for which the Annual
Bonus is awarded, unless the Executive shall elect to defer the receipt of such
Annual Bonus .
(iii) Incentive, Savings and Retirement Plans. During the Employment
Period, the Executive shall be entitled to participate in all incentive, savings
and retirement plans, practices, policies and programs applicable generally to
other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide the Executive
with incentive opportunities (measured with respect to both regular and special
incentive opportunities, to the extent, if any, that such distinction is
applicable), savings opportunities and retirement benefit opportunities, in each
case, less favorable, in the aggregate, than the most favorable of those
provided by the Company and its affiliated companies for the Executive under
such plans, practices, policies and programs as in effect at any time during the
120-day period immediately preceding the Effective Date or if more favorable to
the Executive, those provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the Executive
and/or the Executive's family, as the case may be, shall be eligible for
participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident
insurance plans and programs) to the extent applicable generally to other peer
executives of the Company and its affiliated companies, but in no event shall
such plans, practices, policies and programs provide the Executive with benefits
which are less favorable, in the aggregate, than the most favorable of such
plans, practices, policies and programs in effect for the Executive at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.
(v) Expenses. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Executive in accordance with the most favorable policies, practices and
procedures of the Company and its affiliated companies in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the Company and its
affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive shall
be entitled to fringe benefits, including, without limitation, tax and financial
planning services, payment of club dues, and, if applicable, use of an
automobile and payment of related expenses, in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
-3-
<PAGE>
(vii) Office and Support Staff. During the Employment Period, the
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal secretarial and
other assistance, at least equal to the most favorable of the foregoing provided
to the Executive by the Company and its affiliated companies at any time during
the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, as provided generally at any time thereafter with
respect to other peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the most favorable plans, policies,
programs and practices of the Company and its affiliated companies as in effect
for the Executive at any time during the 120-day period immediately preceding
the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
5. Termination of Employment. (a) Death or Disability. The Executive's
employment shall terminate automatically upon the Executive's death during the
employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 12(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Executive shall not have returned to full-
time performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative.
(b) Cause. The Company shall terminate the Executive's employment
during the Employment Period for Cause. For purposes of this Agreement, "Cause"
shall mean:
(i) The willful and continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of its
affiliates (other than any such failure resulting from the incapacity due
to physical or mental illness), after a written demand for substantial
performance is delivered to the Executive by the Board or the Chief
Executive Officer of the Company which specifically identifies the manner
in which the Board or Chief Executive Officer believes that the Executive
has not substantially performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct or
gross misconduct which is materially and demonstrably injurious to the
Company.
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a resolution
duly adopted by the affirmative vote of not less than three quarters of the
entire membership of the Board at a meeting of the Board called and held for
such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
-4-
<PAGE>
(i) the assignment to the Executive of any duties inconsistent
in any respect with the Executive's position (including status, offices,
titles and reporting requirements), authority, duties or responsibilities
as contemplated by Section 4(a) of this Agreement, or any other action by
the Company which results in a diminution in such position, authority,
duties or responsibilities, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by
the Executive;
(ii) any failure by the Company to comply with any of the
provisions of Section 4(b) of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and which
is remedied by the Company promptly after receipt of notice thereof given
by the Executive;
(iii) the Company's requiring the Executive to be based at any
office or location other than as provided in Section 4(a)(i)(B) hereof or
the Company's requiring the Executive to travel on Company business to a
substantially greater extent than required immediately prior to the
Effective Date;
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
(v) any failure by the Company to comply with and satisfy
Section 11(c) of this Agreement.
For purposes of this Section 5(c), any good faith determination of "Good
Reason" made by the Executive shall be conclusive.
(d) Notice of Termination. Any termination by the Company for Cause, or
by the Executive for Good Reason, shall be communicated by Notice of Termination
to the other party hereto given in accordance with Section 12(b) of this
Agreement. For purposes of this Agreement, a "Notice of Termination" means a
written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the Executive's employment under the provision so indicated and (iii) if the
Date of Termination (as defined below) is other than the date of receipt of such
notice, specifies the termination date (which date shall be not more than 30
days after the giving of such notice). The failure by the Executive or the
Company to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause shall not waive any right of
the Executive or the Company, respectively, hereunder or preclude the Executive
or the Company, respectively, from asserting such fact or circumstance in
enforcing the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
Date of Termination shall be the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment is
terminated by reason of death or Disability, the Date of Termination shall be
the date of death of the Executive or the Disability Effective Date, as the case
may be.
6. Obligations of the Company upon Termination. (a) Good Reason; Other
Than for Cause, Death or Disability. If, during the Employment Period, the
Company shall terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (1) the Executive's Annual Base Salary
through the Date of Termination to the extent not theretofore paid,
(2) the product of (x) the higher of (I) the Recent Annual Bonus
and (II) the Annual Bonus paid or payable, including any bonus or
portion thereof which has been earned but deferred (and annualized
for any fiscal year consisting of less than twelve full months or
during which the Executive was employed for less than twelve full
months),
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for the most recently completed fiscal year during the Employment
Period, if any (such higher amount being referred to as the
"Highest Annual Bonus") and (y) a fraction, the numerator of which
is the number of days in the current fiscal year through the Date
of Termination, and the denominator of which is 365 and (3) any
compensation previously deferred by the Executive (together with
any accrued interest or earnings thereon) and any accrued vacation
pay, in each case to the extent not theretofore paid (the sum of
the amounts described in clauses (1), (2), and (3) shall be
hereinafter referred to as the "Accrued Obligations"); and
B. the amount equal to the product of (1) three and (2) the
sum of (x) the Executive's Annual Base Salary and (y) the Highest
Annual Bonus; and
C. an amount, if any, equal to the excess of (1) the
actuarial equivalent of the benefit under any qualified defined
benefit retirement plan maintained by the Company (the "Retirement
Plan") (utilizing actuarial assumptions no less favorable to the
Executive than those in effect under the Retirement Plan
immediately prior to the Effective Date), and any supplemental or
excess retirement plan in which the Executive participates
(together, the "SERP") which the Executive would receive if the
Executive's employment continued for three years after the Date of
Termination assuming for this purpose that all accrued benefits are
fully vested, and, assuming that the Executive's compensation in
each of the three years is that required by Section 4(b)(i) and
Section 4(b)(ii), over (2) the actuarial equivalent of the
Executive's actual benefit (paid or payable), if any, under the
Retirement Plan and the SERP as of the Date of Termination;
(ii) for three years after the Executive's Date of Termination,
or such longer period as may be provided by the terms of the appropriate
plan, program, practice or policy, the Company shall continue benefits to
the Executive and/or the Executive's family at least equal to those which
would have been provided to them in accordance with the plans, programs,
practices and policies described in Section 4(b)(iv) of this Agreement if
the Executive's employment had not been terminated or, if more favorable to
the Executive, as in effect generally at any time thereafter with respect
to other peer executives of the Company and its affiliated companies and
their families, provided, however, that if the Executive becomes reemployed
with another employer and is eligible to receive medical or other welfare
benefits under another employer-provided plan, the medical and other
welfare benefits described herein shall be secondary to those provided
under such other plan during such applicable period of eligibility. For
purposes of determining eligibility (but not the time of commencement of
benefits) of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to have
remained employed until three years after the Date of Termination and to
have retired on the last day of such period;
(iii) the vesting date for all options (including substitute or
replacement options or other options granted in connection with any
Business Combination) to purchase shares of the Company's common stock
which were issued to Executive by the Company or an affiliate of or
successor to the Company which would have occurred during the Employment
Period but for such earlier termination of employment, shall be accelerated
and said Executive shall have the right to exercise such options as so
vested at any time during the Employment Period or as provided in
accordance with the terms of such options, if longer, provided that the
options must, notwithstanding the foregoing, be exercised within the terms
of the options.
(iv) the Company shall, at its sole expense as incurred, provide
the Executive with outplacement services the scope and provider of which
shall be selected by the Executive in his sole discretion; and
(v) to the extent not theretofore paid or provided, the Company
shall timely pay or provide to the Executive any other amounts or benefits
required to be paid or provided or which the Executive is eligible to
receive under any plan, program, policy or practice or contract or
agreement of the Company and its affiliated companies (such other amounts
and benefits shall be hereinafter referred to as the "Other Benefits").
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(b) Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. Accrued Obligations shall be paid to the
Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(b) shall
include, without limitation, and the Executive's estate and/or beneficiaries
shall be entitled to receive, benefits at least equal to the most favorable
benefits provided by the Company and affiliated companies to the estates and
beneficiaries of peer executives of the Company and such affiliated companies
under such plans, programs, practices and policies relating to death benefits,
if any, as in effect with respect to other peer executives and their
beneficiaries at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive's estate and/or the
Executive's beneficiaries, as in effect on the date of the Executive's death
with respect to other peer executives of the Company and its affiliated
companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason of
the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term "Other Benefits" as utilized in this Section 6(c) shall
include, and the Executive shall be entitled after the Disability Effective Date
to receive, disability and other benefits at least equal to the most favorable
of those generally provided by the Company and its affiliated companies to
disabled executives and/or their families in accordance with such plans,
programs, practices and policies relating to disability, if any, as in effect
generally with respect to other peer executives and their families at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive and/or the Executive's family, as in effect at any
time thereafter generally with respect to other peer executives of the Company
and its affiliated companies and their families.
(d) Cause; Other than for Good Reason. If the Executive's employment shall
be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive (x) his Annual Base Salary through the Date of
Termination, (y) the amount of any compensation previously deferred by the
Executive, and (z) Other Benefits, in each case to the extent theretofore
unpaid. If the Executive voluntarily terminates employment during the Employment
Period, excluding a termination for Good Reason, this Agreement shall terminate
without further obligations to the Executive, other than for Accrued Obligations
and the timely payment or provision of Other Benefits. In such case, all Accrued
Obligations shall be paid to the Executive in a lump sum within 30 days of the
Date of Termination.
7. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which the Executive may qualify, nor, subject to Section 12(f), shall
anything herein limit or otherwise affect such rights as the Executive may have
under any contract or agreement with the Company or any of its affiliated
companies. Amounts which are vested benefits or which the Executive is otherwise
entitled to receive under any plan, policy, practice or program of or any
contract or agreement with the Company or any of its affiliated companies at or
subsequent to the Date of Termination shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as explicitly
modified by this Agreement.
8. Full Settlement. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement and such amounts
shall not be reduced whether or not the Executive obtains other employment. The
Company agrees to pay as incurred, to the full extent permitted by law, all
legal fees and expenses which the Executive may reasonably incur as a result of
any contest (regardless of the outcome thereof) by the Company, the Executive or
others of the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof (including as a result
of any contest by the Executive about the amount of any payment pursuant to this
Agreement), plus in each case
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interest on any delayed payment at the applicable Federal rate provided for in
Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the
"Code").
9. Certain Additional Payments by the Company. (a) Anything in this
Agreement to the contrary notwithstanding and except as set forth below, in the
event it shall be determined that any payment or distribution by the Company to
or for the benefit of the Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of
the Code or any interest or penalties are incurred by the Executive with respect
to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. Notwithstanding the foregoing provisions of this
Section 9(a), if it shall be determined that the Executive is entitled to a
Gross-Up Payment, would not receive a net after-tax benefit of at least $10,000
(taking into account both income taxes and any Excise Tax) as compared to the
net after-tax proceeds to the Executive resulting from an elimination of the
Gross-Up Payment and a reduction of the Payments, in the aggregate, to an amount
(the "Reduced Amount") such that the receipt of Payments would not give rise to
any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the
Payments, in the aggregate, shall be reduced to the Reduced Amount.
(b) Subject to the provisions of Section 9(c), all determinations required
to be made under this Section 9, including whether and when a Gross-Up Payment
is required and the amount of such Gross-Up Payment and the assumptions to be
utilized in arriving at such determination, shall be made by an independent
certified public accounting firm retained by the Company, which firm may be the
Company's independent auditors, or such other certified public accounting firm
as may be designated by the Executive (the "Accounting Firm") which shall
provide detailed supporting calculations both to the Company and the Executive
within 15 business days of the receipt of notice from the Executive that there
has been a Payment, or such earlier time as is requested by the Company. In the
event that the Accounting Firm is serving as accountant or auditor for the
individual, entity or group effecting the Change of Control , the Executive
shall appoint another nationally recognized accounting firm to make the
determinations required hereunder (which accounting firm shall then be referred
to as the Accounting Firm hereunder). All fees and expenses of the Accounting
Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined
pursuant to this Section 9, shall be paid by the Company to the Executive within
five days of the receipt of the Accounting firm's determination. Any
determination by the Accounting Firm shall be binding upon the Company and the
Executive. As a result of the uncertainty in the application of Section 4999 of
the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which will not have been made
by the Company should have been made ("Underpayment"), consistent with the
calculations required to be made hereunder. In the event that the Company
exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is
required to make payment of any Excise Tax, the Accounting Firm shall determine
the amount of the Underpayment that has occurred and any such Underpayment shall
be promptly paid by the Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is required to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
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(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with respect
to such claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively
to contest such claim, and
(iv) permit the Company to participate in any proceedings relating
to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 9(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
the Executive to pay the tax claimed and sue for a refund or to contest the
claim in any permissible manner, and the Executive agrees to prosecute such
contest to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such advance;
and further provided that any extension of the statute of limitations relating
to payment of taxes for the taxable year of the Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
the Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 9(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(c), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 10 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
11. Successors. (a) This Agreement is personal to the Executive and
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
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(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
12. Miscellaneous. (a) This Agreement shall be governed by and construed
in accordance with the laws of the State of Colorado, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may not
be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive: ________________
________________
________________
If to the Company: Online System Services, Inc.
1800 Glenarm Place
Denver, CO 80202-3859
Attention: Chairman of the Board of Directors
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communication shall be effective when
actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.
(d) The Company may withhold from any amounts payable under this Agreement
such Federal, state, local or foreign taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason
pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will"
and, subject to Section 1(a) hereof, prior to the Effective Date, the
Executive's employment and/or this Agreement may be terminated by either the
Executive or the Company at any time prior to the Effective Date, in which case
the Executive shall have no further rights under this Agreement. From and after
the Effective Date this Agreement shall supersede any other agreement between
the parties with respect to the subject matter hereof.
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IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day hand year first above written.
EXECUTIVE ONLINE SYSTEM SERVICES, INC.
___________________________________ By___________________________________
Its_______________________
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EXHIBIT 10.8
OPERATING AND
MEMBER CONTROL AGREEMENT
OF
NETIGNITE 2, LLC
This OPERATING AND MEMBER CONTROL AGREEMENT ("Agreement") is made this
9th day of March, 1999, by and among NetIgnite 2, LLC, a Colorado limited
liability company (the "Company"), Online System Services, Inc. a Colorado
corporation ("OSS") and NetIgnite, Inc., a Colorado corporation ("NetIgnite")
(collectively, the "Members" and each, individually, a "Member").
RECITALS
The undersigned constitute all of the current Members of the Company.
Each of the undersigned desires to enter into this Agreement, which is
intended to constitute an operating agreement within the meaning of Colorado
Revised Statutes Section 7-80-706.
Simultaneously herewith the Members are entering into a Buy-Sell
Agreement (the "Buy-Sell Agreement"). In addition, Perry Evans ("Evans"), the
sole shareholder of NetIgnite, is also entering into an Employment Agreement
with OSS and the Company pursuant to which he will serve as the President of the
Company (the "Employment Agreement").
AGREEMENT
In consideration of the foregoing and the mutual promises and
agreements set forth below, the Members agree as follows:
ARTICLE 1
DEFINITIONS
The terms defined in this Article 1 (except as otherwise expressly
provided in this Agreement or unless the context clearly requires otherwise)
shall, for purposes of this Agreement, have the following respective meanings:
1.1 "ACT" means the Colorado Limited Liability Company Act, as
amended from time to time, and any successor statute.
1.2 "AGREEMENT" means this Operating and Member Control Agreement,
and all amendments, schedules, exhibits, and modifications hereto.
1.3 "ARTICLES OF ORGANIZATION" means the Articles of Organization of
the Company, as the same may be amended from time to time.
1.4 "CAPITAL ACCOUNT" means the account of a Member established and
maintained in accordance with the provisions of Section 4.1 hereof.
1.5 "CAPITAL CONTRIBUTION" means the total amount of cash and/or the
agreed upon fair market value of property contributed to the Company by any
Member or all of the Members in the aggregate (including contributions by
predecessor Members in the event of any assignment).
1.6 "CODE" means the Internal Revenue Code of 1986, as amended, and
any successor thereto. Any reference to specific sections of the Code shall be
to the Section as it now exists and to any successor provision.
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1.7 "COMMITTED AMOUNT" means the amount described in Schedule A.
1.8 "DISTRIBUTION" means the total amount of cash and/or the fair
market value of property distributed by the Company to a Member at any time or
from time to time with respect to his or her interest as a Member of the
Company.
1.9 "MEMBER" means a member of the Company as named herein and any
successor or additional member admitted pursuant to this Agreement.
1.10 "SALE GAIN OR LOSS" means the gain or loss on the sale of
substantially all of the assets of the Company.
1.11 "UNIT" means a fractional interest in the Company and its assets.
ARTICLE 2
FORMATION
2.1 FORMATION OF LIMITED LIABILITY COMPANY. By this Agreement and
upon filing Articles of Organization, the Members form a limited liability
company under the Act. The rights and liabilities of the Members shall be as
provided in the Act, except as otherwise expressly provided herein or in the
Articles of Organization.
2.2 MEMBERS. OSS and NetIgnite.
2.3 NAME. The name of the Company is "NetIgnite 2, LLC."
2.4 OFFICES. The Company's registered office shall be located at 1401
Blake Street, Suite 201, Denver, Colorado 80202, or such other place as the
Members may from time to time determine. The Company's principal executive
office shall be located at 1401 Blake Street, Suite 201, Denver, Colorado 80202,
or such other place as the Members may from time to time determine. The Company
may maintain such other offices at such other places as the Members deem
advisable.
2.5 PURPOSES. The Company is formed for purposes of transacting any
or all lawful business for which a limited liability company may be organized
under the laws of the State of Colorado.
2.6 TERM. Unless the Company is dissolved earlier in accordance with
law, the period of existence of the Company shall be forty (40) years from the
date of filing of the Articles of Organization.
2.7 MEMBERS' NAMES AND ADDRESSES. The names and addresses of the
Members as of the date hereof are as follows:
Online System Services, Inc.
1800 Glenarm Place
Suite 700
Denver, CO 80202-3859
NetIgnite, Inc.
1401 Blake Street, Suite 201
Denver, Colorado 80202
2.8 TITLE TO COMPANY PROPERTY. All property owned by the Company,
whether real or personal, tangible or intangible, shall be deemed to be owned by
the Company as an entity, and no Member, individually, shall have any ownership
interest in any such property.
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2.9 WAIVER OF PARTITION. Each Member hereby waives any and all rights
such Member may have to a partition of any Company property or properties.
ARTICLE 3
CAPITAL CONTRIBUTIONS
3.1 INITIAL CAPITAL CONTRIBUTIONS. As their initial Capital
Contributions to the Company, the Members shall make the Capital Contributions
set forth on SCHEDULE A, which is attached hereto and made a part of this
Agreement, for which they shall receive the number of Units set forth on
SCHEDULE A.
3.2 ADDITIONAL CAPITAL CONTRIBUTIONS. If , after the Company has paid
in the Committed Amount, the Company needs additional working capital in
accordance with the requirements therefore set forth in the Proforma Statements
(as defined on Schedule A), OSS' obligation to make additional capital
contributions shall be as follows:
(a) OSS shall make such capital contributions equal to the amount of
distributions it receives under Section 4.5 hereof less OSS's
reasonable estimate of its income tax liability attributable to
the allocation of income to OSS under Section 4.3 hereof;
(b) In addition to amounts under Section 3.2(a) hereof, OSS shall
make additional capital contributions without modifying the
income and loss allocation to Members if (i) this increased need
is a result of realizable revenue or value (i.e., patent) in
excess of that identified in the Proforma Statements (as defined
on Schedule A), or (ii) is required to cover short-term (i.e.,
three months or less) working capital requirements, provided in
each case that OSS agrees to the decisions that would give rise
to the increased working capital need.
(c) OSS may, but is not obligated to, make additional capital
contributions in the event the Company requires more working
capital than the Committed Amount, or than that which is required
by the Company to achieve its pro forma revenue plan under 3.2(b)
above, with such amount referred to as the "Proforma Shortfall
Funding" subject to an increase in its income allocation as
provided in Section 4.3 hereof. NetIgnite may contribute up to a
proportionate share (measured by the then allocation of Sale Gain
and Loss) of any additional working capital provided by OSS
hereunder to reduce or avoid the income adjustment under Section
4.3 hereof.
NetIgnite is not obligated to make any additional capital
contributions.
3.3 NO RIGHT TO RETURN OF CAPITAL CONTRIBUTION. No Member shall have
the right to withdraw or to demand the return of all or any part of such
Member's Capital Contribution, except as otherwise expressly provided herein.
The Company shall not be liable to Members for repayment of their Capital
Contributions.
3.4 LOANS FROM MEMBERS TO COMPANY. Subject to any other restrictions
contained herein, the Company may borrow money from one or more Members at such
interest rate or rates and upon such other terms as are agreed upon by the
Company and the lending Member; provided that the interest rate on any such
loans shall not exceed the rate that would apply to Company borrowing on similar
terms from recognized banks or financial institutions.
3.5 NO INTEREST ON CONTRIBUTIONS. No interest shall be paid to any
Member on Capital Contributions.
3.6 NONASSESSABILITY. No Member shall be required to make any Capital
Contribution in excess of the amount stated in Section 3.1 unless agreed by all
Members.
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ARTICLE 4
ALLOCATIONS OF PROFITS
AND LOSSES; DISTRIBUTIONS
4.1 CAPITAL ACCOUNTS. A separate Capital Account shall be maintained
by the Company for each Member. The Capital Account for each Member shall be
increased by such Member's Capital Contributions and shall be decreased by
Distributions made to such Member. Each Member's Capital Account shall also be
increased or decreased, as the case may be, to account for allocations of
profits and losses to such Member. As of the date on which additional Capital
Contributions are made by any Member, or Distributions are made in liquidation
of any Member's interest in the Company, the Capital Account balances of the
Members may be restated to reflect the market values of the Company's properties
as of such date and the manner in which profits and losses would have been
allocated had the Company disposed of its properties on such date, all in
accordance with Treasury Regulations (S)(S) 1.704-1(b)(2)(iv)(f) and (r), as in
effect on the date hereof. Subsequent adjustments to Capital Accounts shall be
made so as to comply with the requirements of Treasury Regulations (S)(S) 1.704-
1(b)(2)(iv) and 1.704-1(b)(4)(i), as in effect on the date hereof. For example,
appreciation and depreciation of assets reflected in the Capital Accounts of the
Members by reason of the adjustments described above shall be taken into account
in making later Capital Account adjustments for profits and losses.
4.2 RESTATEMENT OF CAPITAL ACCOUNTS. If any additional Capital
Contributions are made to the Company, upon agreement of the Members the Capital
Accounts of the Members may be restated to reflect the Members' interests in
Company assets. Any such restatement shall reflect such increases or decreases
in the Capital Accounts of the Members as would reflect the manner in which
income, gains, losses, etc., would be allocated if there were a taxable
disposition of all Company property for its fair market value on the date of
such Capital Contributions.
4.3 ALLOCATIONS OF PROFITS AND LOSSES. Profits and losses of the
Company for a year shall be allocated to the members as follows:
(a) GENERALLY:
Net income (other than Sale Gain or Loss): 99.5% to OSS and .5%
to NetIgnite;
Net loss (Other than Sale Gain or Loss): 60% to OSS and 40% to
NetIgnite; and
Sale Gain or Loss: 60% to OSS and 40% to NetIgnite.
(b) UPON A FAILURE BY OSS TO PROVIDE THE COMMITTED AMOUNT WHEN
REQUIRED TO, THE ALLOCATION OF PROFITS AND LOSSES OF THE COMPANY SHALL BE
RECALCULATED AS FOLLOWS AND THEREAFTER, SUBJECT TO FURTHER CHANGE PURSUANT TO
THE TERMS OF THIS AGREEMENT, WILL BE AS SO RECALCULATED:
Net income (other than Sale Gain or Loss): 99.5% to OSS and .5%
to NetIgnite;
Net loss (Other than Sale Gain or Loss): x% to OSS and y% to
NetIgnite; and
Sale Gain or Loss: x% to OSS and y% to NetIgnite, where x is
equal to 100 times (i) the amount of the Committed Amount OSS actually
contributed, divided by (ii) the sum of the amount of the Committed
Amount OSS actually contributed plus $1 million (the value of the
technology transferred by NetIgnite), and y is 100 minus x.
(c) UPON A CAPITAL CONTRIBUTION BY OSS UNDER SECTION 3.2(C):
If OSS provides the Proforma Shortfall Funding and NetIgnite does not
contribute its proportionate amount under Section 3.2(c), NetIgnite's
interest in the Sale Gain and Loss shall be reduced (and OSS's shall
be correspondingly increased) based on the ratio of the Proforma
Shortfall Funding to the then calculated value of the Company based on
a value of the Company determined, subject to the minimum value for
1999 set forth below, by multiplying an
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annualization of three months trailing gross revenue at the time of
the Proforma Shortfall Funding by 2.8. The parties agree for the
purposes of this provision to value the Company during the period from
the date hereof through December 31, 1999 at the greater of $2.5
million or the multiple of annualized gross revenue set forth above.
For example, assuming an initial Proforma Shortfall Funding of
$500,000, at a time when three months trailing revenue equaled
$500,000, NetIgnite's interest in Sale Gain and Loss would be reduced
to 36.7% as follows:
Value of the Company at time of funding = 2.8 x ($500,000 x 4) =
$5,600,000
OSS percentage interest following funding = (.6 ($5,600,000) +
$500,000)/($5,600,000 + $500,000) = 63.3%
NetIgnite's percentage following funding = .4 ($5,600,000)/($5,600,000
+ $500,000) = 36.7%.
4.4 SECTION 704(C) ALLOCATION. To the extent required by Section
704(c) of the Code, items of income, gain, loss, or deduction with respect to
contributed properties shall be allocated among the Members in such manner as
takes into account any variations between the bases of such properties to the
Company upon contribution and the fair market values of such properties at the
time of contribution. Any allocations made solely to comply with this Section
4.4 and Section 704(c) of the Code shall not be reflected in Capital Account
adjustments.
4.5 DISTRIBUTIONS PRIOR TO LIQUIDATION. By no later than March 1st of
each year, the Company shall make a Distribution to its Members of its Net
Income (other than Sale Gain or Loss), if any, for the preceding tax year (to
the extent not distributed in the preceding year) in proportion the allocation
of such Net Income to the Members. To the extent reasonably possible, the
Company shall make a Distribution to its Members of its Net Income (other than
Sale Gain or Loss), if any, for any calendar quarter by the end of the first
month of the next calendar quarter in proportion to the allocation of such Net
Income to the Members. Except as provided in Section 4.8, all distributions to
Members prior to the liquidation, winding up, and dissolution of the Company
shall be in cash.
4.6 DISTRIBUTIONS UPON DISSOLUTION AND WINDING UP. At the time of the
dissolution and winding up of the Company, following the allocation of all net
income and net losses and the payment of all Company obligations, the remaining
assets shall be distributed to the Members in accordance with Section 9.2.
4.7 NO DISTRIBUTION BY REASON OF WITHDRAWAL. Neither withdrawal from
the Company, transfer of any membership interest, nor demand for the return of
capital shall entitle any Member to receive any Distribution from the Company
except AS PROVIDED IN ARTICLE 9.
4.8 DISTRIBUTIONS IN KIND. No Member shall have any right to demand
or receive a Distribution from the Company in any form other than cash, nor
shall any Member be compelled to accept any distribution of property in kind
except under circumstances where all Members receive undivided interests in
property or substantially equivalent interests in property on the basis of their
Capital Accounts. In the event of a Distribution of property in kind, such
property shall be assumed to have been sold at its fair market value at the time
of the Distribution, and the resulting gain or loss shall be allocated among the
Members according to their Capital Accounts, and their Capital Accounts shall be
adjusted accordingly.
ARTICLE 5
MANAGEMENT
5.1 MANAGEMENT. Except as otherwise specified herein, the right to
make decisions concerning the management of the Company is reserved to the
Managers, and the Managers shall have all of the rights, power, and authority
generally conferred under the Act or other applicable law, on behalf and in the
name of the Company to carry out any and all of the purposes of the Company and
to perform all acts and, enter into, perform, negotiate and
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execute any and all leases, documents, contracts and agreements on behalf of the
Company that the Mangers, exercising sole discretion, deems necessary or
desirable
5.2 MANAGER APPROVAL. Each Manager shall be entitled to one vote on
all matters submitted to Managers. Except as otherwise provided in this
Agreement, all matters submitted to the Managers shall require approval by the
affirmative vote of Managers representing a Majority of the Managers.
5.3 LIMITATIONS ON AUTHORITY OF THE MEMBERS AND MANAGERS. Except upon
the written consent of all of the Members, no action shall be taken by or on
behalf of the Company to:
(a) Adopt a Business and Implementation Plan for the Company, it
being the agreement of the Members that a Business and Implementation
Plan will be adopted annually and that the Company's business will be
conducted in accordance with such plan except as otherwise agreed in
writing by the Members;
(b) Merge with or into any other entity, exchange securities
with any other company, license intellectual property (including, but
not limited to licensing terms that contain conditions of exclusivity
or access to software code) or sell or lease more than ten percent
(10%) of its property and assets to any other entity in any one
transaction or series of related transactions or enter into any joint
venture or profit sharing agreements with others;
(c) Substantially change the present or now intended nature of
the Company's business operations.
(d) Dissolve or liquidate the Company;
(e) Issue, reissue or cause the issuance or reissuance of any
securities of the Company, or subscriptions, options, warrants, rights
or privileges, preemptive or otherwise, to acquire any securities of
the Company;
(f) Except as provided in Section 4.5 hereof, make any
distribution or declare or pay any dividend;
(g) Except as authorized in a Business and Implementation Plan
adopted by the Members, loan money or other assets to or guarantee the
obligations of any person or entity;
(h) Except as authorized in a Business and Implementation Plan
adopted by the Members, enter into any other contract, agreement or
similar arrangement that could have a material effect upon the Company
or its business or assets, including, but not limited to, any contract
with a term of more than one year which is not terminable by the
Company without penalty upon not more than thirty (30) days notice.
5.4 RIGHT OF PUBLIC TO RELY ON AUTHORITY OF MEMBERS; SIGNATORY
AUTHORITY. No person shall be required to determine the authority of the Members
or of a Member to make any undertaking on behalf of the Company, or to see to
the application or distribution of revenues or proceeds paid to the Members or
to a Member. Except as otherwise provided herein or as agreed by Members holding
a majority of the outstanding Units, all contracts, deeds, or other instruments
or documents shall require only one signature and may be signed on behalf of the
Company by the President.
5.5 MANAGERS.
(a) The Company shall have a President, who shall be the Company's
chief manager, as defined in the Act. The President shall have
primary authority to sign and deliver in the name of the Company
any deeds, mortgages, bonds, contracts, or other instruments
pertaining to the business of the Company, except in cases in
which the authority to sign and deliver is required by law to be
exercised by another person or is expressly delegated by the
Articles of Organization, this
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Agreement, or the Members to some other Member, manager, or agent
of the Company, and shall perform such other duties as may from
time to time be prescribed by the Members.
(b) The Company shall have a Treasurer, who shall serve as the
treasurer of the Company, and shall perform such other duties as
may from time to time be prescribed by the Members.
(c) A manager, as such, shall not be obligated to devote his or her
full time to the conduct of the Company affairs, but shall devote
only as much time as he or she deems necessary for the proper
conduct thereof, and provided further, that nothing in this
Agreement shall be deemed to restrict in any way the freedom of a
manager to conduct any other businesses or activities whatsoever
without any accountability to the Company.
5.6 INITIAL MANAGERS. The initial managers and their titles shall be
as follows:
President Perry Evans
Treasurer Gwenael Hagan
5.7 ELECTION AND REMOVAL OF MANAGERS. The Members may elect or
appoint other managers or agents of the Company, with such titles, duties, and
authority as they shall designate. Subject to any limitations that the Members
may impose, the President may delegate authority and appoint other managers and
agents of the Company, with such titles, duties, and authority as the President
shall designate. The President, at any time, may remove or terminate the
authority of any manager or agent that was appointed by the President. Managers
shall be elected for one-year terms. From and after the date hereof, at all
regular, special and adjourned meetings of, and in all actions in writing by,
the Members, each Member agrees to vote its Units so as to elect as Mangers of
the Company (i) one nominee of each Member and, (ii) if, at the discretion of
OSS, one or more additional Managers are to be elected, the nominee or nominees
selected by OSS. In the event that a Member wishes to remove a Manager nominated
by it, each Member shall vote its Units in favor of such removal. A vacancy in
the number of Mangers to serve may be filled only by the Members and only in the
manner specifically authorized in this Section 5.7.
5.8 REIMBURSEMENT OF EXPENSES. Except to the extent otherwise
provided for herein, and except for items generally constituting Members'
overhead, the Company will pay all costs and expenses associated with the
Company business, and shall reimburse the Members for the actual costs incurred
for goods, materials, and services used by or for the Company.
5.9 INDEMNIFICATION AND LIABILITY OF MEMBERS AND MANAGERS. The
Company shall indemnify the Members and managers or any Member or manager
against any claim or liability incurred by the Members, managers, or any of them
in connection with the conduct of the business of the Company, and neither the
Company nor any Member shall have any claim against the Members, managers, or
any of them by reason of any such act or omission of the Members, managers, or
any of them; provided that, in each instance, a Member or manager shall not be
indemnified or exculpated if such act or failure to act was not in good faith or
constituted fraud, gross negligence, or willful misconduct. The provisions of
this Section regarding liability and indemnification shall apply with equal
force and effect to any manager, Member, agent or employee of a Member, and
their successors and assigns.
5.10 RETENTION OF COUNSEL, ETC. In engaging counsel, accountants, and
other professional advisors for the Company, the Members expressly acknowledge
that such advisors shall represent the Company and all Members, and they
expressly waive any personal claim of privilege or defense founded on any
alleged client relationship based upon the fact that a particular Member engaged
them for the Company.
ARTICLE 6
BOOKS AND RECORDS; TAX MATTERS
6.1 TAX CHARACTERIZATION. The Members intend that the Company be
treated as a "partnership" for tax purposes, and Members shall not take any
action inconsistent with that characterization.
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6.2 FISCAL YEAR. The fiscal year of the Company shall be the calendar
year.
6.3 BOOKS AND RECORDS. The Company's books and accounting records and
all other papers, records, and documents relating to the Company's affairs shall
be kept at the Company's principal executive office or such other place as the
Members may agree. Each Member shall have the absolute right to examine, in
person or by legal representatives, all Company records at any reasonable time,
subject only to such protection as may be necessary to prevent further
dissemination of the inventions, trade secrets and other confidential
information of the Company.
In addition to any other books and records of the Company required by statute,
the Company shall maintain the following records:
(a) a current list of the full name and last-known address of each
Member and the managers of the Company;
(b) a copy of the Articles of Organization of the Company and all
amendments thereto;
(c) a copy of any currently effective written operating agreement;
(d) copies of the Company's federal, state, and local income tax
returns and reports, if any, for the three most recent years;
(e) copies of any Company financial statements for the three (3) most
recent years;
(f) records of all actions and proceedings of Members for the last
three years;
(g) a copy of any effective member control agreements;
(h) a statement of all Capital Contributions or contributions of
services accepted by the Company; and
(i) any written consents obtained from Members pursuant to the Act.
6.4 ANNUAL FINANCIAL STATEMENTS. Within one hundred twenty (120) days
after the close of each fiscal year, annual financial statements for the
Company, including statements of assets and liabilities, income statements, and
such other statements as are commonly included in financial statements, or as
may be requested by the Members, shall be prepared and delivered to each of the
Members.
6.5 TAX RETURNS. As soon as practical following the close of each
year of the Company, the partnership income tax return for the Company shall be
prepared by such accountant or firm as may be selected by the President.
6.6 TAX ELECTIONS. In the sole discretion of the Members, the Company
may make or not make any and all tax elections deemed appropriate, including, in
the event of a transfer of all or part of any Member's interest in the Company,
the election under Section 754 of the Code to adjust the bases of the assets of
the Company.
ARTICLE 7
TRANSFERS OF MEMBERSHIP INTERESTS
7.1 LIMITATION ON SALE OR EXCHANGE. The rights of a Member to
transfer its interest in the Company are governed by a Buy-Sell Agreement
between the Company and its Members dated March 9, 1999 (the Buy-Sell
Agreement).
7.2 CONTINUATION OF ASSIGNOR'S STATUS. Anything herein to the
contrary notwithstanding, the Company, its managers, and the Members shall be
entitled to treat the assignor of a Member's interest in the Company as the
absolute owner thereof in all respects, and shall incur no liability for
distributions of cash made in good faith to him until such time as a written
assignment that conforms to all requirements of this Article 7 has been received
by and recorded on the books and records of the Company. Until such time, any
payments by the
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Company to an assigning Member or his executors, administrators, or
representatives shall, to the extent of such payments, acquit the Company of
liability to any other Person who may have an interest in such payment by reason
of an assignment by the Member, such Member's death, or otherwise.
7.3 ASSIGNEE'S RIGHTS. An assignee of any Member's interest shall be
entitled to receive Distributions of cash or other property from the Company and
to receive allocations of the gains, profits, and losses of the Company
attributable to such interest after the effective date of the assignment. The
"effective date" of an assignment shall be that date set forth on the written
instrument of assignment, which may in no event be any earlier than the date
upon which the requirements of this Article 7 have been satisfied.
7.4 REQUIREMENTS FOR ADMISSION AS A SUBSTITUTE OR ADDITIONAL MEMBER.
An assignee of an interest in the Company, if not already a Member, may become
an additional or substitute Member only with the consent of other Members
holding a majority of all Units held by such other Members, which consent may be
granted or withheld all in each Member's sole discretion. No assignee of any
Member's interest who is not already a Member shall become a substitute or
additional Member with respect to such interest without such consent.
7.5 DOCUMENTS AND EXPENSES. As a condition to admission as a
substitute or additional Member, an assignee of all or a part of any interest in
the Company or the legatee or distributee of all or part of any interest in the
Company shall execute and acknowledge such instruments, in form and substance
satisfactory to the Company, as the Company deems necessary or advisable to
effectuate such admission and to confirm the agreement of the person being
admitted as such substitute or additional Member to be bound by all of the terms
and provisions of this Agreement. Such assignee, legatee, or distributee shall
pay all reasonable expenses in connection with such admission as a substitute or
additional Member, including, but not limited to, legal fees and costs of
preparing and filing any amendment to the Articles of Organization of the
Company if necessary or desirable in connection therewith.
7.6 ACQUIT COMPANY. Until such time as a written assignment that
conforms to all requirements of this Article 7 has been received by and recorded
on the books of the Company, any payment by the Company to an assigning Member
or his executors, administrators, or representatives shall acquit the Company of
liability to the extent of such payments to any other person who may have an
interest in such payment by reason of an assignment by the Member, such Member's
death, or otherwise.
ARTICLE 8
ADDITIONAL MEMBERS
Additional Members may be admitted to the Company upon such terms and
conditions, and for such Capital Contributions, as are approved unanimously by
all Members.
ARTICLE 9
DISSOLUTION
9.1 DISSOLUTION EVENTS. The Company shall continue until the
occurrence of any of the following events (each a "Dissolution Event"):
(a) The expiration of the Company's period of existence, as set forth
in the Articles of Organization;
(b) The agreement of all Members of all Units to dissolve and
terminate the Company; and
(c) The decree of a court of competent jurisdiction that dissolution
and liquidation is required.
9.2 DISSOLUTION AND LIQUIDATION PROCEDURE. Except as otherwise
provided by the Act, upon the occurrence of a Dissolution Event, no further
business shall be done in the name of or on behalf of the Company except insofar
as may be necessary to wind up the business of the Company and distribute its
assets to the Members or their successors in interest, and the Company shall
execute and file a notice of dissolution as required by the Act.
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Upon dissolution and termination of the Company, except as otherwise provided in
any valid business continuation agreement and by applicable law, the Company's
assets shall be applied in the following order:
(a) To the payment of the debts and obligations of the Company,
including, to the extent permitted by law, obligations to Members
who are creditors, in the order prescribed by law;
(b) Next, to the setting up of any reserves deemed reasonably
necessary by the Members for any contingent or unforeseen
liabilities or obligations of the Company;
(c) Next, to the Members who are creditors for any debts and
liabilities not permitted to be paid under (a), above; and
(d) Next, to the Members in accordance with their respective Capital
Account balances.
For purpose of determining the rights of Members to Distributions in
dissolution, in the event of a distribution of property in kind, such property
shall be assumed to have been sold at its fair market value, with any gain or
loss allocated to the Members in accordance with Article 4. If a Member is
indebted to the Company, the Company shall, if possible, offset such
indebtedness to satisfy its obligations to said indebted Member rather than
distribute a portion of said indebtedness to the other Member(s).
ARTICLE 10
MEETINGS OF MEMBERS; VOTING
Meetings of the Members for any purpose may be called by any Member by
written notice to all Members. Such notice of any such meeting shall be given
personally or by first class mail, postage prepaid, to the Members not less than
thirty (30) days or more than sixty (60) days before the date of the meeting,
and shall state the place, date, hour, and purpose of the meeting. All meetings
shall be held at the principal office of the Company or at another location that
is reasonably convenient for the Members as a whole and is selected by agreement
of Members holding a majority of all outstanding Units. Members may take action
by the vote of Members holding a majority of all outstanding Units.
Each Member may authorize any other Member or Members to act for him
by written proxy in all matters in which a Member is entitled to act. In
addition, a Member may designate in writing the manner in which he desires that
his vote be cast, which writing must be received by the Company prior to the
meeting. Members of record on the date of the meeting shall be entitled to vote.
ARTICLE 11
AMENDMENTS
This Agreement may be amended at a meeting of the Members called for
such purpose upon the approval of Members; provided, however, that any change
that reasonably could be expected to materially and adversely affect the rights
of any Member shall require the consent of such Member and that any change that
may materially and adversely affect the ability of the Company to be taxed as a
partnership for federal income tax purposes shall require unanimous approval.
ARTICLE 12
ARBITRATION
Any controversy or dispute of any nature whatsoever between or among
Members or managers involving: (1) the formation, direction and all phases of
the operation of the Company, including but not limited to the election and
removal of managers, whether or not any of said managers, has been guilty of any
misconduct, and all matters of company business, management, purposes, policy,
employment and termination thereof, salaries, profits and dividends; (2)
termination of, or other change in the Company or its purposes or powers,
including but not limited to formal dissolution, merger, consolidation and
mortgage, pledge or sale of any or all of its assets, and any amendment of the
Articles of Organization; and (3) any change in the Members or their interests
in the Company,
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including but not limited to all questions involving the issuance, transfer,
repurchase, redemption and rights to subscribe to newly issued and reissued
interests of the Company and the payment of dividends, shall be settled by
arbitration in Denver, Colorado in accordance with the Commercial Arbitration
Rules of and by the American Arbitration Association, and judgment upon the
award rendered by the arbitrators may be entered in any Court having
jurisdiction thereof. The decision of the arbitrators shall be final and
conclusive. With respect to such arbitration:
(a) All questions as to the meaning of the above clause, or as to the
arbitrability of any dispute under said clause shall be resolved by the
arbitrators, and their decision thereon shall be binding and not subject to
judicial review.
(b) In addition to all methods for enforcement of their award
otherwise given by law (including all equitable remedies), the arbitrators
shall possess the irrevocable proxy of the parties to vote said parties'
Units in conformity with the decisions arrived at by said arbitrators in
accordance with the procedure above described.
(c) Every aspect of this arbitration clause is intended to be
severable. If any term or provision hereof, in general or with respect to
a specific situation, is illegal or invalid for any reason whatsoever, such
illegality or invalidity shall not affect the validity of the remainder
hereof.
ARTICLE 13
WAIVER OF DISSENTERS' RIGHTS
The Members waive any and all dissenters' rights under the Act to the
extent that the Act permits such waiver.
ARTICLE 14
MISCELLANEOUS
14.1 OTHER BUSINESS VENTURES. Any Member may engage in or possess an
interest in other business ventures of every nature and description,
independently or with others; and neither the Company nor the Members shall have
any right by virtue of this Agreement in or to such independent ventures or to
the income or profits derived therefrom. Except as provided above, no Member
shall have the obligation to bring any business opportunity to the Company or to
any other Member.
14.2 CONFLICTS OF INTEREST; CONFIDENTIALITY. The relationship between the
Members is one of confidence and trust. Neither Member will disclose
confidential information about the Company or the other Member to others without
first advising the other Member of its intent to do so and receiving such
Member's prior written consent thereto, and such consent will not be
unreasonably withheld. In connection with any such disclosure, the disclosing
Member will obtain a suitable confidentiality undertaking from the party to whom
the disclosures are to be made prior to making any such disclosure.
14.3 REIMBURSEMENT OF EXPENSES. Upon execution of this Agreement, OSS
shall pay NetIgnite $50,000 for reimbursement of expenses NetIgnite has incurred
in connection with the formation of the Company.
14.4 PRIOR LIMITED LICENSE OF TECHNOLOGY. NetIgnite has previously granted
OSS a limited license in certain events (as defined in Section 8.5 of the Buy-
Sell Agreement) to the technology NetIgnite is transferring to the Company. The
Company acknowledges the existence of such limited license and hereby agrees to
recognize and honor such limited license.
14.5 GOVERNING LAW. Notwithstanding the fact that the Company may conduct
business in states other than Colorado, and notwithstanding the fact that some
or all of the Members may be residents of states other than Colorado, this
Agreement and the rights of the parties hereunder will be governed by,
interpreted, and enforced in accordance with the laws of the State of Colorado.
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14.6 ARTICLES OF ORGANIZATION; AMENDMENT OF ARTICLES OF ORGANIZATION. The
Articles of Organization are incorporated by reference and hereby made a part of
this Agreement. In the event of any conflict between the Articles of
Organization and this Agreement, the provisions of this Agreement shall govern
to the extent not contrary to law. No Member shall vote its Units in favor of
any amendment to the Articles of Organization unless all of the Members have
agreed to so act.
14.7 BINDING EFFECT. This Agreement will be binding upon and inure to the
benefit of the Members, and their respective heirs, executors, administrators,
personal representatives, successors and assigns.
14.8 SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under the present or future laws effective
during the term of this Agreement, such provision will be fully severable, and
this Agreement will be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part of this Agreement, and the
remaining provisions of this Agreement will remain in full force and effect and
will not be affected by the illegal, invalid, or unenforceable provision or by
its severance from this Agreement. Furthermore, in lieu of such illegal,
invalid, or unenforceable provision, there will be added automatically as a part
of this Agreement a provision as similar in terms to such illegal, invalid, or
unenforceable provision as may be possible and be legal, valid, and enforceable.
14.9 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which will be deemed an original, but all of which will
constitute one and the same instrument. However, in making proof hereof it will
be necessary to produce only one copy hereof signed by the party to be charged.
14.10 ADDITIONAL DOCUMENTS AND ACTS. Each Member agrees to execute and
deliver such additional documents and instruments and to perform such additional
acts as may be necessary or appropriate to effectuate, carry out and perform all
of the terms, provisions, and conditions of this Agreement and the transactions
contemplated hereby.
14.11 NO THIRD PARTY BENEFICIARY. This Agreement is made solely and
specifically among and for the benefit of the parties hereto, and their
respective successors and assigns, and no other person will have any rights,
interest, or claim hereunder or be entitled to any benefits under or on account
of this Agreement, whether as a third party beneficiary or otherwise.
14.12 NOTICES. Any notice to be given or to be served by a Member upon
the Company in connection with this Agreement must be in writing and will be
deemed to have been given when delivered personally or mailed to the Company at
its registered office or its principal executive office or to the Company's
President. Notice to a Member will be deemed to have been given when (i)
delivered personally to the Member or (ii) deposited in the United States mail,
postage prepaid and addressed to a Member at the address specified in Section
2.7 hereof. At any time, by giving five (5) days' prior written notice to the
Company, a Member may designate another address in substitution of the foregoing
address as the address to which notice is to be given.
14.13 HEADINGS AND TITLES. Article and Section headings and titles are
for descriptive purposes and convenience of reference only and shall not control
or alter the meaning of this Agreement as set forth in the text.
14.14 ENTIRE AGREEMENT. This Agreement is the final integration of the
agreement of the parties with respect to the matters covered by it and
supersedes any prior understanding or agreement, oral or written, with respect
thereto.
14.15 GENDER, ETC. Except where the context requires otherwise, the use
of terminology of any of the masculine, feminine, or neuter genders shall
include all such genders, and the use of the singular number shall include the
plural and vice versa.
12
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
date first above written.
COMPANY:
NetIgnite 2, LLC
By:_______________________________
Its:____________________________
MEMBERS:
Online System Services, Inc.
By:_______________________________
Its:____________________________
NetIgnite, Inc.
By:_______________________________
Its:____________________________
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<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Member Capital Contributions Number of Units
- ------ --------------------- ---------------
<S> <C> <C>
Online Service Systems, Inc. (1) 60
NetIgnite, Inc. (2) 40
</TABLE>
(1) OSS agrees to provide as capital contributions cash of up to
$1,500,000 for working capital of the Company (the "Committed Amount) in
accordance with the requirements therefor set forth in the proforma financial
statements for the Company prepared by NetIgnite and a copy of which has been
furnished to OSS (the "Proforma Statements"). OSS's failure to provide the
Committed Amount shall not constitute a breach of this Agreement but shall (A)
result in a dilution of interest in profits and losses as provided in Section
4.3(b) hereof and (B) constitute a triggering event under Section 4 of the Buy-
Sell Agreement. If NetIgnite believes that OSS' funding is not being done in a
timely manner, it shall provide written notice thereof to OSS. OSS shall
respond to such notice in writing within 10 days of receipt of such notice. If
the Members cannot then reach agreement as to the timeliness of funding, the
matter will then be immediately submitted to arbitration pursuant Article 12 of
this Agreement.
(2) All of NetIgnite's rights and interests in certain property, as
set forth in Schedule B hereto, subject to certain rights of OSS in the
technology conditioned upon certain events. The Members agree that the value of
NetIgnite's capital contribution shall be $1 million and NetIgnite's initial
Capital Account shall be that amount.
14
<PAGE>
SCHEDULE B
ASSIGNMENT
This, Assignment, dated as of _____________________________, 1999, from
NetIgnite, Inc. a Colorado corporation (the "Assignor"), to NetIgnite2, L.L.P.,
a Colorado Limited Liability Company (the "Assignor"). For good and valuable
consideration paid to the Assignor, receipt of which is hereby acknowledged,
Assignor by these presents does hereby agree as follows:
1. Assignment of Assets and Properties. The Assignor does hereby sell,
-----------------------------------
assign, transfer, convey, grant, bargain, set over, release, deliver, and
confirm unto the Assignee, its successors and assigns, forever, all of the
assets of the Assignor set forth below:
(a) all intellectual property relating to the creation and
development of new XML-based internet local market advertising services,
including technical designs (including requirements, definitions, technical
architecture and development plans) relating thereto;
(b) business models (including pricing, service delivery strategies
and product packaging plans) relating to 1(a) above; and,
(c) data concerning prospective clients relating to 1(a) above.
2. Warranty of Title. Assignor hereby represents that the above described
-----------------
property is owned by it free and clear of all mortgages, liens and encumbrances
and includes all intellectual property of Perry Evans relating to 1(a) above.
Assignor and its officers, directors, shareholders and assigns, do hereby agree
to WARRANT and DEFEND the sale of the property to Assignee against all and every
person or persons. THERE IS NO WARRANTY OF MERCHANTIBILITY OR FITNESS FOR ANY
PURPOSE AND SAID WARRANTY IS EXCLUDED.
3. No Rights in Third Parties. Nothing expressed or implied in this
--------------------------
Assignment is intended to confer upon any Person, other than the Assignor and
the Assignee and their respective successors and assigns, any rights, remedies,
obligations or Liabilities under or by reason of this Assignment.
4. Successors and Assigns. This Assignment shall bind and inure to the
----------------------
benefit of the Assignor and the Assignee and their respective successors and
assigns.
5. Governing Law. This Assignment shall be governed by, and construed in
-------------
accordance with, the laws of the State of Colorado applicable to contracts
executed and to be performed entirely within that State.
IN WITNESS WHEREOF, the Assignor has caused this Assignment to be executed
as of the date first written above by its officer thereunto duly authorized.
NetIgnite, Inc.
By:___________________________
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<PAGE>
BUY-SELL AGREEMENT
This BUY-SELL AGREEMENT (the "Agreement") is made effective the 9th day of
March, 1999 by and among NetIgnite 2, LLC, a Colorado limited liability company
(the "Company"), Online System Services, Inc., a Colorado corporation ("OSS")
and NetIgnite, Inc., a Colorado corporation ("NI"), OSS and NI are individually
referred to as a "Member" and collectively referred to as the "Members").
RECITALS
A. The Members own all of the issued and outstanding interests of the
Company. The Company and the Members have entered into an Operating and Member
Control Agreement dated March 9, 1999 (the "Operating and Member Control
Agreement").
B. The Members desire to preserve the continuity of corporate ownership
by restricting the ownership and transferability of interests, providing for the
purchase of interests in certain events, and as otherwise provided in this
Agreement.
C. Perry Evans, a Colorado resident ("Evans"), is the sole shareholder of
NI and is entering into an Employment Agreement with OSS and the Company dated
as of the date hereof (the "Employment Agreement") pursuant to which he will
serve as President of the Company.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the mutual promises
contained in this Agreement, the parties agree as follows:
1. DEFINITIONS. The following terms, when capitalized, will have the
meanings indicated:
1.1 "Interest" or "Interests" means any one or more of the issued and
outstanding Interests of any class or series of securities of the Company
presently owned or hereafter acquired by or on behalf of a party to this
Agreement, any transferee, and any other person who in the future acquires
any such securities, by purchase, gift, or any other means.
1.2 "Transfer" means, with respect to any Interests, any sale, gift,
assignment, exchange, pledge, transfer or other disposition or change in
ownership thereof, the creation of a bankruptcy estate which includes such
Interests, the assignment for the benefit of creditors which includes such
Interests, the appointment of a trustee or receiver with respect thereto,
the grant or appointment of an irrevocable proxy coupled with an interest
with respect thereto, or the grant or imposition of a security interest or
lien thereon, whether voluntary or involuntary, and to "Transfer," when
used as a verb, means, with respect to any Interests, to sell, give,
assign, exchange, pledge, transfer or otherwise dispose or change ownership
thereof, create a bankruptcy estate which includes such Interests, assign
such Interests for the benefit of creditors, appoint a trustee or receiver
with respect thereto, grant or appoint an irrevocable proxy coupled with an
interest with respect thereto, or grant or act to permit the imposition of
a security interest or lien thereon, whether voluntarily or involuntarily.
2. RESTRICTIONS ON INTERESTS. All Interests are subject to the terms of
this Agreement. No Member may Transfer any Interests, and no Transfer of any
Interests will be valid or binding, except upon compliance with and pursuant to
the terms of this Agreement or with the express written consent of all other
Members. As a condition to the effectiveness of any Transfer of Interests, the
proposed transferee must agree to become a party to this Agreement by executing
a Consent in the form attached hereto as EXHIBIT A (a "Consent"). The Company
may not issue additional Interests of capital stock unless the subscriber
becomes a party to this Agreement by executing and delivering a Consent to the
Company.
3. TERMINATION OF EMPLOYMENT. If Evans' Employment Agreement is
terminated pursuant to either Section 8.2 or 8.3 thereof or Evans gives a notice
of non-extension of the Employment Agreement pursuant to Section 8.1 thereof,
OSS shall have the option of exercising the Put-Call Offer (defined in Section 7
below),
<PAGE>
provided that the Put-Call Offer shall not be subject to any Minimum Price (as
defined in Section 7 below). In this event, the purchase price shall be the Fair
Market Value for Interests (as defined in Section 9 below).
4. CHANGE IN CONTROL; FAILURE TO FUND. If there is a "Change in Control"
of OSS as defined in Section 3 of Evans' Option (Exhibit A to the Employment
Agreement) or if OSS shall fail to provide the Committed Amount (as defined in
Schedule A to the Operating and Member Control Agreement), either Member shall
have the option, in the event of a Change in Control, and NI shall have the
option, in the event of a failure to fund, of exercising the Put-Call Offer,
provided that the Put-Call Offer shall not be subject to any Minimum Price. In
this event, the purchase price shall be the Fair Market Value for Interests.
5. INVOLUNTARY TRANSFER. Upon any Transfer (or purported Transfer) of
Interests as a result of (i) the creation of a bankruptcy, (ii) the appointment
of a receiver or trustee with respect to the Interests, (iii) an order of any
court having jurisdiction, (iv) an assignment of the Interests for the benefit
of creditors, or (v) any other Transfer that arises out of the exercise of the
legal right or remedies of a third party (an "Involuntary Transfer"), the
remaining Member will have the option to exercise the Put-Call Offer provided
that in such event, there shall be no Minimum Price, the price to be paid in
connection therewith to be equal to the Fair Market Value. The Member whose
Interests are subject to the Involuntary Transfer must give written notice of
the Involuntary Transfer to the remaining Member at the earliest possible date.
The option granted by this Section 5 may be exercised commencing upon the
Involuntary Transfer and through the period of 90 days following the earlier of
the date of receipt of such notice or the receipt of written notice from a court
or other third party of the Involuntary Transfer.
6. SWITCHBOARD OPTION. At any time on or before September 30, 1999, NI
shall have the right to offer Switchboard Incorporated or its parent, Banyan
Systems Incorporated, the option (the "Switchboard Option") of acquiring all of
the outstanding Interests, provided that such option shall be subject to the
Minimum Price requirement for an offer made prior to December 31, 1999. The
exercise of the Switchboard Option shall be subject to the provisions of Section
8, to the extent applicable, and must be closed within 45 days of the exercise
thereof (but not later than November 14, 1999, in any event).
7. MEMBER PUT-CALL. Subject to the terms hereof, if a Member (the
"Offeror Member") desires to Transfer all of its Interests to the other Member
or to acquire all of the other Member's Interests prior to the occurrence of an
event that triggers the provisions of any of Sections 3 through 6, the Offeror
Member may give to the other Member (the "Offeree Member") written notice of an
offer to purchase all of the other's Interests or to sell all of its Interests,
which notice must include the price (such price to be based on each one percent
(1%) Interest in the Company) and all other material terms and conditions of the
offer (the "Put-Call Offer"). The Offeree Member will then have the option for
a period of 10 days after the Put-Call Offer is given to agree either to
purchase the Offeror Member's Interests or to sell its Interests to the Offeror
Member for the price set forth in the Put-Call Offer. If the Offeree Member
does not elect to purchase all of the Offeror Member's Interests within such 10
day period, in the case of an offer to sell, then the Offeree Member has the
obligation to sell, and the Offeror Member has the option to purchase, all of
Offeree Member's Interests, for the price set forth in the Put-Call Offer. If
the Offeree Member does not elect to sell all of its Interests within such 10-
day period, in the case of any offer to purchase, then the Offeree Member has
the option to purchase, and the Offeror Member has the obligation to sell, all
of the Offeror Member's Interest, for the price set forth in the Put-Call Offer.
In the event that the Member (the "First Member") who as a result of the Put-
Call Offer process has an option to purchase the other Member's (the "Second
Member") Interests does not close the purchase of such Interests within the 45-
day term of the option (the last day of the 45-day term being referred to herein
as the "Termination Date"), the First Member's option shall terminate and the
Second Member shall have an option to purchase all of the First Member's
Interests on the same basis as the terminated option. This secured option must
close within 45 days of the Termination Date or it also shall terminate.
To be effective, the Offeror Member's offered price for any offer made
prior to December 31, 2001 must meet or exceed a price (the "Minimum Price")
which for 100% of the Interests in the Company is at least: (i) from the date
hereof to December 31, 1999 -- $10 million; (ii) from January 1, 2000 to
December 31, 2000 -- $15 million; and (iii) from January 1, 2001 to December 31,
2001 -- $20 million. The Minimum Price requirement is not applicable in certain
events as provided herein and there shall be no Minimum Price requirement for
any offer made after December 31, 2001. Notwithstanding any proposed closing
date set forth in the Put-Call Offer, a closing must occur at the principal
offices of the Company no later than 55 days after delivery of the Put-Call
Offer by the Offeror Member.
2
<PAGE>
8. PROCEDURES. The following procedures govern options and obligations
to purchase Interests under this Agreement:
8.1 EXERCISE OF AN OPTION TO PURCHASE INTERESTS. If a Member has an
option to purchase or to sell Interests pursuant to this Agreement, the
option may be exercised at any time during the applicable option period.
8.2 CLOSING. The closing of a purchase and sale under this Agreement
is to be held at the principal offices of the Company no later than 10:00
a.m. on the date 45 days after the delivery of written notice of the
exercise of an option to purchase or to sell Interests, or at such other
place and on such other date as the parties to the purchase and sale agree.
If the closing date falls on a day other than a business day, the next
business day will be the closing date.
8.3 TRIGGERING DATES. If there occurs more than one event that,
under the provisions of Sections 3 through 7 of this Agreement, gives rise
to an option to purchase or to sell Interests under this Agreement, the
provisions that apply by reason of the first of such events to occur will
govern the purchase and sale of such Interests, provided that the effective
date of a Put-Call Offer by a Member pursuant to Section 7 given within 45
days of an option arising pursuant to Sections 3 through 6 shall be deemed
to be one day after the later to occur of the events specified in Sections
3 through 6. If such an event gave rise to an option, and Interests were
not purchased and sold because options were not exercised to purchase or
sell all Interests subject to such option, then, upon the expiration of
such option, the provisions applicable to the next in time of such multiple
events will be given effect.
8.4 CORPORATE ACTIONS/MEMBER VOTES. Except as otherwise specifically
provided herein, decisions of the Company with respect to this Agreement
will be determined by a vote of the Members, and will not require the
approval of the Managers of the Company. In the event of the exercise of a
Put-Call Offer or the Switchboard Option, each Member agrees to cooperate
with the other and the Company and to use its best efforts to see that the
transaction is completed as soon as reasonably possible.
8.5 TECHNOLOGY LICENSE. Should the Switchboard Option be offered and
exercised or should the exercise of a Put-Call Offer result in OSS selling
its Interests, the Company will grant to OSS, at no cost to OSS, a non-
exclusive royalty-free worldwide source code license to Company-owned or
developed technology (the "License"). The License shall be restricted to
use within or associated with OSS' products and services. It will be
provided in the License that any OSS product or service which integrates
Company technology must have substantial and demonstrable value derived
from other OSS software or Internet service. OSS will not have the right
to license or sub-license the Company-owned or developed technology,
although OSS may transfer its rights to the License in connection with a
sale of its business or substantially all of its assets, provided that the
License, as transferred, shall be limited to using the technology with OSS'
products, as such products exist at the time of any such event. Further,
in such event, the Company shall make available at cost, reasonable access
to its development resources to assist OSS in its use of the Licensed-
technology for a period of one year.
8.6 FAILURE TO EXERCISE PUT-CALL OFFER. If neither Member has
exercised the Put-Call Offer prior to January 1, 2002, NI shall have the
right to require OSS to acquire all of NI's Interest at their Fair Market
Value, the purchase price therefor to be paid in shares of OSS' common
stock. In this event, the OSS common stock shall be deemed to have a value
equal to the average of the closing sale price (or bid price in the event
that there is no sale of such stock on a given day) for the OSS common
stock for the 20 trading days immediately preceding the exercise of such
option. If exercised, NI shall sell and OSS shall purchase all of NI's
Interest. The shares of OSS common stock issued upon exercise of such
option shall be restricted shares as defined in Rule 144 promulgated by the
Securities and Exchange Commission. The Members may agree at any time, but
are under no obligation to do so, to convert NI's Interest into shares of
OSS common stock.
8.7 RETENTION OF CERTAIN PAYMENTS. In the event that OSS should
acquire NI's interests in the Company, Evans has agreed to remain an
employee of the Company for one year thereafter, based upon the
compensation parameters in effect at the time of such acquisition. NI
hereby agrees that should OSS acquire its interests in the Company, that
OSS may retain 7% of the purchase price for NetIgnite's interests to
provide incentive for Evans to remain employed by the Company or its
successor and assigns
3
<PAGE>
for two years after OSS' purchase of NetIgnite's interest in the Company.
If Evans remains so employed for two years, or such employment is
terminated by the Company or its successors and assigns without cause prior
to the end of such two-year period, OSS will pay to NI the full retained
amount plus interest at the rate of 8% per annum. If Evans does not remain
so employed for the full two-year period, OSS shall be entitled to retain
the full retained amount.
9. PURCHASE PRICE. Except for an offer pursuant to Section 7, the
purchase price of any Interests will be the "Fair Market Value" of the Interests
as of the date on which occurred the event giving rise to the option or
obligation to purchase the Interests (the "Valuation Date"). For this purpose
the "Fair Market Value" of Interests means the value of Interests of the Company
as of the last day of the most recent month ending on or prior to the Valuation
Date, without regard to any retained earnings of the Company and disregarding
any adjustments for minority or majority ownership, all determined in accordance
with this Section 9. In the event of an offer pursuant to Section 7, the
purchase price shall, subject to any Minimum Price requirement, be the price set
forth in the Offeror Member's offer.
9.1 ESTABLISHMENT BY STIPULATION. The Fair Market Value of an
Interest will be the purchase price per Interest stipulated by unanimous
agreement of the Members.
9.2 ESTABLISHMENT BY APPRAISAL. If the Members do not agree on a
Fair Market Value of an Interest, the Fair Market Value of an Interest will
be determined based on the criteria set forth above and using the following
process:
(a) The Members will attempt to mutually agree upon a single
appraiser who, if so selected, will establish the Fair Market Value of
an Interest. In such case the Members will share the cost of such
appraiser equally.
(b) If a single appraiser is not mutually selected pursuant to
paragraph (a) within 15 days after written demand from one Member to
the other, then, upon written demand of a Member, each Member will
have 10 days to select one appraiser. Each Member must pay the costs
of its respective appraiser. If only one appraiser is selected during
this 10-day period, such appraiser, at the cost of the party who
selected such appraiser, will establish the Fair Market Value of an
Interest.
(c) If two appraisers are selected within the 10-day period
provided for in paragraph (b), such appraisers are to attempt to agree
on the Fair Market Value of an Interest. If such appraisers do not
agree upon the Fair Market Value of an Interest within 30 days after
the appointment of the second of them, within 45 days after the
appointment of the second appraiser each must separately determine the
Fair Market Value of an Interest. If the higher of the two values is
no more than 110% of the lower of the two values, the Fair Market
Value of an Interest will be the average of the two values.
(d) If the higher of the two values is more than 110% of the
lower of the two values, the two appraisers must jointly appoint a
third appraiser within 15 days after the 45 day period provided for in
Section 9.2(c) above, the cost of which is to be shared equally by the
Members. If the two appraisers do not agree upon a third appraiser
within this time period, the District Court for Denver, Colorado will
appoint a third appraiser on petition of either Member. Within 15
days of appointment, the third appraiser must then separately
determine the Fair Market Value of an Interest. If the Fair Market
Value of an Interest as determined by the third appraiser is the same
as the Fair Market Value of an Interest as determined by either of the
other two appraisers, such value will be the Fair Market Value of an
Interest. In other cases the Fair Market Value of an Interest will be
determined as follows: The middle value of the three values will be
determined. If the two other values differ from the middle value by
an equal amount, the Fair Market Value of an Interest will be the
middle value. If the difference between each of the other two values
and the middle value is not identical, then the value with the
greatest difference from the middle value will be disregarded and the
Fair Market Value of an Interest will be the average of the two
remaining values. The Fair Market Value of an Interest, as so
determined, will be binding upon all parties.
4
<PAGE>
(e) Unless otherwise agreed, in order to be eligible to be an
appraiser under this Section, an individual or entity must be a
competent appraiser of businesses.
(f) Only appraisals completed in writing and delivered to the
Members within the specified time periods will be considered valid for
purpose of this Agreement. The Company will allow its books, records,
and operations to be available for review by all chosen appraisers for
the purposes of determining the Fair Market Value of an Interest.
9.3 CAPITAL CHANGES. The purchase price for Interests under this
Agreement is to take into account, as appropriate, any changes in the
capital of the Company occurring (a) after the event giving rise to the
purchase and sale and/or the establishment of the Fair Market Value of an
Interest and (b) before the closing of such purchase and sale.
10. TERMS AND CONDITIONS OF CLOSING.
10.1 PAYMENT OF PURCHASE PRICE. In the case of any purchase of
Interests by the remaining Member under this Agreement, the purchase price
for such Interests, is to be paid in cash at the closing by the purchasing
Member.
10.2 DELIVERY OF CERTIFICATES. At the closing, the transferring
Member must deliver to the purchaser transfer instruments, duly endorsed
for transfer, representing the Interests purchased.
11. TERMINATION. This Agreement will terminate automatically upon the
occurrence of any of the following:
11.1 AGREEMENT. An agreement in writing executed by all Members who
are parties to this Agreement and who own Interests;
11.2 ONE MEMBER. One Member becomes the owner of all of the
Interests which are then subject to this Agreement; or
11.3 DISSOLUTION. The dissolution of the Company.
12. ARBITRATION. In the event of a dispute, claim and/or disagreement
between the Members or between any of the Members and the Company arising out
of, under, in connection with, or in relation to, this Agreement or any
agreement, note, or other instrument or document executed or to be executed
pursuant to the terms and conditions of this Agreement, including any claims or
disputes involving fraud or fraud in the inducement, such disputes, claims
and/or disagreements must be submitted to binding arbitration by the American
Arbitration Association, in accordance with the rules of the American
Arbitration Association; provided that the valuation of Interests determined in
accordance with Section 9 will not be subject to arbitration. Any arbitration
hearing will be limited to not more than 10 day(s). Unless otherwise agreed by
the parties, such arbitration will occur in Denver, Colorado. A decision of the
arbitrator(s) will be final and binding upon all parties, and judgment upon the
award of the arbitrator(s) may be entered in any court having jurisdiction. The
arbitrator(s) is entitled to award or include in any award the specific
performance of the terms of this Agreement. The costs of any arbitration
proceeding will be paid equally by Members, and the parties will pay their own
attorneys' fees and expenses, but the prevailing party will be entitled to
recover its reasonable attorneys' fees and expenses from the losing party.
Notwithstanding the foregoing, any party to this Agreement may seek and obtain
injunctive or other appropriate equitable relief from a court of competent
jurisdiction to prevent or end a violation of this Agreement that would cause
irreparable harm to such party and for which it would be difficult or impossible
to determine the damages that would arise from such violation or the continuance
thereof; provided, however, that the substance of any dispute is to be resolved
through arbitration as provided in this Section and that the court's equitable
relief may include an order compelling such arbitration.
13. MISCELLANEOUS.
13.1 GOVERNING LAW; VENUE. This Agreement is made under and is to be
governed by, and construed in accordance with, the laws of the State of
Colorado (without regard to its conflicts of laws principles), and each of
the parties hereto consents to venue of any suit or action arising out of,
under, in
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<PAGE>
connection with, or in relation to this Agreement in an appropriate court
with jurisdiction in Denver, Colorado.
13.2 CONSTRUCTION; SEVERABILITY. Wherever possible each provision of
this Agreement is to be interpreted in such a manner as will be effective
and valid under applicable law, but if any provision of this Agreement is
prohibited by or invalid under applicable law, such provision will be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Agreement.
13.3 BINDING AGREEMENT. This Agreement is binding not only upon the
parties hereto, but also upon their heirs, personal representatives,
successors, and assigns; and the parties hereby agree for themselves, their
heirs, personal representatives, successors, and assigns to execute any
instrument and to perform any acts that may be necessary or proper to carry
out the purposes of this Agreement.
13.4 LEGEND. Each Member agrees to cause the following legend to be
endorsed upon any instrument representing the Member's Interests, and that
all Interests hereafter issued to them will bear the same endorsement:
"These Interests are subject to, and are transferable only upon the
terms and conditions of, that certain Buy-Sell Agreement and Member
Control Agreement between the Company and its Members dated effective
March 9, 1999. Copies of said agreements are on file with the
Company. Any attempted transfer of these Interests other than in
accordance with said agreement, whether by or pursuant to a gift,
sale, pledge, or otherwise, and whether voluntarily or involuntarily,
is void and of no effect."
13.5 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which will be deemed to be an original, and all of
which will constitute one and the same instrument.
13.6 EXTENSION OF TIME FOR PERFORMANCE. If a party's performance of
any obligation or exercise of any option under this Agreement might
reasonably be expected to be affected by the prior determination of the
purchase price and the purchase price cannot administratively be determined
within the period of time specified, then the period of time within which
such action must be taken will be extended to the date fifteen (15) days
after the date on which the purchase price is determined.
13.7 AMENDMENT. This Agreement may be amended or modified only by a
writing executed by all of the parties hereto.
13.8 INTEGRATION. This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof and replaces and
supersedes any and all prior oral or written agreements, representations
and discussions pertaining to the subject matter hereof or thereof.
13.9 NOTICES. Any notice, offer, acceptance of an offer or other
communication provided for by this Agreement must be in writing and will be
deemed given or delivered when delivered by hand or when deposited in the
United States mail, certified or registered, return receipt requested,
postage prepaid and properly addressed. The proper address of the Company
is its principal office address and the proper address of any other party
is the address on file with the Company, and the Company will make such
information available to any Member upon request. The address of a party
to whom notices or other communications is to be mailed may be changed from
time to time by giving written notice to all other parties to this
Agreement.
13.10 CAPTIONS. Captions and headings in this Agreement are for
convenience only and in no way define, limit, or describe the scope or
intent of the provisions hereof.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed effective as of the day and year first above written.
MEMBERS:
ONLINE SYSTEM SERVICES, INC.
By________________________________________
Its_____________________
NETIGNITE, INC.
By________________________________________
Its______________________
COMPANY:
NETIGNITE 2, LLC
By________________________________________
Its______________________
7
<PAGE>
EXHIBIT A
CONSENT
This Consent is executed effective the ______ day of
__________________________, ________, by the undersigned as required by that
certain Buy-Sell Agreement by and among NetIgnite 2, LLC, Online System
Services, Inc. and NetIgnite, Inc., dated effective March 9, 1999, as the same
may have been thereafter amended (the "Agreement").
The undersigned hereby agrees to be subject to all terms and conditions of
the Agreement. The undersigned will hereafter be deemed to be a "Member" as set
forth in the Agreement. With the exception of the addition of the undersigned
as an additional party, all other provisions of the Agreement will remain in
full force and effect.
IN WITNESS WHEREOF, the undersigned has executed this Consent effective the
date first above written.
___________________________________
Signature
___________________________________
Print Name
___________________________________
___________________________________
Address
<PAGE>
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") made March 9, 1999, by and between
ONLINE SYSTEM SERVICES, INC., a Colorado corporation ("OSS"), NETIGNITE 2, LLC,
a Colorado limited liability company ("NI"), and PERRY EVANS, an individual
residing in Denver, Colorado ("Executive").
RECITALS
WHEREAS, OSS and NI desire to hire and employ Executive as President of NI,
a 60% owned subsidiary of OSS.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties agree as follows:
1. EMPLOYMENT. OSS, its subsidiaries and affiliate companies
(collectively, the "Company") agree to employ Executive and Executive hereby
agrees to be employed by the Company on a full-time basis. Executive represents
and warrant that the execution of this Agreement and his performance under this
Agreement does not breach any other agreement and does not require the consent
of any other person.
2. DUTIES. Executive shall be employed as NI's President and shall
perform the duties, bear the responsibilities commensurate with his position and
serve the Company faithfully and to the best of his ability, under the direction
of the Managers (for purposes of this Agreement, the term "Managers" shall mean
the Managers of NI). In addition, the Executive will hold, without additional
compensation, such other offices and directorships for the Company to which he
may be appointed or elected from time to time. Executive's conduct must promote
the best interests of the Company and must not discredit the Company, its
products or services.
3. EXCLUSIVITY. Executive shall devote his full business time, efforts,
attention, skill and energy to the NI's business. Executive shall disclose all
other business activities to the Managers and Executive shall not engage in any
other business activity that requires significant personal services by
Executive. After notifying the Managers, Executive may take reasonable personal
time for:
3.1. personal investments that do not require any significant
services by Executive;
3.2. participation in volunteer or charitable activities;
3.3. participation in industry-related organizations;
3.4. with the Managers' prior approval, serving as a Director for
other companies; and
3.5. activities approved in advance by the Managers;
except that Executive shall cease any such outside activity if the Managers
determine that such activity will interfere or conflict with the Company's
interests.
4. CONFLICTS OF INTEREST. Executive shall not engage in any activity
that, in the Managers' judgment, may interfere or conflict with the proper
performance of Executive's duties or the NI's interests. If Executive has any
interest in a proposed transaction involving the Company, that interest must be
fully disclosed to the Managers and the disinterested Managers must approve the
transaction.
5. CONFIDENTIALITY. The relationship between the Company and Executive
is one of confidence and trust. Executive agrees that the provisions of this
Section are fair and reasonable because as a result of his employment by the
Company he will have access to proprietary Company information and that such
information is a highly-valued asset of the Company. The provisions of this
Section 5 shall be interpreted in a manner that is consistent with the
provisions of Section 14.2 of the Operating and Member Control Agreement dated
March 9, 1999 among NI, OSS and NetIgnite, Inc.
<PAGE>
5.1. Confidential Information. The term "Confidential Information"
means all information relating to the Company, its affiliates, customers
and suppliers considered by the Company to be confidential, including,
without limitation:
5.1.1. the Company's plans, products, processes and personnel;
5.1.2. the nature of the Company's services and any area where
such services are performed or planned to be performed;
5.1.3. research, development, manufacturing, purchasing, and
engineering;
5.1.4. markets, marketing strategies, customer lists and
prospect lists;
5.1.5. merchandising, selling, pricing, tariffs or contractual
terms,
5.1.6. inventions, discoveries, concepts and ideas, whether
patentable or not, processes, methods, formulas, and techniques, trade
secrets, related improvements and knowledge;
5.1.7. financial and accounting information;
5.1.8. the Company's technology, expertise or business; and
5.1.9. any component of Confidential Information or anything
derived from Confidential Information.
The Company's determination that specific information constitutes
Confidential Information shall be binding, except for information already
in the public domain other than by Executive's act and except for
information which is no longer a trade secret as defined by the Uniform
Trade Secrets Act.
5.2. Non-disclosure. Executive agrees that, except as permitted by
Section 14.2 of the Operating and Member Control Agreement, he shall at no
time, whether during his employment or at any time thereafter, disclose or
use any Confidential Information for any purpose other than the conduct of
the Company's business. Upon the breach or threatened breach of this
covenant by Executive, the Company shall be entitled without notice to
obtain relief pursuant to Section 12 below.
5.3. Notice to Company. Executive will immediately notify the Company
if he learns that Confidential Information has been disclosed or is about
to be disclosed, whether by Executive's acts, acts of third parties, law,
regulation or court order. Executive will cooperate with the Company's
efforts to prevent or limit disclosure of Confidential Information.
5.4. Ownership. Any Confidential Information that is directly
originated, developed or perfected to any degree by Executive during his
employment hereunder shall be and remain the sole property of the Company
and shall be deemed trade secrets of the Company. To the extent that any
Confidential Information constitutes an original work of authorship by
Executive which is protectable by copyright, Executive acknowledges that
such work is a "work for hire" as defined by the U.S. Copyright Act (17
U.S.C. (S)101 et seq.).
5.5. Assignment. The Executive hereby assigns to NI all of his
intellectual property rights (including copyrights, patents, and
trademarks) that may exist due to his direct involvement in the Company.
10
<PAGE>
5.6. Return of Confidential Information. Upon termination of
Executive's employment or upon request by the Managers, Executive or his
legal representative shall deliver to the Company all original and
duplicates and/or copies of all documents, records, notebooks, computer
records or media, and similar materials containing Confidential Information
then in his possession.
5.7. Further Assurances. Executive agrees to execute such separate and
further confidentiality agreements embodying and enlarging upon the
provisions of this Section as the Company may reasonably request.
further confidentiality agreements embodying and enlarging upon the
provisions of this Section as the Company may reasonably request.
6. COMPENSATION AND BENEFITS. In consideration of the services to be
rendered pursuant to this Agreement, Executive shall receive the following
compensation and benefits during the term of his employment:
6.1. Salary and Bonus. NI shall pay Executive an annual base salary,
payable semi-monthly in arrears. The annual base salary during the term
hereof shall be $190,000 with annual increases as approved by the Managers.
Executive will have an opportunity to earn an incentive bonus based upon
Executive's accomplishment of objectives that are mutually defined and
agreed upon between Executive and the Managers. The Managers shall annually
review the amounts of the base salary and bonus. The bonus for calendar
1999 shall be determined as follows. First, the actual net revenues for NI
for 1999 shall be determined, such determination to be consistent with the
assumptions made in the projection of net resources in the NI pro forma
financial statements previously delivered to OSS. Executive will be paid a
bonus based on the level of net revenues for NI in excess of the projected
net revenues set forth in the NI pro forma financial statements, the amount
of such bonus to be equal to:
<TABLE>
<CAPTION>
Revenue Over Targeted Amount Percentage of Net Revenue
---------------------------- -------------------------
to be Paid as Bonus
-------------------
<S> <C>
0% to 19.9% 0%
20%-49.9% 5% in excess of such 20%
50% and greater 7% in excess of such 50%
</TABLE>
6.2. Benefits. The Company shall provide Executive with the benefits
of such insurance plans, hospitalization plans, retirement plans and other
employee benefits generally provided to executive employees of the Company
and for which Executive may be eligible under the terms and conditions
thereof.
6.3. Stock Options. Executive shall be granted an option to purchase
80,000 shares of OSS Common Stock (the "Option") pursuant to the OSS 1995
Stock Option Plan, the shares subject thereto to vest (subject to
acceleration as provided therein) one-third per year subject to Executive's
continuous employment by the Company, to have a term of five years and to
have an exercise price equal to the fair market value of OSS Common Stock
on the first day of Executive's employment by the Company. The Option shall
be in the form attached hereto as Exhibit A.
6.4. Annual Leave. Executive shall be entitled to vacations, sick
leaves, personal days and other tine off in accordance with the Company's
policies in effect for officers and executive employees of the Company.
6.5. Reimbursement of Expenses. Upon receipt of an itemized
accounting of such expenses with reasonable supporting documentation, the
Company shall reimburse Executive for
11
<PAGE>
all reasonable and necessary out-of-pocket expenses incurred by Executive
in connection with the business of the Company and in performance of
Executive's duties under this Agreement.
7. DURATION. Executive's employment shall commence on the date of this
Agreement and continue until terminated in accordance with Section 8. The
initial term of Employee's employment shall be two years ("Initial Term"), with
renewal terms of one year. After termination of Executive's employment, the
applicable provisions of Sections 5, 8, and 9 shall remain in full force and
effect in accordance with the provisions of each such section.
In the event that the Company acquires NetIgnite, Inc.'s (a company owned
by Executive) interests in NI during the Term (as defined below) and the then
Term, unless adjusted, would expire within one year of the date of such
acquisition by the Company, the Term shall be extended to a date that is one
year after the date of such acquisition by the Company.
8. TERMINATION. Executive's employment may be terminated as follows:
8.1. Expiration of Term. Upon written notice by either party
delivered at least 30 days before the expiration of the Initial Term or
renewal term (collectively, "Term"), Executive's employment will terminate
at the expiration of the Term.
8.2. Death; Disability. If Executive dies or becomes disabled during
the Term of his employment, his employment shall be deemed terminated on
the date of his death or disability. The Company shall provide Executive
with any death or disability benefits generally provided to executive
employees of the Company.
8.3. Cause. The Company may immediately terminate Executive's
employment at any time for:
8.3.1. gross negligence or willful misconduct by Executive of
any material duties as an executive officer of the Company which
continues after 15 days written notice specifying such negligence or
willful misconduct; or
8.3.2. the commission of any theft, fraud, embezzlement or
similar crime involving the commission of any felony, for acts of
dishonesty or moral turpitude, for intentional violations of the
securities laws or for a material breach of any provision of this
Agreement which is not cured within 10 days after Executive has
received written notice of such breach from the Company.
9. COVENANT NOT TO COMPETE. Since Executive will be a key employee of
the Company, Executive shall have access to Confidential Information, and the
national scope of the Company's proposed business, Employee agrees that the
restrictions on his future activities contained in this Section are fair,
reasonable and necessary.
9.1. Covenant Period. The covenants contained in this Section shall
continue until the earlier of one year after the termination of Executive's
employment or at such time as OSS shall have sold and assigned its
ownership interests in NetIgnite to either Executive or the other Member of
NetIgnite (such Member being a corporation controlled by Executive (the
"Covenant Period").
9.2. Restrictions on Future Employment. In the event that Executive
gives a notice of nonrenewal of the Term of this Agreement in accordance
with Section 8.1 hereof, resigns his employment hereunder or is terminated
for cause in accordance with Section 8.3 hereof, then, until the Covenant
Period expires, Executive shall not own, manage, operate, control, be
employed by, assist or participate in the ownership, management, operation
or control of a business operating in the United States that is engaged in
a business which is in competition with NI's business as such business was
being conducted at the time of Executive's employment
12
<PAGE>
hereunder. Nothing herein shall prohibit Executive from employment with or
providing consulting services to a business whose activities include as a
portion of its operations the business described in this subsection;
provided that Executive does not assist or otherwise provide services to
such business operations. In the event that Executive is terminated without
cause, this provision shall not apply.
9.3. Non-solicitation. Executive shall not directly or indirectly:
9.3.1. induce any employee of the Company to leave the employ
of the Company;
9.3.2. interfere with the relationship between the Company and
any employee;
9.3.3. hire any Company employee to work for any organization
of which Executive is an officer, director, employee, consultant,
independent contractor or owner of an equity or other financial
interest;
9.3.4. solicit or service any actual or prospective supplier,
client, customer of the Company who was solicited or serviced during
Executive's employment; or
9.3.5. interfere or attempt to interfere with any transaction
involving the Company;
until the Covenant Period expires.
10. SECURITIES MATTERS. Since the Executive will have access to
Confidential Information, his ability to engage in securities transactions
(including securities issued by the Company and by others) will be limited.
Executive agrees to:
10.1. not engage in any transactions that violate the securities
laws;
10.2. file all reports required by securities regulatory authorities;
10.3. provide information about securities transactions when
requested by the Company;
10.4. follow written Company policies concerning securities
transactions;
10.5. when requested by the Board, execute any "lock-up" agreements
or other restrictions on transactions, provided that all executive
employees of the Company are being requested to execute similar lock-up
agreements;
10.6. comply with securities law requirements for all transactions.
While Executive may request the Managers' permission for proposed securities
transactions, Executive is still responsible for compliance with legal
requirements.
11. SWITCHBOARD FINDER'S FEE. In the event that NI is sold to Switchboard
Incorporated or its parent, Banyan Systems Incorporated (such companies herein
referred to as "Switchboard"), Executive shall have the opportunity to earn a
finder's fee if Executive secures a relationship acceptable to OSS between OSS
and Switchboard which is distinct from the acquisition of NI by Switchboard and
offers measureable revenue to OSS. In such event, OSS will pay Executive a fee
based on the following formula:
<PAGE>
<TABLE>
<CAPTION>
Revenues to OSS Fee Paid, Based on % of Revenue
--------------- -------------------------------
<S> <C>
$ 0 - $1,000,000 5%
$1,000,001 - $2,000,000 4%
$2,000,001 - $3,000,000 3%
$3,000,001 - $4,000,000 2%
$4,000,001 + 1%
</TABLE>
12. INJUNCTIVE RELIEF. Upon a material breach or threatened material
breach by Executive of any of the provisions of Sections 3, 4, 5, 9 and 10 of
this Agreement, the Company shall be entitled to an injunction restraining
Executive from such breach, together with any other relief or remedy available,
for such breach or threatened breach, including the recovery of damages.
Nothing herein shall be construed as prohibiting the Company from pursuing any
other remedies for such breach or threatened breach. If the Company or
Executive takes legal action to enforce the provisions of this Agreement or to
enjoin Executive or the Company from violating this Agreement, the prevailing
party, as part of its damages, shall be entitled to recover its legal fees and
expenses incurred in such action from the losing party.
13. SEVERABILITY. It is the desire and intent of the parties that the
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision or portion of
this Agreement shall be adjudicated to be invalid or unenforceable, this
Agreement shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to apply only with
respect to the operation of such Section in the particular jurisdiction in which
such adjudication is made.
14. NOTICES. All communications, requests, consents and other notices
under this Agreement shall be given in writing and delivered by facsimile,
courier, registered or certified mail (postage prepaid) to the receiving party
at the address set forth below or the recipient's last known address. Notice
shall be deemed given on the date of delivery as shown by the facsimile
confirmation or delivery receipt.
15. GOVERNING LAW. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Colorado.
16. ASSIGNMENT. The Company may assign its rights and obligations
under this Agreement to any successor corporation and all covenants and
agreements hereunder shall inure to the benefit of and be enforceable by or
against any such assignee. Neither this Agreement nor any rights or duties
hereunder may be assigned or delegated by Executive.
17. NO WAIVER. A waiver by the Company of a breach of any provision
of this Agreement by Executive shall not operate or be construed as a waiver of
any subsequent or other breach by Executive.
18. AMENDMENTS. No provision of this Agreement shall be altered,
amended, revoked or waived, except by an instrument in writing, signed by the
Company and Executive.
19. BINDING EFFECT. Except as otherwise provided herein, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective legal representatives, heirs, successors and
assigns.
20. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
21. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement
and understanding of the parties with respect to the subject matter hereof and
supersedes all prior understandings, agreements or representations by or between
the parties, whether written or oral.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
14
<PAGE>
ONLINE SYSTEM SERVICES, INC.,
a Colorado corporation
By:____________________________________________
Its__________________
1800 Glenarm Place
Suite 700
Denver, Colorado 80202-3859
NETIGNITE 2, LLC
By:____________________________________________
Its_________________
1401 Blake Street
Suite 201
Denver, Colorado 80202
EXECUTIVE:
By:____________________________________________
PERRY EVANS
1401 Blake Street
Suite 201
Denver, Colorado 80202
15
<PAGE>
EXHIBIT 10.9
Online System Services, Inc.
Electronic Banking Service
Contract
This Contract ("Contract") made and entered into on the 28th day of May, 1997 by
and between Online System Services, Inc. ("OSS") having offices located at 1800
Glenarm Place, Denver, Colorado 80202 and Rockwell Federal Credit Union
("Client) located at ______________________________________ is as follows:
1. Scope of the Contract
OSS agrees to set-up ("Set-up") an electronic banking system per the
description in paragraph 3.1 and to provide Client with electronic banking
services ("Services") as described in paragraph 3.2 and Schedule A
(attached). This contract is for all Phase I Services only, as defined in
Schedule A. Phase II and Phase III services are referenced in Schedule A
of this agreement as services which will be made available to the Client by
OSS in calendar Q1 1998 and Q3 1998 respectively. Phase II and Phase III
services are not included in the pricing of this contract and will be
purchased under a separate agreement between OSS and Client.
2. Relationship of the Parties
2.1 OSS will purchase certain software modules as defined in paragraph 3.1
from Edify Corporation ("Edify"). Additionally, OSS will contract
with Edify for certain professional services during the Set-up of the
electronic banking system. Set-up will include integrating an
electronic commerce system which is being sold to Client by Checkfree
Corporation ("Checkfree") under a separate agreement with Client
2.2 Upon completion of Set-up (paragraph 3.1.6) OSS will be responsible to
provide the Services described in paragraph 3.2. All services related
to the Checkfree electronic commerce system will be provided by
Checkfree under a separate agreement with the Client. Services in
Schedule A which are denoted by "Checkfree" in the column labeled
"Implementation Phase" are included for reference only.
3. Statement of Work
OSS shall set up an electronic banking system for Rockwell Federal Credit
Union ("RFCU") and use it to provide ongoing electronic banking services to
RFCU and its members.
3.1 Setup
OSS shall establish an electronic banking system to provide the
ongoing electronic banking services to RFCU that are specified in
Schedule A, "Technical Specifications" as Phase 1 items. (Items
designated part 2 of Phase I are not needed for commencement of
service - they can be implemented after service is underway.)
Specifically, OSS shall provide or acquire and shall assemble,
configure and integrate the facilities, hardware, software,
telecommunications lines and other components for the required RFCU
electronic banking system. OSS shall also work with RFCU to integrate
the electronic banking system with RFCU's Re:Member Data Services
back-end computer system, and with CheckFree to integrate with the
CheckFree bill payment system and service being procured separately by
RFCU.
3.1.1 Edify Electronic Banking System
OSS shall utilize Edify Electronic Banking System (EBS) software
as the basis for RFCU's electronic banking services. This
software will include the Electronic Workforce core underlying
software layer, and the Home Banking, Personal Profile,
<PAGE>
Message Center and Bill Payment EBS Modules. The capability to
integrate with CheckFree for bill payment is also provided. OSS
shall acquire the required EBS software from Edify and, with
support from Edify as a subcontractor, shall configure the
software to meet the RFCU-specific needs described in Schedule A,
including integration with Re:Member and with CheckFree.
OSS shall work with RFCU personnel to define and implement the
interface between. EBS and Re:Member, and with CheckFree
personnel to implement the interface between EBS and CheckFree.
It is expected tat RFCU will provide the appropriate permissions
and authorizations as well as access to its relevant facilities,
systems and personnel, will perform any needed configuration,
modification or set up of existing RFCU systems, and will provide
needed space or other facilities or equipment (e.g., AC power),
in order to support implementation of the RFCU end of the
interface to the electronic banking system. It is expected that
CheckFree will be fully responsible for implementing its end of
the interface to the electronic banking system.
3.1.2 Network and System Operation Center
OSS shall provide a Compaq Proliant 2500, 6/200 system running
OS/2 Warp as part of its Network and System Operation Center
(NSOC) at its facilities in Denver. This server will have a 2 GB
Wanglek Tape Backup system and will be running Edify's Electronic
Banking System software (EBS). The NSOC will have five (5)
modems available to RFCU customers for direct dial in access to
the RFCU on-line banking system. Direct point to point
connectivity between OSS and RFCU will allow the Edify system to
directly talk to RFCU's banking back-end service. An interface
with the 56Kbps frame relay connection from CheckFree will
support the EBS-CheckFree interface. Redundant T-l connections
to the Internet through two different carriers will ensure
continuous Internet access. The NSOC has complete redundancy
within its environment, this includes multiple redundant web
servers, routers, Raid 5 systems, Hubs, Backup Domain controllers
and SQL servers.
3.1.3 Backup System
OSS shall provide backup or redundant server equipment to be used
on behalf of RFCU and housed in an off-site Denver area location
as a redundant Backup Site: Compaq 1500R Web server, Compaq
Proliant 2500, 6/200 system running OS/2 Warp. This System will
have "hot", direct Internet connectivity, a 2 GB Wanglek Tape
Backup system and will be redundant to the system that houses
RFCU's main interface. "Hot" backup direct point to point
connection to RFCU and a "hot" interface with a backup frame
relay connection from CheckFree will be provided for within this
Backup Site. Three Backup modems will be immediately available
for RFCU members should the Backup site need to be made available
for use. Daily tape backups will be available to restore the
RFCU system within 6 hours should the OSS facility fail.
3.1.4 Help Desk
OSS shall provide a service bureau Help Desk to handle all
customer inquiries regarding system operation. Sign-up and
password protection are also to be provided by the Help Desk.
OSS shall work with RFCU personnel to define and implement the
interface of the Help Desk with the RFCU Customer Service and IVR
systems, and with CheckFree personnel to define and implement the
interface of the Help Desk with CheckFree's Customer Service and
its Bill Pay D/R as required. It is expected that RFCU and
CheckFree will be each be responsible for any modifications to
their telephone, Customer Service or D/R systems needed to
implement the interface with the Help Desk.
-2-
<PAGE>
3.1.5 Telecommunications Links
OSS shall provide T1 connections to the Internet and 56 Kbps
point-to-point lines for direct connectivity to RFCU, for both
the NSOC and Backup Sites as described above. OSS shall provide
RFCU with the required routers and CSU/DSUs for the RFCU end of
the point-to-point connection (as well as for the OSS end). OSS
shall also arrange for establishment of an 800 line connecting
the RFCU customer service center with the OSS Help Desk center.
It is understood that CheckFree will provide the 56 Kbps frame
relay lines for direct connectivity between CheckFree and the
NSOC and the Backup Site, as well as any router or (35U/DSU
required at the OSS end of the connections. OSS will coordinate
with CheckFree for interface of its Customer Service and Bill Pay
IVR centers with the OSS Help Desk Center. It is understood that
CheckFree is to arrange for these lines. OSS will coordinate the
interface with CheckFree.
3.1.6 Completion of Set Up
OSS intends to have the set up activities sufficiently complete
and the system ready for a Pilot Test by September 1, 1997. A
Pilot Test Period will be 30 days, unless RFCU and OSS mutually
agree to a shorter period. It is the mutual intent of the
parties to have full member service commence on or about October
13, 1997. For the Pilot Test, OSS will coordinate with RFCU
personnel to exercise the system, in order to demonstrate the
effective working of the appropriate functions and features
specified in Schedule A. It is expected that RFCU will support
this test by setting up appropriate "dummy" accounts or other
test databases, establishing a group of nominally 50 RFCU
employees to exercise the system using their own accounts, making
access available to appropriate systems for test purposes,
contributing to establishing the test plan and procedures, and
participating in and monitoring the test.
OSS and RFCU will jointly conduct the test, making note of any
deficiencies discovered with respect to the functions and
features of Schedule A. It is intended that OSS will be alerted
immediately as to any such deficiencies discovered, and that OSS
will promptly work to remedy them, so as to allow appropriate re-
testing during the Pilot Test period. Before or at the
conclusion of the Pilot Test Period, RFCU will indicate
acceptance, conditional acceptance or rejection of test results.
if no specific response is given within 5 days of the conclusion
of the Pilot Test Period, the test results will be considered to
have been accepted. if any deficiencies are outstanding at the
conclusion of the Pilot Test Period, OSS will remedy them within
12 days in order to meet the specifications of Schedule A and to
achieved acceptance.
Upon acceptance of the Pilot Test results, the system will be
considered ready to "go live" and online electronic banking
service will then be available to RFCU members.
3.2 Ongoing Electronic Banking Services
OSS shall provide ongoing electronic banking services to RFCU as
specified in Schedule A, "Technical Specifications."
3.2.1 Electronic Banking Service
OSS shall utilize the system as set up per section 3.1 above to
provide on-line banking services to RFCU members, and associated
management services to RFCU staff.
-3-
<PAGE>
3.2.2 Bill Payment Service
For bill payment services, OSS shall provide the user interface
to CheckFree, which will provide bill payment services under a
separate agreement with RFCU.
3.2.3 Help Desk Service
OSS shall provide a Help Desk for telephone-based customer
service to RFCU members, for online banking (including interface
to CheckFree bill payment) and related technical calls. The Help
Desk staff at OSS will also assign all passwords and PIN numbers,
distribute sign-up material and sign up all members onto the RFCU
system. Members may contact OSS via e-mail, by postcards
available in RFCU lobbies, optionally by direct dial, and by
RFCU's PBX system. All user D's and passwords will be logged by
OSS and usage and call tracking reports made available to RFCU
staff.
OSS will staff its help desk between 6:00 am and 12:00 midnight
Pacific Time to handle all member and staff inquiries about the
online banking system operations. Calls from members will be
routed through RFCU's PBX telephone system, calls about account
information will be handled by RFCU staff. Calls regarding
operation and usage of the online banking and bill payment system
will be handled by OSS help desk staff, or transferred directly
to CheckFree's help desk staff RFCU members will be unaware of
any transfers being made. A direct dial 800 number to OSS's help
desk will also be provided, along with e-mail access.
3.2.4 Marketing Support
OSS shall provide support to RFCU for marketing of the online
electronic banking service per section III.A, Marketing Services,
of Schedule A.
3.2.5 Training
OSS shall provide training support for the electronic banking
system. A series of two one-day training sessions will be
conducted by OSS personnel at the main RFCU office once the
system is set up. Designated RFCU staff, not to exceed twenty
(20) trainees, will be trained on all the system's capabilities
by OSS, with support from Edify, and OSS will coordinate with
CheckFree so that CheckFree can include bill payment training as
well if appropriate.
4. Fees and Payment Terms
4.1 Set-up Fee
Client agrees to pay a Set-up Fee in the amount specified in Schedule B
due upon the execution of this Contract.
4.2 Monthly Service Fees
Client agrees to pay to OSS monthly, within 30 days of receipt of
invoice, the amounts as set forth in the section titled "Monthly Service
Fees" in Schedule B. Invoices will include applicable sales taxes, if
any.
4.3 OSS agrees that, on the one (1) year anniversary of the commencement of
Services, Client may elect t provide it's own Help Desk services
provided Client has notified OSS in writing at least sixty (60) days
prior to the one (1) year anniversary date. Upon receipt of such
notification, 058 and Client agree to negotiate, in good faith, a
mutually agreed upon reduction in Monthly Service Fees which is
commensurate with the reduction in OSS provided Help Desk services. The
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reduction in fees will become effective sixty (60) days after either the
one (1) year anniversary date or the date of a written fee reduction
agreement signed by both parties, whichever is later.
4.4 Invoices for Services shall be due and payable thirty (30) days after
receipt of the invoice. If Client fails to pay such amounts when due,
OSS may, at it's option and after giving at least ten (10) days prior
written notice, discontinue furnishing the Services until all past due
amounts are paid in full.
5. Term of Contract
5.1 This Contract shall be effective as of __________________ and shall
remain in force for thirty six (36) months ("Initial Term") from the
Completion of Set-up as defined in paragraph 3.1.6. The Contract shall
automatically renew and extend for successive one (1) year terms
commencing at the conclusion of the Initial Term unless contrary notice
in writing is given by Client or OSS at least ninety (90) days prior to
termination of the then current term.
5.2 One (1) year from Completion of Set-up (paragraph 3.1.6), Client may, at
it's option, terminate this Contract if certain performance criteria, as
specified in Schedule C, have not been met by OSS. Client shall notify
OSS in writing, at least ninety (90) days prior to termination, of the
areas of non compliance to the criteria in Schedule C and OSS shall have
forty (45) days to cure such non compliance. If OSS is unable to cure,
the Client may, at it's option, proceed with termination.
6. Trade Secrets and Confidentiality.
Client acknowledges that all computer programs, data file content and
organization, techniques, methods, rules, procedures, protocols, forms,
instructions, trade secrets, copyrights and any other proprietary rights of
085 or third parties used in connection with or in any way relating to the
System or Services ("Products") are the exclusive and confidential property
of OSS or parties from whom OSS has secured such Products. Client, its
subsidiary or affiliated corporations, consultants or contractors shall treat
the Products as confidential and will not disclose or otherwise make
available same in any form to any person other than employees of Client or
its data processor who need to know such information for rendition of the
Services. Client will instruct such employees and data processors to keep the
same confidential using the same care and discretion that Client would use
with respect to its own confidential property and trade secrets. Upon
termination of this Contract for any reason, Client shall return to OSS any
and all Products in its possession or under its control and shall cease using
them in any way.
6.1 OSS shall treat as confidential and shall not disclose or otherwise make
available the personal account information or other data received by OSS
from Client ("Client's Data") or Users ("Users' Data") to any person,
other than employees, agents, contractors or affiliates of OSS or
Client. OSS shall instruct such employees, agents, affiliates and
contractors to keep the same confidential by using the same care and
discretion that OSS uses with respect to its own confidential
information. OSS shall not release Client's Data to any party without
written permission from Client.
7. Reliance on Information Provided.
OSS shall rely on the accuracy of all information provided to OSS by Client.
Client shall promptly inform OSS of any such incorrect data or information,
bear the cost of correction and pay any damages arising therefrom.
8. Warranty and Limitation of Liability.
8.1 OSS warrants that it will exercise reasonable care in the performance of
its obligations under this Contract. OSS makes no other warranties,
express or implied, including without limitation, any warranty of
merchantability or fitness for a particular purpose with respect to the
services provided hereunder. Because of the extreme difficulty of fixing
actual damages for any failure of
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OSS to perform its obligations hereunder, or from any failure of OSS to
perform any obligations imposed by law, the parties agree that OSS's
liability hereunder, if any, shall be limited to liquidated damages in
the amount of the Fees paid by Client to OSS for the two calendar
months immediately preceding the month in which the event occurred that
gave rise to the damages. The provisions of this paragraph apply even
though the loss or damage, irrespective of cause or origin, results,
directly or indirectly, either from performance or nonperformance of
obligations imposed by this Contract.
8.2 IN NO EVENT WILL OSS BE RESPONSIBLE FOR (A) ANY INCIDENTAL, INDIRECT,
CONSEQUENTIAL, SPECIAL, PUNITIVE, OR EXEMPLARY DAMAGES OF ANY KIND,
INCLUDING LOST REVENUES OR PROFITS, LOSS OF BUSINESS OR LOSS OF DATA
REGARDLESS OF WHETHER IT WAS ADVISED, HAD REASON TO KNOW, OR IN FACT
KNEW OF THE POSSIBILITY THEREOF; OR (B) FOR ANY LOSS OR DAMAGE TO
CLIENT OR USER, DIRECT OR CONSEQUENTIAL, ARISING OUT OF OR IN ANY WAY
RELATED TO ACTS OR OMISSIONS OF THIRD PARTIES INCLUDING, BUT NOT
LIMITED TO, ELECTRONIC COMMERCE SYSTEM PROVIDERS AND TELECOMMUNICATION
CARRIERS.
OSS shall not be liable for any delay or other failure of performance
caused by factors beyond its reasonable control, such as, but not
limited to, strikes, insurrection, war, fire, lack of energy, acts of
God, governmental acts or regulation, or acts of third parties. If,
alter the date of this Contract, any law, regulation, or ordinance,
whether federal, state, or local, becomes effective that substantially
alters the ability of OSS to perform services hereunder, OSS shall have
the right to terminate this Contract upon thirty (30) days written
notice to Client
9. Indemnification.
OSS agrees to indemnify Client, its officers, directors, agents and
employees from and against any and all loss, liability, cost and expense,
including punitive damages and reasonable attorneys' fees, incurred by any
one or more of them by reason of any and all claims, demands, suits, or
proceedings made or brought against any one or more of them arising from or
related to the breach of any obligation, responsibility, warranty, or
representation made by OSS herein. Client agrees to indemnify OSS, its
officers, directors, and employees from and against any and all loss,
liability, cost and expense, including punitive damages and reasonable
attorneys' fees, incurred by any one or more of them by reason of any and
all claims, demands, suits or proceedings, made or brought against any one
or more of them arising from or related to any act or omission of Client or
the breach of any obligation, responsibility, warranty, or representation of
the Client to OSS related to the operation, promotion, or use of the
Services pursuant to this Contract.
10. Default; Remedies Upon Default.
10.1 Should Client (i) default in the payment of any sum of money hereunder,
(ii) default in the performance of any of its other obligations under
this Contract, (iii) become the subject of any proceeding under the
Bankruptcy Code or become insolvent, or (iv) have any substantial part
of its property become subject to any levy, seizure, assignment,
application or sale for or by any creditor or governmental agency, OSS,
at its option, may, upon at least ten (10) days advance written notice
thereof, terminate this Contract and declare all amounts immediately
due and payable. The remedies contained in this paragraph 10.1 are
cumulative and are in addition to all other rights and remedies
available to OSS under this Contract or at law or in equity.
Conversely, should OSS fall into any of the above situations, the same
remedies will apply on behalf of Client, at their option.
10.2 In the event either party defaults in the performance of this Contract,
the other, not in default, shall have such remedies, including
cancellation of this Contract, as may be appropriate at law or in
equity; provided, however, that no legal action shall be brought by.
either party unless the other shall have been given at least forty-five
(45) days notice in writing specifying the alleged breach thereof and
if during said time such breach is cured or remedied no such action
shall exist
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11. General
11.1 Client acknowledges that it has not been induced to enter into this
Agreement by any representation or warranty not set forth in this
Agreement. This Agreement contains the entire agreement of the
parties with respect to its subject matter and supersedes all
existing agreements and all other oral, written or other
communications between them concerning its subject matter. This
Agreement shall not be modified in any way unless it is in written
form and signed by both parties.
11.2 This Contract shall be binding upon and shall inure to the benefit of
OSS and Client and their respective successors and permitted assigns.
11.3 If any provision of this Contract (or any portion thereof) shall be
held to be invalid, illegal or unenforceable, the validity, legality
or enforceability of the remainder hereof, shall not in any way to be
affected or impaired thereby.
11.4 The headings in this Contract are intended for convenience of
reference and shall not affect its interpretation.
11.5 The individuals executing this Contract on behalf of OSS and Client
do each hereby represent and warrant that they are duly authorized by
all necessary action to execute this Contract on behalf of their
respective principals.
11.6 This Agreement is made in the County of Denver, State of Colorado,
and shall be construed and interpreted in accordance with the laws of
the State of Colorado without regard to choice of law principles.
12. Arbitration.
12.1 Any controversy or claim between or among the parties hereto
including but not limited to those arising out of or relating to this
Contract or any related agreements or instruments, including any
claim based on or arising from an alleged tort, shall be determined
by binding arbitration in accordance with the Federal Arbitration Act
(or if not applicable, the law of Colorado). Judgment upon any
arbitration award maybe entered in any court having jurisdiction. Any
party to this Contract may bring an action, including a summary or
expedited proceeding, to compel arbitration of any controversy or
claim to which this Contract applies in any court having jurisdiction
over such action.
12.2 The arbitration shall be conducted in Los Angeles, California. All
arbitration bearings will be commenced within ninety (90) days of the
demand for arbitration, further, the arbitrator shall only, upon a
showing of cause, be permitted to extend the commencement of such
heating for up to additional sixty (60) days.
13. Notices.
Service of all notices under this Agreement shall be in writing and son by
U.S. Certified Mail, return receipt requested, postage paid, addressed to
the party to be served notice at the following address:
Online System Services, Inc.
1800 Glenarm Place, 8th Floor
Denver, Colorado 80202
Attention: Steve Mans, President
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Rockwell Federal Credit Union
7800 E. Imperial Highway
Downey, California 90241
Attention: President
EXECUTED in multiple originals on the dates shown below.
ROCKWELL FEDERAL CREDIT UNION ONLINE SYSTEM SERVICES
By: ___________________________ By:___________________________
Name:__________________________ Name:_________________________
(please print) (please print)
Title:_________________________ Title:________________________
Date:__________________________ Date:_________________________
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EXHIBIT 10.10
ONLINE BANKING SERVICE AGREEMENT
This Agreement ("Agreement") is made and entered into by and between ONLINE
SYSTEM SERVICES, INC., a corporation organized under the laws of Colorado and
located at 1800 Glenarm Place, Denver, Colorado 80202 ("OSS" or "Company") and
CU COOPERATIVE SYSTEMS, INC., a cooperative organized under the laws of
California ("CO-OP NETWORK" or "Client") and located at 2350 South Garey Avenue,
Pomona, California 91766, with an effective date of FEBRUARY 10, 1999.
1. Recitals
Whereas, CO-OP Network is legally organized as a cooperative that is owned by
its shareholder credit unions, and
Whereas, CO-OP Network's business is supplying electronic transaction switching
and related services to its shareholder credit unions and to other credit
unions, and
Whereas, CO-OP Network desires to include online banking services among the
services it offers its shareholder and other credit unions, and
Whereas OSS is in the business of providing online banking services to financial
institutions, and
Whereas, OSS desires to provide online banking services to CO-OP Network and to
support it in improving the quality of online banking offered its credit unions,
Therefore, OSS and CO-OP Network, intending to be legally bound by this
Agreement, agree as follows:
2. Definitions
CO-OP Network's network - the network of interconnected ATMs, host computers,
and external systems such as credit card processors and other ATM networks.
ATMs - Automated Teller Machines.
Deluxe Electronic Payment Systems ("Deluxe") - the company that operates CO-OP
Network's electronic transaction switch for it on an outsource basis.
Switch - the computer at Deluxe that connects and routes ATM and other
electronic transactions between CO-OP Network's credit unions and between these
credit unions and other parties on the CO-OP Network's network.
Host - the computer a particular credit union uses for its internal, back-end
account maintenance and processing, which may be on-premises at the credit
union, or remote at a processing service center operated on an outsource basis.
Online Banking - Internet-based access to various banking functions such as
account information, transfers between accounts, and bill pay.
Online Banking Service - the Online Banking Service provided under this
Agreement by OSS for CO-OP Network, as used by CO-OP Network credit unions and
their members.
Online Banking System - the computer, network and telecommunications hardware,
software and data bases that provide functions and features offered in the
Online Banking Service.
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Online Banking Service Bureau - the providing of Online Banking Services by OSS
to CO-OP Network's credit unions and their members on an outsource basis.
Subscribers - members of CO-OP Network credit unions enrolled in the Online
Banking Service who use the system for online banking.
Users (of the Online Banking Service) - Subscribers, personnel of credit unions
enrolled in the Online Banking Service who perform administration of their
individual credit unions' online banking web sites or customer support, and
personnel of CO-OP Network who perform administrative or customer support for
CO-OP Network credit unions.
EBS - Electronic Banking System licensed from Edify Corporation, which is the
software layer upon which the Online Banking System is built.
3. Scope of Services
OSS will set up and operate an Online Banking Service Bureau on behalf of CO-OP
Network, to provide Internet-based remote banking services to CO-OP Network's
credit unions (CUs) and their members on an outsource basis.
3.1 Initial System Design and Implementation
OSS will set up an Online Banking System to provide Online Banking
Services. OSS will provide or acquire and will assemble, configure and
integrate the facilities, hardware, software, network systems,
telecommunications lines and equipment, and other components for the
required Online Banking System. OSS will employ the Edify Electronic
Banking System (EBS) software as the foundation of the service, and will
develop a custom Online Banking Service Bureau implementation for CO-OP
Network, including integrating with the Deluxe switch and with the Bill Pay
provider. OSS will also develop customer support materials for the program.
Schedule A specifies the items and activities included in Initial System
Design and Implementation. Schedule B specifies the functions and features
to be included in the Online Banking System.
3.1.1 Network Operations Center
OSS will provide the appropriate computing and network equipment at
Network Operations Center (NOC) facilities in the Denver area.
3.1.2 Telecommunications Links
OSS will provide T1/T3 connections to the Internet. CO-OP Network
shall arrange for and maintain the appropriate telecommunications
lines or links for direct connectivity from the Online Banking System
to Deluxe and to the Bill Pay Provider. OSS will provide the required
local access line, routers, and modems for the OSS end of the OSS-to-
Deluxe connection and for the OSS end of the OSS-to-Bill Pay Provider
connection, as specified in Schedule A.
3.1.3 Bill Payment
For bill payment, OSS will provide the front end User interface for
bill payment and the back end system interface from the Online Banking
System to the Bill Pay Provider, as specified in Schedule A. CO-OP
Network will contract directly with the Bill Pay Provider for bill
payment services, including transaction research, adjustment and
maintenance services.
3.1.4 Pilot Testing
OSS shall have the Initial System Design and Implementation activities
sufficiently complete and the system ready for a Pilot Test within six
months of the effective date of this Agreement,
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assuming the Deluxe and Bill Pay provider sides of those interfaces
are made available in a timely manner and CO-OP Network provides its
inputs in a timely manner. The Pilot Test will involve two or three
credit unions, each with a different host system, unless OSS and CO-OP
Network mutually decide differently. The Pilot Test Period will be 45
days, unless CO-OP Network and OSS mutually agree to a different
period. The pilot credit unions will be brought up on line
sequentially.
For the Pilot Test, OSS will coordinate with CO-OP Network and pilot
CU personnel to exercise the system, in order to demonstrate the
effective working of the appropriate functions and features specified
in Schedule B. CO-OP Network shall support this test by: contributing
to establishing the test plan and procedures; making access available
to appropriate systems for test purposes; establishing test accounts
at the pilot CUs for OSS personnel; having CO-OP Network and pilot CU
employees exercise the system using their own accounts; and
participating in and monitoring the test.
OSS and CO-OP Network will jointly conduct the test, making note of
any deficiencies discovered with respect to the functions and features
of Schedule B. OSS shall be alerted immediately as to any such
deficiencies discovered, and OSS shall promptly work to remedy them,
so as to allow appropriate re-testing during the Pilot Test Period.
Before or at the conclusion of the Pilot Test Period, CO-OP Network
will indicate acceptance, conditional acceptance or rejection of test
results. If no specific response is given within 10 business days of
the conclusion of the Pilot Test Period, the test results will be
considered to have been accepted. If any deficiencies are outstanding
at the conclusion of the Pilot Test Period, OSS will remedy them
within 15 business days of notice in order to meet the specifications
of Schedule B and to achieve acceptance.
Upon acceptance of the Pilot Test results, the system will be
considered ready for operation, and the Online Banking Service will
then be made available to the pilot CUs' general membership, and then
to other CO-OP Network CUs. Acceptance of Pilot Test results will
constitute the Completion of Initial System Design and Implementation.
3.2 Service Bureau Operation
OSS will configure and implement individual online banking Web sites for
the various CUs CO-OP Network enrolls in the program, and will operate them
on a service bureau basis. For each CU implementation, OSS will provide
training, a User guide, online help and a Web-based customer support
knowledge base and will support User enrollment. OSS will provide ongoing
24x7 system operation and management of each Web site, including redundant
high bandwidth connections to the Internet and interfaces to Deluxe and the
Bill Pay Provider. OSS will serve as Tier 2 technical support for the
Online Banking Service, providing the CUs and CO-OP Network with support on
technical issues requiring escalation. Schedule C specifies the items and
activities included in Service Bureau Operation. Schedule D describes the
overall customer service concept of operations, and the part that OSS will
fulfill.
3.2.1 Capacity planning
OSS shall implement in a timely manner the online banking Web sites
for all CUs enrolled in the Online Banking Service Bureau as they are
signed up. Implementing such online banking Web sites for CUs will
require OSS (and CO-OP Network) labor and other resources. CO-OP
Network agrees to work with OSS in planning the volume of CU online
banking sites that OSS should be prepared to handle from period to
period, so as to avoid implementation delays or over-capacity
problems.
3.2.2 Test Accounts, Employee Dishonesty Insurance
Each credit union will an online banking site will provide an
appropriate test account that OSS can access, to support
implementation testing and ongoing testing and troubleshooting by OSS.
OSS
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will maintain during the term of this Agreement coverage in the form
of an employee dishonesty policy in the amount of $1,000,000 covering
loss of or from damage to money and securities and property other than
money and securities, from the fraudulent and dishonest acts,
including wire fraud, of its employees.
3.3 Additional Services
OSS will provide all services to setup the service bureau and operate it
under nominal operating conditions, as specified in paragraphs 3.1 and 3.2
above. Additional charges would apply for work in addition to that
specified in paragraphs 3.1 and 3.2. Examples of such additional work, for
which additional charges would apply, are: modifying the EBS side of the
interface to the Deluxe switch system to accommodate changes on the Deluxe
or CU side of the interface (such as specification changes, upgrades,
enhancements and migrations); designing or implementing system or service
upgrades or modifications at CO-OP Network's request; adding other new or
custom functions such as check imaging, real time loan applications, or
"screen pops" for CU MSRs; implementing enhancements to the system or
service as available and offered by Edify/OSS (such as Open Financial
Exchange [OFX], bill presentment, and targeted promotions manager);and
providing additional training on online banking.
3.3.1 Additional Functions and Features
It is expected that from time to time that CO-OP Network will desire
that certain new or enhanced functions and features or related
services be added to the Online Banking Service it offers its credit
unions. It is the pates' intention that CO-OP Network acquire those
additional or enhanced functions, features or services through OSS,
under this Agreement or an amendment to it. CO-OP Network and OSS
agree to negotiate in good faith to arrive at mutually acceptable
terms for incorporating such additions or enhancements. If OSS is
unable to provide certain additional or enhanced functions, features
or services requested by CO-OP Network or declines to do so, CO-OP
Network may obtain those additional or enhanced functions, features or
services from a third party without violation of paragraph 4
(Exclusive Provider), but OSS will continue to be the exclusive
provider to CO-OP Network for the term of this Agreement of Online
Banking Services within the scope of this paragraph 3.
3.3.2 Task Authorization
Additional services will be conducted by way of task orders. CO-OP
Network will authorize work packages by written task order, which will
include a statement of work, deliverables and pricing. Pricing will be
as negotiated and mutually agreed for each task order. A task order
can be time and materials (T&M) at OSS's current T&M rates, or fixed
price, or other mutually agreed terms. Blanket task orders can be
established to allow informal authorization (verbally for instance) of
a series of small tasks (e.g., periodic graphics updates for a CU not
wishing to do it itself) under that blanket task order.
4 Exclusive Provider
The pates agree that OSS will be the exclusive provider to the CO-OP Network of
Online Banking Services within the scope of paragraph 3 for the term of this
Agreement, and that OSS knowingly will provide Online Banking Services to CO-OP
Network CUs only through and with CO-OP and, for twenty-four (24) months after
Completion of Initial System Design and Implementation (as defined in paragraph
3.1.4), to any CU only after first affording CO-OP the opportunity to contract
with such CU for Online Banking Service, unless otherwise mutually agreed on a
case by case basis.
4.1 Existing CO-OP Online Banking Service
It is recognized that CO-OP Network currently is providing Online Banking
Services to certain CUs under the service name Access Anywhere, and certain
other CUs are in the process of being enrolled in the
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service ("Access Anywhere CUs"). As of the effective date of this
Agreement, CO-OP Network will enroll all other CUs desiring Online Banking
Services directly into the OSS-provided service, will cease marketing the
existing Access Anywhere service, and when reasonably possible will migrate
the Access Anywhere CUs to the OSS-provided service covered by this
Agreement. CO-OP Network agrees to use reasonable effort to persuade the
Access Anywhere CUs to change to the OSS service in a reasonably timely
manner. It is recognized that the Access Anywhere CUs have certain
contractual rights that allow them to make the ultimate decision as to when
to migrate. If despite CO-OP Network's reasonable efforts, certain of these
CUs decline to change to the OSS-provided service in a reasonably timely
manner, CO-OP Network may continue to provide these CUs with Access
Anywhere service without violation of the exclusive provider provisions of
this paragraph 4.
4.2 Existing OSS Online Banking Service
It is recognized that OSS offers services similar or identical to the
Online Banking Services to financial institutions other than through this
Agreement. Should OSS have any CU as a client, OSS may continue to provide
that CU with such services outside the scope of this Agreement without
violation of the exclusive provider provisions of this paragraph 4.
5 Fees and Payment Terms
CO-OP Network will pay OSS for the services provided under this Agreement in the
following manner.
5.1 Initial System Design and Implementation Fee
CO-OP Network will pay OSS an Initial System Design and Implementation fee
in the amount specified in Schedule F. This fee is payable upon execution
of this Agreement.
5.2 Service Bureau Monthly Fee
CO-OP Network will pay OSS a monthly fee to operate and maintain the Online
Banking System and Service, in the amount specified in Schedule F. OSS will
invoice CO-OP Network monthly, and COOP Network agrees to pay monthly.
5.3 Credit Union Setup Fee
CO-OP Network will pay OSS a setup fee for each credit union when it is
enrolled in the service bureau, in the amount specified in Schedule F. This
amount is payable to OSS prior to OSS's commencing work on implementing the
online banking Web site for that credit union.
5.4 Credit Union Monthly Fee
CO-OP Network will pay OSS a credit union monthly fee for all credit unions
enrolled in the system at month end, in the amount specified in Schedule F.
OSS will invoice CO-OP Network monthly, and CO-OP Network agrees to pay
monthly.
5.5 Subscriber Monthly Fees
CO-OP Network will pay OSS a subscriber monthly fee for all Subscribers
enrolled in the system at month end, in the amount specified in Schedule F.
OSS will invoice CO-OP Network monthly, and CO-OP Network agrees to pay
monthly.
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5.6 Transaction Fee
CO-OP Network will pay OSS a transaction fee for transactions performed
through Deluxe, in the amount specified in Schedule F. OSS will invoice CO-
OP Network monthly, and CO-OP Network agrees to pay monthly.
5.7 Months and Years Defined
The fees to be paid monthly are based on activity during the month (such as
operating the service for the month, adding CUs, or processing a certain
number of transactions through Deluxe) or totals at end of month (such as
number or enrolled CUs or Subscribers). And several fee levels as specified
in Schedule F vary according to year. For invoicing purposes, a month is a
calendar month, and years begin counting at the 1st of the next calendar
month after Completion of Initial System Design and Implementation as
defined in paragraph 3.1.4. Any fractional month between Completion of
Initial System Design and Implementation and the l~ of the next calendar
month, or at the end of the Term of this Agreement, will be treated on a
pro rata basis based on number of days.
5.8 Future Changes in Laws or Regulations
If future changes in the laws or regulations affecting the business of CO-
OP Network or any CO-OP Network CU require OSS to incur material changes to
the Online Banking Services provided under this Agreement, the pates agree
that they will negotiate and mutually agree to the changes required and any
resulting adjustments in the fees payable by CO-OP Network to OSS under
this Agreement.
5.9 Changes in Technology
OSS will render the Online Banking Services under this Agreement using the
EBS software available from and supported by Edify. CO-OP Network will
cooperate with OSS with the use of any upgrades to the EBS required by
Edify. If at any time during the term of this Agreement other changes in
the software or other technology used for rendering the Online Banking
Services under this Agreement are reasonably required or requested by
either party, OSS and CO-OP Network will negotiate and mutually agree to
the applicable changes and any resulting adjustments in the fees payable by
CO-OP Network to OSS under this Agreement.
5.10 Fees for Additional Services
OSS will invoice CO-OP Network monthly for any additional service work
performed under the provisions of paragraph 3.3, with amounts detailed by
task order. Billing will include any incurred T&M charges, as well as any
initial, progress or final payments that are part of fixed price task
orders.
5.11 Residual Costs Fee
Upon conclusion of the Term of this Agreement, or upon any early
termination, CO-OP Network will pay OSS a Residual Costs Fee, which is
intended to cover unabsorbed setup costs associated with adding new
Subscribers towards the end of the service, in the amount specified in
Schedule F.
5.12 Invoices
Invoices will include applicable sales taxes, if any. Invoices will be due
and payable thirty (30) days of receipt of the invoice. If with respect to
any amount which is not at the time subject to a good-faith dispute, CO-OP
Network fails to pay such amounts when due, OSS may, at its option and
after giving at least twenty-one (21) days' prior written notice,
discontinue furnishing the Online Banking Services specified in paragraph 3
until all past due amounts are paid in full.
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6 Term of Agreement
This Agreement will remain in force for five (5) years ("Initial Term") from the
date of Completion of Initial System Design and Implementation, as defined in
paragraph 3.1.4. At its sole option to be exercised by CO-OP Network by written
notice given not less than 270 days before the end of the Initial Term, this
Agreement may be extended for an additional term of five (5) years. Thereafter
(or at the end of the Initial Term if CO-OP Network fails to extend for an
additional five year (5) term), the Agreement will automatically renew and
extend for successive one (1) year terms unless contrary notice in writing is
given by CO-OP Network or OSS at least one hundred eighty (180) days prior to
termination of the then current term. The Initial Term and any renewal terms are
together referred to as the "Term" of this Agreement.
If CO-OP Network exercises its option to extend for an additional five (5) year
term, then within thirty days of receipt of that notice by OSS, OSS may
nonetheless terminate this Agreement and the relationship at the end of the
Initial Term by arranging for a transfer to CO-OP Network of all items held in
escrow pursuant to Section 14.1, below, to occur at the end of the Initial Term.
Upon such transfer, CO-OP Network shall pay through the escrow the sum of Two
Hundred Fifty Thousand Dollars ($250,000) to OSS, in addition to any amounts
payable pursuant to Section 14.1.
7 Early Termination for Business Reasons
The parties acknowledge that they are entering into this Agreement with the
expectation that a significant number of CO-OP Network CUs and their members
will subscribe to the Online Banking Service covered by this Agreement. If there
are fewer than 25,000 Subscribers (actual or reasonably anticipated) enrolled in
the Online Banking Service by the third anniversary of Completion of Initial
System Design (as defined in paragraph 3.1.4), either party may, no later than
(30) days after the third anniversary date, give notice of its intent to
terminate this Agreement early, provided the effective date of termination as
specified in said notice follows the date of the notice by at least one hundred
eighty (180) days. Should a party make such a call for early termination, the
parties agree to work together to plan and implement a controlled wind-down of
service. It is acknowledged that this controlled wind-down may entail OSS
performing additional work that will need to be covered under the provisions of
paragraph 3.3, and the parties agree to work together in good faith to define
and implement the wind-down and termination of the Agreement.
8 Confidential Information
8.1 Acknowledgment of Confidentiality
Each party hereby acknowledges that it may be exposed to confidential and
proprietary information of the other party, or related third parties such
as Edify or Deluxe, including, without limitation, technical information
(specifications, designs, drawings, analysis, research, processes, computer
programs, methods, ideas, "know how" and the like), business information
(sales and marketing research, materials, plans, accounting and financial
information, personnel records and the like) and other information
designated as confidential expressly or by the circumstances in which it is
provided ("Confidential Information"). Confidential Information does not
include (i) information already known or independently developed by the
recipient; (ii) information in the public domain through no wrongful act of
the recipient, or (iii) information received by the recipient from some
third party who was free to disclose it.
8.2 Covenant Not to Disclose
With respect to the other party's Confidential Information or a related
third party's Confidential Information obtained from the other party, the
recipient hereby agrees that during the Term and at all times thereafter it
will not use, commercialize or disclose such Confidential Information to
any person or entity, except to its own employees having a "need to know"
(and who are themselves bound by similar nondisclosure restrictions), and
to such other recipients as the other party may approve in writing;
provided, that all such recipients will have first executed a
confidentiality agreement in a form acceptable
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to the owner of such information. Neither party nor any recipient may alter
or remove from any software or associated documentation owned or provided
by the other party any proprietary, copyright, trademark or trade secret
legend. Each party will use at least the same degree of care in
safeguarding the other party's Confidential Information as it uses in
safeguarding its own confidential information. Upon termination of this
Agreement for any reason, each party will use its best effort to effect the
return of all such Confidential Information obtained from the other party
in its possession or under its control and will cease using it in any way.
The terms and conditions of this Agreement, including, without limitation,
the fees payable by CO-OP Network, shall be considered confidential
information of OSS, subject to the nondisclosure restrictions under this
paragraph 8.2.
9 Reliance on Information Provided
OSS will rely on the accuracy of all information provided to OSS by CO-OP
Network. CO-OP Network will promptly inform OSS of any such incorrect data or
information, bear the cost of correction and pay any damages arising therefrom.
10 Data Security
The Online Banking System will contain data on the members of the CO-OP Network
credit unions who use the system (CO-OP Network User Data). This data will
include such items as User IDs, PINs, bill payment payee and payment lists, and
certain bill payment and account history data. OSS acknowledges that CO-OP
Network User Data will remain the property of CO-OP Network, and agrees to
provide CO-OP Network, upon its reasonable request, with copies of the CO-OP
Network User Data in a mutually agreed form.
10.1 Restricted Access
OSS will implement reasonable security precautions designed to restrict
external access to CO-OP Network User Data so that a User will only be able
to access his own data in the CO-OP Network User Data, and only his credit
union and CO-OP Network will have administrative access to a User's data.
10.2 Data Integrity
OSS will implement reasonable security precautions designed to prevent the
loss or alteration of COOP Network User Data.
10.3 Data Retention
OSS shall retain copies of all CO-OP Network User Data and Online Banking
System transaction logs and reports for at least 1 year. OSS agrees to
notify CO-OP Network 30 days in advance of any plan to dispose of any such
data, and will provide archive copies of such data to CO-OP Network prior
to such disposition if so requested.
11 Disaster Recovery
OSS will maintain a disaster recovery plan and will perform disaster recovery
preparations including maintenance of current backup tapes stored off-site from
the Network Operations Center (NOC). In the event of a disaster, OSS shall
execute its disaster recovery plan, which will include provisions for acquiring
and integrating appropriate replacement computing and network equipment at the
NOC or at a backup NOC as required, re-establishing appropriate
telecommunications links as required, and re-installing software and databases
from backup tapes as required. Such disaster recovery systems shall be tested no
less than annually and results made available to CO-OP Network. OSS shall
exercise its best efforts, consistent with its obligations to its entire
customer base and to the extent within the reasonable control of OSS, to
reestablish the Online Banking Service at the earliest possible time following a
disaster.
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12 Minimum Performance Requirements
OSS recognizes the importance to CO-OP Network of high availability of the
Online Banking Services specified in paragraph 3.2, including high reliability
of the online banking web site and high levels of responsiveness to customer
support requirements. OSS therefore agrees to meet the minimum performance
criteria specified in Schedule E.
13 Default
13.1 Declaration of Default
Either party may be declared in default of this Agreement upon written
notice thereof (describing the default and [as best the party is able] the
steps necessary to correct the default) if it breaches any material
provision of this Agreement and fails for ten (10) days after receipt of
written notice of default to correct such default or to commence corrective
action reasonably acceptable to the other party and proceed with due
diligence to completion. If the alleged default cannot reasonably be
corrected within such ten (10) day period, the party allegedly in default
will have up to an additional twenty (20) days to correct the default so
long as that party uses all reasonable efforts to correct the default as
soon as reasonably possible during that twenty (20) day period.
13.2 Bankruptcy, Insolvency
Either party may be declared in default of this Agreement upon written
notice thereof if it files for bankruptcy or has a petition filed against
it which has not been dismissed within ninety (90) days, or becomes
insolvent, or if any substantial part of such party's property becomes
subject to any levy, seizure, assignment, application of sale for or by any
creditor or governmental agency, and in any such event, the non-defaulting
party may also declare all amounts due, and to become due, immediately due
and payable.
13.3 Termination for Default
Should either party be declared in default and that default not be timely
corrected, the party not in default, at its option, may, upon written
notice thereof after expiration of the applicable time period in Section
13.1 above, terminate this Agreement and declare all amounts immediately
due and payable. The remedies contained in this paragraph are cumulative
and are in addition to all other rights and remedies available under this
Agreement or at law or in equity.
14 Software Escrow
OSS agrees to keep and maintain in escrow pursuant to an escrow agreement
attached hereto as Schedule G with an escrow agent acceptable to CO-OP current
executed copies of an Edify License Transfer Agreement (an unexecuted copy of
which is attached hereto as Schedule H) and the EBS Application Software
together with all reasonably available documentation for said Software and
business processes employed in providing the Online Banking Service. The escrow
agreement will authorize and obligate the escrow agent to release the EBS
Application Software and documentation to CO-OP Network upon receipt of a letter
of request from CO-OP Network. CO-OP agrees that it will only execute and
deliver a letter of request to the escrow agent if it is able to represent
therein that OSS is in default under this Agreement and such default has not
been timely cured pursuant to this Agreement.
14.1 Edify License Transfer
OSS will maintain with the escrow agent a current executed Edify License
Transfer Agreement. This agreement will effect a transfer from OSS to CO-OP
Network of the Edify Electronic Banking System software and service bureau
licenses obtained by OSS and in use for the Online Banking Services
pursuant to this Agreement. The Transfer Agreement will include provisions
for CO-OP Network to pay OSS the
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then remaining value of the Edify licenses, calculated using a straight-
line 5-year amortization schedule applied to the actual purchase prices and
dates of original acquisition by OSS from Edify.
14.2 EBS Application Software
OSS will provide the escrow agent with a copy of the EBS Application
Software and a license for COOP Network to use that software to provide
Online Banking Services to CO-OP Network member credit unions. EBS
Application Software is that software developed and implemented by OSS for
use in support of the Online Banking Services delivered to CO-OP Network
under this Agreement. This software includes the configuration parameters
needed to operate the CO-OP Network EBS system, the application code needed
to execute the CO-OP Network EBS system (including EBS application code for
the Deluxe and Bill Pay Provider interfaces), the CO-OP Network EBS
database schemas, and the supporting HTML and active server page scripts,
and applicable operating manuals. OSS agrees to provide the escrow agent
copies of this Application Software on no less than a quarterly basis
throughout the term of this Agreement, and also when major upgrades occur.
15 Insurance, Indemnity
Each party will maintain adequate insurance protection covering its respective
activities hereunder, including coverage for statutory workers' compensation,
comprehensive general liability for bodily injury and property damage, as well
as adequate coverage for vehicles. Each party hereto waives any claim against
the other to the extent it is reimbursed by its own insurance carrier. To the
extent a party is not reimbursed by its own insurance carrier, each party will
indemnify, defend and hold the other harmless from all claims, liability,
settlements, costs and expenses, including reasonable attorneys' fees, for loss
or damage to the extent and in the proportion resulting from the acts or
omissions of its own officers, agents, employees or representatives. Each party
does waive as against the other party to this Agreement all rights of
subrogation it or those claiming through it might have.
16 Covenants, Representations, Warranties and Limitation on Liability
The parties acknowledge that the following provisions reflect a fair allocation
of risk:
16.1 Warranties
OSS warrants, to the extent warranted by Edify to OSS, that (i) the use of
the EBS for the Online Banking Services rendered under this Agreement will
not infringe any patents or copyrights under United States law and (ii) the
EBS is "Year 2000 Compliant." "Year 2000 Compliant" means (to the extent
that other information technology, used in combination with the EBS,
properly exchanges date/time data with the EBS) the EBS as provided by
Edify will accurately process date/time data from, into and between the
twentieth and twenty-first centuries, and the years 1999 and 2000 in
accordance with the Edify-supplied documentation. OSS warrants that it will
exercise reasonable care in the performance of its obligations under this
Agreement. OSS makes no other warranties, express or implied, including
without limitation, any warranty of merchantability or fitness for a
particular purpose with respect to the services provided hereunder. OSS
agrees to provide to CO-OP timely and substantive responses to any
inquiries submitted by CO-OP concerning the status of the Online Banking
System in relation to year 2000 compliance. If such responses will require
OSS to incur costs outside the normal course of business, CO-OP will
reimburse OSS for these costs.
16.2 Limitation of Liability
OSS's MAXIMUM AGGREGATE LIABILITY FOR DAMAGES TO CO-OP NETWORK SHALL BE
LIMITED TO ACTUAL, DIRECT AND OUT-OF-POCKET MONEY DAMAGES SUFFERED OR
INCURRED BY CO-OP NETWORK IN AN AMOUNT NOT TO EXCEED THE AMOUNT OF THE FEES
PAID BY CO-OP NETWORK TO OSS FOR THE THREE CALENDAR MONTHS IMMEDIATELY
PRECEDING THE MONTH IN WHICH THE EVENT OCCURRED THAT GAVE
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RISE TO THE DAMAGES, OR $2,500,000, WHICHEVER IS LESS. THE PROVISIONS OF
THIS PARAGRAPH APPLY EVEN THOUGH THE LOSS OR DAMAGE, IRRESPECTIVE OF CAUSE
OR ORIGIN, RESULTS, DIRECTLY OR INDIRECTLY, EITHER FROM PERFORMANCE OR
NONPERFORMANCE OF OBLIGATIONS IMPOSED BY THIS AGREEMENT.
16.3 Limitation on Certain Kinds of Damages and Third Party Actions
IN NO EVENT WILL OSS BE RESPONSIBLE FOR (A) PUNITIVE OR EXEMPLARY DAMAGES
OF ANY KIND, OR LOST REVENUES OR PROFITS, REGARDLESS OF WHETHER IT WAS
ADVISED, HAD REASON TO KNOW, OR IN FACT KNEW OF THE POSSIBILITY THEREOF; OR
(B) FOR ANY LOSS OR DAMAGE TO CO-OP NETWORK, DIRECT OR CONSEQUENTIAL,
ARISING OUT OF OR IN ANY WAY RELATED TO ACTS OR OMISSIONS OF THIRD PARTIES
INCLUDING, BUT NOT LIMITED TO, BILL PAYMENT SYSTEM PROVIDERS AND
TELECOMMUNICATION CARRIERS. NEITHER PARTY SHALL SEEK, OR OTHERWISE APPLY
FOR, ANY PUNITIVE OR EXEMPLARY DAMAGES.
16.4 Factors Beyond Control
OSS will not be in default under this Agreement or liable for any delay or
other failure of performance caused by factors beyond its reasonable
control, such as, but not limited to, strikes, insurrection, war, fire,
floods, earthquakes, lack of energy, acts of God, governmental acts or
regulation, power outages, telecommunications failures or delays, or acts
of third parties. Any right of termination or other remedy under this
Agreement shall be delayed during the occurrence of any event described in
this Section 16.4 so long as OSS continues to use reasonable efforts to
restore its ability to continue to comply with this Agreement. OSS will not
be in default under this Agreement if, after the date of this Agreement,
any law, regulation, or ordinance, whether federal, state, or local,
becomes effective that substantially prevents the ability of OSS to perform
services hereunder. In such event OSS will have the right to terminate this
Agreement upon one hundred eighty (180) days written notice to Client.
16.5 CO-OP Network Covenants
CO-OP Network covenants and agrees that it shall include in its customer
contracts covering the resale of Online Banking Service a provision
substantially as follows: "The CO-OP Network, its officers, directors,
employees, agents and suppliers shall have no liability for delay or
failure of performance in any manner whatsoever caused or contributed to by
factors beyond the reasonable control of such parties."
16.6 Authority, No Conflict
Each party represents that it has the full right, power and authority to
enter into this Agreement and to perform its obligations under this
Agreement. Each party acknowledges that this Agreement constitutes a legal,
valid and binding obligation on it enforceable against it in accordance
with the terms of this Agreement. Each party warrants that its entering
into and performing under this Agreement will not result in a breach nor
constitute a default under its certificate of incorporation or bylaws or
any agreement or instrument to which it is a party or by which it or its
assets are bound.
17 Disputes, Governing Law
17.1 Arbitration
Any controversy, claim or dispute between the parties hereto including but
not limited to those arising out of or relating to this Agreement or any
related agreements or instruments, including any claim based-on or arising
from an alleged tort, shall be determined by binding arbitration in
accordance with the Federal Arbitration Act (or if not applicable, the law
of Colorado). Judgment upon any arbitration award may be entered in any
court having jurisdiction. Any party to this Agreement may bring an action,
including a summary or expedited proceeding, to compel arbitration of any
controversy or claim to which this
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Agreement applies in any court having jurisdiction over such action.
Neither party will initiate an arbitration proceeding until the parties
have, during at least a thirty (30) day period, used reasonable efforts to
attempt to resolve any dispute or claim under this Agreement.
17.2 Venue
The arbitration shall be conducted in Denver, Colorado, if initiated by CO-
OP Network, and in Los Angeles County, California, if initiated by OSS. All
arbitration hearings will be commenced within ninety (90) days of the
demand for arbitration; further, the arbitrator shall only, upon a showing
of cause, be permitted to extend the commencement of such hearing for up to
an additional sixty (60) days.
17.3 Governing Law
This Agreement shall be construed and enforced in accordance with the laws
of the State of Colorado without regard to choice of law principles.
18 Audit and Inspection
Upon reasonable advance notice to OSS, CO-OP Network may at its expense during
business hours inspect and audit the records of OSS pertaining to the
calculation of fees payable under this Agreement. In addition, OSS will arrange
annually for a third party review of its systems, controls and operations, and
will make the results of that review available to CO-OP Network.
19 Notices
Service of all notices under this Agreement shall be in writing and sent by U.S.
Certified Mail, return receipt requested, postage paid, or by national overnight
delivery carrier such as FedEx, addressed to the party to be served notice at
the following address:
Online System Services, Inc.
1800 Glenarm Place, 8th Floor
Denver, Colorado 80202
(303) 296-9200
Attention: ____________________
The CO-OP Network
2350 South Garey Avenue
Pomona, California 91766
(800) 782-9042
Attention: ____________________
20 Trademarks, Publicity and Branding
OSS and CO-OP Network will not use each other's trademarks or service marks
without the other party's prior written consent, which will not be unreasonably
withheld. OSS and CO-OP Network may use each other's name, with consent, in
customer lists and will cooperate with each other with publicity and marketing
activities. CO-OP may "brand" the Online Banking Service provided by OSS by
using the "ACCESS ANYWHERE" brand or another brand of its determination.
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21 Continuing Obligations
CO-OP Network's and OSS's continuing obligations under this Agreement include,
without limitation, those relating to Confidential Information as set forth in
paragraph 8, those relating to limitation of liability as set forth in paragraph
16, those relating to indemnification as set forth in paragraph 15, and all
other obligations which expressly state that they survive. These continuing
obligations shall survive and continue in effect after the termination of this
Agreement.
22 General
22.1 Client acknowledges that it has not been induced to enter into this
Agreement by any representation or warranty not set forth in this
Agreement. This Agreement contains the entire agreement of the pates with
respect to its subject matter and supersedes all existing agreements and
all other oral, written or other communications between them concerning its
subject matter. This Agreement shall not be modified in any way unless it
is in written form and signed by both pates.
22.2 Neither party will assign this Agreement without the prior written
consent of the other party, such consent not to be unreasonably withheld.
No consent shall be required for the assignment of this Agreement by either
party in connection with a merger or sale of substantially all of the
assets of a party, provided that the affected party provides the other
party prompt notice of the transaction. This Agreement shall be binding on
OSS and CO-OP Network and their respective successors and assigns. Any
assignment in violation of this Section 22.2 shall be void.
22.3 If any provision of this Agreement (or any portion thereof) shall be
held to be invalid, illegal or unenforceable, the validity, legality or
enforceability of the remainder hereof, shall not in any way to be affected
or impaired thereby.
22.4 Waiver of any provision hereof in one instance shall not preclude
enforcement thereof on future occasions.
22.5 The headings in this Agreement are intended for convenience of
reference and shall not affect its interpretation.
22.6 The individuals executing this Agreement on behalf of OSS and Client
do each hereby represent and warrant that they are duly authorized by all
necessary action to execute this Agreement on behalf of their respective
principals.
22.7 This Agreement includes each of the Schedules referred to herein,
which are incorporated in this Agreement by reference.
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EXECUTED in multiple originals on the dates shown below.
THE CO-OP NETWORK ONLINE SYSTEM SERVICES
By: /s/ By: /s/
------------------------------- ---------------------------------
Name:_____________________________ Name:_______________________________
(please print) (please print)
Title:____________________________ Title:______________________________
Date:_____________________________ Date:_______________________________
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EXHIBIT 10.11
INTERNET/BUSINESS SITE DEVELOPMENT & HOST
AGREEMENT
This Agreement ("AGREEMENT") is entered into and effective this 12th day of
November, 1997 by and between RE/MAX International, Inc. ("RE/MAX"), a Colorado
corporation with its principal place of business soon to be relocated to 8390
East Crescent Parkway, Suite 600, Greenwood Village, CO 80111 and Online Systems
Services, Inc. ("OSS"), a Colorado corporation with its principal place of
business at 1800 Glenarm Place, Denver, CO 80202.
WHEREAS, RE/MAX is interested in creating for itself and providing to its
affiliates a private site on the World Wide Web ("WWW") for their use in
communicating with RE/MAX and other affiliates and benefiting from an array of
other service capabilities and is desirous of assuring that such site is always
competitive, if not state of the art, and regularly enhanced to take full
advantage of emerging technologies, such site is to be a password protected area
on the WWW using HTML documents, Active Server Pages, Databases, Forums, Chat
Rooms and other features, all combined to present a virtual RE/MAX community
which initially will be referred to as "RE/MAX Mainstreet," and such site will
include, among other functions, security, help desk, billing, and Email and will
be hosted and administered for RE/MAX; and
WHEREAS, OSS is a company with expertise in the design and development of
Internet web pages and their placement on the World Wide Web ("WWW"), a company
that desires to serve the needs of RE/MAX and is capable of developing from its
proprietary OSS FORUMS software and format a custom software product and a
unique, password protected web site on the WWW which meets the needs and
specifications of RE/MAX, is interested in hosting the web site and providing
the other ancillary services required by RE/MAX, and is willing to grant RE/MAX
an industry specific exclusive license respecting the desired customized version
of OS S's proprietary software products to be known herein as the R/M Customized
Software.
NOW THEREFORE, in consideration of the mutual covenants set forth herein,
the parties hereto agree as follows:
1. DEFINITIONS
For purposes of this AGREEMENT and their relationship, the following terms
shall have the meanings assigned to them.
a. "HOST SERVICES": That collection of services specified to be provided
by the entity acting as host of RE/MAX Mainstreet, including without
limitation, services such as security, help desk, billing, Email and
other specified ancillary services commonly or customarily performed
by a site host.
b. "DELIVERABLES": The components of the online services and capabilities
specified for subscribers to RE/MAX Mainstreet, including without
limitation, Host Services, HTML documents, Active Server Pages,
Databases, Forums, Message Conferences, Chat, a Moderated Library and
other services and capabilities specified in this AGREEMENT.
c. "EMBEDDED SOFTWARE": Commercially available, third party software such
as Microsoft SQL Server, Microsoft Internet Information Server,
Microsoft Commerce Server, Internet Explorer 4.0 Browser, VPOS, which
software is not owned by OSS, but is or will be used by OSS in its
solutions to RE/MAX's business web site objectives.
d. "DEVELOPED SOFTWARE": Software developed and owned exclusively by OSS,
including without limitation, that software developed using ASP
Technology for highly flexible, database-driven WWW web sites and that
software developed by OSS to enhance or supplement the OSS FORUMS
Software and/or compliment or integrate the Embedded Software in the
creation of the R/M Customized Software.
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e. "`OSS FORUMS' SOFTWARE": An integrated, creatively interfaced
combination of Developed Software and Embedded Software which serves
as OSS's basic suite of virtual community products. The operational
software package from which OSS's response to RE/MAX's RFP was
developed.
f. "R/M CUSTOMIZED SOFTWARE": "OSS FORUMS Software as customized,
enhanced and modified by Developed Software and Embedded Software to
meet the objectives of RE/MAX for "RE/MAX Mainstreet" and which, when
properly interfaced, supported, and integrated, will provide the
Deliverables specified by RE/MAX for "RE/MAX Mainstreet."
g. "RE/MAX MAINSTREET": The RE/MAX highly flexible, functional, scalable,
portable, easy-to-use, database driven business, virtual community web
site which utilizes the R/M Customized Software and which satisfies
all criteria and specifications identified in the RE/MAX RFP and
related meetings between RE/MAX and OSS and contemplated by this
AGREEMENT.
h. "RESIDUAL INFORMATION": Information in non-tangible form, which may be
retained by persons within OSS's organization who have participated in
the development and delivery of the R/M Customized Software anchor the
RE/MAX Mainstreet site.
i. "INDUSTRY EXCLUSIVE LICENSE": An exclusive license within the real
estate industry, for the term of this license and any renewals
thereof, to use the OSS FORUMS Software and the Developed Software in
the bundled product comprising the R/M Customized Software and to use
exclusively the un-bundled customized Developed Software components of
the R/M Customized Software. Under the exclusivity terms, OSS agrees
not to resell or replicate the R/M Customized Software, the bundled
package comprising the R/M Customized Software
page 3 missing
consistent with the specifications set forth in Exhibit A thru F
attached.
f. LINKING AND BRIDGING CAPABILITIES: System flexibility for creating
data entry, transfer, and retrieval and communication links to third
party service and content providers, e.g., CyberHomes, on the WWW
consistent with the specifications set forth in Exhibit E attached.
g. ADMINISTRATIVE CAPABILITIES: An OSS FORUMS administrator interface
which provides for administering and reporting on the subscriber
accounts, structure of the conferences, chat rooms, libraries, content
(text), and other components of RE/MAX Mainstreet and otherwise
consistent with Exhibit F attached. In addition, RE/MAX shall have
file transfer protocol access for upgrading graphics and layout
content for the RE/MAX Mainstreet site.
h. TELEPHONE HELP DESK: On call subscriber help desk and support
capabilities which will provide subscribers the ability to speak to a
technical support agent within (3) minutes of receiving the call.
Support will be available from 6:00 a.m. until 12 midnight, Mountain
time, (7) days a week. In addition, technical support will be
accessible via Email with a response within 24 hours and otherwise
consistent with Exhibit G attached.
i. BILLING CAPABILITIES: Each subscriber will be billed for the
subscription fee on a monthly basis after initial Conference and Email
setup is completed and authorization is performed by RE/MAX. The
subscriber will be billed via an automatic debit to a registered
credit card and OSS is responsible for collecting the monthly fee.
Billing disputes and questions can be answered via the on-line
Telephone Help Desk provided by OSS.
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3. BENCH MARKS TOWARD COMPLETION
To assure regular progress toward the timely completion of all required
software customization and ultimately, the timely availability of RE/MAX
Mainstreet, OSS and RE/MAX shall meet the following "bench marks":
a. On or before November 30, 1997, RE/MAX shall provide to OSS the
initial requirements for all front page and related graphic and
textural content. All text to appear shall be provided in a word
processing format (Microsoft WORD, WordPerfect or ASCII test) via
computer disk or via Email. Art work, logos, and photos to be used in
the site shall be provided in the form of digital files.
b. On or before December 15, 1997, OSS shall demonstrate online the
RE/MAX Mainstreet site, accessible via the agreed upon URL address
"_______________ _______________." Such demonstration need not include
all graphics and/or text content provided or to be provided by RE/MAX,
but such demonstration shall include successful functional performance
of not less than eighty percent (80%) of the OSS FORUMS Software
features checked as "Yes" in OSS's proposal in response to RE/MAX's
RFP.
c. On or before December 19, 1997, RE/MAX shall provide to OSS the final
rendition of all front page and related graphic and textural content
in the formats specified in sub-paragraph "a." above. The parties
hereto agree that RE/MAX is, and will remain, the exclusive owner of
all rights in the graphic and textural material, including but not
limited to its marks, provided by RE/MAX, and the benefit of all use
thereof in RE/MAX Mainstreet shall enure exclusively to RE/MAX.
d. On or before January 10, 1998, OSS shall demonstrate online the RE/MAX
Mainstreet site, including 100% of the OSS FORUMS features checked as
"Yes" in OSS's proposal in response to RE/MAX's RFP and not less than
90% of the additional features to be provided by the R/M Customized
Software together with 100% of the final renditions of all graphic and
textural content provided by RE/MAX.
e. On or before January 15, 1998, OSS shall demonstrate online 100% of
all Host Services and 100% of the features to be provided by the R/M
Customized Software, all in a Pilot program format. Beta testing will
begin.
f. All Deliverables under this AGREEMENT shall be demonstrated by OSS for
acceptance by RE/MAX on or before March 15, 1998 at which time Beta
testing will end and RE/MAX Mainstreet will "go live".
OSS's ability to meet its bench marks is dependent upon receiving certain
information from RE/MAX as defined in the bench marks in Paragraphs 3(a)
and 3(c) above. Should RE/MAX fail to meet either or both of those bench
marks, OSS will make a reasonable effort to adhere to its bench marks,
however, a new bench mark schedule which reflects a day for a day slip to
all bench marks will be developed by OSS and become the effective schedule
of bench marks for purposes of this AGREEMENT. It is acknowledged by both
parties that any failure of either party to meet any then effective bench
mark, however justified the reason may be, will necessarily cause the other
party concern and reaction, including the potential for embarrassment. To
compensate for such concern and to provide a proper incentive for not
missing any bench mark, the parties hereto agree that the final payment
shall be increased by $5,000 for each bench mark missed by RE/MAX through
no fault of OSS and decreased by $5,000 for each bench mark missed by OSS
through no fault of RE/MAX.
4. SOFTWARE LICENSE
On and subject to the terms and conditions set forth below in this
Paragraph 4, OSS hereby grants to RE/MAX a one site industry exclusive
license to use the R/M Customized Software, including all components of the
Developed Software, the Embedded Software and the OSS FORUMS Software that
are included in the R/M Customized Software by OSS.
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a. OSS TO ACQUIRE EMBEDDED SOFTWARE: To the extent Embedded Software is
used in the R/M Customized Software and/or to make RE/MAX Mainstreet
fully operational, OSS shall acquire on behalf of and in the name of
RE/MAX all Embedded Software and shall configure, interface, and/or
modify such Embedded Software and then modify, interface and/or
integrate the same with the Developed Software and the OSS FORUMS
Software to create a complete, fully operational duplicate of the R/M
Customized Software.
b. COPY OF R/M CUSTOMIZED SOFTWARE TO RE/MAX: OSS shall deliver to
RE/MAX, for safe keeping by RE/MAX, a fully operational duplicate of
the R/M Customized Software hereby licensed once it has been
completed, Beta tested, and found to functionally and effectively
provide to subscribers all Deliverables contemplated by this
AGREEMENT.
c. LICENSE COVERS FUTURE ENHANCEMENTS, ETC.: The license right conferred
by this Paragraph 4 shall extend for the initial term and all renewal
terms of this license and shall be deemed to cover all upgrades,
enhancements, modifications, revisions, additions, substitutions, and
replacements of the software created for and/or utilized in the R/M
Customized Software.
d. TERM AND RENEWAL OF LICENSE: This license shall extend for an initial
term of three (3) years and shall automatically renew for consecutive
like terms unless RE/MAX gives notice of its intent not to renew in
writing at least thirty (30) days prior to the expiration of the then
existing term of license.
e. LICENSE SURVIVES THIS AGREEMENT/OSS: This license shall survive
termination of this AGREEMENT and shall be deemed to be separate and
apart from the development, hosting, and other services contemplated
by this AGREEMENT. This license shall survive OSS and be binding on
its successors, assigns, creditors, parent and/or subsidiary
corporations, and any other person or entity coming to have knowledge
of this license. This license shall also survive every transfer of the
Host Service responsibility to any entity other than OSS, provided,
however, the monthly fees shall be paid to the entity identified in
those fee provisions set forth below in this Paragraph 4.
f. SOFTWARE SUPPORT BY OSS: OSS shall fully support the software licensed
for the term of this license and any renewals hereof at the monthly
software maintenance fee specified in sub-paragraph I of this
Paragraph 4, provided, however, that in the event of a transfer of the
Host Service responsibility to an entity other than OSS, which entity
is willing and capable to take over such software support, OSS shall
have the option to continue to provide software support at the cost
specified for the monthly software maintenance fee in sub-paragraph 1
of this Paragraph 4 or, in the alternative, to forego such monthly
software maintenance fee and provide RE/MAX with full documentation
and source codes so that RE/MAX can contract with such third party
for, or provide its own, software support.
g. ESCROW OF DOCUMENTATION AND SOURCE CODES: To assure continuity of
RE/MAX Main-street irrespective of events which may interfere with or
preclude OS S's performance under this license or this AGREEMENT, OSS
agrees to place with a mutually agreeable escrow agent a regularly
updated copy of the R/M Customized Software together with all the
source codes and documentation for that and all software included in
R/M Customized Software, provided, however, the escrow instructions
shall authorize the release of the source codes and documentation to
RE/MAX only in the event RE/MAX presents to the escrow agent
documentation showing the discontinuation of OSS's business operations
or the bankruptcy of OSS or that OSS has failed to maintain the OSS
FORUMS Software and/or any Developed Software built into the R/M
Customized Software. The costs of such escrow shall be borne entirely
by RE/MAX.
h. CONFIDENTIALITY MAINTAINED: In no event shall RE/MAX have the right to
sell, disseminate, or disclose in any way such source codes or
documentation other than is necessary for a contractor to provide
software support/enhancement or to use the source codes or
documentation for any
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purpose other than the maintenance and/or enhancement of the R/M
Customized Software or RE/MAX Mainstreet business site.
i. SALE/TRANSFER OF SOFTWARE BY OSS: Any sale, assignment, or transfer by
OSS of any software or software rights licensed hereunder shall be
made expressly subject to this license and the support obligations
specified herein, provided, however, that in no event shall OSS sell,
assign, or transfer any rights in such software, or the right to
collect monthly fees under this AGREEMENT, to any competitor of RE/MAX
or the parent, subsidiary, agent, or representative of any competitor
of RE/MAX. This provision shall not be construed to preclude or limit
in any way OSS's right to license its Developed Software or its OSS
FORUMS Software or any derivative versions thereof
j. NOT ASSIGNABLE: The license conferred upon RE/MAX by this Paragraph 4
shall not be assignable by RE/MAX without the prior written consent of
OSS, provided, however, that in the event of the reorganization of
RE/MAX such that its satellite communication and Internet
communications are grouped together under a new or existing corporate
affiliate of RE/MAX, RE/MAX shall have the right to assign this
license to such corporate affiliate.
k. ONE TIME PAID UP LICENSE FEE: The one time advance paid up license
fee, i.e., $_____ ($_____ for the license to use the VPOS software and
$_____ for the license to use those components of the OSS FORUMS
Software built into the R/M Customized Software). Such license fee
shall be paid initially as part of the Contract Price specified in
Paragraph 10 hereof and broken out in Paragraph 11 hereof and upon
each renewal for a three year term of this license. Such license fee
shall be deemed to include the cost of all upgrades and enhancements
to the VPOS software and to those components of the OSS FORUMS
Software built into the R/M Customized Software.
l. MONTHLY SOFTWARE MAINTENANCE FEE: The monthly maintenance fee, i.e.,
$________, shall compensate for the continuing maintenance of those
components of the Developed Software and/or the OSS FORUMS Software
built into the R/M Customized Software and for regular upgrades,
enhancements, modifications, and expansions for keeping the site
competitive and state of the art. Such monthly maintenance fee to be
paid to OSS or the entity providing maintenance, upgrade, and
enhancement services for such components of the Developed Software and
OSS FORUMS Software.
m. TERMINATION OF LICENSE: RE/MAX shall have the right to terminate this
license for cause upon thirty (30) days prior written notice in the
event OSS ceases to exist, is acquired by or merges with any other
entity that directly or indirectly competes with RE/MAX or its
affiliates, files bankruptcy or goes into receivership, or becomes
insolvent, fails to meet the minimum performance measures established
or fails to maintain the R/M Customized Software as required herein,
or breaches this AGREEMENT and fails to cure such breach within thirty
(30) days of its receipt of written notice of such breach and demand
for cure.
5. SOFTWARE UPGRADES/ENHANCEMENTS
Consistent with Microsoft's commitment to product enhancements and
upgrades, OSS hereby agrees that included within the software license set
forth above in Paragraph 4 hereof is a commitment for the term of the
license to meet every six (6) months with RE/MAX to discuss possible
relevant upgrades of possible interest for inclusion in the R/M Customized
Software and RE/MAX Mainstreet. As to any enhancements of interest to
RE/MAX, OSS will endeavor to develop a proposal for the inclusion of the
desired upgrades in the R/M Customized Software and RE/MAX Mainstreet.
Enhancements and/or upgrades made by OSS in its OSS FORUMS Software or any
subsequently created custom version thereof shall be made available for
inclusion in the R/M Customized Software and RE/MAX Mainstreet at the
request of and at no expense to RE/MAX. Upgrades and enhancements requested
by RE/MAX that are not otherwise already adapted by OSS to the OSS FORUMS
Software shall be made the subject of a proposal at fair market value to
Re/MAX for inclusion in the R/M Customized Software and such proposal shall
include plans and terms for maintaining such upgrades and enhancements.
OSS's modifications to software shall be accomplished with a minimum of
disruption in Host Services and RE/MAX Mainstreet's online availability.
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Additionally, in the event RE/MAX becomes aware of any software, feature,
enhancement, or of new technology that RE/MAX believes may be advantageous
for RE/MAX Mainstreet. RE/MAX will notify OSS and OSS will endeavor to
develop a proposal at fair market value to RE/MAX for the inclusion of the
same in RE/MAX Mainstreet and such proposal shall include plans and terms
for maintaining such software, feature enhancements or new technology.
RE/MAX shall have the right to seek directly other bids from third parties
and to present the same to OSS. If OSS is unwilling or unable to include
the feature of interest at a cost below or not more than ten percent (10%)
above the best competing proposal, RE/MAX shall have the right to have such
feature built into the R/M Customized Software and RE/MAX Mainstreet by a
third party selected by RE/MAX. OSS agrees to cooperate with such third
party or, in the alternative, to provide such access to its documentation
and source codes as may be necessary to enable such third party to include
such feature in the R/M Customized Software and RE/MAX Mainstreet. The
function of maintaining the R/M Customized Software as modified shall still
be the responsibility of OSS or the assigned party receiving the monthly
maintenance fee and the costs thereof shall still be deemed to be included
in the monthly maintenance fee except where additional costs are approved
as part of the proposal approval process in which case RE/MAX shall bear
such additional costs.
6. LINKS WITH THIRD PARTY SERVICE & CONTEST PROVIDERS
OSS hereby agrees that RE/MAX shall have the right to develop or require
OSS to accommodate data insertion and retrieval links and communication
links on the WWW with third party providers of services and/or content. For
example, RE/MAX shall have the right at any time during the term of this
AGREEMENT, to develop itself, or require OSS to develop, a link between
RE/MAX Mainstreet and the CyberHomes web she, through which link
subscribers to RE/MAX Mainstreet could insert listing information, carry
out searches based upon property characteristics, and retrieve property
listing information, all without leaving the RE/MAX Mainstreet web site.
Should there be costs to OSS involved in satisfying RE/MAX's request for
any such link, it is understood that such costs shall be paid or reimbursed
by RE/MAX, but only to the extent they are reasonable and that such costs
are consistent with estimates, quotes, or proposals submitted to RE/MAX by
OSS in advance. It is further understood that if there is a subscriber fee
or access fee associated with access to any such third party provider,
RE/MAX shall have the right to charge back or recover such fee from the
subscribers actually using such link in the form of a special user fee or
to increase the monthly subscriber fee to reasonably reflect the value of
the link or both. Furthermore, RE/MAX shall have the right to divide any
additional income generated from any such link with the third party
provider, and do so with no duty to account or disclose to OSS the details
of its relationship with such third party provider, and without sharing
with OSS any portion of the additional income.
7. HARDWARE REQUIRED FOR RE/MAX MAINSTREET
RE/MAX hereby agrees to pay upon receipt of the vendor's invoice, as part
of the contract price broken out in Paragraph 11 hereof, the sum of $______
for the acquisition by OSS of the site server (Compaq Proliant 2500R, 128Mb
RAM, 8.6Gb Raid 5 Disk Storage and Tape), the Email Server (Compaq Proliant
850R, 64Mb RAM, 4Gb Disk Storage), and Embedded Software needed for the
development of the R/M Customized Software, development of the Pilot for
RE/MAX Mainstreet, and, ultimately, for use in providing the Deliverable
required by this AGREEMENT at the web site created. It is agreed and
understood that the computer equipment purchased with such $_____ shall be
and remain the property of RE/MAX. Additional hardware required due to the
increase in the subscriber volume over time during the term of this
AGREEMENT shall be purchased by OSS and be and remain the property of OSS,
provided, however, that should this AGREEMENT be terminated or not renewed,
or should the Host Service function be transferred to an entity other than
OSS, RE/MAX shall have the right to acquire such additional computer
hardware from OSS at the then used, depreciated value. In the event that
additional hardware is needed as a result of a change in the requirements
as specified by RE/MAX, RE/MAX agrees to pay for such additional hardware
and such hardware shall be and remain the property of RE/MAX. RE/MAX shall
have the right to direct the shipment of any hardware owned initially or
acquired by it to its headquarters or to the business location of any third
party that may be selected to assume responsibility for providing the Host
Services required for RE/MAX Mainstreet.
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8. HOST SERVICES FOR RE/MAX MAINSTREET
OSS hereby agrees to host RE/MAX Mainstreet and to provide all services
contemplated by the role of community web site host and all services of an
administrative or ancillary nature, including without limitation, security,
help desk, subscriber billing, and billing administration, online credit
card validation and/or charge authorizations, monthly, or, if required,
more frequent, ongoing, maintenance of the foregoing functions as well as
the basic functions of the RE/MAX Mainstreet web site, all consistent with
the specifications set forth in Exhibit H attached hereto.
9. TRANSFER OF HOST SERVICES
RE/MAX reserves the right to move RE/MAX Mainstreet to a new hosting entity
and to use its copy of the R/M Customized Software if necessary to continue
RE/MAX Mainstreet in any of the following circumstances:
a. A failure on the part of OSS for any reason to fulfill its Host
Services obligations under this AGREEMENT;
b. Any failure or disruption in the business of OSS due to any bankruptcy
filing by or on behalf of OSS or any other event which threatens the
ability of OSS to continue to perform its obligations under this
AGREEMENT;
c. Any change in ownership of OSS or any transfer of control of OSS to
any entity or organization which competes directly or indirectly with
RE/MAX or its affiliates;
e. The disruption of access by subscribers to RE/MAX Mainstreet which
persists for more than three working days or any repeated disruptions
of duration greater than four (4) hours in such access, any three (3)
of which occur within any sixty (60) day period; and
f. Reports to RE/MAX from 1.0% of subscribers or fifty (50) subscribers,
which ever is greater, to the effect they cannot get online or they
have difficulty getting access to RE/MAX Mainstreet, that chat rooms
are not available, Email is not functioning, security has been
breached, access to the Help Desk at RE/MAX Mainstreet is difficult,
or any other similar type of problem which continues to be reported to
RE/MAX thirty (30) days after OSS has been notified in writing of such
problem.
The transfer of the Host Services function to a new entity shall not
relieve OSS of its other obligations under this AGREEMENT or the software
license set forth herein, nor shall it affect the monthly software
maintenance fee to OSS so long as OSS continues to provide software
support, enhancements, and upgrades as required by this AGREEMENT. In the
event, however, that OSS is placed in receivership under any bankruptcy
order, the obligations of RE/MAX to continue to pay a monthly maintenance
fee shall be modified automatically to allow RE/MAX to properly compensate
the third party who will be substituting for OSS in the providing of
software support.
In the event of a transfer of the Host Services function to a new entity,
all monthly subscription fees paid following the effective date of such a
transfer shall be paid to the new entity assuming responsibility for such
Host Services, and no portion of any such monthly subscription fees shall
be due OSS. OSS hereby agrees to cooperate in the orderly transfer of Host
Services to any third party selected by RE/MAX toward the goal of
minimizing, if not avoiding entirely, disruptions in RE/MAX Mainstreet
accessibility and performance.
10. CONTRACT PRICE
Pricing for development of the R/M Customized Software and the RE/MAX
Mainstreet site together with Hosting, Maintenance, Help Desk, and the
software license set forth herein is specified in Exhibit I attached
hereto, provided, however, that the final payment (and thus the actual
contract price) may be
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adjusted up or down to reflect the amounts to be added or deducted for
failures to meet the bench marks, all as set forth in Paragraph 3 hereof
11. PAYMENT TERMS
Payment terms for hardware costs and the development of the R/M Customized
Software and the RE/MAX Mainstreet site, i.e., $_________ are as follows:
$ upon execution of this AGREEMENT
$ for computer hardware within ten (10) days of the date of receipt
of the vendor's invoice and after execution of this AGREEMENT.
$ one time per term paid up license fee for use of the VPOS
Software, and
$ one time per term paid up license fee for use of the components
of the OSS FORUMS Software built into the R/M Customized
Software, both such paid up license fees payable upon execution
of this AGREEMENT.
Balance As adjusted for any failure by either party to meet any of its
bench marks, upon acceptance by RE/MAX of all Deliverables
specified under this AGREEMENT.
OSS shall be paid for Host Services via the Internet based, credit card
payment system, which is provided within the R/M Customized Software. Each
such subscriber payment will be made in the first month that Host Services
are provided and monthly thereafter. Monthly subscription fee shall be
collected by OSS as part of its Host Services, provided, however, that if
in the aggregate the monthly subscription fees due for any month, i.e.,
$7.00 x #of subscribers, is less than $10,500, OSS shall invoice RE/MAX for
the difference, minus any rebate that may be due to RE/MAX, and such
difference shall be paid by RE/MAX to OSS within fifteen (15) days of the
end of the month in which such difference was invoiced. If the aggregate of
subscription fees due OSS is greater than $10,500 and if RE/MAX is due a
rebate under the schedule set forth in Exhibit I attached hereto, such
rebate shall be paid by OSS to RE/MAX within fifteen (15) days of the end
of the month for which such subscription fees were due, i.e., RE/MAX's
obligation to subsidize monthly subscription fees or enjoy a rebate shall
be determined by subscription fee collections. In any case, whether payment
is due from or to RE/MAX, OSS agrees to provide with its invoice or
remittance a monthly report, listing the names and OSS account numbers for
all subscribers, indicating which are current and which are delinquent,
with totals supporting the calculation of amounts due. RE/MAX reserves the
right to adjust the format of this report from time-to-time as it may
reasonably need such information for other programs, marketing efforts,
etc.
12. SUBSCRIBERS & SUBSCRIBER FEES
RE/MAX reserves the right to determine who is and who is not entitled to
access to RE/MAX Mainstreet and to modify and update the listings of those
in either or both categories. Initially, it is the intent of RE/MAX to
grant access privilege and subscriber rights to all individuals in good
standing with RE/MAX, who are affiliated with RE/MAX's independently owned
and operated offices as sales associates, broker associates, broker owners,
and office managers in addition to the directors, officers, and employees
of RE/MAX itself and the RE/MAX Regional Operations. The privilege of
access is linked to continuing affiliation with the RE/MAX organization,
which in turn is linked annually to the prompt payment of dues to RE/MAX.
OSS agrees to honor the directions of RE/MAX as to those entitled to
access, and further agrees to terminate access for anyone who ceases for
any reason to be affiliated with a RE/MAX office and/or fails to pay when
due his or her annual dues to RE/MAX. Initially, the access of such persons
to RE/MAX Mainstreet shall be suspended with a message posted to the
individual that his or her access is "denied" because records indicate they
are no longer in good standing with RE/MAX International, Inc. If good
standing is reestablished, their subscription shall be reinstated and
access restored without any penalty or re-connection fee. If their good
standing is not restored, OSS shall cancel their subscriber AGREEMENT,
their access password, and effectuate a permanent "Lock Out" from access to
the web site.
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RE/MAX will periodically provide OSS with a computer readable list of
individuals who have ceased to be affiliates in good standing of RE/MAX so
that OSS can implement this provision.
The monthly subscriber fee for access to RE/MAX Mainstreet shall be
determined exclusively by RE/MAX, and RE/MAX shall have the right during
the initial and any renewal term of this AGREEMENT to add to or change the
monthly subscriber fee. RE/MAX agrees to publish on RE/MAX Mainstreet a
notice of monthly subscriber fee changes at least sixty (60) days before
the effective date of such change. Initially, the monthly subscriber fee
shall be $___ and such fees shall be divided between RE/MAX and OSS in
accordance with the gradient schedule set forth in Exhibit I attached
hereto. If and as subscriber fees are added to or changed, the additional
revenues generated shall go entirely to RE/MAX for reimbursement of
development costs of RE/MAX Mainstreet, reimbursement of the monthly
license fee, and to provide RE/MAX with a royalty for use of its name and
marks in connection with the RE/MAX Mainstreet web site. OSS agrees that
access to RE/MAX Mainstreet by the directors, officers, and employees of
RE/MAX and of the headquarters staff of RE/MAX Regional Operations shall be
by free subscriber agreements, i.e., a regular subscriber agreement will be
required, an access name and password will be assigned, but no monthly
subscriber fee will be charged or accepted by OSS. To facilitate
implementation of this subscriber fee waiver provision, RE/MAX will provide
OSS with a directory and/or periodically updated list of the individuals
who will be entitled to this status.
13. OWNERSHIP OF OSS INTELLECTUAL PROPERTY
Except for the rights under the license herein granted to RE/MAX and
otherwise specifically addressed in this AGREEMENT, it is hereby
acknowledged and agreed to by OSS and RE/MAX that all rights of any nature
whatsoever in and to the Developed Software, the OSS FORUMS Software and
the R/M Customized Software, excluding in all cases Embedded Software, are
retained by OSS.
14. OWNERSHIP OF OSS PROPRIETARY TECHNOLOGY
OSS shall own all worldwide rights, title, and interest in and to the
Developed Software, including copyright right, and also in and to any
software tools, specifications, ideas, concepts, know-how, processes, and
techniques used by OSS in performing the services covered by this AGREEMENT
(collectively "Proprietary Technology"), including all Intellectual
Property rights therein. Nothing in this AGREEMENT or otherwise shall be
deemed to prohibit or limit in any way OSS's right to use the Proprietary
Technology (as defined herein) or Residual Information, in whole or in
part, to develop and market any software that is the same in any or all
respects as the Developed Software, or to develop other software products
or applications for OSS customers, provided, however, that OSS agrees not
to sell, resell or license to any third party the R/M Customized Software,
or any similarly customized version of its OSS FORUMS Software, in its
entirety or any of the customized components created with funds paid by
RE/MAX under this AGREEMENT without the written consent of and reasonable
compensation to RE/MAX. The reasonable compensation demanded by RE/MAX for
its consent shall not exceed the Contract-Price set forth in Paragraph 10
hereof and RE/MAX shall not unreasonably withhold its consent for any
reason, provided, however, that RE/MAX shall not be deemed to be
unreasonable for withholding its consent absolutely to any proposed sale or
license of such software to any franchising or real estate competitor of
RE/MAX or to any entity which in turn is likely to make the same available
to any such competitor. For purposes of this AGREEMENT, the term
"competitor" shall be deemed to include the parent, owner, subsidiary,
trustee or controlling entity over any direct franchising or real estate
competitor of RE/MAX.
15. RE/MAX ACKNOWLEDGMENT
RE/MAX hereby acknowledges that the Documentation and Source Codes for the
R/M Customized Software may contain trade secrets and confidential
information of OSS and that providing the R/M Customized Software, in whole
or in part, to any unauthorized third parties would be harmful to the
interests of OSS. RE/MAX agrees, therefore, to use reasonable efforts to
supervise, manage and control the R/M Customized Software, and to safeguard
all copies of the same licensed under this AGREEMENT using the same degree
of care that RE/MAX uses to safeguard its own proprietary materials. RE/MAX
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agrees that, except to the extent expressly authorized in this AGREEMENT or
the license contained herein, it will not sub-license, re-sell, or
otherwise authorize any other party to possess or obtain the R/M Customized
Software.
16. RE/MAX OWNERSHIP OF DATA, CONTENT & SUBSCRIBER INFORMATION
RE/MAX shall own all worldwide rights, title, and interest in and to its
name and logos and all other components of graphical and textural content
used in, or in connection with, the promotion of RE/MAX Mainstreet and
RE/MAX shall own all rights, title, and interest in the name "RE/MAX
Mainstreet" and in the URL address selected for the site. All use of the
RE/MAX marks in connection with the web site shall enure exclusively to the
benefit of RE/MAX. RE/MAX shall also own exclusively all data entered by
subscribers and/or by RE/MAX or third parties and OSS shall periodically
create back-up tapes of such data and provide a copy of each such back-up
tape to RE/MAX for its safekeeping. RE/MAX shall also own exclusively all
subscriber data, including without limitation, subscriber name, address,
telephone number, FAX number, credit card numbers and expiration dates, and
all other data collected or developed in reference to subscribers
individually or collectively as a subscriber base. In no event shall OSS
disclose, sell, market, use, distribute, or provide to any third party or
governmental agency any form of name, address, phone number, user name,
Email address or other listing, either physically or electronically, or
provide any form of online solicitation rights or opportunities to any
third party or governmental agency. OSS itself shall not solicit or
communicate directly with the subscriber base for RE/MAX Mainstreet, except
with the prior written consent of RE/MAX to the subject matter and content
of such communication, and such prior written authority shall be required
of RE/MAX for each proposed communication. the overall objective being to
minimize the volume of unwanted solicitations over RE/MAX Mainstreet. OSS
and RE/MAX shall develop a guideline for responding to requests by
subscribers, for global Email messages to all or large groupings of
subscribers, and OSS shall follow such guideline. OSS shall periodically
provide RE/MAX with a back-up tape setting forth all subscriber information
on file for safekeeping by RE/MAX.
17. OSS ACKNOWLEDGMENT
OSS hereby acknowledges that RE/MAX's venture into the area of WWW web site
development for its affiliates is a matter of trade secret competitive
business plans and strategy which, upon completion in confidence, will give
RE/MAX and its affiliates a competitive advantage over other entities and
organizations that compete directly or indirectly with RE/MAX or its
affiliates and that RE/MAX estimates that such competitive advantage will
extend for a period of at least eighteen (18) months. OSS further
acknowledges that the name "Mainstreet" for a real estate industry related
web site is unique to RE/MAX and that the database, subscriber information,
and content of RE/MAX Mainstreet may contain trade secrets, confidential
information, and/or highly sensitive data. OSS acknowledges and understands
that RE/MAX and/or its subscriber base will be irreparably damaged if such
information or its business plans to develop a WWW web site for its
affiliates were disclosed, sold, or otherwise distributed or made public.
OSS acknowledges that RE/MAX is the exclusive owner of such business plans
and such data, content, and information and OSS agrees not to disclose such
business plans or strategy or such data, content and information and not to
challenge the validity of any mark owned by RE/MAX, or RE/MAX claim to
ownership to the site name, "RE/MAX Mainstreet," or of the URL address for
the site. OSS agrees, therefore, to use its best efforts to protect and
secure such business plans and strategy and such data, content, and
subscriber information from third parties and to incorporate into the R/M
Customized Software such security measures as it deems reasonable and
appropriate to protect the RE/MAX Mainstreet web site from unauthorized
use, access, or invasion by third parties. OSS hereby agrees that the terms
of this AGREEMENT and any knowledge of RE/MAX's business plans and strategy
and its intentions, relationships, uses, designs, content, drawings,
partnerships or strategy concerning the application of the R/M Customized
Software and/or the OSS FORUMS Software and the Developed Software and the
terms of its REP leading to this AGREEMENT with OSS, third party products,
membership service goals or other information or technology are to remain
confidential and will not be disclosed to , discussed with or shared with
any third party for any reason whatsoever or in any way publicized. No
information shall be released or made public or disclosed by OSS regarding
this AGREEMENT or the purposes of the
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relationship created between OSS and RE/MAX until and unless RE/MAX
approves in advance and in writing the content and circulation thereof.
18. DESIGN CHANGES
Changes to the specifications for the R/M Customized Software or for the
RE/MAX Mainstreet site or Deliverables requested by RE/MAX may affect
pricing or completion schedules or both. Any requested design changes will
be priced on an individual basis, and the specifications and pricing for
such changes accepted by RE/MAX will be added to this AGREEMENT as an
addendum. Design changes not withstanding, all elements of this AGREEMENT,
including pricing, will remain in effect. The parties hereto agree that
RE/MAX shall have the exclusive right, without consultation with or notice
to OSS, at any time and from time-to-time to modify the structural,
graphical, and textural content and appearance of RE/MAX Mainstreet and/or
to change the name of the web site to something other than RE/MAX
Mainstreet. OSS agrees to provide RE/MAX with access codes and information
sufficient to enable RE/MAX to effectuate such changes via online
modifications, invisible to OSS or subscribers. Changes effectuated by
RE/MAX of the foregoing type shall not be deemed to be "Design Changes"
such as would concern OSS or result in any charges or proposals for change
by or from OSS.
19. COMPLETION SCHEDULE & DELAYS
The pricing under this AGREEMENT was developed in part based on certain
work flow assumptions consistent with the schedule in the OSS proposal in
response to RE/MAX's RFP and the bench marks set forth in Paragraph 3
hereof. OSS agrees to provide the necessary resources and to apply those
resources to the development of the RE/MAX Mainstreet site pursuant to the
Schedule agreed upon. In the event that the work flow at OSS is disrupted
for thirty (30) days or more due to delays caused by RE/MAX for any reason,
including the scheduled delivery of RE/MAX content, RE/MAX will be invoiced
for project restart charges of 10% of the total value of the web site
development portion of the contract. If, due to RE/MAX's delay in providing
its graphical or textural content, and as a result, the project's scheduled
completion date is extended beyond May 1, 1998, then the web site
development portion of the price will then become due and payable in full,
in advance of completion of the development and other OSS responsibilities
under this AGREEMENT.
20. LIMITATIONS ON LIABILITY
OSS makes no direct or implied guarantee regarding the response or business
which will be generated from the RE/MAX Mainstreet site nor will RE/MAX
attempt to hold OSS responsible for any economic or legal liabilities which
may result from the presence or distribution of the material contained in
the RE/MAX Mainstreet web site, provided, however, that OSS will work with
RE/MAX in developing guidelines for subscriber uses and message content,
and OSS, as Host Services provider, shall exercise its best efforts to
assure compliance by subscribers with such guidelines and terminate any
subscriber who refuses or fails repeatedly to honor such guidelines. To
this end, the parties hereto agree that the subscriber agreement shall
include both the obligation to honor guidelines established, and from time-
to-time amended, for RE/MAX Mainstreet. Such subscriber agreement will also
expressly recite the right to terminate RE/MAX Mainstreet access privileges
for failure to honor such guidelines.
Neither OSS nor anyone else who has been or will be involved in the
creation, production, or delivery of the RE/MAX Mainstreet web site shall
be liable for any direct, indirect, consequential or incidental damages
(including damages for loss of business profits, business interruption,
loss of business information and the like) arising out of the use or
inability to use RE/MAX Mainstreet even if OSS has been advised of the
possibility of such damages.
21. RE/MAX INDEMNIFICATION OF OSS
RE/MAX hereby acknowledges that OSS employees, agents, and officers have
assumed no liability or responsibility for the content generated by RE/MAX,
subscribers to RE/MAX Mainstreet or others and supplied to OSS for mounting
on OSS's servers for Password Protected access via the Internet and World
-11-
<PAGE>
Wide Web (WWW). RE/MAX agrees to indemnify, save, and hold harmless OSS and
its directors, officers, employees, and agents from and against any and all
claims arising out of RE/MAX's publication of content on RE/MAX Mainstreet
and to pay reasonable attorney fees incurred in the defense of any such
claim, provided, however, that RE/MAX's obligation hereunder for liability
and defense costs together shall be limited strictly by the amount for
which such claim could have been settled. This indemnification shall
include any and all claims of copyright infringement, slander, or libel,
but excludes any claim to the effect that the Developed Software, the R/M
Software or RE/MAX Mainstreet as such, infringe any copyrights or other
rights of third parties. This AGREEMENT does not create or imply and shall
not be construed to create or imply an agency relationship between OSS and
RE/MAX. OSS agrees under these terms to provide the specific development
and Host Services described in this AGREEMENT.
22. OSS INDEMNIFICATION OF RE/MAX
OSS hereby acknowledges that neither RE/MAX nor any of its directors,
officers, employees, or agents have assumed any liability whatsoever for
the conduct, actions, or performance of OSS under this AGREEMENT, or for
OSS's performance of Host Services hereunder. OSS hereby agrees to
indemnify, save, and hold harmless RE/MAX and its directors, officers,
employees, and agents from and against any and all claims whatsoever,
including without limitation, claims arising out of the software or
software development efforts or undertakings of OSS, and claims to the
effect that any software used in the R/M Customized Software infringes the
copyrights of any third party or that OSS wrongfully obtained, is not
entitled to use, or is not the rightful owner of the Developed Software,
OSS FORUMS Software, R/M Customized Software, Residual Information,
Intellectual Property, Proprietary Technology and/or trade secrets, and
confidential information as those terms are defined herein, and claims
relating in any way to OSS relationships with any employee or independent
contractor working on the development of the RE/MAX Mainstreet web site or
involved at any level in providing Host Services under this AGREEMENT. OSS
further agrees to pay reasonable attorney fees incurred by RE/MAX in the
defense of any such claim, provided, however, that OS S's obligation
hereunder for liability and defense costs together shall be limited
strictly by the amount for which such claim could have been settled. OSS
does not warrant the license or the reliability of work conducted by any
third party.
23. OSS WARRANTIES
OSS hereby warrants that its Developed Software, its OSS FORUMS Software
and its other claimed proprietary tools and residual information were
originally developed by OSS or rightfully and lawfully acquired, and that
OSS has the rights therein to enter into this AGREEMENT, to enter into and
license the R/M Customized Software in accordance with the license
contained herein, to provide the Deliverables contemplated, and perform the
Host Services agreed to, and that in doing so, OSS will not be violating
the rights of privacy, the copyrights or any other rights of any third
party and that its performance of its obligations hereunder will not place
it in breach of any other contract or commitment.
24. SECURITY MEASURES & PASSWORD ACCESS
Access to RE/MAX Mainstreet shall be restricted to individuals affiliated
in good standing with RE/MAX International, Inc. and who have executed and
returned a current form subscriber agreement. Each such individual shall
have a unique user name and a confidential password. Such names and
passwords will be assigned in accordance with the procedure outlined in
Exhibit J attached hereto. Access to RE/MAX Mainstreet will require the use
of industry standard encrypted and secure communication protocols for those
portions of the subscriber's access, file transfers, messaging, or other
activities which contain content which is deemed to be sensitive by RE/MAX
and, more specifically, those involving the transfers of billing, credit
card or other sensitive data and information exchange. On site system
security will be provided by hardware, protocol, and Windows-NT based
security consistent with specifications set forth on Exhibit J attached
beret..
-12-
<PAGE>
25. DATA & CONTENT BACK-UP
As an added safeguard against the possible loss or destruction by fire or
other means of the R/M Customized Software and other components of the
RE/MAX Mainstreet web site, OSS shall provide to RE/MAX, in addition to the
back-up copy of the R/M Customized Software required by the license
included herein, a monthly copy of all application software, content,
subscriber identity data, subscriber payment history information with
billing address, subscriber Email address and password information, and
operating software residing on the servers allocated to providing access to
RE/MAX Mainstreet. Such back-up copy shall be maintained by RE/MAX for the
benefit of itself and OSS should the software and web site become corrupted
or inoperable for any reason.
26. MINIMUM PERFORMANCE STANDARDS
In the performance of its obligations under this AGREEMENT, OSS shall
demonstrate to RE/MAX that access to RE/MAX Mainstreet will satisfy the
minimum performance standards of simultaneous use by 10, 25, 50, 75, and
100 concurrent users performing a mixture of chat, library downloads, and
messaging without any significant (i.e., less than 10%) degradation of
response time.
27. TERM AND TERMINATION
The initial term of this AGREEMENT is three years from the effective date
of this AGREEMENT. This AGREEMENT may be renewed on the same terms and
conditions set forth herein for up to two consecutive like terms.
Thereafter, RE/MAX shall have the right to renew the relationship hereby
created with OSS, but to do so subject to negotiated mutually agreeable
adjustments in OSS minimum share of monthly subscriber fees to reflect
circumstances then existing. RE/MAX may terminate this AGREEMENT on any
annual anniversary of the effective date hereof in the event the service
does not generate subscription fees sufficient to cover the monthly minimum
guaranteed to OSS as specified in Addendum A. RE/MAX may terminate this
AGREEMENT at any time in the event OSS fails to meet or satisfy the Minimum
Performance Standards established by Paragraph 26 hereof. Either party may
terminate this contract in the event that the other party breaches this
AGREEMENT provided that the breach has not been cured, notwithstanding that
the non-breaching party has given the breaching party written notice of the
alleged breach and thirty (30) days to cure. This AGREEMENT will
automatically renew for successive three (3) year terms, commencing at the
conclusion of the initial three (3) year term, unless written notice of
intent not to renew is provided by RE/MAX to OSS or by OSS to RE/MAX at
least ninety (90) days prior to the expiration of the then current term.
This Paragraph 27 shall be deemed to be separate and apart from the license
agreement included in Paragraph 4 of this AGREEMENT which itself is
renewable and terminable, but on the terms specified in Paragraph 4 hereof.
28. MOST FAVORED NATIONS CLAUSE
OSS hereby agrees that the terms of this AGREEMENT and the license set
forth in Paragraph 4 hereof, are at least as favorable as the similar terms
of similar development agreements, license arrangements, and Host Service
contracts. In the event OSS hereafter enters into any contract of a similar
nature that includes additional benefits and/or more favorable terms than
the benefits and terms of this AGREEMENT and/or the license contained
herein, OSS agrees to amend this AGREEMENT and/or such license, as the case
may be, to include such additional benefits and/or more favorable terms.
29. NOT ASSIGNABLE
This AGREEMENT is uniquely between OSS and RE/MAX and is based in large
measure on the trust, confidence, mutual respect, and unique attributes of
the parties. This AGREEMENT shall not be assignable by either party without
the express written consent of the other, and such written consent may be
withheld for any reason whatsoever. Notwithstanding the foregoing, RE/MAX
shall have the right to assign this AGREEMENT to any new corporation formed
or any existing corporation to oversee, own and/or manage RE/MAX Mainstreet
so long as the same group of individuals who own a majority of shares in
RE/MAX also control such new or existing corporation.
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<PAGE>
30. CHOICE OF LAW
This AGREEMENT shall be construed and interpreted in accordance with the
laws of the state of Colorado and of the United States of America.
31. INCORPORATION BY REFERENCE
Exhibits A through K attached to this AGREEMENT are hereby incorporated
herein by reference.
32. ARBITRATION
IN THE EVENT OF ANY DISPUTE BETWEEN THE PARTIES HERETO REGARDING DUTIES OR
RESPONSIBILITIES UNDER THIS AGREEMENT, OR ANY OTHER CLAIM BY ONE PARTY
AGAINST THE OTHER ARISING OUT OF THEIR RELATIONSHIP UNDER THIS AGREEMENT,
OR THEIR PERFORMANCE OF ANY DUTY OR OBLIGATION RELATING TO THIS AGREEMENT,
OR ITS SUBJECT MATTER, OR THE RE/MAX MAINSTREET WEB SITE, SUCH DISPUTE
SHALL BE SUBMITTED TO BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL
ARBITRATION ACT AM! SHALL BE ARBITRATED BY THE AMERICAN ARBITRATION
ASSOCIATION IN ACCORDANCE WITH ITS RULES AND PROCEDURES FOR COMMERCIAL
ARBITRATION.
33. NO WAIVER
Any failure by either party hereto to enforce at any time any term or
condition of this AGREEMENT shall not be considered a waiver of that
party's right thereafter to enforce that same term or condition or any
other term or condition of this AGREEMENT.
34. ENTIRE AGREEMENT
This AGREEMENT constitutes the entire agreement between RE/MAX and OSS
regarding the subject matter hereof, and this AGREEMENT may not be amended,
altered, or changed except
35. HEADINGS
The headings used in this AGREEMENT are used solely for convenience and are
not an aid in the interpretation of this AGREEMENT or a limitation to the
application of any term or condition hereof.
IN WITNESS WHEREOF, RE/MAX INTERNATIONAL, INC. AND ONLINE SYSTEMS SERVICES, INC.
HAVE EXECUTED THIS AGREEMENT.
ONLINE SYSTEM SERVICES, INC. RE/MAX INTERNATIONAL, INC.
/s/ /s/
- ----------------------------------- ---------------------------------------
By By
___________________________________ _______________________________________
Title Title
___________________________________ _______________________________________
Date Date
-14-
<PAGE>
EXHIBIT 10.12
LONG-TERM EQUIPMENT SALE AND SOFTWARE LICENSE AGREEMENT 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 BOULDER RIDGE CABLE
TV INC. a California corporation, dba Starstream Communications, with its
principal place of business located at 4120 Citrus Ave, Rocklin, CA
("Starstream"), dated as of February 16, 1998.
1. PURPOSE I DESCRIPTION OF THE SYSTEM. EQUIPMENT. APPLICATION PROGRAMS AND
------------------------------------------------------------------------
RELATED MATERIALS AND SERVICES: 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; 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 Partnership" ("CAP") Web site software, with
future versions to include, without limitation, "Electronic Banking" and
"Electronic Commerce" functionality, and user documentation, as well as the SAGE
Application which performs subscriber management and billing functions
(hereinafter collectively described as the "Application Program").
Starstream desires to license the Application Programs set forth on Schedule
"A"(the "Software License") and purchase certain Equipment set forth on Schedule
"B" along with certain related materials and services set forth on Schedule "C"
from OSS to establish an Internet point of presence, to design web pages for
customers to perform such services and, generally, to enable Starstream to
become an ISP provider to its own customers in its franchise territory in the
city of Rocklin, California and adjacent localities defined by the following ZIP
codes:
95630 Folsom 96577 Rocklin
95648 Lincoln 95765 Rocklin
95650 Loomis 95746 Granite Bay
95658 Newcastle 96818 Hickam
95663 Penryn 96853 Hickam
2. TERM: The term of the Agreement shall commence on March 30, 1998, 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 15
hereunder (the "Term"). Upon completion of this Term, Starstream may at its sole
discretion extend the contract for an additional five years.
3. PROVISIONS APPLICABLE TO EQUIPMENT SALE AND PURCHASE: 3.1 Purchase and
- -- ---------------------------------------------------- ----------------
Sale: Starstream hereby agrees to purchase from OSS, and OSS agrees to sell to
- ----
Starstream, the Equipment set forth on Schedule "B" (attached hereto) along
with the materials and services set forth on Schedule "C" (attached hereto) at
the price set forth on Schedule "B" ("Equipment Purchase Price").
3.2 Payment: (a) A payment of ten (10%) percent of the Equipment Purchase
--- -------
Price shall be made to OSS at the address set forth herein, or any other address
designated by OSS on or before April 30, 1998; such amount payable in U.S. funds
by electronic wire transfer to OSS' account at NORTHWEST BANK, COLORADO, N.A.
Account # 101-8048688, ABA # 102000076. A second payment of ten (10%) percent
shall be due and payable on or before May 31, 1998. The remaining eighty (80%)
percent shall be paid to OSS within 60 days upon completion and testing of the
ISP POP by OSS, and Starstream has accepted certifying document stating testing
and certification of the ISP POP by OSS, and Starstream has received from OSS
certifying document stating that the Internet Point of Presence is working
according to manufacturers specifications including but not limited to the DNS,
e-mail, Web services, News Groups, ftp, ping, dial-up access, dedicated access,
associated software is installed and working local loop and Internet backbones
are complete, as well as other OSS Supplied equipment software or related
services located at the Starstream's POP. The Equipment Price is calculated net
---
of any and all taxes, duties, customs, deductions or withholdings or any other
moneys required to be withheld by any other government regulation which
Starstream shall bear on its own account and pay. (b) OSS shall provide a
written invoice to Starstream for all amounts due. Notwithstanding anything to
the contrary contained herein, in the case of Starstream's Acceptance of a
Partial Delivery of Equipment, Starstream will receive equipment from OSS but
will
<PAGE>
not make any payments to OSS until complete testing and certification of the ISP
POP has been completed by OSS and certifying documents have been accepted by
Starstream. Starstream's utilization of the equipment for any commercial purpose
shall be deemed acceptance by Starstream.
3.3 System Upgrades Prior to Installation: OSS agrees that should it make
--- -------------------------------------
any changes, upgrades or improvements to its standard equipment configuration
between the date of execution of this Agreement and the date of actual system
installation, but not later than June 1, 1998, such improvements shall be
incorporated into the Starstream system at no added cost.
4. PROVISIONS APPLICABLE TO LICENSE OF THE APPLICATION PROGRAM: 4.1 Grant of
----------------------------------------------------------- ------------
Software License: During the Term in the Territory and subject to Starstream's
- ----------------
compliance with the terms and conditions herein, OSS hereby grants to Starstream
a Software License granting Starstream the right to use and execute the
Application Program and its future releases and versions throughout the Term,
including but not limited to those specified on Schedule "G," with no further
costs to Starstream than those set forth in Section 8. Except for the license
herein granted to Starstream, it is hereby acknowledged and agreed to by the
parties that as between OSS and Starstream all rights of any nature whatsoever
in and to the Application Program and any other intellectual property relating
to OSS are retained exclusively by OSS. The License shall be non-exclusive to
Starstream, subject to the provisions set forth in Section 15.5.
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
Starstream shall not have the right to assign, sub-license, rent, lease, sell,
encumber, or otherwise transfer any of the rights granted hereunder. Subject to
the same terms, conditions and qualifications; except for the rights expressly
granted herein, any and all rights in and to the Application Programs are hereby
reserved to OSS.
4.3 Software Upgrades Prior to Installation: OSS agrees that should it
--- ---------------------------------------
make any changes, upgrades or improvements to the standard Applications Programs
between the date of execution of this Agreement and the date of actual system
installation, but not later than June 1, 1998, such improvements shall be
incorporated into the Starstrearn system at no added cost.
5. RESPONSIBILITIES OF STARSTREAM: Starstream 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 Starstream's use of the System. In addition, Starstream
shall be responsible for insuring for the provision of adequate 110/220 volt
power circuits for the System, including backup (uninterruptible) power supply,
if desired) power.
6. OSS INSTALLATION: 6.1 Installation Plan and Acceptance: With respect to
---------------- ------------------------------------
Equipment purchased by Starstream from OSS, OSS will provide an Installation
Time Line similar to Exhibit D-l developed specifically for Starstream's system
which shall be incorporated by reference into Schedule "D." OSS will promptly
provide onsite installation of the equipment as set forth in Schedule "B,"
providing materials and services as outlined in Schedule "C" using its best
efforts to comply with the Installation Plan and Time Line in Schedule "D"
attached hereto and such other services as the panics mutually agree are
necessary to permit Starstream to begin use of the System in accordance with
such Installation Plan in compliance with the testing, certification and
acceptance set forth in this Agreement. An OSS technician shall be responsible
to test, certify and demonstrate to Starstream that all material and equipment
successfully operates according to manufacturers specifications and performs all
functions outlined in this Agreement and attachments prior to completing the
certification documents that the installation has been completed and is
operating in accordance with this Agreement and the specifications for the ISP
POP. In the event of alleged non-compliance, OSS shall receive written notice
and have 30 days within which to cure or to take reasonable steps to cure
alleged non-compliance in which OSS shall be deemed to have been in full
compliance with its obligations under this agreement.
6.2 Passage of Title/Risk of Loss/Equipment Delivery: Title to the System
--- ------------------------------------------------
shall pass to Starstream upon delivery. Until such time as title passes to
Starstream 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 and Additional Equipment to Starstream 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 or Additional
Equipment as
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<PAGE>
it becomes available. Delivery dates are approximate. Starstream shall provide
an acceptable installation and operation environment suitable for computer
equipment.
6.3 Starstream Responsibilities: Starstream shall promptly perform all
--- ---------------------------
responsibilities it is assigned under the Installation Plan. Starstream shall
also furnish to OSS, free of charge, for the period of time required for
installation of the System: I) 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 Starstream's business and technical operations.
7. OSS SUPPORT AND TRAINING: OSS agrees to furnish Starstream with on-going
------------------------
support and training, including Tier I and Tier II End-User telephone support.
The parameters of such on-going support and training are defined in Schedules
"E" and "F" attached hereto.
8. OSS PROFESSIONAL MANAGEMENT AND INTELLECTUAL PROPERTY FEES: In
----------------------------------------------------------
consideration of the rights and licenses granted hereunder. Starstream shall pay
to OSS:
(a) ________ percent of all "Internet Access Gross Receipts" which shall be
defined as all billings by Starstream 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 access revenues
(including web hosting revenues) minus uncollectible billings, installation
charges, franchise fees value added, sales and other transactional taxes (other
than those taxes which Starstream is legally obligated to pay on its own
behalf):
(b) __________ percent of all "Content Related Gross Receipts" which shall
be defined as all fees by Starstream or its Assignees attributable to all
content 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
franchise fees, value added sales and other transactional taxes (other than
those taxes which Starstream is legally obligated to pay on its own behalf).
(c) In addition, Starstream 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 Starstream's offering of the OSS
products and services to other systems within the Territory in which Starstream,
its subsidiaries, parent companies or partners have or may acquire an interest.
(d) The Professional Management and Intellectual Property Fees provided for
in Section 8 shall be paid by Starstream on or before the thirtieth day
---------
following each month for Gross Receipts collected by the Starstream, with
respect to the Starstream Business during the previous month.
(e) Starstrearn may exclude from all "Internet Access Gross Receipts"
revenues and fees associated with the direct connection of an organization's
internal or corporate network ("LAN/WAN Extension") to its cable/fiber optic
distribution network, plus fees or charges to an organization for providing
dial-up or dedicated access to the organization's corporate network. This
exclusion shall not apply to fees charged to remote offices or employees of the
corporation for access via the ISP POP or Internet. Starstream may also exclude
all revenues and fees directly associated with the provision of discounted
services to bonafide non-profit organizations when such services are offered for
the express purpose of fulfilling conditions of Starstream's franchise.
9. TAXES: Except as set forth herein to the contrary, Starstream 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 Starstream is
legally obligated to pay on its own behalf) from the moneys .due to OSS
hereunder; provided, however, that Starstream shall furnish to OSS, at
Starstream'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.
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<PAGE>
10. AUDITS/INSPECTIONS: Starstream 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 three month period, upon at least
thirty (30) days prior notice to Starstream for the purpose of verifying and
confirming the accuracy of the payments made to OSS. In the event that any await
reveals any error in the calculation of the amounts due to OSS, Starstream shall
immediately pay or be refunded the difference unless Starstream 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, Starstream shall
pay the costs associated with the audit unless Starstream contests such audit in
good faith. In the event Starstream contests such audit, the dispute shall be
subject to Section 17.5 hereunder.
11. FORCE MAJEURE: 11.1 If OSS' or Starstream's performance of any of its
------------- ----
obligations hereunder are delayed or impaired by reason of any Act of God, or,
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
Starstream'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 Starstream,
then OSS or Starstream, 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.
11.2 Withdrawal and Replacement: Subject to Section 11.1 above, and
---- --------------------------
notification to and approval by Starstream, at anytime during the Term, OSS
shall have the right to withdraw the Application Program or any component and
upon Starstream's consent replace same with another comparable application
program.
12. PERMITS: Starstream shall at its sole cost, obtain all consents, licenses,
-------
permits, approvals, authorizations, and inspections from 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. Starstream 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. Starstream shall furnish OSS with such proof
of its compliance as OSS may reasonably request by giving Starstream notice
thereof.
13. CONFIDENTIALITY / PUBLIC DISCLOSURE / PROPRIETARY RIGHTS: 13.1
----
Confidentiality: Each of the parties agrees to keep all proprietary ideas, plans
- ---------------
and information received by or otherwise disclosed to the receiving party from
or by the disclosing party, that is marked proprietary or confidential (or bears
a marking of like import) during these proposed transactions confidential for a
period of two years from the date hereof, except those disclosures which are
required by law or by order of a court having lawful jurisdiction. The parties
agree that all such proprietary ideas, plans and information shall remain the
property of the disclosing party. The parties agree that the terms of this
Agreement shall be considered confidential and subject to all provisions of this
paragraph 13.1.
13.2 Public Disclosure: OSS and Starstream 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 NonDisclosure Agreement between the parties, and to
Section 15.5 hereunder.
13.3 Proprietary Rights: As between Starstream and OSS, Starstream
---- ------------------
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
Starstream 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
Starstream 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
-4-
<PAGE>
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 Starstream may be given or have access. Starstream shall not itself, nor
shall it permit, by way of carrying out its reasonable commercial efforts, any
third panics to remove any copyright except as specifically authorized
hereunder.
14. WARRANTIES AND INDEMNITIES/SPECIFICATIONS AND CAPACITY: 14.1 SERVICES AND
------------------------------------------------------ -----------------
SYSTEM WARRANTY: OSS MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, AS
- ---------------
TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, ITS SERVICES, THE
SYSTEM, THE DESIGN OR CONDITION OF THE EQUIPMENT OR ANY APPLICATION OR ANY
OUTPUT BASED ON THE USE OF THE SYSTEM. OSS SPECIFICALLY DISCLAIMS, WITHOUT
LIMITATION. ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
14.2 Assignment of Warranty: OSS hereby assigns to Starstream (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 Starstream 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.
14.3 Compatibility: (a) OSS warrants and represents that the Equipment
---- -------------
being sold to Starstream by OSS and the Software being Licensed to Starstream by
OSS hereunder are compatible. (b) Starstream acknowledges that certain software
and equipment may not be compatible with the System and Starstream 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 Starstream
fails to inform OSS of such use, any damages to the Equipment or otherwise as a
result of such use shall be borne by Starstream.
14.4 System Functions: The System under fully loaded conditions which
---- ----------------
shall not exceed 1800 simultaneous residence subscribers, or 900 simultaneous
business subscribers or any combination thereof 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 dial-up user access and perform all accounting and control functions
of Starstream. Starstream agrees that additional random access memory and semi-
permanent (hard disk) memory made need to be added from time to time based on
growth of subscriber traffic.
14.5 Repair of Manufacturer Defects: OSS shall coordinate all calls with
---- ------------------------------
system component manufacturers and suppliers concerning repair or warranty
issues and shall use its best efforts to assist Starstream in obtaining the
repair of any operational deficiencies from third party manufacturer in
accordance with manufacturer's warranty assigned to Starstream herein. OSS has
made arrangements with manufacturers of two critical system components (Cisco
Router, 3Com, formerly USR Modem Hub) for replacement of defective parts within
24 hours. Sample copies of these Original Equipment Manufacturers extended
maintenance program agreements are included as Attachments El and E2. Other
items are generally available locally, such that repairs can be effected within
one business day. Nothing contained in this section shall be deemed to require
OSS to maintain the Equipment or Additional Equipment or to repair any defect
caused by Starstream s failure to properly maintain the Equipment or Additional
Equipment. Notwithstanding the above, all repair, replacement and restoration of
any Equipment or Additional Equipment manufactured by OSS will be done by OSS
without extra costs or charges to Starstream.
14.6 OSS Indemnification: OSS shall indemnify and hold Starstream
---- -------------------
harmless from and against any claims, liabilities, damages and expenses,
including, without limitation, reasonable attorney's fees relating to or arising
out of 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
Starstream'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 Starstream's negligence, provided that OSS is not also
negligent.
-5-
<PAGE>
14.7 Starstream Indemnification: Starstream 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 Starstream's material obligations hereunder.
14.8 OSS Indemnification: OSS shall indemnify and hold harmless
---- -------------------
Starstream 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 OSS's material obligations hereunder.
14.9 Service: Notwithstanding any of the foregoing, in view of the nature
---- -------
of the System and its complexity and conditions of use, OSS does ensure that the
functions of the System shall meet industry standard performance criteria. In
the event that the System does not meet industry standard performance criteria
as a result of OSS' responsibilities, Starstream shall notify OSS in writing and
both parties agree to immediately consult in order to ascertain the urgency of
the situation and OSS shall utilize best efforts to rectify the problem within
the agreed upon timetable but in any event no later than thirty (30) days. Upon
investigation and remedy of the problem, if it is determined that the problem
was primarily and directly attributable to Starstream's negligent actions or
enhancements to the System, Starstream agrees to pay time and materials plus out
of pocket expenses to remedy the situation.
14.10 Two-Way Operations: OSS warrants that all software furnished in the
----- ------------------
system headend equipment and ISP POP shall be fully compatible with two-way
system operations. This notwithstanding, the Starstream agrees that it will be
necessary to add additional hardware and two-way subscriber modems to support
two-way operations.
15. DEFAULT / TERMINATION: 15.1 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 (IS) 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.
15.2 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, and 2) Any Equipment fully paid for
shall remain Starstream Equipment; provided, however, that as to am Equipment
for which Starstream has made partial payment, Starstream shall: provide full
payment immediately upon termination and the Equipment shall be delivered to
Starstream upon full payment; or such Equipment shall be returned to OSS and OSS
shall refund Starstream 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.
15.3 Non Release of Obligations: No termination of this Agreement shall
---- --------------------------
release Starstream from any obligation to pay OSS any amounts accrued or become
payable prior to the date of termination.
15.4 Survival: The provisions of Sections 13, 14, 15.2, 15.4 and 17.1
---- --------
shall survive the expiration or termination of this Agreement.
15.5 Performance Standards: OSS agrees that it will employ its best
---- ---------------------
efforts to maintain the system and software within the most advanced state of
performance and technology available through the use of release version hardware
and software. As from the first anniversary of this Agreement and on each
subsequent yearly anniversary of the same, and for an extra (30) day period,
Starstream shall have the option to request OSS to meet so as to have
-6-
<PAGE>
a performance review carried out by an independent and well-known consultant
with an established practice in the field of Internet technology. Failing the
parties' agreement to the same, the appointment of the independent consultant
will be made by Starstream. The independent consultant's review will be limited
to an assessment of whether the level of technical performance of the
hardware/software and services provided by OSS are substantially similar or
better than those provided by the three top-ranked companies who provide similar
services. Should the report of the consultant indicate that said level of
technical performance is below said threshold, Starstream shall notify OSS so
that within a thirty (30) day period OSS can take steps to upgrade its services
to meet the said threshold. If at the end of such thirty (30) day period, OSS
has not upgraded its level of performance to meet or exceed said threshold,
Starstream will be authorized to declare a material breach of contract in which
case Starstream's remedies will be limited to termination of this Agreement
without any indemnification or obligation towards OSS, subject to the provisions
of Paragraph 4 - Application Program. Starstream shall bear -expenses of
consultant, except in the event of termination of this agreement under the
provisions of this paragraph, whereupon OSS shall pay consultant fees.
16. INTELLECTUAL PROPERTY / INFRINGEMENT CLAIMS: If Starstream receives a claim
-------------------------------------------
that any Equipment or Application Program manufactured or provided by OSS
infringes upon any patent, copyright, or other intellectual property interest,
Starstream 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 Starstream the right to use the Equipment and
Application Program or compatible Equipment and Application Program; 3) replace
or restore the Equipment and Application Program; and 4) indemnify Starstream
from liability arising from any of the foregoing. In the event that any
Equipment or Application Program is not manufactured nor provided by OSS, OSS
shall not be required to indemnify Starstream 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 Starstream
for any claims of infringement relating to Equipment or Application Program
modified or altered in any way or made to Starstream s designs or specifications
without OSS consent.
17. MISCELLANEOUS: 17.1 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;
17.2 Notice: Any notice required to be given under this Agreement shall be
-----------
provided in writing and delivered by hand or by registered mail to the party's
address indicated herein;
17.3 Severability: The invalidity or unenforceability of any provisiopn 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;
17.4 Governing law: The Agreement shall be governed by and consttued under
------------------
the laws of Colorado;
17.5 Dispute Resolution: All claims or disputes arising out of this
-----------------------
Agreement or the breach thereof shall be decided by arbitration in accordance
with the appropriate rules of the American Arbitration Association, which cannot
be settled amicably by the parties, then obtaining unless the parties mutually
agree otherwise. Notice of demand for arbitration shall be filed in writing with
the other party to the Agreement and with the American Arbitration Association
and shall be made within a reasonable time after the dispute has arisen. The
arbitration hearing shall be held in San Francisco, California. The arbitration
award shall be binding and enforceable in any court having jurisdiction
thereover. The cost of the arbitration proceedings, exclusive of each party's
own attorney's fees and out of pocket costs, shall be shared equally by both
parties.
17.6 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 Starstream;
17.7 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
-7-
<PAGE>
Agreement. Starstream 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;
17.8 Assignment: This Agreement is non-assignable 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;
17.9 Successors in Interest: This Agreement shall inure to the benefit of
---------------------------
and be binding upon the successors in interest to either of the parties.
18. LIMITED EXCLUSIVITY: OSS agrees that it will not enter into any similar
-------------------
arrangement with any other operator whose focus is primarily directed at
subscribers in the Territory prescribed in Section 1. Neither will OSS enter
into any similar arrangement with any other operator who proposes to provide
similar services in areas adjacent to the Territory without giving the
Starstream first right of refusal to extend this Agreement to provide its
services into the subject adjacent territories on terms no less favorable to OSS
than those contained within this agreement.
19. FAVORED NATIONS: OSS agrees that from the date of this agreement should it
---------------
enter into any similar agreement with another cable operator located in the
United States of America with fewer than 15,000 subscribers under overall terms
which are more favorable than the terms incorporated herein, it will notify
Starstream of this agreement and extend to Starstream similar or equivalent
terms. Starstream agrees that as a systems integrator OSS has no control over
Original Equipment Manufacturer's prices and that this clause shall not apply to
any sales amount or terms related to hardware or software purchased from 3rd
parties. Therefore this clause shall only be applied to revenue sharing
percentages, scope of services rendered, and general operating terms and
conditions.
Each of the parties hereto who have executed and delivered this binding
Agreement hereby confirm its effectiveness and validity as of the date first
written above.
ONLINE SYSTEM SERVICES [Corporate Seal]
By: /s/
-------------------------------------
R. Steven Adams
President and Chief Executive Officer
Date: February 16, 1997
Date Accepted:______________________________
STARSTREAM [Corporate Seal]
By: /s/
-------------------------------------
ZoeHazen
President
Date: ___________________
-8-
<PAGE>
EXHIBIT 10.13
AGREEMENT FOR THE PROVISION OF INTERNET SERVICES, EQUIPMENT, AND SOFTWARE
-------------------------------------------------------------------------
LICENSES
--------
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 American Telecasting, Inc., a Delaware corporation, with its principal place
of business located at 5575 Tech Center Drive, Suite 300, Colorado Springs,
Colorado 80919 ("Customer"), dated as of November 26, 1997.
1. PURPOSE / DESCRIPTION OR THE SYSTEM, EQUIPMENT, APPLICATION PROGRAMS AND
------------------------------------------------------------------------
RELATED MATERIALS AND SERVICES: 1.1 General: 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; 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 Partnership" ("CAP" ) Web site software, with
future versions to include, without limitation, "Electronic Banking" and
"Electronic Commerce" functionality, and user documentation, as well as the SAGE
Application which performs subscriber management and billing functions
(hereinafter collectively described as the "Application Program ").
1.2 Scope of this Agreement: This Agreement includes the terms and
--- -----------------------
conditions applicable to all Internet systems purchased by ATI from OSS. The
parties agree that six (6) systems will be selected and measured against certain
performance criteria, mutually agreed to by the parties as detailed in Schedule
A. Upon the successful achievement of these performance criteria or by any other
replacing criteria, mutually agreed between the parties, ATI agrees to enter
into good faith negotiations with OSS to use the services of OSS in offering
Internet services in other markets. The six (6) markets include Colorado
Springs' Denver, Portland, and the other three (3) markets will be determined at
some subsequent date by ATI management.
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
15 hereunder (the "Term").
3. PROVISIONS APPLICABLE TO EQUIPMENT SALE AND PURCHASE: Customer and OSS have
----------------------------------------------------
executed two (2) Memorandums of Agreement (MOA) dated September 29, 1997, and
November 11, 1997 which provided for the purchase of hardware/software,
Application Program, and the Installation of all hardware and software. These
MOAs are incorporated herein by reference as Schedule "B". The unit pricing
terms found in these Memoranda will apply to all ISP systems sold by OSS to the
Customer. The price for any market will be determined by individual market
requirements and agreed to between OSS and Customer.
4. PROVISIONS APPLICABLE TO LICENSE OF THE APPLICATION PROGRAM: 4.1 Grant of
----------------------------------------------------------- ------------
Software License: During the Term in the Customer's Internet POP locations and
- ----------------
subject to Customer's compliance with the terms and conditions herein, OSS
hereby grants to Customer a Software License granting Customer the right to use
and execute the Application Program and its future releases and versions
---
throughout the Term, with no further costs to Customer than those set forth in
Section 8. Except for the license herein granted to Customer, it is hereby
acknowledged and agreed to by the parties that as between OSS and Customer 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 Customer, subject to the
provisions set forth in Section 15.
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
Customer shall not have the right to assign, sub-license, rent, lease, sell,
encumber, or otherwise transfer any of the rights granted hereunder. Subject to
the same terms, conditions and qualifications, except for the rights expressly
granted herein, any and all rights in and to the Application Programs are hereby
reserved to OSS.
<PAGE>
5. RESPONSIBILITIES OF CUSTOMER: Customer shall be solely responsible for the
----------------------------
costs of telecommunication services provided by the local telephone company,
interchange carriers and any other telecommunications company which may be
necessary for the Customer's use of the System. In addition, Customer 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.
6. OSS INSTALLATION: 6.1 Installation Plan and Acceptance: With respect to
---------------- ------------------------------------
Equipment purchased by Customer 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 "B" attached
hereto and such other services as the parties mutually agree are necessary to
permit Customer 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 Customer 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 Customer 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 Customer
hereunder, OSS shall bear the risk of loss or damage to the System, cc any part
thereof. Unless otherwise determined by OSS, OSS shall deliver all Equipment and
Additional Equipment to Customer ROB. 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 or additional Equipment as it becomes
available. Delivery dates are approximate. Customer shall provide an acceptable
installation and operation environment suitable for computer equipment
6.3 Customer Responsibilities: Customer shall promptly perform all
--- -------------------------
responsibilities it is assigned under the Installation Plan. Customer 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 each
territory in which the Equipment is to be placed; 2) the cooperation of a
management-level employee in each market (hereinafter the Project Leader)
knowledgeable in aspects of Customer's business and technical operations.
7. OSS ACCESS SUPPORT, COMMUNITY ACCESS PARTNER SUPPORT, TRAINING, AND
-------------------------------------------------------------------
DOCUMENTATION: OSS agrees to furnish Customer with on-going support, training,
- -------------
and documentation which supports the Internet access, Community Access
Partnership, and Web hosting services provided by the Customer. The parameters
of this support, training, and documentation are defined in Schedule "C"
attached hereto.
8. OSS PROFESSIONAL MANAGEMENT AND INTELLECTUAL PROPERTY FEES: In
----------------------------------------------------------
consideration of the rights and licenses granted hereunder and the support,
training, and documentation provided, Customer shall pay to OSS:
8.1 Installation and License Fee: Upon executing purchase order for the
--- ----------------------------
POP equipment for each individual market, Customer agrees to pay OSS a non-
refundable Installation and License Fee of $_______ per market The current
markets to which this fee is applicable are Colorado Springs, Denver, and
Portland.
8.2 Access Revenue Sharing: The percentages, as found in the following
--- ----------------------
table, of all Internet Access Gross Receipts "Access" which shall be defined as
all billings by Customer or its Assignees attributable to the provision of"
Internet Access" to be defined for the purpose of this Agreement as dial-up,
dedicated, telco return and two way wireless cable modem Internet access
revenues (including webhosting revenues) minus uncollectible billings,
installation charges, value added, sales and other transactional taxes (other
than those taxes which Customer is legally obligated to pay on its own behalf):
8.3 Content Revenue Sharing: The percentages, as found in the following
--- -----------------------
table, of Content Related Gross Receipts "Content" which shall be defined as all
fees by Customer or its Assignees attributable to all content 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 Customer is
legally obligated to pay on its own behalf).
[Table]
-2-
<PAGE>
8.4 All Systems: The above percentages apply to those markets for which
--- -----------
the Customer purchases the hardware/software and other services associated with
the CAA product.
8.5 Payment Dates: The Professional Management and Intellectual Property
--- -------------
Fees provided for in Section 8 shall be paid by Customer on or before the
thirtieth day following each month for Gross Receipts collected by the Customer,
- ---------
with respect to the Customer Business during the previous month.
9. TAXES: Except as set forth herein to the contrary, Customer 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 Customer is legally
obligated to pay on. its own behalf) from the moneys due to OSS hereunder;
provided, however, that Customer shall furnish to OSS, at Customer's expense,
the following information and documents: (a) an original receipt from taxing
authority with respect to the Lax; (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.
10. AUDITS/INSPECTIONS: Customer 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 three month period, upon at least
thirty (30) days prior notice to Customer for the purpose of verifying and
confirming the accuracy of the payments made to OSS. In the event that any audit
reveals any error in the calculation of the amounts due to OSS, Customer shall
immediately pay or be refunded the difference unless Customer 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, Customer shall
pay the costs associated with the audit unless Customer contests such audit in
good faith. In the event Customer contests such audit, the dispute shall be
subject to Section 17.5 hereunder.
11. FORCE MAJEURE: 11.1 If OSS' or Customer's performance of any of its
------------- ----
obligations hereunder are delayed or impaired by reason of any Act of God, or,
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
Customer'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 Customer,
then OSS or Customer, 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 15
below.
11.2 Withdrawal and Replacement: Subject to Section 11.1 above, and
---- --------------------------
notification to and approval by Customer, at anytime during the Term, OSS shall
have the right to withdraw the Application Program or any component and upon
Customer's consent replace same with another comparable application program.
12. PERMITS: Customer shall at its sole cost, obtain all consents, licenses,
-------
permits, approvals, authorizations, and inspections from 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. Customer 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. Customer shall furnish OSS with such proof of
its compliance as OSS may reasonably request by giving the Customer notice
thereof.
13. CONFIDENTIALITY / PUBLIC DISCLOSURE / PROPRIETARY RIGHTS: 13.1
-------------------------------------------------------- ----
Confidentiality: Each of the parties agrees to keep all proprietary ideas,
- ---------------
plans and information received by or otherwise disclosed to the receiving party
from or by the disclosing party, that is marked proprietary or confidential (or
bears a marking of like import) during
-3-
<PAGE>
these proposed transactions confidential for a period of two years from the date
hereof The parties agree that all such proprietary ideas, plans and information
shall remain the property of the disclosing party.
13.2 Public Disclosure: OSS and Customer 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 set-vices and the design and development of ISP business,
subject to the Non-Disclosure Agreement between the parties, and to Section 15-5
hereunder.
13.3 Proprietary Rights: As between Customer and OSS, Customer
---- ------------------
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
Customer 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 Customer 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 Customer may be given or have access. Customer 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.
14. WARRANTIES AND INDEMNITIES/SPECIFICATIONS AND CAPACITY: 14.1 SERVICES AND
------------------------------------------------------ -----------------
SYSTEM WARRANTY: OSS MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED,
- ---------------
AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, ITS SERVICES, THE
SYSTEM, THE DESIGN OR CONDITION OF THE EQUIPMENT OR ANY APPLICATION OR ANY
OUTPUT BASED ON THE USE OF THE SYSTEM. OSS SPECIFICALLY DISCLAIMS, WITHOUT
LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
14.2 Assignment of Warranty: OSS hereby assigns to Customer (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 pans' replacements,
or additional units and agrees to provide a detailed description of same to
Customer 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.
14.3 Compatibility: (a) OSS warrants and represents that the Equipment
---- -------------
being sold to Customer by OSS and the Software being Licensed to Customer by OSS
hereunder are compatible. (b) Customer acknowledges that certain software and
equipment may not be compatible with the System and Customer 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 Customer fails to
inform OSS of such use, any damages to the Equipment or otherwise as a result of
such use shall be borne by Customer.
14.4 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 accounting and control functions of
Customer.
14.5 Repair of Manufacturer Defects: OSS shall use best efforts to assist
---- ------------------------------
Customer in obtaining the repair of any operational deficiencies from third
party manufacturer in accordance with manufacturer's warranty assigned to
Customer herein. Nothing contained in this section shall be deemed to require
OSS to maintain the Equipment or Additional Equipment or to repair any defect
caused by Customer's failure to properly maintain the Equipment or Additional
Equipment.
Notwithstanding the above, all repair, replacement and restoration of any
Equipment or Additional Equipment manufactured by OSS will be done by OSS
without extra costs or charges to Customer.
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<PAGE>
14.6 OSS Indemnification: OSS shall indemnify and hold Customer harmless
---- -------------------
from and against any claims, liabilities, damages and expenses, including,
without limitation, reasonable attorney's fees relating to or arising out of
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 Customers
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 Customer's negligence, provided that OSS is not also negligent.
14.7 Customer Indemnification: Customer 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 Customer's material obligations hereunder.
15. DEFAULT / TERMINATION: 15.1 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 Parry
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.
15.1.a Mutual Termination: Anything herein to the contrary
------ ------------------
notwithstanding, Customer and OSS may mutually elect to terminate this Agreement
at any time by counter-signing a Notice of Termination setting forth the
effective date of such termination no sooner than thirty (30) days following the
delivery of such counter-signed document to both parties. If Customer and OSS
terminate this Agreement in accordance with the provisions of this Subsection
15.1.A, in addition to any payment required to be made to OSS pursuant to
Subsection 15.2 hereunder, OSS shall be entitled to be reimbursed by Customer
for all of OSS' Professional Management and Intellectual Property Fees earned by
OSS prior to the effective date of such termination.
15.1.b Performance based termination: Should any market fail to meet the
------ -----------------------------
performance criteria as defined in schedule "A" within the specified time frame,
then either party may elect to terminate this agreement for that specific market
by a written notice of termination.
15.1.c Termination Upon Sale of Customer: Anything herein to the contrary
------ ---------------------------------
notwithstanding, Customer may, upon ninety (90) days prior written notice to OSS
terminate this Agreement in the event that any "unaffiliated entity" acquires
control of Customer. For purposes hereof, an "unaffiliated entity" shall mean a
person, company or business whose ownership or management is not controlled by,
controlling or under common control with Customer.
If Customer and OSS terminate this Agreement in accordance with the
provisions of this Subsection 15.1.b and 15.1c, in addition to any payment
required to be made to OSS pursuant to Subsection 15.2 hereunder, OSS shall be
entitled to be reimbursed by Customer or to retain from the amount of monies
previously paid by Customer under this Agreement the amount of non-cancelable
costs actually incurred or committed in connection with OSS' performance under
this Agreement, in addition to all of OSS Professional Management and
Intellectual Property Fees earned by OSS prior to the effective date of such
termination and the purchase price of any equipment delivered to Customer prior
to such effective date.
15.1d Other Termination: Customer reserves the right to terminate this
----- -----------------
agreement for any of the markets in which they have deployed Internet services
and which is bound by the terms of this Agreement The following Termination Fees
to be paid to OSS apply to each market for which Customer desires to terminate
this Agreement, (1) If this agreement is terminated within the first twelve (12)
months there will be no additional fees due OSS. (2) If this Agreement is
terminated between the end of month 12 and prior to the end of month 24 of the
date of first commercial launch of Internet services in a market, Customer shall
pay OSS a fee of $50,000; (3) For the period from the beginning of month 25 to
the end of the term of this Agreement, the Termination Fee shall be the greater
of $100,000 or an amount equal to the Earned OSS Professional Management and
Intellectual Property Fee for the month immediately preceding the issuance of
the Notice of Termination multiplied by the number of
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<PAGE>
months remaining in the unelapsed portion of the Five (5) Year Term had such
termination not have taken effect ("Termination Fee"). For example, assuming the
OSS' Fee for the month prior to the issuance of the Termination Notice is $4,000
and 30 months of the Term has elapsed at the effective date of termination, the
Termination Fee owing to OSS would be $120,000.
15.2 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, and 2) Any Equipment fully paid for
shall remain Customer Equipment; provided, however, that as to any Equipment for
which Customer has made partial payment, Customer shall: provide full payment
immediately upon termination and the Equipment shall be delivered to Customer
upon full payment; or such Equipment shall be returned to OSS and OSS shall
refund Customer 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.
15.3 Non Release of Obligations: No termination of this Agreement shall
---- --------------------------
release Customer from any obligation to pay OSS any amounts accrued or become
payable prior to the date of termination.
15.4 Survival: The provisions of Sections 13, 14, 15.2, 15.4 and 17.1
---- --------
shall survive the expiration or termination of this Agreement.
16. INTELLECTUAL PROPERTY / INFRINGEMENT CLAIMS: If Customer receives a claim
-------------------------------------------
that any Equipment or Application Program manufactured or provided by OSS
infringes upon any patent, copyright, or other intellectual property interest,
Customer shall immediately notify OSS in writing. OSS shall have the exclusive
authority to handle any such claims and, at its sole option will: I) settle or
defend the claim; 2) procure for Customer the right to use the Equipment and
Application Program or compatible Equipment and Application Program; 3) replace
or restore the Equipment and Application Program; and 4) indemnify Customer from
liability arising from any of the foregoing up to the amount of any fees
theretofore paid by Customer to OSS under this Agreement. In the event that any
Equipment or Application Program is not manufactured nor provided by OSS, OSS
shall not be required to indemnify Customer 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 Customer for
any claims of infringement relating to Equipment or Application Program modified
or altered in any way or made to Customer's designs or specifications without
OSS consent.
17. MISCELLANEOUS: 17.1 Non Waiver: A failure by either party to enforce any
------------- ---------------
right hereunder shall not constitutes a waive of such right or any other right,
and shall not modify the rights or obligations of either party under this
Agreement; 17.2 Notice: Any notice required to be given under this Agreement
-----------
shall be provided in writing and delivered by hand or by registered mail to the
party's address indicated herein; 17.3 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, 17.4 Governing law: The
------------------
Agreement shall be governed by and construed under the laws of Colorado; 17.5
----
Dispute Resolution: The parties hereby agree and consent to the exclusive
- ------------------
jurisdiction and venue of the state courts situated in Colorado, USA for
resolution of any dispute arising from this Agreement 17.6 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 Customer; 17.7 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. Customer 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; 17.8 Assignment. This Agreement is non-assignable
---------------
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; 17.9 Successors in Interest: This
---------------------------
Agreement shall inure to the benefit of and be binding upon the successors in
interest to either of the parties.
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<PAGE>
Each of the parties hereto who have executed and delivered this binding
Agreement hereby confirm its effectiveness and validity as of the date first
written above.
ONLINE SYSTEM SERVICES [Corporate Seal]
By: /s/
---------------------------------
R. Steven Adams
Date: _________________________________
STARSTREAM [Corporate Seal]
By: /s/
---------------------------------
Robert Hostetler, President
Date: _________________________________
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<PAGE>
EXHIBIT 10.14
EQUIPMENT SALE AND SOFTWARE LICENSE AGREEMENT
This EQUIPMENT SALE AND SOFTWARE LICENSE AGREEMENT (this Agreement) is
being entered into between Online System Services, Inc. (OSS), having its
principal office at 1800 Glenarm Place, Denver, Colorado, and Intermedia
Partners Southeast, 424 Church Street, Suite 1600, Nashville, Tennessee 37219
(Customer).
PRELIMINARY STATEMENT
OSS is generally in the business of providing Internet related equipment,
software and service to enable a customer to establish a turn-key Internet
package which generally enables a customer to become an Internet service
provider to its own customers. OSS is also generally in the business of
assisting customers in establishing designing, programming, and implementing web
page design and establishing a web site presence on the Internet ("OSS
Business").
The concept underlying OSS Business is that there is a business opportunity
in non-urban areas of this county for the establishment of an Internet Service
Provider ("ISP") operation which can connect local residents to the worldwide
Internet by dialing a local telephone number. OSS has recognized that one major
barrier which discourages local operators from entering the ISP business is a
lack of technical, administrative, and marketing expertise about the Internet
Service Provider business. In response to these observations OSS has developed
a business model in which OSS provides the needed expertise and services which
support a local operator in establishing and maintaining a local ISP business.
OSS provides a range of services, such as hardware and software selection,
installation, initial training, consulting, and general assistance in
implementing and operating an ISP business. OSS also provides extensive
documentation and supporting materials for ISP administration, marketing, sales,
Web development support, and other materials for successful ISP operations. OSS
provides this turnkey package and post-installation support and receives the
fixed initial fee set forth herein and subsequent royalties which are dependent
on the revenue stream of the ISP operation.
In connection with the OSS Business, OSS owns and/or has the right to
license various software which OSS has generally named Community Access America
which consists of computer software programs. The software consists of various
programs set forth on Schedule A attached hereto including a proprietary program
developed by OSS known as the Accounting and Control System together with
various user documentation prepared by the OSS to assist the Customer to operate
the Customer Business. Such materials are referred to in this Agreement as the
Application Programs. This Agreement grants Customer a right and license to the
Application Programs provided that certain software has been provided to OSS by
Microsoft for sublicense to the Customer conditioned on the Customer executing
the Microsoft License attached hereto as Schedule B (the "Microsoft License" ).
OSS also sells equipment and related software some or all of which may be
purchased by OSS from others for use with the Application Programs in connection
with the operation of the Customer Business (the "Equipment").
For purposes of this Agreement, the Application Programs and the Equipment
are collectively referred to as the "System".
Customer desires to establish an Internet point of presence, to design web
pages for customers and to perform such services generally to enable it to
become an Internet Service Provider ("Customer Business") to its own customers.
Customer desires to conduct the Customer Business using the System only in the
location(s) specified herein and OSS desires to establish the Customer as the
only user of the System in such location.
<PAGE>
OSS AND CUSTOMER, INTENDING TO BE LEGALLY BOUND, HEREBY AGREE AS FOLLOWS:
SECTION 1
PROVISIONS APPLICABLE TO EQUIPMENT SALE AND PURCHASE
1.1 PURCHASE AND SALE. Customer hereby agrees to buy, and OSS hereby
agrees to sell to Customer, subject to the terms and conditions of this
Agreement, the Equipment set forth and described on Schedule C described at the
price also set forth on in Schedule C ("Equipment Purchase Price"), together
with the materials and services shown in Schedule D attached hereto.
1.2 PAYMENT. Payments of the Equipment Purchase Price will be made to OSS
at the address set forth above, or at any other place designated by OSS. Upon
execution of this Agreement, Customer agrees to pay fifty percent (50%) of the
Equipment Purchase Price set forth in Schedule C. Twenty-five percent (25%) of
the Equipment Purchase Price shall be paid to OSS upon delivery of the equipment
to the Customer. OSS agrees to provide customer with a written invoice upon
delivery of the Equipment. The remaining twenty-five percent (25%) is due upon
completion of the Installation Plan as defined herein and acceptance of the
installation of the System by the Customer as also defined herein. In the event
any components of the Equipment are found to be defective prior to Customer's
acceptance under Section 3.6, then OSS shall, at its sole cost and expense,
repair such Equipment or replace same with comparable Equipment within five (5)
days of notice Customer agrees to pay when due (or, if necessary, reimburse OSS
for) any applicable sales, use, property, excise, and other similar taxes. The
cost of packing, crating, shipping, in-transit insurance, and all
training/installation-related travel expenses incurred by OSS (OSS Expenses) is
an additional charge and will, at OSS's option, be added to the Equipment
Purchase Price, reimbursed upon written request, or paid by Customer directly.
In the event the OSS Expenses exceed one thousand five hundred dollars
($1,500.00) in the aggregate, OSS shall advise Customer of the amount of any
such charges in excess of such amount prior to incurring same and secure
Customer's written consent to such charges.
1.3 OTHER EQUIPMENT. In light of possible equipment and software
incompatibility, Customer agrees that it shall not use any equipment or other
devices or hardware in conjunction with the Equipment without first consulting
with OSS.
SECTION 2
PROVISIONS APPLICABLE TO SOFTWARE LICENSE
2.1 GRANT OF LICENSE. So long as this Agreement is in full force and
effect, OSS hereby grants to Customer a license which shall be exclusive to the
extent provided for in paragraph 3.3 hereof, to install, use, and execute the
Application Programs on Equipment owned by Customer at the Approved Location(s)
(as specified in Section 3.1 hereof) solely to conduct the Customer Business.
Customer shall have the right, but not the obligation, to use the name Community
Access America in conjunction with customer's name and logo in offering the
product at the Approved Location(s). If the Customer desires to use the
Microsoft Internet Explorer Administration Kit, Customer agrees to execute the
Microsoft License and comply with the terms and conditions thereof
2.2 LICENSE FEE. Customer has paid a one time license fee of $_______ for
one Approved Location and shall thereafter pay a one time licence for each
additional Approved Location ("License Fee") of $_____ dollars in consideration
of the license of the Application Programs. The License Fee shall be included
in the total price as shown in Schedule C and is due and payable within ten (10)
days of the Customer's commencement of the commercial launch of the Customer's
business in the Approved Location.
2.3 OWNERSHIP OF SOFTWARE. Subject only to the right and license
expressly granted hereunder, all right, title, and interest in and to all
intellectual property are and shall remain the property of the party who owned
such rights prior to licensing same to the other party.
2.4 USE OF APPLICATION PROGRAMS. The Application Programs are for use
solely on the Equipment and solely at the Approved Location(s). Use of the
Application Programs at other locations is expressly forbidden unless OSS has
provided the Customer with written approval to copy, reproduce, or assign the
Application Programs for use at other locations.
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<PAGE>
2.5 ROYALTY. In consideration of the rights and licenses granted
hereunder, Customer shall pay OSS a monthly royalty ("Royalty" ) provided for in
Schedule E hereto. The Royalty provided for in Schedule B will be separately
determined for Customer's revenues attributable to the provision of Internet
access and for other Web services provided by Customer.
2.6 PAYMENT OF ROYALTY. The Royalty shall be paid by Customer on or
before the thirtieth (30th) day following each month for gross revenue collected
by the Customer, with respect to the Customer Business during the previous
month. Customer agrees to maintain and provide to OSS a Royalty Report Form
with each royalty payment in the format of the monthly Royalty Report Form set
forth in Schedule F (attached hereto) to enable the parties to accurately
compute the Royalty. The Royalty shall be paid to OSS and submitted with the
Royalty Report at the address herein.
2.7 UPGRADES. OSS agrees to make all upgrades and enhancements to the
Application Programs available to Customer at the lowest price charged by OSS to
any of its customers.
2.8 USE OF OTHER SOFTWARE. In light of possible equipment and software
incompatibility, Customer agrees that it shall not use any software in
conjunction with the Equipment and Application Software without first consulting
with OSS.
SECTION 3
PROVISIONS APPLICABLE TO EQUIPMENT SALE
AND SOFTWARE LICENSE
3.1 APPROVED LOCATION. The Approved Location(s) are specified in Schedule
G hereto. The parties may add, delete, or change the Approved Location(s) at
any time through a signed addendum to this Agreement.
3.2 SELECTION OF APPROVED LOCATION(S). OSS and Customer hereby
acknowledge that the Approved Location(s) have been and will be selected and
proposed by Customer and mutually agreed to by Customer and OSS based upon
Customer's own independent judgment of its needs and objectives. Neither party
provides any assurance with respect to the suitability or profitability of the
use of the System in Customer's business or the selection of the Approved
Location.
3.3 EXCLUSIVE RIGHT. So long as this Agreement is in full force and
effect, OSS hereby grants to Customer the exclusive right to exploit the license
to the Application Programs in the Approved Location solely in pursuit of the
Customer's Business. So long as this Agreement is in full force and effect, OSS
agrees that it will not enter into any agreement granting rights similar to
those rights granted herein to any other party whose approved location is in the
same telephone local calling area as the Approved Location(s) granted to the
Customer herein.
3.4 ANCILLARY SERVICES. Customer shall be solely responsible for
arranging 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 Customer to utilize the System at the
Approved Location(s). In addition, Customer shall be solely responsible for
insuring the provision of adequate 110 volt power circuits for the System,
including backup (uninterruptible power supply, if desired) power.
3.5 INSTALLATION. OSS is responsible for staging, configuration,
installation, and testing of the System. The System will accommodate and/or
perform 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. The System will also
perform all of the accounting and control functions for dialup customers gaining
access to the System.
3.6 ACCEPTANCE. OSS's technician is responsible for the initial
acceptance of the System at the time of installation. OSS's technician will
demonstrate to Customer the successful operation of all material functions of
the installed System prior to certifying in writing to Customer that the
installation has been completed. In the event the Customer contests that all
material functions of the installed System are operating successfully, or the
certification of the installation, Customer shall provide written notice of such
claimed defects to OSS within thirty (30) days following OSS's certification
that the System operates successfully. The parties shall thereafter diligently
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<PAGE>
resolve any such disputes. The System will be considered to have received final
acceptance by the Customer thirty (30) days following the completed installation
unless Customer provides written notice to OSS specifying in reasonable detail
the claimed defects.
3.7 REPAIR OF DEFECTS. OSS is responsible for repairing any operational
deficiencies believed to be caused by the System at its sole cost, or explaining
to the Customer's satisfaction that perceived deficiencies or operational
problems are not caused by the System.
3.8 CAPACITY OF SYSTEM. The parties hereto agree and acknowledge that the
system capacities set forth on Schedule H represent the design capabilities for
the System. In the event the Customer desires to expand the capacity of the
System in any regard, the Customer first agrees to contact OSS and advise them
as to the projected expansion. OSS shall then advise Customer whether or not the
proposed expansion is technically possible and the cost thereof. In the event
Customer determines to so modify or expand the System, Customer may elect to
enter into a modification of this Agreement with OSS to provide such expansion.
Alternatively, and in its sole discretion, Customer may elect to conduct a bid
process on the same terms and conditions used by OSS to provide the initial
estimate to Customer and may elect to enter into a separate agreement regarding
expansion of the System.
3.9 ERROR CORRECTION. OSS shall correct any material reproducible error
or malfunction in the System. OSS agrees to cure such material reproducible
error or malfunction within forty-eight (48) business hours after such error or
malfunction is detected and reported to OSS. If OSS, in its discretion,
requests written verification of an error or malfunction discovered by Customer,
Customer shall immediately provide such verification to the extent possible, by
facsimile or overnight mail, setting forth in reasonable detail the respects in
which the System fails to perform. An error or malfunction shall be material if
it represents a nonconformity with OSS's current published specifications for
the System, and/or if Customer, in its reasonable discretion, determines (and
notifies OSS) that such error or malfunction interferes with the use of the
System. In the event OSS has diligently pursued the correction of such errors
and such errors are not corrected within such forty-eight (48) hours, OSS shall
be deemed in default of this Agreement.
3.10 SERVICE. Customer shall reimburse OSS at $75.00/hour plus materials
for all work of OSS spent investigating an error or malfunction that OSS
reasonably determines to have been caused by a modification to the System that
was neither made nor authorized by OSS, unless the error or malfunction was not
caused by OSS's negligence, recklessness or willful misconduct.
3.11 ACT OF GOD. The date on which the parties obligations are required
to be fulfilled will be extended for a period equal to the time lost by reason
of any delay arising directly or indirectly from (1) acts of God, unforeseeable
circumstances, acts (including a delay or failure to act) of any governmental
authority (de jure or de facto), war (declared or undeclared), riot, revolution,
priorities, fires, floods, strikes, labor disputes, sabotage, or epidemics; (2)
inability due to causes beyond either party's reasonable control and either
party's best efforts to timely obtain instructions or information from the other
party, to or obtain necessary and proper labor, materials, components,
facilities, or transportation; or (3) any other cause beyond the applicable
party's reasonable control. The foregoing extension will apply even though such
cause(s) may occur after the applicable party's performance of its obligations
has been delayed for other causes.
3.12 CUSTOMER SUPPORT. OSS shall, during the hours of 8:00 A.M. to 5:00
P.M., MOUNTAIN TIME ZONE on weekdays (exclusive of holidays), make reasonable
telephone support available to Customer's Project Leader and other personnel of
Customer who have been trained by OSS in the use of the System. OSS also will
provide a digital pager number to the Customer to which emergency calls can be
made to OSS's technicians on a 24 hour per day basis. In addition, OSS shall
agree with Customer what, if any, additional telephone support shall be made
available. Such telephone support shall not exceed five (5) hours per month.
Additional hours above the five (5) basic hours will be charged at OSS's normal
hourly rate of $75.00 per hour, billable in 1/4 hour increments, beginning with
the month first commencing sixty (60) days after installation of the System.
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<PAGE>
SECTION 4
INSTALLATION, DELIVERY AND TITLE
4.1 TITLE. Title to the Equipment and risk of loss shall pass to Customer
on Acceptance as provided for in paragraph 3.6 hereof.
4.2 DELIVERY OF EQUIPMENT. Unless otherwise determined by OSS, OSS will
deliver all Equipment to Customer F.O.B. OSS's principal place of business. OSS
reserves the right to make partial deliveries and to ship the Equipment as it
becomes available. Delivery dates are approximate. Customer shall provide a
mutually agreeable installation and operations environment suitable for computer
equipment.
4.2 INSTALLATION PLAN. OSS shall promptly provide on-site installation
assistance comprised of the installation and other services described in the
Installation Plan set forth in Schedule I attached hereto and such other
services as the parties mutually and reasonably determine are necessary to
permit Customer to begin use of the System in accordance with such Installation
Plan.
4.3 CUSTOMER RESPONSIBILITIES. Customer shall promptly perform all
responsibilities it is assigned under the Installation Plan. Customer shall
also furnish to OSS, free of charge for the period of time required for
installation of the System, (1) access to the location in which the Equipment is
to be placed during normal business hours, and (2) the time and attention of a
management-level employee (hereinafter the Project Leader ) knowledgeable in
aspects of Customer's business and operations.
SECTION 5
OPTIONAL TELEPHONE SUPPORT AND STARTUP SOFTWARE FOR CUSTOMER'S USERS
5.1 Customer Internet User Support. OSS will provide customer support for
the Customer's Internet users if requested by the Customer. This support will
consist of telephone consultation in response to Customer's Internet Users'
request for assistance. OSS will provide a toll-free (to the Internet user)
number for handling of these calls. The terms and pricing for this service
shall be as mutually agreed between the parties.
5.2 NEWSGROUP SERVICES. OSS will provide Usenet Newsgroup Services for
the Customer's end users from its server located at OSS headquarters. The
pricing for Newsgroup Services is shown in Schedule E.
5.3 INTERNET USER STARTUP SOFTWARE. OSS will provide Internet user
startup software if requested by the Customer. The software includes the
Microsoft(R) Internet Explorer, which is provided under a no-fee license
agreement between OSS and Microsoft. The Customer must also sign an identical
License and Distribution Agreement with Microsoft if the Customer desires OSS to
prepare the user startup software. The terms and pricing for software shall be
as mutually agreed between the parties.
SECTION 6
CONFIDENTIALITY
6.1 CONFIDENTIAL INFORMATION. For purposes of this Agreement,
"Confidential Information" shall mean all confidential and proprietary
information disclosed by one party to the other party, including (i) information
disclosed in writing and marked "confidential", (ii) information disclosed
orally and identified as confidential at the time of disclosure, and (iii)
information which the receiving party knows or has reason to know is
confidential, trade secret, or proprietary information of the disclosing party,
and (iv) the terms and conditions of this Agreement. Customer and OSS will
maintain each other's Confidential Information in confidence, will not use such
Confidential Information other than in connection with this Agreement, and will
not disclose such Confidential Information to any persons other than their
employees with a need to know except: (i) to the extent necessary to comply with
law of the valid order of a court or governmental agency or authority in which
case the disclosing party will so notify the other in writing as promptly as
practicable (and, if possible, prior to making any disclosure) and will seek
confidential treatment of such terms and conditions; (ii) as part of normal
reporting or review procedure to parent companies, auditors and attorneys;
provided, that such parent company, auditors and attorneys are bound by
substantially similar obligations; and (iii) in order to enforce their
respective rights pursuant to this Agreement in a legal proceeding. The
provisions of this Section 6 shall in no event apply to information that (i) is
in or enters the
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<PAGE>
public domain without breach of this Agreement; (ii) is lawfully received from a
third party without restriction on disclosure and without breach of
nondisclosure obligation; or (iii) is developed independently.
6.2 INJUNCTIVE RELIEF. Each party acknowledges that the unauthorized
disclosure and/or use of any Confidential Information of the other party would
cause irreparable harm that could not be remedied by the payment of damages
alone. Accordingly, the party whose Confidential Information has been
improperly disclosed and/or used will be entitled to preliminary and permanent
injunctive relief and other equitable relief for any breach of this Section 6.
SECTION 7
INSPECTION
7.1 INSPECTION. OSS's authorized representatives shall provide seven (7)
days written notice to contact Customer for an appointment to be promptly
scheduled at the parties mutual convenience to visit the Customer's premises and
to be granted access to the Customer's offices, employees, and managers during
normal business hours for the purpose of inspecting Customer's equipment,
physical plant, and applicable books and records necessary to verify the
accuracy of Customer's Royalty Payments, and Customer's compliance with the
material provisions of this Agreement. All such books and records will be
retained by Customer for inspection and audit by OSS for not less than six (6)
months and no longer than one (1) year after the creation of such books and
records. In furtherance of the foregoing, Customer also agrees to grant OSS
reasonable access to the Customer's billing database via the Internet for such
verification. Permission for such access shall not unreasonably be withheld by
Customer. Customer shall maintain full and complete records in accordance with
generally accepted accounting principles and shall submit to OSS the monthly
Royalty Report Form pursuant to Section 2.6 herein.
SECTION 8
INITIAL CUSTOMER TRAINING
8.1 INITIAL CUSTOMER TRAINING. Before commencing its use of the System,
Customer and OSS shall determine a training schedule acceptable to Customer and
the Customer shall make its managers and employees available during normal
business hours for training of such duration and scope as the parties may
mutually agree. Reasonable out of pocket expenses incurred by OSS for such
training, and agreed to in advance by Customer, shall be borne by Customer and
reimbursed to OSS within thirty (30) days of being invoiced by OSS to Customer.
Employees of the Customer shall include a technician familiar with computers,
computer networks, communications and data protocols. Such technician shall be
competent to deal with routine questions from current and potential customers
obtaining Internet access from the Customer.
SECTION 9
WARRANTIES AND LIMITATION OF LIABILITY
9.1 SERVICE WARRANTY. OSS warrants that it will render its services
provided for herein in a good and workmanlike manner. As OSS's sole
responsibility and Customer's exclusive remedy in the event of any material
failure to meet such standard, OSS shall make its best efforts to remedy any
resulting discrepancies or defects which are required to be remedied by OSS as
provided for herein. Any claim based on the foregoing warranty must be
submitted in writing in accordance with OSS's standard procedures within ninety
(90) days after delivery or the date of required delivery of the pertinent
service. Except as expressly set forth in this Agreement, OSS makes no warranty
or representation, express or implied, as to any matter whatsoever, including,
without limitation, its services, the System, the design or condition of the
equipment or any programming, or any output based on use of the System. OSS
specifically disclaims, without limitation, any implied warranty of
merchantability or fitness for a particular purpose.
9.2 SYSTEM WARRANTY. OSS warrants, for Customer's sole benefit, that the
System, when delivered, properly installed, and used in accordance with OSS's
instructions, will conform to OSS's most current version of the published
specifications (Schedule 1) for the System in all material respects. As OSS's
sole responsibility and Customer's exclusive remedy in the event of any material
nonconformity, OSS shall, at its option, make a reasonable effort to repair or
replace the System so that it conforms to such written specifications or shall
reimburse Customer's license fee. Any claim based on the foregoing warranty
must be submitted in writing in accordance
-6-
<PAGE>
with OSS's standard procedures within ninety (90) days after delivery of the
Application Programs. Such warranty shall not apply if the System has been
modified by Customer.
9.3 PARTY TO WARRANTIES AND REPRESENTATIONS. Neither party shall have the
authority to and shall not make any representations or warranties to others on
behalf of the other party.
9.4 LIMITATION ON LIABILITY. The total liability of either party
(including their subcontractors and suppliers) for all claims, whether in
contract, tort (including negligence and product liability) or otherwise,
arising out of, connected with, or resulting directly or indirectly from this
Agreement, the license, delivery, installation, use, support, or maintenance of
the Application Programs shall not exceed the amount of the License Fee.
Notwithstanding any other provision in this Agreement to the contrary, in no
event shall either party be liable for any incidental, consequential, indirect,
or special damages, including, without limitation, damages for loss of profits
or revenue, cost of capital, claims of customers for service interruptions or
failure of supply, and costs and expenses incurred in connection with labor,
overhead, transportation, installation, or removal of equipment or programming
or substitute facilities or supply resources, whether arising in contract, tort
(including negligence) or otherwise.
9.5 LIMITATION OF WARRANTY. Except as set forth in this Agreement or
another written agreement signed by a duly appointed officer of such party,
neither party makes any warranty or representation, express or implied, with
respect to any matter whatsoever, including, without limitation, the application
programs, the system, or any output based on use of the system, and both
Customer and OSS specifically disclaim, without limitation, any implied warranty
of merchantability, fitness for a particular purpose.
9.6 LIMITATION OF DAMAGES ON EXPIRATION OR TERMINATION OTHER THAN FOR
CAUSE. Neither party will be liable to the other for damages of any kind or
upon its termination of this Agreement in accordance with its terms or upon its
termination other than for a material breach. Both parties waive any right it
may have to receive any compensation or reparations under the law of any
jurisdiction in the event of such an expiration or termination other than for a
material breach.
SECTION 10
TERM AND TERMINATION
10.1 TERM. This Agreement shall commence on the date of both parties
written acceptance of this Agreement, as set forth at the end of this Agreement.
Unless sooner terminated in accordance with this Section, this Agreement shall
continue in effect for two (2) years, and thereafter may be renewed upon the
mutual written agreement of the parties.
10.2 TERMINATION ON DEFAULT. Either party may send thirty (30) days
written notice of termination to the other party specifying in detail one or
more of the following events
1. Ether Party defaults in the performance of any material
requirement or obligation contained in this Agreement;
2. Either Party fails to make a required payment to the other Party
within fifteen (15) days of its due date;
3. Customer or OSS ceases doing business or otherwise sells all or a
portion of its assets used in connection with providing Internet
Services in the Approved Location(s);
4. Customer or OSS is the subject of bankruptcy, insolvency, or
similar proceeding, or makes an assignment for the benefit of
creditors; or a receiver is appointed for Customer's or OSS's assets
related to providing Internet Services in the Approved Location(s).
10.3 OPPORTUNITY TO CURE DEFAULT. Except as otherwise provided in this
Agreement, upon receipt of a written notice asserting an event of default, the
party receiving such notice shall have an opportunity to cure such
-7-
<PAGE>
default within thirty (30) days of such notice, or at a minimum, dispute the
claimed event of default, or if such default cannot be reasonably cured within
such thirty (30) day period, then the party in default shall demonstrate, to the
other party's
10.4 EFFECT OF TERMINATION. Upon and after any termination of this
Agreement or the expiration of the Term:
1. Customer, its receivers, trustees, assignees, or other
representatives shall immediately surrender all rights, licenses, and
privileges granted under this Agreement.
2. Customer, its receivers, trustees, assigns, or other
representatives shall immediately cease using and return without
delay all equipment and property owned by OSS, including, without
limitation, all manuals, billing and other proprietary software, and
informational materials furnished by OSS to Customer. Any equipment
delivered to Customer by OSS and fully paid for by Customer and all
non-proprietary software provided by OSS to Customer (to the extent
permitted by the original seller thereof) shall not be deemed
equipment or property owned by OSS.
3. Except as may be necessary for a short duration following
termination, neither Customer nor OSS, nor its receivers, trustees,
assigns, or other representatives shall continue to market, advertise
or otherwise, use or display any of the other Party's, OSS's
trademarks or any name, mark, or logo that is the same as or similar
to the other Party's trademarks, represent itself to be a licensee of
the other, or in any way identify itself with the other Party.
4. If Customer has paid for all Equipment in full, Customer shall be
entitled to keep such Equipment. Upon termination, Customer shall pay
Royalties then due and payable up to the date of termination, less
any amounts due and owing Customer from OSS. Upon termination, if
Customer has not paid for all Equipment, Customer shall return all
Equipment to OSS and OSS shall reimburse Customer for the difference
between the reasonable value of the returned Equipment (after
deducting the costs of retrieving and shipping such Equipment) and
the total amount due for the purchase of the Equipment and any
Royalties then due and payable.
10.4 NON-RELEASE OF OBLIGATIONS. No termination of this Agreement shall
release either party from any obligation to pay the other any amount that has
accrued or become payable at or prior to the date of termination.
10.5 SURVIVAL OF PROVISIONS. The provisions of paragraphs 2.3, 2.4, 6.1,
9.1, 9.4, 9.5, 9.6, 11, and 12 shall survive the termination of this Agreement.
SECTION 11
INDEMNIFICATION
11.1 To the extent of each parties negligence, OSS and Customer will each
defend, indemnify and hold harmless the other's affiliated companies and
partners and their respective officers, directors, employees and agents from all
liabilities, damages, costs and expenses (including, without limitation,
reasonable counsel fees and expenses) directly or indirectly incurred in
connection with any third party claim arising directly or indirectly out of a
breach of any material term or condition set forth in this Agreement or the
performance of either party hereunder.
11.2 To assert its rights of indemnification hereunder in cases involving
third party claims, the party seeking indemnification must:
-8-
<PAGE>
1. promptly notify the indemnifying party in writing of any claim or
legal proceeding which gives rise to such right;
2. afford the indemnifying party the opportunity to participate in,
or, at its option, fully control any proceeding and the compromise,
settlement, resolution or other disposition of such claim or
proceeding; and
3. fully cooperate with the indemnifying party, at the indemnifying
party's expense, in such indemnifying party's participation in, and
control of, any claim or proceeding and the compromise, settlement,
resolution or other disposition of such claim or proceeding; provided,
however, that if such compromise, settlement, resolution or the
disposition could have an adverse effect on the indemnified party,
then indemnified party's consent to such compromise, settlement,
resolution or other disposition will be required but will not be
unreasonably withheld.
SECTION 12
INTELLECTUAL PROPERTY RIGHTS AND OWNERSHIP
12.1 "Intellectual Property Rights" means all patent rights, copyright
rights (including, but not limited to, rights in music and audiovisual works and
moral rights), trademark rights, trade secret rights, and any other intellectual
property rights recognized by the law of each applicable jurisdiction.
12.2 Except as specified in Section 12.3 below, (I) Customer will not
acquire any proprietary or other rights by reason of this Agreement in any
names, trademarks, and logos used by OSS and (ii) OSS will not acquire any
proprietary or other rights by reason of this Agreement in "InterMedia" or any
other names, trademarks, and logos used by Customer. Materials used by one
party that incorporate any of the other party's names, trademarks, and logos
(the "Marks") will not be made available to third parties unless they comply
with the trademark guidelines then in effect for such Marks.
12.3 Subject to the terms and conditions of this Agreement, each party
grants the other party a non-exclusive, non-transferable license for the term of
this Agreement for its use in accordance with the trademark guidelines then in
effect for such Marks. Such use must reference the owner of the Marks. The
license grant set forth herein will automatically terminate for any further use
of the Marks in the Approved Locations upon the termination or expiration of the
Agreement. Upon any such termination or expiration, neither party will use the
Marks of the other party.
12.4 Each party will have the exclusive right to own, use, hold, apply for
registration for, and register its own Marks during the term of, and after the
expiration or termination of, this Agreement. Neither party will take nor
authorize any activity inconsistent with these exclusive rights of the other
party.
12.5 Customer's ownership rights under this Section 12 will include, but
not be limited to (i) all Intellectual Property Rights held by Customer; and
(ii) all modifications to, and derivative works base upon, such Intellectual
Property Rights.
12.6 OSS represents that the Application Programs, including associated
report formats, screen displays, and menu features, constitute copyrightable
works protected by federal and international copyright laws. In addition to and
in furtherance of the protection afforded by such copyright laws, Customer shall
not knowingly permit any one, including its personnel, to remove any proprietary
or other legends or restrictive notices, which are specifically designated as
such, contained or included in any materials provided by OSS, and Customer shall
not knowingly permit any persons to copy or modify any such materials except as
specifically authorized hereunder.
12.7 Neither party will delete or in any manner alter the Intellectual
Property Rights notices of the other party or its suppliers, if any. Each party
will reproduce and display the other party's Intellectual Property Notices where
appropriate. Each party will use its reasonable efforts to protect the other
party's Intellectual
-9-
<PAGE>
Property Rights and will report promptly to the other party any actual or
suspected infringement or misappropriation of such rights of which it becomes
aware.
12.8 THIRD PARTY INFRINGEMENT. Each party reserves the sole and exclusive
right at its discretion to assert claims against third parties for infringement
or misappropriation of its Intellectual Property Rights.
12.9 INFRINGEMENT. If Customer receives a claim that any item of
Equipment, when used in accordance with OSS's instructions, infringes a U.S.
patent, copyright, or other intellectual property interest, Customer will notify
OSS promptly in writing and give OSS all necessary information and assistance
and the exclusive authority to evaluate, defend, and settle such claim. OSS
shall indemnify Customer against any such claim. OSS, at its own expense and
option, will then (1) settle or defend against such claim; (2) procure for
Customer the right to use such item of Equipment; (3) replace or modify inch
item of Equipment to avoid infringement; or (4) remove such item of Equipment
and refund the purchase price less a reasonable amount for depreciation.
Provided such timely notice has been given by Customer, should any court of
competent jurisdiction hold the manufacture or use of such item of Equipment to
constitute infringement, OSS will pay any costs and damages finally awarded on
account of such infringement and, if the use of such item of Equipment is
enjoined, OSS will take, at its option, one or more of the actions described in
this Section 12. With respect to any item of Equipment or part thereof not
manufactured by OSS, only the indemnity, if any, given by the manufacturer
thereof will apply. The foregoing indemnity will not apply to any item of
Equipment made to the specification or design of Customer or modified or altered
in any way or to the use of the Equipment outside the scope of the System. The
rights and obligations of the parties with respect to patents and all other
intellectual property rights are solely and exclusively as stated herein.
SECTION 13
MISCELLANEOUS
13.1 NON-WAIVER. A failure by either party to enforce any right under
this Agreement shall not at any time constitute a continuing waiver of such
right or any other right, and shall not modify the rights or obligations of
either party under this Agreement.
13.2 WRITTEN NOTICE. Any notice to a party required or permitted by this
Agreement shall be sufficiently given only when provided in writing, and either
personally delivered or sent via certified or registered mail express mail
delivery, with receipt confirmation, or via fax with receipt confirmation to the
party's address indicated below. Each party shall promptly give the other party
notice of any address change. No sales person or field representative of either
party shall be authorized to act or make any commitment for such party except
pursuant to written instructions made and signed by a duly appointed officer of
such party.
Notice to OSS:
Online System Services, Inc.
1800 Glenarm Place
Denver, Colorado ZIP
ATTN:
Notice to InterMedia:
InterMedia Partners of Tennessee, L.P.
c/o 105 Jack White Drive
Kingsport, TN 37664
ATTN: General Manager
With Copy to:
InterMedia Partners
424 Church Street, Suite 1600
Nashville, TN 37219
ATTN: Legal Department
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<PAGE>
13.3 SUCCESSORS. This Agreement shall obligate and benefit the parties,
and their permitted receivers, trustees, assignors, and other representatives.
Neither party may assign all or any part of this Agreement without the prior
written consent of the other party. No assignment or transfer of any interest
in this Agreement or any other agreement relating to the subject matter hereof
(including sublicenses, hypothecations, security interests, and the like) may be
made by either party without the prior written consent of the other party, which
shall not be unreasonably withheld. In the event that Customer ceases doing
business or sells all or a portion of the assets used in connection with
providing Internet services in the Approved Location(s), then if the transferee
does not agree to assume the terms of this Agreement for such Approved
Location(s), Customer shall have the right to terminate this Agreement upon
thirty (30) days written notice to OSS.
13.4 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.
13.5 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Colorado.
13.6 ENTIRE AGREEMENT. This Agreement is the entire agreement of 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 Customer.
13.7 CREDIT REPORTS. Both parties understand and agree that credit reports
concerning the other party may be requested by and shall be furnished to the
requesting party in connection with this Agreement, not more than once per year.
13.8 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. Customer
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.
13.9 FORCE MAJEURE. Notwithstanding any other provision in this Agreement
to the contrary, neither party will have any liability to the other with respect
to its failure to perform its obligations under this Agreement, except of the
payment of amounts due, if such failure is due to any of the following events
(each a "Force Majeure" event): (i) the failure of any equipment or software
under the control of a person, firm or entity not affiliated with such party;
(ii) any labor dispute, fire, flood, riot, law, government regulation or delay,
or act of God; or (iii) any other cause beyond the reasonable control of such
party. In any such case, the parties' time for performance under this Agreement
and the term hereof, to the extent affected by any of the foregoing, will be
correspondingly extended.
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<PAGE>
SECTION 14
ACCEPTANCE
14.1 Acceptance. This Agreement shall not become effective until accepted
in writing by both parties. Such acceptance shall be evidenced by the signature
of the Chairman of the Board, President, Treasurer, or any Vice President, or
other authorized party with OSS or Customer and the entry of the acceptance date
in the space provided below.
INTERMEDIA PARTNERS ONLINE SYSTEMS SERVICES
Southeast (Customer)
BY /s/ BY /s/
---------------------------- ------------------------------------
Authorized Signature Authorized Signature
______________________________
Printed Name and Title Paul Spieker - VP -Network Development
Printed Name and Title
______________________________ ______________________________________
- ------------------------------ 1800 Glenarm Place, Suite 800, Denver CO
Address Address
August 4, 1997
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<PAGE>
AMENDMENT NO. 1
TO
EQUIPMENT SALE AND SOFTWARE LICENSE AGREEMENT
WHEREAS, Online System Services, Inc. ("OSS") and InterMedia Partners Southeast
("Customer") have entered into that EQUIPMENT SALE AND SOFTWARE LICENSE
AGREEMENT (the "Agreement") dated August 4, 1997; and
WHEREAS, OSS and Customer desire to set forth terms which shall govern
Customer's use of the OSS System in additional Approved Locations; and
WHEREAS, OSS and Customer desire to modify the Agreement such that wherever
language contained in this Amendment conflicts with the terms of the Agreement
or any exhibit thereto, the language contained in this Amendment shall control;
NOW, THEREFORE, the parties agree as follows:
1. The first five sentences of Section 1.2 shall be replaced with the
following:
Payments of the Equipment Purchase Price, including the design and
integration fee, will be made to OSS at the address set forth above, or at
any other place designated by OSS. Customer agrees to make payments for
Equipment which Customer agrees to buy and OSS agrees to sell to Customer
in accordance with the following schedule: (a) fifty percent (50%) of the
Equipment Purchase Nice, including the design and integration fee, as set
forth in Schedule C shall be paid upon execution of this Agreement or, as
applicable, an amendment thereto which provides for the purchase of
additional Equipment; (b) twenty-five percent (25%) of the Equipment
Purchase price shall be paid to OSS upon delivery of the Equipment to
Customer with a written invoice; and (c) the remaining twenty-five percent
(25%) of the Equipment Purchase Price shall be due ninety (90) days after
the date of delivery of the Equipment unless OSS fails to complete the
Installation Plan as defined herein or Customer provides notice that the
installation is unacceptable pursuant to Section 3.6 herein.
2. The following new Section IA entitled "Expansion Markets and New Markets"
is added to the Agreement:
1A.1 EXPANSION MARKETS. For the purposes of this Agreement, an Expansion
Market shall be defined as any Approved Location in the East
Tennessee region that is utilizing the backbone connection to the
Internet existing in Kingsport, Tennessee. All terms and conditions
in this Agreement shall apply to any Expansion Market, except that
(i) the License Fee shall not be applicable in any Expansion Markets,
(ii) the Royalty for an Expansion Market shall be set forth in
Schedule E-l, and (iii) Customer agrees to pay the "Installation
Fees" set forth in Section 4.3 and Schedule I-1 for the installation
and integration of the System in Expansion Markets.
1A.2 NEW MARKETS. For the purposes of this Agreement, a New Market shall
be deemed any Approved Location, excluding any Expansion Market and
excluding the Kingsport, Tennessee market as currently defined in
Schedule G. All terms and conditions in this Agreement shall apply to
any New Market, except that (i) the License Fee shall not be
applicable in any New Markets, (ii) the Royalty for a New Market
shall be set forth in Schedule E-1,(iii) Customer agrees to pay the
"Installation Fees" set forth in Section 4.3 and Schedule I-1 for the
installation and integration of the System in New Markets, and (iv)
the length of the term of this Agreement for such New Markets shall
be five (5) years unless otherwise agreed upon by the parties.
1A.3 MATCHING OPTIONS FOR OSS. Should Customer seek to utilize the OSS
System in an Expansion Market and/or a New Market (collectively an
"Additional Market"), then within thirty (30) days of Customer's
request for a proposal to use the OSS System in an Additional Market,
OSS agrees to provide Customer with a proposal which includes an
itemized list of Equipment with related maintenance information and
the cost therefor which is necessary to provide the OSS system in
such Additional Market. For thirty (30) days following receipt of the
proposal, Customer may
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<PAGE>
seek to obtain competitive proposals for comparable equipment. After
receipt of competitive proposals, should Customer have an interest in
accepting a competitive proposal, Customer agrees to first provide
OSS with written notice and the right to match the competitive
proposal. Should OSS fail to match the competitive proposal with an
offer containing comparable equipment that is no greater than 5% of
the total cost of the competitive proposal within ten (10) days of
the notice, then Customer shall be entitled to accept the competitive
proposal.
3. The sentence in Section 4.1 is hereby deleted in its entirety and the
following is substituted therefor:
Title to the Equipment and risk of loss pass to Customer upon delivery of
the Equipment to Customer.
4. Section 4.2 entitled Installation Plan shall be renamed "Installation Fees
Plan", shall be designated as Section 4.3, and the language in such section
shall be deleted in its entirety and the following shall be substituted
therefor:
4.3 INSTALLATION FEES PLAN. OSS shall promptly provide on-site
installation assistance comprised of the installation and other
services described in the Installation Plan set forth in Schedule 1
attached hereto and such other services as the parties mutually and
reasonably determine are necessary to permit customer to begin use of
the System in accordance with such Installation Plan. The
Installation Fees set forth in Schedule I-1 shall be paid by Customer
to OSS for the performance by OSS of the services described in the
Installation Plan concerning the installation and integration of the
System in Additional Markets.
5. Section 4.3 entitled "Customer Responsibilities" shall be designated as
Section 4.4.
6. The second sentence of Section 10.1 of the Agreement is deleted in its
entirety and the following is substituted therefor:
This Agreement shall continue for a period of three (3) years from July 1,
1997, unless sooner terminated in accordance with the terms of this
Agreement.
7. The title of Section 8 of the Agreement shall be revised to read: "Internet
Access Support, Community Access Partner Support, Training and
Documentation".
8. The following new Section 8.2 is added to the Agreement:
8.2 OSS agrees to furnish Customer with on-going web support, training and
documentation which supports the Internet access, Community Access
Partnership, and Web hosting services provided by the Customer, and
with additional services to support the access and content business.
The parameters and scope of the foregoing services, support, training
and documentation are defined in Schedules "K" and "J" attached
hereto.
9. Section 2.5 of the Agreement is deleted in its entirety, and the following
is substituted therefor:
2.5 Royalty & Content Fees. In consideration of the rights and licenses
granted hereunder and the support training and documentation provided,
Customer shall pay to OSS:
2.5.1 Royalty. In consideration of the rights and licenses granted
hereunder, Customer shall pay OSS a monthly royalty ("Royalty")
provided for in Schedule E hereto. The Royalty provided for in
Schedule E will be separately determined for Customer's revenues
attributable to the provision of Internet access and for other
Web services provided by Customer.
2.5.2 Content Revenue Sharing. The parties hereby agree to the
following Content Revenue sharing arrangement: (a) For Content
Revenues generated or derived from sales by Customer, Customer
shall retain _____% of the Content Revenues, and shall pay OSS
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<PAGE>
___% of such Content Revenue; (b) For Content Revenues generated
or derived from sales by OSS, OSS shall retain ____% of the
Content Revenues, and shall pay Customer ____% of such Content
Revenue. For purposes of this section, Content Revenues shall be
defined as all fees generated from or attributable to all content
sales related activities on the service in the Territory,
including but not limited to sponsorships, electronic
advertising, electronic banking and electronic commerce minus
custom software and web-design development costs, uncollectible
billings, installation charges, and value added, sales and other
transactional taxes (other than those which Customer is obligated
to pay on its own behalf').
2.5.3 Newsgroups. Newsgroup service will be provided by OSS for an
additional S___ per end-user per month with a cap of $_____ per
month. If $_______ cap is reached on Schedule E, then Customer
shall receive the newsgroup service for no charge.
10. Schedule C-1, which is attached hereto, is hereby added to the Agreement.
11. Schedule E is hereby revised to add the Royalty Payment terms for months 25
through 36. A revised Schedule E is attached hereto.
12. Schedule I is hereby amended to include the following item Number 10:
10. Consulting assistance in the following areas will be provided by OSS
on an "as needed" basis and upon the mutual agreement of the parties:
. Technical Support for Operation of the POP
. Internet Backbone Services
. Telecommunications Connections to the POP and Other General
Telecommunications Issues
. Financial Modeling of the Internet Access and Web Content
Business
. Domain Name Registration Process
. Marketing and Promotional Materials such as Brochures, Flyers,
Ad Formats
. Sample Customer Contracts & Agreements for Access and Web-based
Services
. Administrative Procedures for Operating the Internet Access
Business
13. Schedule K, which is attached hereto, is hereby added to the Agreement.
14. Schedule L, which is attached hereto, is hereby added to the Agreement.
All terms and conditions of the Agreement shall remain in full force and effect
unchanged, except as modified herein.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of May
26, 1998.
CUSTOMER: OSS:
INTERMEDIA PARTNERS SOUTHEAST ONLINE SYSTEM SERVICES, INC.
By: /s/ By: /s/
--------------------------- ------------------------------
Name:_________________________ Name:_________________________
Title:________________________ Title:________________________
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<PAGE>
Exhibit 21
Subsidiaries of Online System Services, Inc.
Durand Acquisition Corporation, a Minnesota corporation.
This corporation is a wholly-owned subsidiary of Online System Services,
Inc. formed solely for the purpose of facilitating the acquisition of
Durand Communications, Inc.
NetIgnite 2, LLC, a Colorado limited liability company.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated March 10, 1999, included in this Form 10-KSB, into Online
System Services, Inc.'s previously filed Registration Statement (File No. 333-
13983) on Form S-8, Registration Statement (File No. 333-03282-D) on Form S-3,
Registration Statement (File No. 333-58653) on Form S-3, Registration Statement
(File No. 333-69477) on Form S-3 and Registration Statement (File No. 333-71503)
on Form S-3.
Arthur Andersen LLP
Denver, Colorado
April 15, 1999.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 698,339
<SECURITIES> 0
<RECEIVABLES> 165,837
<ALLOWANCES> 18,000
<INVENTORY> 55,126
<CURRENT-ASSETS> 2,203,113
<PP&E> 1,920,180
<DEPRECIATION> 741,552
<TOTAL-ASSETS> 3,385,276
<CURRENT-LIABILITIES> 1,326,022
<BONDS> 0
0
4,101,336
<COMMON> 16,410,300
<OTHER-SE> (20,774,129)
<TOTAL-LIABILITY-AND-EQUITY> 3,385,276
<SALES> 1,103,717
<TOTAL-REVENUES> 1,589,380
<CGS> 905,234
<TOTAL-COSTS> 1,291,537
<OTHER-EXPENSES> 11,053,912
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (139,806)
<INCOME-PRETAX> (10,616,263)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,616,263)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (5,146,109)
<NET-INCOME> (15,762,372)
<EPS-PRIMARY> (4.35)
<EPS-DILUTED> (4.35)
</TABLE>
