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As filed with the Securities & Exchange Commission on January 29, 1999
Registration No. ____________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_________________________
ONLINE SYSTEM SERVICES, INC.
(Exact name of issuer as specified in its charter)
Colorado 84-1293864
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1800 GLENARM PLACE, SUITE 700
DENVER, COLORADO 80202
(303) 296-9200
(Address and telephone number of principal executive offices)
_________________________
R. Steven Adams
Online System Services, Inc.
1800 Glenarm Place, Suite 700
Denver, Colorado 80202
(303) 296-9200
(Name, address and telephone number of agent for service)
Copy to:
Lindley S. Branson
Scott A. Hendrickson
Gray, Plant, Mooty, Mooty & Bennett, P.A.
33 South Sixth Street
3400 City Center
Minneapolis, Minnesota 55402
(612) 343-2800
_________________________
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box.[_]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box.[X]
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If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of earlier effective registration
statement for same offering.[_] ________________________________________________
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for same offering.[_]___________________________________________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[_]______________________________________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of securities Amount to be Proposed maximum Proposed maximum aggregate Amount of
to be registered registered offering price (1) offering price (1) registration fee
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par 820,000 $16.4375 $13,478,750 $3,976.23
value (2)
Common Stock, no par 20,000 $16.4375 $ 328,750 $ 96.98
value (3)
Total 840,000 $16.4375 $13,807,500 $4,073.21
</TABLE>
_______________________________
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of Regulation C as of the close of the market on
January 27, 1999.
(2) Common stock issuable by OSS upon conversion of OSS' issued and outstanding
Series C Preferred Stock. An indeterminate number of additional shares of
common stock are registered hereunder that may be issued by reason of any
stock split, stock dividend or similar transaction involving the common
stock, in order to prevent dilution, in accordance with Rule 416 under the
Securities Act of 1933, as amended.
(3) Common stock issuable by OSS upon exercise of issued and outstanding
transferable warrants of OSS. An indeterminate number of additional shares
of common stock are registered hereunder in accordance with Rule 416 under
the Securities Act of 1933, as amended, that may be issued as provided in
such warrants in the event that the provisions against dilution in such
warrants become operative.
_______________________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer of sale is not permitted.
SUBJECT TO COMPLETION, DATED JANUARY 29, 1999
PROSPECTUS
ONLINE SYSTEM SERVICES, INC.
This is a public offering of a minimum of 165,278 and a maximum of
_________ shares of common stock of Online System Services, Inc. The selling
shareholders identified in this prospectus are offering all of the shares to be
sold. OSS will not receive any of the proceeds from the offer and sale of the
shares, however, certain shares offered by this prospectus are issuable upon the
exercise of issued and outstanding transferable warrants of OSS. If these
warrants are exercised in full OSS will receive proceeds of $114,200.
The shares to be sold by the selling shareholders consist of shares of
common stock issuable to them upon:
. Their conversion of OSS' Series C Preferred Stock; or
. Their exercise of issued and outstanding transferable warrants of OSS
exercisable at a price per share of $5.71.
The Nasdaq SmallCap Market lists the common stock under the symbol "WEBB".
INVESTING IN THE COMMON STOCK INCLUDES CERTAIN RISKS. YOU SHOULD NOT
PURCHASE THE COMMON STOCK UNLESS YOU CAN AFFORD TO LOSE YOUR ENTIRE INVESTMENT.
SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
The shares may be offered and sold at various times by the selling
shareholders identified in this prospectus pursuant to rules promulgated by the
Securities and Exchange Commission. The selling shareholders will offer and sell
the shares at market prices prevailing at the time of sale or at negotiated
prices and may sell the shares to or through brokers or dealers. Because the
selling shareholders will offer and sell the shares at various times, OSS has
not included in this prospectus information about the price to the public of the
shares or the proceeds to the selling shareholders.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities or passed on the
adequacy of the disclosures in this prospectus. Any representation to the
contrary is a criminal offense.
The date of this prospectus is _______________, 1999.
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THE COMPANY
Online System Services, Inc. develops, markets and supports products
and services that enable individuals to create and manage their own Internet Web
presence, create public or private online communities and manage their own
interactions. Our i2u foundation software provides users with the ability to
create their own home pages using simple, on-screen templates, as well as
integrated online communications, commerce and publishing tools. We have
targeted the following market opportunities:
. I2U COMMUNITY - Customized community and communication portals or start
pages for broadband (high bandwidth or high data transmission capabilities)
operators who provide Internet access.
. I2U ENTERPRISE - Internet and Extranet services for businesses,
associations and government institutions.
. I2U EDUCATION - Classroom applications for elementary and secondary
schools, including parent/teacher communications, virtual campuses for
colleges and universities and online classrooms for corporate training.
. I2U FINANCIAL SERVICES - Online banking services for banks, credit unions
and other financial institutions.
Our integrated i2u software permits the generation of Internet Web
site content by individual users, Internet service providers ("ISPs"), local
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. The i2u software
includes personal communication tools which facilitate user interaction and
community "groupware" which enables any group to create a public or private
community for personal interaction and information exchange.
In order to gain market share and to create a foundation for future
content revenues, we have developed a suite of products, marketed under the i2u
brand, which provides broadband operators with our proprietary software, as well
as the equipment, training, systems and services required for the broadband
operator to become a fully operational Internet service provider. These
products and services are provided at minimal or no initial cost to the operator
in exchange for which we share in the revenues from Internet advertising and
commerce and, if the operator utilizes our access products and services,
Internet access.
We have utilized the i2u foundation software to develop an online
product designed for elementary and secondary schools which facilitates
communications and information exchange among teachers, administrators, parents
and students. We have also developed "RE/MAX Mainstreet," a system designed to
be RE/MAX International, Inc.'s primary communication tool linking its real
estate agents, management and approved suppliers worldwide and a state-of-the-
art system for providing online banking services for Rockwell Federal Credit
Union.
As part of our product enhancement efforts, we have agreed to acquire
Durand Communications, Inc. ("DCI"), a developer and marketer of Internet
"community" building tools and services which allow users to set up their own
password-protected virtual communities. DCI's CommunityWare product is being
integrated into the i2u suite of products and services. DCI has provided the
information regarding DCI included in this prospectus. See "Recent
Developments--DCI Acquisition."
Our strategies to achieve our growth objective include:
. Gaining early market share by offering the i2u Community products and
services to broadband operators at minimal or no initial cost in exchange
for a share of the revenues from Internet commerce and access;
. Continuing to expand the i2u suite of products and services;
. Leveraging the i2u platform software to develop products for the
development of online communities for specific industries and markets;
. Aggregating subscribers of multiple online communities to develop unique
channels of distribution for Internet products, advertising and services;
. Acquisitions; and
. Developing strategic alliances.
On January 11, 1999 we sold 3,000 shares of our Series C Preferred
Stock to Arrow Investors II LLC in a private placement offering of such stock.
We received $3,000,000 in gross proceeds from such offering. We intend to use
such proceeds for general working capital purposes. In connection with such
offering, we also issued a warrant to Arrow Investors II LLC to purchase an
additional 2,000 shares of Series C Preferred Stock for an aggregate purchase
price of $2,000,000 on or before June 30, 1999. This warrant also grants us the
right to require Arrow
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Investors II LLC to exercise such warrant. See "Risk Factors--Increased Need for
Working Capital; Ability to Continue as a Going Concern," "Risk Factors--Rights
to Acquire Shares; Potential Substantial Dilution," "Risk Factors-Pending
Acquisition of DCI; Possible Dilution to OSS Shareholders Caused by the
Acquisition," Risk Factors--Ability to Issue Common Stock and Preferred Stock;
Anti-Takeover Devices," and "Risk Factors--Affect of Issuance of 10%, 5%, Series
A and Series C Preferred Stock on Net Loss."
OSS was incorporated under the laws of the State of Colorado on March
22, 1994. Our executive offices are located at 1800 Glenarm Place, Suite 700,
Denver, Colorado 80202, telephone number (303) 296-9200.
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RISK FACTORS
The common stock offered by this prospectus is highly speculative and
involves a high degree of risk. Before you purchase any common stock you should
carefully read this entire prospectus, and you should consider the following
risks and speculative factors. You should purchase common stock only if you can
afford the loss of your entire investment in the common stock.. You should also
be aware that certain statements set forth below are "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995.
Please refer to the "Special Note Regarding Forward-Looking Statements" on page
12 of this prospectus for more information.
RISKS RELATED TO BUSINESS OF OSS
Limited Operating History; Accumulated Losses. OSS was founded in
March 1994, commenced sales in February 1995 and was in the development stage
through December 31, 1995. DCI was founded in 1993. Accordingly, we have only
a limited operating history upon which you can base your evaluation of our
prospects, DCI and us. In conducting your evaluation, you should consider our
prospects, including the prospects of DCI, in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets such as
the Internet market. These risks include our ability to respond to competitive
developments, our ability to continue to attract, retain and motivate qualified
persons, and our ability to continue to upgrade and commercialize our products
and services. There is no assurance that we will be successful in addressing
these and other risks. Economic and market conditions over which we have no
control may also significantly affect our business. We have incurred net losses
since inception totaling $13,158,897 through September 30, 1998. DCI has
incurred net losses since its formation totaling $8,061,004 through September
30, 1998.
ADDITIONAL ANTICIPATED LOSSES. We currently intend to increase our
capital expenditures and operating expenses in order to expand the functionality
and performance of our i2u products and services, support additional subscribers
of our ISP customers in future markets, and market and provide our products and
services. In addition, we adopted a new pricing structure in the second quarter
of 1998 which will provide our i2u Community products and services to broadband
operators, including the equipment required for the operator to provide high-
speed Internet access to its subscribers, at little or no initial charge to the
operator in return for a percentage of the operator's future Internet access and
e-commerce transaction fees. This new pricing structure will increase our costs
and lower our revenues at the time that we sell our i2u products and services to
broadband operators. As a result of our increased capital expenditures and
operating expenses and our new pricing structure, we expect to incur additional
substantial operating and net losses in fiscal 1999 and for one or more fiscal
years thereafter.
Furthermore, if we complete the DCI acquisition, we will incur
additional losses for the fiscal year in which the acquisition occurs (currently
anticipated to be in the first quarter of fiscal 1999). These losses will occur
because accounting rules require us to recognize as a loss in the fiscal period
in which the acquisition is consummated that portion of the purchase price for
DCI which we allocate to in-process research and development. We expect to
allocate approximately $500,000 to in-process research and development. In
addition, if the DCI acquisition is completed, we will record goodwill and other
intangible assets estimated to be approximately $12.5 million which we will
amortize over their estimated useful life of three years. There can be no
assurance that the acquisition of DCI will ever make a positive contribution to
our results of operations. The final determination of the value of
consideration issued by OSS and the liabilities assumed will be made at the
effective time of the DCI Merger. Accordingly, the determination of the total
purchase price, liabilities assumed and the allocations may change significantly
from the amounts reflected above. If we do not complete the DCI Merger, it is
likely that we would have to write-off the note receivable of approximately
$950,000 (including accrued interest) at January 25, 1999, which would increase
our losses.
INCREASED NEED FOR WORKING CAPITAL; ABILITY TO CONTINUE AS GOING
CONCERN. We believe that our present cash and cash equivalents and working
capital (including the proceeds from the sale of the Series C Preferred Stock
described below) will be adequate to sustain operations only through June 1999.
In addition, we expect the acquisition of DCI to increase our monthly working
capital needs by approximately $130,000 for at least the next six months. On
January 11, 1999, we issued 3,000 shares of our Series C Preferred Stock for an
aggregate purchase price of $3,000,000. In connection with such offering, we
also issued a warrant to purchase an additional 2,000 shares of Series C
Preferred Stock for an aggregate purchase price of $2,000,000 on or before June
30, 1999. This warrant also grants us the right to require the warrantholder to
exercise such warrant on or before June 30, 1999.
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We estimate that we will need to raise at least an additional $5 million through
equity, debt or other external financing to fund proposed operations for fiscal
1999 and to pay DCI indebtedness which would be assumed as part of the DCI
Merger. Our estimate of our working capital needs may change due to factors some
of which are outside of our control. There is no assurance that we will be able
to raise additional funds in amounts required or upon acceptable terms. If we
cannot raise funds when needed, we may be required to curtail or scale back our
operations. These actions could have a material adverse effect on our business,
financial condition, or results of operations. In its report accompanying the
audited financial statements for the years ended December 31, 1997 and 1996, our
auditor, Arthur Andersen LLP, expressed substantial doubt about our ability to
continue as a going concern.
UNCERTAINTY OF FUTURE PROFITABILITY. Our ability to become profitable
in the future depends on the success of our i2u products and services in
generating revenues. This success will depend upon, among other things, the
willingness of subscribers of our broadband customers to pay the installation
costs of Internet service and monthly Internet access fees, both of which will
be set by our broadband customers. Furthermore, since we expect a significant
portion of our future revenues to be based on advertising and e-commerce
transactions conducted through our i2u products, this success will also depend
upon the extent to which consumers and businesses use our i2u products and
conduct e-commerce transactions and advertising utilizing our products. Our
pricing model assumes that our broadband customers will share with us a
percentage of their revenues generated by installation and Internet access fees
(if we provide the access capability) and a percentage of their revenues
generated by advertising and e-commerce conducted through our i2u products.
Because of the new and evolving nature of the Internet, we cannot predict
whether our pricing model will prove to be viable, whether demand for our
products and services will materialize at the prices we expect to be charged, or
whether current or future pricing levels will be sustainable. Our ability to
generate future sales will be dependent on a number of factors, many of which
are beyond our control, including, among others, the success of broadband
operators in marketing Internet services to subscribers in their local areas,
the extent that users utilize our i2u products and conduct online e-commerce
transactions and the prices that the broadband operators set for Internet
services. Because of the foregoing factors, among others, we are unable to
forecast our revenues with any degree of accuracy. We may never become or
remain profitable.
CABLE SYSTEM OPERATORS AFFILIATION WITH NATIONAL PROVIDERS. @Home
Corporation and RoadRunner (the "National Providers") offer high-speed Internet
access and related services to cable system operators. The National Providers
historically have focused their activities on larger markets because they
generally require cable system systems with two-way high speed data transmission
to fully implement their high-speed Internet access programs. Approximately 70%
of all cable system operators are currently affiliated with one of the National
Providers and this percentage could increase as a result of consolidations
within the cable industry. The terms of the agreements between the National
Providers and their affiliated cable operators prevent affiliated cable
operators from working with any person other than the National Providers to
provide high-speed Internet access. Although we have designed our i2u products
and services to be complementary to that of the National Providers, we have no
assurance from the National Providers that they will permit their affiliated
cable companies to work with us to provide high-speed Internet access in markets
in which the National Providers are not currently providing high speed Internet
access. If the National Providers prohibit us from providing high-speed
Internet access to these affiliated cable system providers, we would be able to
provide the high-speed Internet access portion of our i2u product and service
offering to only those broadband operators who are not affiliated with the
National Providers. This would significantly reduce the size of the domestic
market for our Internet access products and services. We do not believe that
the affiliation agreements between the affiliated cable system operators and the
National Providers limit our ability to partner with the affiliated cable system
operators to provide the local content portion of our i2u Community product and
services.
NEW AND UNCERTAIN MARKETS. The market for Internet products and
services has only recently developed. Since this market is relatively new and
because current and future competitors are likely to introduce competing
Internet products and services, and because both DCI and we have only limited
market experience for our respective products and services, we cannot predict
the rate at which the market for our products and services or for DCI's products
and services will grow or at which new or increased competition will result in
market saturation. If the Internet markets or the markets for our products and
services or DCI's products and services fail to grow, grow more slowly than we
anticipate or become saturated with competitors, our business, including the
business of DCI if the DCI Merger is completed, operating results and financial
condition will be materially adversely affected.
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DEPENDENCE ON BROADBAND OPERATORS. Certain of our services are
dependent on the quality of the cable system infrastructure. Cable system
operators have announced and have begun to implement major infrastructure
upgrades in order to increase the capacity of their networks and to deploy two-
way capability. These upgrades have placed a significant strain on the
financial, managerial, operating and other resources of cable system operators,
most of which are already significantly leveraged. Further, cable system
operators must periodically renew their franchises with city, county, or state
governments and, as a condition of obtaining such renewal, may have to meet
certain conditions imposed by the issuing jurisdiction. These conditions may
have the effect of causing the cable system operator to delay such upgrades.
Although we provide Internet access services to cable system operators
irrespective of their two-way capabilities, to the extent we provide Internet
access services over cable systems to the home with a telephone line return path
for data from the home, our services may not provide the high speed, quality of
experience, and availability of certain applications, such as video
conferencing, necessary to attract and retain subscribers to our Internet
services. In addition, cable system operators are primarily concerned with
increasing television programming capacity to compete with other modes of
multichannel entertainment delivery systems such as DBS and may, therefore,
choose to roll-out set-top boxes that are incompatible with and do not support
high-speed Internet access services, rather than to upgrade their network
infrastructures as described above. The failure of cable system operators to
complete these upgrades in a timely and satisfactory manner, or at all, would
adversely affect the market for our products and services.
We expect our contracts with cable system operators for our i2u
Community products and services to have terms of up to five years. There can be
no assurance that we will be able to renew any such contracts. Moreover, even
if cable system operators renew these contracts, there can be no assurance that
such renewals will be on terms satisfactory to the Company.
Because users of our i2u Community products and services generally are
expected to subscribe through a broadband operator, the broadband operator (and
not us) will substantially control the customer relationship with the users.
Therefore, in addition to our business being subject to general economic and
market conditions and factors relating to ISPs and online services specifically,
the success and future growth of our business may also be subject to economic
and other factors affecting broadband operators.
PRODUCT DEVELOPMENT; TECHNOLOGICAL CHANGE. Our future success will
depend upon our ability to develop new products and services that meet changing
customer requirements. The markets for our, and DCI's, products and services
are characterized by rapidly changing technology, evolving industry standards,
emerging competition and frequent new product and service introductions. We may
not be able to successfully identify new product and service opportunities or
develop and bring new products and services to market in a timely manner. Even
if we are able to successfully identify, develop and introduce new products and
services there is no assurance that a market for these products will
materialize. Furthermore, products and services or technologies developed by
others may render ours, and DCI's, products, services, and technologies
noncompetitive or obsolete.
GENERAL RISKS OF BUSINESS. We have formulated our business plans and
strategies based on the rapidly increasing size of the Internet markets, our
anticipated participation in those markets, and the estimated sales cycle, price
and acceptance of our products and services. Although these assumptions are
based on our best estimates, there is no assurance that our assumptions will
prove to be correct. We have not commissioned or obtained any independent
marketing studies, either with respect to our current business, or the business,
products and technologies of DCI, nor are any such studies planned. Any future
success that we might enjoy will depend upon many factors including some beyond
our control or that we cannot predict at this time.
SIGNIFICANT CONCENTRATION OF CUSTOMERS. Our customer base is highly
concentrated among a limited number of customers, eight as of January 25, 1999,
primarily due to the fact that the cable television and telecommunications
industries in the United States are dominated by a limited number of large
companies and to the relatively short time that we have been offering our
current products and services. Except for geographically contiguous systems,
our customers do not experience significant economies of scale by purchasing
additional systems from us. There is no assurance that we will be able to
attract or retain major customers. The loss of, or reduction in demand for
products or related services from, any of our major customers could have a
material adverse effect on our business, operating results, cashflows and
financial condition.
INTENSE COMPETITION. The market for Internet products and services is
highly competitive, and we expect this competition to intensify in the future.
Many nationally known companies and regional and local companies
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across the country are involved in Internet applications and the number of
competitors is growing. We also compete with broadband companies who are
developing their own Internet access and content and with the internal
departments of prospective customers who are retaining Internet-related
activities in-house. Even if a prospective customer chooses to outsource its
Internet-related activities, that customer may choose to outsource these
activities to a company other than us.
DCI's and our current and prospective competitors include many companies
whose financial, technical, marketing and other resources are substantially
greater than ours. Increased competition could result in significant price
competition, which in turn could result in significant reductions in the average
selling price of our products and services. In addition, increased competition
could cause us to increase our spending on marketing, sales and product
development. There is no assurance that we will be able to offset the effects of
any such price reductions or increases in spending through an increase in the
number of our customers, higher sales from enhanced services, cost reductions or
otherwise. Therefore, any of these events could have a materially adverse effect
on our financial condition and operating results. There is no assurance that we
will have the financial resources, technical expertise or marketing, sales and
support capabilities to compete successfully.
LIMITED AVAILABILITY OF PROPRIETARY PROTECTION. We do not believe that our
current products or services, or the products or services of DCI, are
patentable. We rely on a combination of copyright, trade secret and trademark
laws, and nondisclosure and other contractual provisions to protect our
proprietary rights. Policing unauthorized use of proprietary systems and
products is difficult and, while we are unable to determine the extent to which
piracy of our software exists, we expect software piracy to be a persistent
problem. In addition, the laws of some foreign countries do not protect software
to the same extent as do the laws of the United States. There is no assurance
that the steps we take to protect our proprietary rights will be adequate to
prevent the imitation or unauthorized use of our proprietary rights. Even if the
steps we take to protect our proprietary rights prove to be adequate, our
competitors may develop products or technologies that are both non-infringing
and substantially equivalent or superior to our products or technologies.
LENGTH OF SALES CYCLE. The decision to enter the Internet services
provisioning business is often an enterprise-wide decision by prospective
customers and may require us to engage in lengthy sales cycles. Our pursuit of
sales leads typically involves an analysis of our prospective customer's needs,
preparation of a written proposal, one or more presentations and contract
negotiations. We often provide significant education to prospective customers
regarding the use and benefits of Internet technologies and products. While our
sales cycle varies from customer to customer, it typically has ranged from one
to six months for i2u projects. Our sales cycle may also be subject to a
prospective customer's budgetary constraints and internal acceptance reviews,
over which we have little or no control. A significant portion of our revenues
are expected to come from Internet access fees paid by subscribers of our
broadband operator customers, advertising revenues and in connection with e-
commerce transactions conducted using our products. We expect that it may take
broadband operators several months or more to market and sell high-speed
Internet access to their subscribers, to establish a significant enough user
base to attract advertisers and for users to conduct significant e-commerce
transactions. For these reasons, we do not expect to realize significant
revenues, if at all, from these activities until a significant time after we
have licensed our i2u products and services.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. As a result of our limited
operating history and the recent increased focus on our i2u products and
services, we do not have historical financial data for a sufficient number of
periods on which to base planned operating expenses. Therefore, our expense
levels are based in part on our expectations as to future sales and to a large
extent are fixed. We typically operate with little backlog and the sales cycles
for our products and services may vary significantly. As a result, our quarterly
sales and operating results generally depend on the volume and timing of and the
ability to close customer contracts within the quarter, which are difficult to
forecast. We may be unable to adjust spending in a timely manner to compensate
for any unexpected sales shortfalls. If we were unable to so adjust, any
significant shortfall of demand for our products and services in relation to our
expectations would have an immediate adverse effect on our business, operating
results and financial condition. Further, we currently intend to increase our
capital expenditures and operating expenses in order to fund product development
and increase sales and marketing efforts. To the extent that such expenses
precede or are not subsequently followed by increased sales, our business,
operating results and financial condition will be materially adversely affected.
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DEPENDENCE ON KEY PERSONNEL; ABSENCE OF EMPLOYMENT AND NONCOMPETITION
AGREEMENTS. We are highly dependent on the technical and management skills of
our key employees, including in particular R. Steven Adams, our founder,
President and Chief Executive Officer. The loss of Mr. Adams' services could
have a material adverse effect on our business and operating results. We have
not entered into employment agreements with Mr. Adams, or any of our other
officers or employees. We do not maintain key person insurance for Mr. Adams or
any other member of management. We generally enter into written nondisclosure
and nonsolicitation agreements with our officers and employees which restrict
the use and disclosure of proprietary information and the solicitation of
customers for the purpose of selling competing products or services. Thus, if
any of these officers or key employees left OSS, they could compete with us, so
long as they did not solicit our customers. Any such competition could have a
material adverse effect on our business.
Our future success also depends in part on our ability to identify, hire
and retain additional personnel, including key product development, sales,
marketing, financial and executive personnel. Competition for such personnel is
intense and there is no assurance that we can identify or hire additional
qualified personnel. In addition, the success of the DCI Merger is highly
dependent on the technical and management skills of Andre Durand, the founder,
President and Chief Executive Officer of DCI. The loss of Mr. Durand's services
could have a material adverse affect on the value of the DCI Merger. The DCI
Merger is contingent on Mr. Durand entering into a three-year non-compete
agreement with OSS.
MANAGEMENT OF EXPECTED GROWTH. We expect to experience significant growth
in the number of our employees, the scope of our operating and financial
systems, and the geographic area of our operations, including the expansion of
our international operations. In addition, as we expand our i2u products and
services, we will need to hire additional employees who will be located at many
widely separated offices, including international offices. Our ability to
successfully manage any such growth will require us to continue to implement and
improve our operational, financial and management information systems. In
addition, this growth will result in new and increased responsibilities for
existing management personnel and will require us to hire and train new
management personnel. There can be no assurance that our management or other
resources will be sufficient to manage any future growth in our business or that
we will be able to implement in whole or in part our growth strategy and any
failure to do so could have a material adverse effect on our operating results
and financial condition.
SECURITY RISKS. Our software and equipment may be vulnerable to computer
viruses or similar disruptive problems caused by our customers or other Internet
users. Computer viruses or problems caused by third parties could lead to
interruptions, delays or cessation in service to our customers. In addition,
while our i2u software integrates software designed to provide a secure
environment for e-commerce, these safeguards may prove to be inadequate. We have
information technology insurance which provides limited coverage for losses
caused by computer viruses, however, certain losses resulting from misuse of
software or equipment by third parties or losses from computer viruses which
exceed the liability limits under such insurance may not be protected. Although
we attempt to limit our liability to customers for these types of risks through
contractual provisions, there is no assurance that these limitations will be
enforceable.
DEPENDENCE ON THE INTERNET. The success of our business depends in large
part upon a robust industry and infrastructure for providing Internet access and
carrying Internet traffic and upon the widespread acceptance and use of
electronic commerce over the Internet. Because global commerce and online
exchange of information on the Internet and other similar open wide area
networks are new and evolving, it is difficult to predict with any assurance the
extent to which the Internet will prove to be a significant commercial
marketplace. If the Internet does not become a significant commercial
marketplace, our business, operating results and financial condition could be
materially impaired.
RISKS ASSOCIATED WITH INTERNATIONAL SALES. We have and are currently
pursuing marketing opportunities in international markets. International sales
are subject to a variety of risks, including difficulties in establishing and
managing international distribution channels, obtaining export licensing,
servicing and supporting overseas products and in translating the products'
graphical user interfaces into foreign languages. International operations are
subject to difficulties in collecting accounts receivable, staffing and managing
personnel and enforcing intellectual property rights. Other factors that can
also adversely affect international operations include fluctuations in the value
of foreign currencies and currency exchange rates, changes in import/export
duties and quotas, introduction of tariff or non-tariff barriers and regulatory,
economic or political changes in international markets.
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GOVERNMENT REGULATION. We are not currently subject to direct regulation
by any government agency, other than regulations applicable to businesses
generally, and there are currently few laws or regulations directly applicable
to access to or commerce on the Internet. However, due to the increasing
popularity and use of the Internet, a number of legislative and regulatory
proposals are under consideration by federal, state, local and foreign
governmental organizations, and it is possible that a number of laws or
regulations may be adopted with respect to the Internet relating to such issues
as user privacy, user screening to prevent inappropriate uses of the Internet
by, for example, minors or convicted criminals, taxation, infringement, pricing,
content regulation, quality of products and services and intellectual property
ownership and infringement. The adoption of any such laws or regulations may
decrease the growth in the use of the Internet, which could in turn decrease the
demand for our products and services, increase our cost of doing business, or
otherwise have a material adverse effect on our business, results of operations
and financial condition. Moreover, the applicability to the Internet of existing
laws governing issues such as property ownership, copyright, trademark, trade
secret, obscenity, libel and personal privacy is uncertain and developing. Our
business, results of operations and financial condition could be materially
adversely effected by any new legislation or regulation, or application or
interpretation of existing laws to the Internet.
YEAR 2000. The Year 2000 issue involves the potential for system and
processing failures of date-related data resulting from computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that contain time-sensitive software may recognize a
date using two digits of "00" as the year 1900 rather than the year 2000. This
could result in system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar ordinary business activities.
We believe that our internal software and hardware systems will function
properly with respect to dates in the year 2000 and thereafter and we have
completed our internal IT and non-IT assessment. We expect to incur no
significant costs in the future for Year 2000 problems. Nonetheless, there is no
assurance in this regard until such systems are operational in the Year 2000. We
are in the process of contacting all of our significant suppliers to determine
the extent to which our systems are vulnerable to those third parties' failure
to make their own systems Year 2000 compliant. We expect to have completed this
review by the second quarter of fiscal 1999. In the event any of our suppliers
or vendors prove not to be Year 2000 compliant, we believe that we could find a
replacement vendor or supplier which is Year 2000 compliant without significant
delay or expense. However, if substantially all of our suppliers and vendors
prove not to be Year 2000 compliant and if we experience difficulties in finding
replacement vendors, then, as a result, our business could be materially
adversely affected. The failure to correct material Year 2000 problems by our
suppliers and vendors could result in an interruption in, or a failure of,
certain of our normal business activities or operations. Such failures could
materially and adversely affect our results of operations, liquidity and
financial condition. Due to the general uncertainty inherent in the Year 2000
problem, resulting from the uncertainty of the Year 2000 readiness of third-
party suppliers and vendors and of our customers, we are unable to determine at
this time whether the consequences of Year 2000 failures will have a material
impact on our results of operations, liquidity or financial condition.
LIMITATION OF DIRECTORS' LIABILITY. Our Articles of Incorporation provide,
as permitted by Colorado law, that our directors shall have no personal
liability for certain breaches of their fiduciary duties to us. In addition, our
Bylaws provide for mandatory indemnification of directors and officers to the
fullest extent permitted by Colorado law. These provisions may reduce the
likelihood of derivative litigation against directors and may discourage
shareholders from bringing a lawsuit against directors for a breach of their
duty.
RISKS RELATED TO THE OFFERING
PENDING ACQUISITION OF DCI; POSSIBLE DILUTION TO OSS SHAREHOLDERS CAUSED BY
THE ACQUISITION. On March 19, 1998, we executed an Agreement and Plan of Merger
pursuant to which we agreed to acquire DCI. We have filed a Proxy
Statement/Prospectus with the Securities and Exchange Commission relating to
this acquisition, and we expect that the acquisition will be completed in the
first quarter of fiscal 1999. The acquisition is subject to, among other things,
approval by our shareholders and the shareholders of DCI. In the event that the
DCI acquisition is not completed as proposed, DCI has agreed to license its
CommunityWare product to us on at least as favorable terms as it licenses such
product to others. As of January 25, 1999, we have loaned DCI approximately
$1,440,000 to maintain its operations pending completion of the acquisition and
have paid DCI, by reducing the balance of the note receivable, approximately
$540,000 for services rendered in connection with the integration of
CommunityWare with our i2u products and services. If the DCI acquisition is not
completed, DCI would not have
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the ability to repay our advances without obtaining significant additional
working capital through the sale of its securities. There is no assurance that
DCI would be able to raise working capital in the amounts required.
If the DCI acquisition is consummated, it will result in an increase in our
outstanding shares of common stock by 955,649 (approximately 17%). On a pro
forma basis, we estimate that the issuance of such shares would have resulted in
an increase to our net book value per share as of September 30, 1998 from $0.76
(actual) to $2.83 (pro forma) and $3.23 (pro forma adjusted to reflect the
subsequent conversions of 10% Preferred Stock and 5% Preferred Stock, the
subsequent issuance and conversion 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 of the Series C Preferred Stock). In addition to issuing the
shares of common stock, we will reserve approximately 240,000 shares of our
common stock for issuance upon exercise of outstanding options and warrants of
OSS that will be issued in connection with the DCI Merger, and we will reserve
approximately 40,000 shares of our common stock for issuance upon conversion of
convertible securities of DCI that will be assumed by OSS in connection with the
DCI Merger. There is no assurance that our results of operations will improve
enough, if at all, as a result of the DCI acquisition, to offset possible future
dilution which could occur to our shareholders as a result of the DCI
acquisition if our operations achieve profitability.
POSSIBLE VOLATILITY OF STOCK PRICES; PENNY STOCK RULES. The over-the-
counter markets for securities such as our common stock historically have
experienced extreme price and volume fluctuations during certain periods. These
broad market fluctuations and other factors, such as new product developments
and trends in our industry and the investment markets generally, as well as
economic conditions and quarterly variations in our results of operations, may
adversely affect the market price of our shares. Although our shares are listed
on The Nasdaq SmallCap Market ("Nasdaq"), there can be no assurance that they
will remain eligible to be included on Nasdaq. If our common stock was no longer
eligible for quotation on Nasdaq, it could become subject to rules adopted by
the Securities and Exchange Commission regulating broker-dealer practices in
connection with transactions in "penny stocks." If the common stock became
subject to the penny stock rules, many brokers may be unwilling to engage in
transactions in the common stock because of the added regulation, thereby making
it more difficult for purchasers of our common stock to dispose of their shares.
RIGHTS TO ACQUIRE SHARES; POTENTIAL SUBSTANTIAL DILUTION. As of January 25,
1999, we had issued the following warrants and options to acquire shares of
common stock:
. Options and warrants to purchase 1,524,265 shares of common stock upon
exercise of such options and warrants, exercisable at prices ranging
from $0.50 to $8.50 per share, with a weighted average exercise price
of approximately $5.90 per share.
. Warrants issued in connection with our initial public offering on May
23, 1996 (the "IPO Warrants") to purchase 634,150 shares upon exercise
of the IPO Warrants at an exercise price of $9.00 per share.
. Options issued to EBI Securities Corporation, the representative of
the underwriters involved in such initial public offering (the
"Representative's Option"), to purchase 106,700 shares upon exercise
of the Representative's Option at a purchase price of $8.10 per share.
. the Representative's Option to purchase 106,700 IPO Warrants issuable
upon exercise of the Representative's Option at a purchase price of
$.001 per IPO Warrant. These IPO Warrants entitle the holder thereof
to purchase up to 53,350 shares upon exercise of such IPO Warrants at
an exercise price of $9.00 per share.
. Warrants issued in connection with the issuance of the 10% Preferred
Stock to purchase 53,500 shares of common stock upon exercise of such
warrants, exercisable at $15.00 per share.
. Warrants issued in connection with the issuance of the 5% Preferred
Stock to purchase 100,000 shares of common stock upon exercise of such
warrants, exercisable at $16.33 per share.
. Warrants issued in connection with the issuance of the Series A
Preferred Stock to purchase 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 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; we will issue 955,649 shares of
our common stock upon the completion of the DCI Merger; we 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 Merger; and we will
reserve approximately 40,000 shares of our common stock for issuance upon
conversion of convertible securities of DCI that will be assumed by OSS in
connection with the DCI Merger. The 10% Preferred
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Stock is convertible into shares of common stock at the lesser of $10 or 80% of
the market value (as defined) of the common stock at the time of the conversion
of such 10% Preferred Stock. The Series C Preferred Stock is convertible, at any
time after February 1, 1999, into shares of common stock at 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 Preferred Stock. Based on the market value for the common stock as of
January 25, 1999, the 10% Preferred Stock is convertible into approximately
159,502 shares of common stock and, on February 1, 1999, the Series C Preferred
Stock would be convertible into approximately 246,026 shares 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 in
the event that the market value for the common stock decreases in the future.
During the terms of the outstanding options, warrants and convertible
securities, the holders thereof will have the opportunity to profit from an
increase in the market price of the common stock with resulting dilution to the
holders of shares who purchased shares for a price higher than the respective
exercise or conversion price. The existence of such stock options, warrants and
convertible securities may adversely affect the terms on which we can obtain
additional financing, and you should expect the holders of such options or
warrants to exercise or convert those securities at a time when we, in all
likelihood, would be able to obtain additional capital by offering securities on
terms more favorable to us than those provided by the exercise or conversion of
such options or warrants.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of common
stock in the public market, or even the potential for such sales, could have an
adverse effect on the market price for shares of our common stock, and could
impair the ability of purchasers of our common stock recoup their investment or
make a profit. Furthermore, such sales could affect our ability to raise capital
through the sale of equity securities. As of January 25, 1999 approximately
1,075,000 of our currently outstanding shares of common stock are "restricted
shares." Restricted shares and shares of the common stock owned by our
affiliates (officers, directors and holders of 10% of our outstanding common
stock) may be publicly sold only by complying with Rule 144 under the Securities
Act unless further registered under the Securities Act, or some other exemption
from further registration thereunder is available. While the shares of the
common stock to be issued to the shareholders of DCI in connection with the
acquisition of DCI will be subject to certain contractual limitations on the
transfer of such shares prior to September 30, 1999, such shares or a portion
thereof could be sold prior to September 30, 1999.
ABILITY TO ISSUE COMMON STOCK AND PREFERRED STOCK; ANTI-TAKEOVER DEVICES.
Our Articles of Incorporation authorize our Board of Directors to issue up to
20,000,000 shares of common stock and 5,000,000 shares of preferred stock in one
or more series, the terms of which may be determined at the time of issuance by
the Board of Directors, without further action by our shareholders. Preferred
stock authorized by the Board of Directors may include voting rights,
preferences as to dividends and liquidation, conversion and redemptive rights
and sinking fund provisions. As of January 25, 1999, our Board of Directors has
authorized the issuance of up to (i) 500,000 shares of 10% Preferred Stock (the
"10% Preferred Stock"), of which 145,000 shares were outstanding, (ii) 3,000
shares of 5% Preferred Stock, of which no shares were outstanding, (iii) 1,400
shares of Series A Preferred Stock, of which no shares were outstanding, and
(iv) 5,000 shares of Series C Preferred Stock, of which 3,000 shares were
outstanding. Although our Board of Directors has no present plans to issue any
other shares of preferred stock (other than the 2,000 shares of Series C
Preferred Stock that will be issued if the warrant to purchase such shares is
exercised), if the Board of Directors authorizes the issuance of preferred stock
in the future, such authorization could affect the rights of the holders of
common stock, thereby reducing the value of the common stock, and could make it
more difficult for a third party to acquire OSS, even if a majority of the
holders of common stock approved of such acquisition.
AFFECT OF ISSUANCE OF 10%, 5%, SERIES A AND SERIES C PREFERRED STOCK ON NET
LOSS. Based on current accounting standards, we will be required to record a
non-operating expense of approximately $4,100,000 for the fiscal year ending
December 31, 1998 as a result of the issuance of the 10%, 5% and Series A
Preferred Stock. While these charges will not affect our operating loss or
working capital during such period, they are expected to result in an increase
of approximately $4,100,000 in the Company's net loss available to our holders
of common stock for the fiscal year ending December 31, 1998. In addition, we
will be required to record a non-operating expense of approximately $3,000,000
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,
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they are expected to result in an increase of approximately $3,000,000 in the
Company's net loss available to our holders of common stock for the quarter
ending March 31, 1999.
NO DIVIDENDS. We have never paid dividends on our common stock and do not
intend to pay any dividends on our common stock in the foreseeable future. Any
decision by us to pay dividends will depend upon our profitability at the time,
cash available therefor, and other factors. We anticipate that we will devote
profits, if any, to our future operations. Except as otherwise required by law,
we are required to pay a quarterly cumulative noncompounded dividend on the 10%
Preferred Stock of 10% per annum based on the stated value of $10.00 per share
of 10% Preferred Stock, and we are required to pay all accrued but undeclared
dividends on the Series C Preferred Stock on the earlier of (1) the redemption
or conversion of the Series C Preferred Stock or (2) the liquidation of the
Company.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made in this prospectus and the documents incorporated
by reference in this prospectus under the captions "The Company", "Risk
Factors," "Recent Developments" and elsewhere in this prospectus constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). These statements are subject
to the safe harbor provisions of the Reform Act. Forward-looking statements may
be identified by the use of the terminology such as "may," "will," "expect,"
"anticipate," "intend," "believe," "estimate," "should," or "continue" or the
negatives thereof or other variations thereon or comparable terminology. To the
extent that this prospectus contains forward-looking statements regarding the
financial condition, operating results, business prospects or any other aspect
of OSS or DCI, you should be aware that OSS's and DCI's actual financial
condition, operating results and business performance may differ materially from
that projected or estimated by OSS or DCI in the forward-looking statements. OSS
and DCI have attempted to identify, in context, certain of the factors that they
currently believe may cause actual future experience and results to differ from
their current expectations. These differences may be caused by a variety of
factors, including but not limited to adverse economic conditions, intense
competition, including entry of new competitors, ability to obtain sufficient
financing to support OSS' and DCI's operations, progress in research and
development activities, variations in costs that are beyond OSS' and DCI's
control, changes in capital expenditure budgets for cable companies, adverse
federal, state and local government regulation, inadequate capital, unexpected
costs, lower sales and net income (or higher net losses) than forecasted, price
increases for equipment, inability to raise prices, failure to obtain new
customers, the possible fluctuation and volatility of OSS' and DCI's operating
results and financial condition, inability to carry out marketing and sales
plans, loss of key executives, and other specific risks that may be alluded to
in this prospectus.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares offered by
this prospectus, however, certain shares offered by this prospectus are issuable
only upon the exercise of issued and outstanding transferable warrants of OSS.
If these warrants are exercised in full we will receive proceeds of $114,200. We
will use such proceeds, if any, for general working capital purposes.
RECENT DEVELOPMENTS
DCI ACQUISITION
On March 19, 1998 we executed an Agreement and Plan of Merger (the "DCI
Merger Agreement") pursuant to which we agreed to acquire Durand Communications,
Inc., a California corporation ("DCI"), via a merger of our wholly owned
subsidiary, Durand Acquisition Corporation, with DCI (the "DCI Merger"). As
consideration for the DCI Merger, we will issue 955,649 shares of our common
stock in exchange for 100% of the outstanding shares of common stock, no par
value, of DCI. In connection with the DCI Merger, we will also issue options
and warrants for approximately 240,000 shares of our common stock at exercise
prices ranging from $4.31 to $20.33 in replacement of similar securities of DCI.
We expect DCI to have liabilities of approximately $1,200,000 (including
approximately $381,000 of convertible securities which will be converted into
similar
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convertible securities of OSS) at the time of the DCI Merger, which will become
the liabilities of the consolidated entities upon consummation of the DCI
Merger. We will reserve approximately 40,000 shares of our common stock to be
issued upon the conversion of these convertible securities. Under the rules of
The Nasdaq SmallCap Market ("Nasdaq") the issuance of our common stock as
consideration for the DCI Merger requires the approval of our shareholders.
Approval by our shareholders is a condition precedent to our obligation to
consummate the DCI Merger. If the issuance of shares of common stock is not
approved by our shareholders, it is unlikely that we will consummate the DCI
Merger. We anticipate that the meeting at which our shareholders will consider
the issuance of such common stock will occur in the first quarter of fiscal
1999.
We anticipate that the DCI Merger, for federal income tax purposes, will be
treated as a reorganization within the meaning of Section 368 of the Internal
Revenue Code (the "Code") and that each of OSS, DCI and Durand Acquisition
Corporation will be a party to the reorganization within the meaning of Section
368(b) of the Code. Based on the facts, representations, warranties and
agreements set forth in the DCI Merger Agreement, we believe that the DCI Merger
will so qualify. However, we have not requested a ruling from the Internal
Revenue Service (the "IRS") with respect to these matters. Therefore, the IRS
may determine that the DCI Merger does not qualify to be treated as a
reorganization within the meaning of Section 368 of the Code.
A significant element of OSS' strategy to achieve its growth objective is
to seek acquisitions that add immediate revenue, provide product or technology
enhancements in one or more of our targeted markets or provide an existing
customer base to increase advertising or e-commerce opportunities. Our
acquisition of DCI will provide us with DCI's technology, including both
completed technology and technology in development, and product development
expertise.
Our product development strategy is based upon our belief that the Web is
evolving from an information access and delivery tool to a system that supports
communication and community interactivity. We believe that DCI's CommunityWare
technology, which enables users to organize themselves on the Internet in a
matter of minutes, and to thereafter manage and expand their own public and
private online community to facilitate and promote communications, information
sharing and commerce among the users that comprise the various constituent
communities, is particularly well suited for providing the communications
component for OSS' i2u software. Since the execution of the DCI Merger
Agreement, representatives of DCI and OSS have worked together to incorporate
the CommunityWare technology into our i2u software. We recently introduced a
version of the i2u product which incorporates elements of the CommunityWare
technology. Following the DCI Merger, we intend to integrate DCI's product
development efforts with our own. In addition, we expect to fully integrate
DCI's products with our i2u products and to market them as part of our product
offerings and not on a stand-alone basis.
We believe that the primary value of DCI to OSS is (i) DCI's proprietary
technology, particularly DCI's CommunityWare technology, (ii) DCI's software
development capabilities which our management believes is important to our
ability to continue to develop state-of-the-art proprietary software products
required to maintain long-term relationships with our customers, and (iii) the
ability the DCI acquisition will give us to greatly reduce the time it will take
us to introduce new proprietary software products. Our management believes
DCI's technology can be quickly integrated with our i2u products to expand the
breadth and functionality of our product offerings. Andre Durand, Chief
Executive Officer of DCI, has been elected Senior Vice President-Product
Development of OSS and will be responsible for our product development efforts.
A condition to the DCI Merger is that Mr. Durand enter into a three-year
noncompete agreement with OSS. We intend to continue to employ most of DCI's
product development personnel following the DCI Merger.
We also believe that DCI's Electronic University Network ("EUN") business,
which offers accredited online courses for colleges, universities and
corporations, represents a valuable business opportunity. We expect to continue
to develop this business both as a separate product offering and as an adjunct
to our product offerings for broadband operators.
We did not seek an opinion from an independent financial advisor as to the
value of the DCI transaction, as management and the Board of Directors
determined that management of OSS was best able to determine the value of the
acquisition since its value was primarily based on the capabilities and
prospects for DCI's technology, the compatibility of DCI's and OSS' technologies
and the ability to quickly integrate the two technologies in order to
significantly reduce OSS' time to develop and introduce new products and to
increase the value of OSS' product offerings. In connection with the
negotiations with DCI, we also considered the fact that DCI had sold shares of
its
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common stock at prices, based on the conversion ratio of DCI common stock into
OSS common stock in connection with the DCI Merger, from $8.11 to $18.94 per
share since December 31, 1996. Based on these factors, the OSS Board of
Directors determined that the proposed purchase price for DCI was reasonable and
fair to OSS and its shareholders.
The acquisition of DCI will increase the outstanding number of shares of
our common stock by 955,649 shares (approximately 17%) (excluding shares
issuable upon the exercise of options and warrants or the conversion of
convertible securities issued in connection with the DCI Merger), will increase
our liabilities, on a consolidated basis, by approximately $1,200,000 and is
expected to increase our operating net loss by approximately $130,000 per month
for at least the next six months. The acquisition of DCI will also increase our
working capital requirements. On January 11, 1999, we issued 3,000 shares of
our Series C Preferred Stock for an aggregate purchase price of $3,000,000. In
connection with such offering, we also issued a warrant to purchase an
additional 2,000 shares of Series C Preferred Stock for an aggregate purchase
price of $2,000,000 on or before June 30, 1999. This warrant also grants us the
right to require the warrantholder to exercise such warrant on or before June
30, 1999. We estimate that we will need to raise at least an additional $5
million through equity, debt or other external financing to fund proposed
operations for fiscal 1999 and to pay DCI indebtedness which would be assumed as
part of the DCI Merger. Our estimate of our working capital needs may change
due to factors some of which are outside of our control. There is no assurance
that we will be able to raise additional funds in amounts required or upon
acceptable terms.
The DCI Merger Agreement contemplates that we will acquire 100% of the
outstanding common stock of DCI. Based on the average closing price of our
common stock for the two days before and the two days after March 19, 1998, the
day that the transaction was announced, the total purchase price is estimated to
be approximately $13,100,000, consisting of (i) 955,649 shares of our common
stock to be issued to the stockholders of DCI, (ii) approximately 240,000 shares
of our common stock to be reserved for issuance upon the exercise of options and
warrants of DCI to be exchanged for similar securities of OSS; and (iii)
approximately $400,000 of expenses to be incurred. In addition, DCI will have
approximately $1,200,000 of liabilities (including approximately $381,000 of
convertible securities which will be converted into similar convertible
securities of OSS) at the time of the DCI Merger, which will become the
liabilities of the consolidated entities upon consummation of the DCI Merger. We
will reserve approximately 40,000 shares of our common stock to be issued upon
the conversion of these convertible securities.
The DCI Merger will be accounted for under the purchase method of
accounting, with the purchase price allocated to the fair value of assets
acquired. A significant portion of such amount and liabilities assumed on a
consolidated basis has been identified as intangible assets, including
approximately $500,000 of research and development in process. The portion of
the purchase price and liabilities assumed on a consolidated basis which is
allocated to in-process research and development will be recognized as expense
in the period the DCI Merger is consummated (currently expected to be the first
quarter of fiscal 1999).
DCI completed the acquisition of CompuLearning Systems, d/b/a Electronic
University Network ("EUN") during January 1998. Based on financial information
provided by DCI and EUN, the combined revenues for DCI and EUN for the year
ended December 31, 1997 totaled $740,739 and their combined loss for the same
period equaled ($2,867,973). For the nine months ended September 30, 1998,
revenues for DCI were $545,353, including $290,251 of services provided to OSS.
In addition, DCI's accumulated deficit at September 30, 1998 was $(8,061,004)
and DCI's shareholders' deficit at September 30, 1998 was $(1,219,356). We
estimate that, on a pro forma basis, the acquisition of DCI would have resulted
in an increase to the net book value of our shares of common stock as of
September 30, 1998 from $0.76 (actual) to $2.83 (pro forma) and $3.23 (pro forma
adjusted to reflect the subsequent conversions of 10% Preferred Stock and 5%
Preferred Stock, the subsequent issuance and conversion 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 of the 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
prospectus.
14
<PAGE>
SELLING SHAREHOLDERS
The following table sets forth, as of January 25, 1999, the name of each of
the Selling Shareholders, certain beneficial ownership information with respect
to each of the Selling Shareholders, and the number and percentage of securities
offered by this prospectus that may be sold from time to time by the Selling
Shareholders pursuant to this prospectus. Unless otherwise indicated, the
number of shares of common stock set forth in the following table that is being
offered by the Selling Shareholders who will receive their shares of common
stock upon the conversion of the Series C Preferred Stock represents an estimate
of the number of shares of common stock that such Selling Shareholder will
offer. The actual number of shares of our common stock that we may issue to
such Selling Shareholders upon conversion of the Series C Preferred Stock is
indeterminate, is subject to adjustment, and could be materially less or more
than such estimated number depending on factors that we cannot predict at this
time, including, among other factors, the future market price of our common
stock. The actual number of shares of common stock offered by this prospectus,
and included in the Registration Statement of which this prospectus is a part,
includes such additional number of shares of common stock that we may be
required to issue upon conversion of the Series C Preferred Stock by reason of
the floating rate conversion price mechanism or the other adjustment mechanisms
described in this prospectus, or by reason of any stock split, stock dividend or
similar transaction involving our common stock, in order to prevent dilution, in
accordance with Rule 416 under the Securities Act of 1933, as amended. There is
no assurance that the Selling Shareholders will sell the shares offered by this
prospectus.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Shares of Percentage of
Common Stock Shares of Common Common Stock
Owned Shares of Stock Owned Owned Beneficially
Name of Selling Beneficially Common Stock Beneficially After Before Offering/After
Shareholder Before Offering Offered Hereby Offering Offering (1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arrow Investors II LLC 346,026 (2) (3) 246,026 0 (3) ___% --
EBI Securities Corporation ____ (4) 20,000 _______ ___% ___%
</TABLE>
_______________
* Less than 1% of shares outstanding.
(1) In calculating percentage ownership, all shares of common stock which the
Selling Shareholder has the right to acquire within 60 days from the date
of this prospectus upon the exercise of options, warrants, or convertible
securities are deemed to be outstanding for the purpose of calculating the
percentage of common stock owned by the Selling Shareholder.
(2) Includes shares issuable upon the conversion of the Series C Preferred
Stock if such conversion occurred as of the close of business on February
1, 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 246,026 shares, but in no event will
be more than 930,000 shares or less than 145,278 shares. Pursuant to the
terms of the Series C Preferred Stock, on January 25, 1999 the conversion
price would be approximately $12.21.
(3) Includes shares of common stock beneficially owned by its affiliates, Arrow
Investors LLC (warrants to acquire 50,000 shares at $15.00 per share) and
West End Capital LLC (warrants to acquire 50,000 shares at $15.00 per
share).
(4) Includes (i) 67,100 shares of common stock issuable upon the exercise of an
option to purchase shares at a per shares exercise price of $8.10, (ii)
33,550 shares of common stock issuable upon the exercise of warrants to
purchase shares at a per share exercise price of $9.00, and (iii) 20,000
shares issuable upon the exercise of a warrant to purchase shares at a per
share exercise price of $5.71 being offered by this prospectus, but does
not include shares held by EBI Securities Corporation in its capacity as
a market maker in the Company's securities.
15
<PAGE>
PLAN OF DISTRIBUTION
We have been advised that the shares offered by this Prospectus may be sold
from time to time by the Selling Shareholders or by pledgees, donees,
transferees or other successors in interest. Such sales may be made in the
Nasdaq SmallCap Market or such other over-the-counter market or otherwise at
prices and at terms then prevailing or at prices related to the then current
market price or in negotiated transactions. Such shares may be sold by one or
more of the following:
. A block trade in which the broker or dealer so engaged will attempt to
sell shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction.
. Purchases by a broker or dealer as principal and resale by such broker
or dealer for its account pursuant to this prospectus.
. Ordinary brokerage transactions and transactions in which the broker
solicits purchasers.
. In privately negotiated transactions not involving a broker or dealer.
In effecting sales, brokers or dealers engaged to sell the shares may
arrange for other brokers or dealers to participate. Brokers or dealers engaged
to sell the shares will receive compensation in the form of commissions or
discounts in amounts to be negotiated immediately prior to each sale. Such
brokers or dealers and any other participating brokers or dealers may be deemed
to be "underwriters" within the meaning of the Securities Act of 1933, as
amended, in connection with such sales. OSS will receive no proceeds from any
resales of the shares offered by this prospectus, and we anticipate that the
brokers or dealers, if any, participating in the sales of such shares will
receive the usual and customary selling commissions.
To comply with the securities laws of certain states, if applicable, the
shares will be sold therein only through brokers or dealers. In addition, in
certain states, the shares may not be sold unless they have been registered or
qualified for sale in such states or an exemption from registration or
qualification is available and is complied with.
DESCRIPTION OF SECURITIES
GENERAL
Our Articles of Incorporation authorize our Board of Directors to issue
25,000,000 shares of capital stock, including 20,000,000 shares of common stock,
no par value, and 5,000,000 shares of preferred stock, with such par value and
such rights, preferences and privileges as are determined by the Board of
Directors.
COMMON STOCK
As of January 25, 1999, 5,535,147 shares of our common stock were
outstanding. Holders of common stock are entitled to dividends when, as and if
declared by the Board of Directors out of funds available therefor, subject to
loan agreement limitations and priority as to dividends for preferred stock that
may be outstanding. Holders of common stock are entitled to cast one vote for
each share held at all stockholder meetings for all purposes, including the
election of directors. The holders of more than 50% of the voting power of the
common stock issued and outstanding and entitled to vote, present in person or
by proxy, (together with any preferred stock issued and outstanding and entitled
to vote, present in person or by proxy) constitute a quorum at all meetings of
our shareholders. The vote of the holders of a majority of common stock present
at such a meeting (together with any preferred stock present and entitled to
vote at such meeting) will decide any question brought before such meeting,
except when Colorado law, our Articles of Incorporation, or our Bylaws require a
greater vote and except when Colorado law requires a vote of any preferred stock
issued and outstanding, voting as a separate class, to approve a question
brought before such meeting. If we liquidate or dissolve, the holders of each
outstanding share of common stock will be entitled to share equally in our
assets legally available for distribution to such shareholder after payment of
all liabilities and after distributions to holders of preferred stock legally
entitled to such distributions. Holders of common stock do not have any
preemptive, subscription or redemption rights. Holders of common stock do not
have cumulative voting for the election of directors. All outstanding shares of
common stock are fully paid and nonassessable and the shares of common stock
offered by this prospectus will be, upon issuance, fully paid and
16
<PAGE>
nonassessable. The holders of the common stock do not have any registration
rights with respect to the common stock.
SERIES C PREFERRED STOCK
As of January 25, 1999, 3,000 shares of our Series C Preferred Stock were
outstanding. The following is a summary of the rights, privileges and
preferences of the Series C Preferred Stock. This summary is qualified in its
entirety by reference to the terms of the Series C Preferred Stock incorporated
by reference as an exhibit to the Registration Statement of which the prospectus
is a part.
VOTING. Each share of Series C Preferred Stock entitles the holder to cast
the number of votes equal to the number of whole shares of common stock into
which the Series C Preferred Stock held by such holder are convertible
immediately after the close of business on the record date fixed for meeting at
which the vote is to be taken. The holders of the Series C Preferred Stock do
not have cumulative voting for the election of directors.
DIVIDENDS. The cumulative noncompounded dividend on the Series C Preferred
Stock is 4% per annum based on the stated value of $1,000 per share, payable as
permitted by law, at our option, in cash or in common stock upon the earlier of
(1) the redemption or conversion of the Series C Preferred Stock or (2) the
liquidation of OSS. We may not declare and pay any dividends on the common
stock unless all we first declare and pay all unpaid dividends on the Series C
Preferred Stock. Dividends on the Series C Preferred Stock are equal in
preference to any dividends declared on our 10% Preferred Stock.
REDEMPTION AND CONVERSION. We may redeem the Series C Preferred Stock, in
whole or in part, at any time for a price per share equal to $1,200 plus any
accrued but unpaid dividends plus a warrant to purchase a number of shares of
common stock equal to each Series C Preferred Stockholder's pro-rata allocation
of 100,000 shares of common stock (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 below) for the Series C Preferred Stock being
redeemed. In addition, we 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 below) is less than $5.40 per share
for a per share price equal to the product of (i) the number of shares of our
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 our
common stock on the date of conversion.
After February 1, 1999, each share of the outstanding Series C Preferred
Stock is convertible, at any time at the election of the holder thereof, into
the number of shares of common stock equal to $1,000 divided by the lesser of
(i) the Maximum Conversion Price (as defined below) for the Series C Preferred
Stock being converted or (ii) the Market Price (as defined below) for our common
stock at the time of conversion (the "Conversion Price"). 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 Preferred Stock. The terms
of the Series C Preferred Stock define Maximum Conversion Price as 140% of the
closing bid price of our 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 our 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. In addition, we 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 our 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.
If we elect to redeem the Series C Preferred Stock, we must give at least
thirty days notice to the holders of the Series C Preferred Stock of our intent
to redeem the Series C Preferred Stock. During this thirty day notice period,
the holders, the holders of the Series C Preferred Stock are entitled to convert
their shares of Series C Preferred Stock into common stock at the Conversion
Price applicable on the day such holder elects to convert such Series C
Preferred Stock. After such thirty day period, the holders of the Series C
Preferred Stock may not thereafter convert the Series C Preferred Stock into
shares of common stock. Upon any conversion of the Series C
17
<PAGE>
Preferred Stock we have the option to pay the accrued but unpaid cumulative
dividend on the Series C Preferred Stock either (1) in cash or (2) by issuing
additional shares of common stock calculated by adding the amount of the accrued
but unpaid dividend into the $1,000 stated value set forth in the formula above.
PREEMPTIVE RIGHTS. The holders of the Series C Preferred Stock have no
preemptive rights to subscribe for any additional shares of any class of our
capital stock or for any issue of bonds, notes or other securities convertible
into any class of our capital stock.
LIQUIDATION PREFERENCE. If we liquidate, dissolve or wind-up our business,
whether voluntary or otherwise, after we pay our debts and other liabilities,
the holders of the Series C Preferred Stock will be entitled to receive from our
remaining net assets, before any distribution to the holders of our common
stock, the amount of $1,000 per share of Series C Preferred Stock in cash plus
payment of all accrued but unpaid dividends. The liquidation preference on the
Series C Preferred Stock is equal in preference to the liquidation preference on
the 10% Preferred Stock. Thereafter, holders of the Series C Preferred Stock
shall be entitled to share in any distributions made to the holders of our
common stock as if each share of Series C Preferred Stock was converted
(pursuant to the formula set forth above) into the number of shares of common
stock into which it is convertible immediately prior to the close of business on
the business day fixed for such distribution.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file with the
SEC at the SEC's public reference room located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's public reference rooms located at it's
regional offices in New York, New York and Chicago, Illinois. Please call the
SEC at 1-800-SEC-0300 (1-800-732-0300) for further information on the operation
of public reference rooms. You can also obtain copies of this material from the
SEC's Internet web site located at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be a part of this prospectus, and information that we file later
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings we
will make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 (file no. 0-28462):
(a) Our Annual Report on Form 10-KSB, as amended, for the year ended
December 31, 1997.
(b) Our Quarterly Reports on Form 10-QSB for the quarters ended March
31, 1998, June, 30, 1998 and September 30, 1998.
(c) The description of our common stock contained in our Registration
Statement on Form 8-A, as amended, filed with the SEC on May 22, 1996.
(d) Our current report on Form 8-K dated January 11, 1999.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address and telephone number:
Shareholder Services
Attn: Kim Castillo
Online System Services, Inc.
1800 Glenarm Place
Suite 700
Denver, Colorado 80202
(303) 296-9200
18
<PAGE>
This prospectus is part of a registration statement we filed with the SEC.
You should rely only on the information or representations provided in this
prospectus. We have authorized no one to provide you with different
information. The Selling Shareholders will not make an offer of these shares in
any state where the offer is not permitted. You should not assume that the
information in this prospectus is accurate as of any date other than the date on
the front page of this prospectus.
LEGAL MATTERS
Our legal counsel, Gray, Plant, Mooty, Mooty & Bennett, P.A., Minneapolis,
Minnesota, will issue an opinion about the legality of the shares registered by
this prospectus.
EXPERTS
The financial statements incorporated by reference in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports. You should refer to
such report, which includes an explanatory paragraph that discusses substantial
doubt about our ability to continue as a going concern.
INDEMNIFICATION
Our Articles of Incorporation provide that we shall indemnify, to the full
extent permitted by Colorado law, any of our directors, officers, employees or
agents who are made, or threatened to be made, a party to a proceeding by reason
of the fact that such person is or was one of our directors, officers, employees
or agents against judgments, penalties, fines, settlements and reasonable
expenses incurred by the person in connection with the proceeding if certain
standards are met. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to our directors, officers
and controlling persons pursuant to these provisions, or otherwise, we have been
advised that, in the opinion of the SEC, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
Our Articles of Incorporation also limit the liability of our directors to
the fullest extent permitted by the Colorado law. Specifically, our Articles of
Incorporation provide that our directors will not be personally liable for
monetary damages for breach of fiduciary duty as directors, except for (i) any
breach of the duty of loyalty to OSS or its shareholders, (ii) acts or omissions
not in good faith or that involved intentional misconduct or a knowing violation
of law, (iii) dividends or other distributions of corporate assets that are in
contravention of certain statutory or contractual restrictions, (iv) violations
of certain laws, or (v) any transaction from which the director derives an
improper personal benefit. Liability under federal securities law is not limited
by our Articles of Incorporation.
19
<PAGE>
================================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Company. This Prospectus does not constitute an offer to
sell or the solicitation of any offer to buy any security other than the
securities offered by this Prospectus, nor does it constitute an offer to sell
or a solicitation of any offer to buy the securities offered hereby by anyone
in any jurisdiction in which such offer or solicitation is not authorized, or
in which the person making such offer or solicitation is not qualified to do
so, or to any person to whom it is unlawful to make such offer or solicitation.
Neither the delivery of this Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication that information contained
herein is correct as of any time subsequent to the date hereof.
_______________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Company........................................................... 2
Risk Factors.......................................................... 4
Special Note Regarding Forward-Looking
Statements....................................................... 12
Use of Proceeds....................................................... 12
Recent Developments................................................... 12
Selling Shareholders.................................................. 15
Plan of Distribution.................................................. 16
Description of Securities............................................. 16
Where You Can Find More Information................................... 18
Legal Matters......................................................... 19
Experts............................................................... 19
Indemnification....................................................... 19
</TABLE>
ONLINE SYSTEM
SERVICES, INC.
_______________
PROSPECTUS
_______________
____________, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED TO BE IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses of the Company in
connection with the sale and distribution of the Shares being registered
pursuant to this Form S-3 Registration Statement. All of the amounts shown are
estimates, except for the Securities and Exchange Commission registration fee
and the Nasdaq listing fee. All of such expenses will be paid by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission fee $ 4,073.21
Accounting fees and expenses $ 1,500.00
Legal fees and expenses $ 3,000.00
Printing, Mailing $ 1,000.00
Transfer Agent fees $ 500.00
Miscellaneous $ 926.79
----------
TOTAL $11,000.00
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Articles of Incorporation provide that the Company shall
indemnify, to the full extent permitted by Colorado law, any director, officer,
employee or agent of the Company made or threatened to be made a party to a
proceeding, by reason of the fact that such person is or was a director,
officer, employee or agent of the Company against judgments, penalties, fines,
settlements and reasonable expenses incurred by the person in connection with
the proceeding if certain standards are met. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 (the "Act") may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
The Company's Articles of Incorporation limit the liability of its
directors to the fullest extent permitted by Colorado law. Specifically, the
Articles of Incorporation provide that directors of the Company will not be
personally liable for monetary damages for breach of fiduciary duty as
directors, except for (i) any breach of the duty of loyalty to the Company or
its shareholders, (ii) acts or omissions not in good faith or that involved
intentional misconduct or a knowing violation of law, (iii) dividends or other
distributions of corporate assets that are in contravention of certain statutory
or contractual restrictions, (iv) violations of certain laws, or (v) any
transaction from which the director derives an improper personal benefit.
Liability under federal securities law is not limited by the Articles.
ITEM 16. EXHIBITS
3.1 Articles of Incorporation, as amended, of the Company*
3.2 Bylaws of the Company (1)
4.1 Specimen form of the Company's Common Stock certificate (2)
4.2 Form of Warrant issued to EBI Securities Corporation (3)
5.1 Opinion of Counsel*
23.1 Consent of Arthur Andersen LLP*
- -----------------------------
* Filed herewith
(1) Filed with the initial Registration Statement on Form SB-2, filed April 5,
1996, Commission File No. 333-3282-D.
II-1
<PAGE>
(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 as Exhibit 4.6 to the Registration Statement on Form S-3, filed
December 22, 1998, Commission File No. 333-69477.
ITEM 17. UNDERTAKINGS
A. The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement to:
(a) include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933,
(b) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or together, represent a fundamental change in
the information in the registration statement, and
(c) to include any additional or changed material information on
the plan of distribution;
(2) to treat, for determining liability under the Securities Act of
1933, each such post-effective amendment as a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof; and
(3) to remove from registration by means of a post-effective
amendment any of the securities being registered that remain unsold at the
termination of the offering.
B. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the registrant as discussed above, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Denver, State of Colorado, on January 28, 1999.
ONLINE SYSTEM SERVICES, INC.
By /s/ R. Steven Adams
----------------------------------
R. Steven Adams, President and
Chief Executive Officer
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints R. Steven Adams and Thomas S. Plunkett, and each
of them, his/her true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution for him/her and in his/her name, place, and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full powers and authority to do and perform each and
every act and things requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he/she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or their or his/her substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below on the 28th day of January, 1999,
by the following persons in the capacities indicated:
/s/ R. Steven Adams
- ----------------------------------------------
R. Steven Adams,
(President, Chief Executive
Officer and a Director)
/s/ Thomas S. Plunkett
- ----------------------------------------------
Thomas Plunkett
(Vice President and Chief Financial Officer)
/s/ Stuart J. Lucko
- ----------------------------------------------
Stuart J. Lucko
(Controller)
/s/ Paul H. Spieker
- ----------------------------------------------
Paul H. Spieker
(Director)
______________________________________________
Robert J. Lewis
(Director)
/s/ Richard C. Jennewine
- ----------------------------------------------
Richard C. Jennewine
(Director)
/s/ William R. Cullen
- ----------------------------------------------
William R. Cullen
(Director)
II-3
<PAGE>
ONLINE SYSTEM SERVICES, INC.
FORM S-3
INDEX TO EXHIBITS
3.1 Articles of Incorporation, as amended, of the Company*
3.2 Bylaws of the Company (1)
4.1 Specimen form of the Company's Common Stock certificate (2)
4.2 Form of Warrant issued to EBI Securities Corporation (3)
5.1 Opinion of Counsel*
23.1 Consent of Arthur Andersen LLP*
- ---------------
* Filed herewith
(1) Filed with the initial Registration Statement on Form SB-2, filed April 5,
1996, Commission File No. 333-3282-D.
(2) Filed with Amendment No. 1 to the Registration Statement on Form SB-2,
filed May 3,1996, Commission File No. 333-3282-D.
(3) Filed as Exhibit 4.6 to the Registration Statement on Form S-3, filed
December 22, 1998, Commission File No. 333-69477.
II-4
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
-------------------------
OF
--
ONLINE SYSTEM SERVICES, INC.
----------------------------
The undersigned incorporator, being a natural person of the age of eighteen
years or more hereby establishes a corporation pursuant to the statutes of the
State of Colorado and adopts the following Articles of Incorporation:
ARTICLE I
---------
NAME
----
The name of the corporation shall be Online System Services, Inc.
ARTICLE II
----------
PERIOD OF DURATION
------------------
This Corporation shall exist in perpetuity, from and after the date of
filing these Articles of Incorporation with the Secretary of State of the State
of Colorado unless dissolved according to law.
ARTICLE III
-----------
PURPOSES
--------
The purpose for which this corporation is organized is to engage in any
lawful act or activity for which corporations may be organized under the laws of
the State of Colorado.
In furtherance of the foregoing purposes, the Corporation shall have and
may exercise all of the rights, powers and privileges now or hereafter conferred
upon corporations organized under the laws of the State of Colorado. In
addition, it may do `everything necessary, suitable or proper for the
accomplishment of any of its corporate purposes.
ARTICLE IV
----------
CAPITAL
-------
1. Authorized Shares. The aggregate number of shares which this
corporation shall have authority to issue is 10,000 shares, all of one class,
Common Stock, having no par value.
<PAGE>
2. Restrictions. The Corporation shall have the right to impose
restrictions on the transfer of shares of the Corporation.
3. Dividends. The Board of Directors may from time to time distribute to
shareholders in partial liquidation, or out of stated capital or capital surplus
of the Corporation, a portion of its assets, in cash or property, subject to the
limitations contained within the statutes of the State of Colorado.
4. Distribution in Liquidation. Upon any liquidation, dissolution or
winding up of the Corporation, and after paying or adequately providing for the
payment of all its obligations, the remainder of the assets of the Corporation
shall be distributed, either in cash or in kind, pro rata to the holders of the
Common Stock.
ARTICLE V
---------
VOTING BY SHAREHOLDERS
----------------------
1. Voting Rights; No Cumulative Voting. Each outstanding share of Common
Stock is entitled to the vote and each fractional share of Common Stock is
entitled to a corresponding fractional vote on each matter submitted to a vote
of shareholders. Cumulative voting shall not be allowed in the election of
directors of the Corporation and every shareholder entitled to vote at such
election shall have the right to vote the number of shares owned by him for as
many persons as there are directors to be elected, and for whose election he has
a right to vote.
2. Denial of Preemptive Rights. No shareholder of the Corporation,
whether now or hereafter authorized, shall have any preemptive or similar right
to acquire any additional unissued or treasury shares of stock or securities of
any class or rights, warrants or options to purchase stock or scrip or
securities in any kind, including shares or securities convertible into shares
or carrying stock purchase warrants or privileges.
3. Majority Vote. A quorum for the purpose of stockholder meetings will
consist of a majority of the shares issued and outstanding and entitled to vote
at the meeting.
When a quorum is present, and when the statute requires a vote of two-
thirds of the shares entitled to vote to take action, the affirmative vote of a
majority of the shares issued and outstanding and entitled to vote on the
subject matter shall be the act of the stockholders.
2
<PAGE>
ARTICLE VI
----------
BOARD OF DIRECTORS
------------------
The initial Board of Directors shall consist of three (3) directors, and
the names and addresses of the persons who shall serve as directors until the
first annual meeting of the shareholders or until their successors are elected
and shall qualify are:
NAME MAILING ADDRESS
- ---- ---------------
R. Steven Adams 1800 Glenarm Place, Suite 700
Denver, Colorado 80202
Craig A. Snapp 9063: S. Bermuda Run Circle
Highlands Ranch, CO 80126
Thomas D. Smart 1700 Broadway, Suite 1800
Denver, CO 80290
The number of directors shall be prescribed by the Bylaws except that there
need be only as many directors as there are shareholders in the event that the
outstanding shares are held of record by fewer than two persons.
ARTICLE VII
-----------
RIGHT OF DIRECTORS TO CONTRACT WITH CORPORATION
-----------------------------------------------
The following provisions are inserted for the management of the business
and for the conduct of the affairs of the Corporation, and the same are in
furtherance of and not in limitation of the powers conferred by law.
1. No contract or other transaction between this Corporation and one or
more of its directors or any other corporation, firm, association, or entity in
which one or more of its directors are directors or officers or are financially
interested shall be either void or voidable solely because of such relationship
or interest or solely because such directors are present at the meeting of the
Board of Directors or a committee thereof which authorizes, approves, or
ratifies such contract or transaction or solely because their votes are counted
for such purpose if:
(a) The material facts as to such relationship or interest and as to the
contract or transaction are disclosed or are otherwise known to the Board of
Directors or committee and the board or committee
3
<PAGE>
authorizes, approves, or ratifies such contract or transaction by the
affirmative vote of a majority of the disinterested directors, even though the
directors are less than a quorum; or
(b) The material facts of such relationship or interest and as to the
contract of transaction are disclosed or otherwise known to the shareholders
entitled to vote thereon and they authorize, approve, or ratify such contract or
transaction by vote or written consent; or
(c) The contract or transaction is fair and reasonable to the Corporation.
2. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or a committee
thereof which authorizes, approves or ratifies such contract or transaction.
ARTICLE VIII
------------
CORPORATE OPPORTUNITY
---------------------
The officers, directors and other members of management of this Corporation
shall be subject to the doctrine of "corporate opportunities" only insofar as it
applies to business opportunities in which this Corporation has expressed an
interest as determined from time to time by this Corporation's Board of
Directors as evidenced by resolutions appearing in the Corporation's minutes.
Once such areas of interest are delineated, all such business opportunities
within such areas of interest which come to the attention of the officers,
directors, and other members of management of this Corporation shall be offered
first to the Corporation. In the event the Corporation declines to pursue any or
all such business opportunities, the officers, directors and other members. of
management of this Corporation shall be free to engage in such areas of interest
on their own and this doctrine shall not limit the right of any officer,
director or other member of management of this Corporation (other than an
officer, director, or member of management) from any duties which he may have to
this Corporation.
ARTICLE IX
----------
INDEMNIFICATION OF OFFICERS,
----------------------------
DIRECTORS AND OTHERS
--------------------
1. To the full extent permitted by the Colorado Corporation Code, the
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending
4
<PAGE>
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative and whether formal or informal (other than an action by or in
the right of the Corporation) by reason of the fact that he is or was a
Director, Officer, employee, fiduciary or agent of the Corporation, or is or was
serving at the request of the Corporation as a Director, Officer, employee,
fiduciary or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he conducted himself in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, or conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the Corporation and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
2. The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a Director, Officer, employee, fiduciary or
agent of the Corporation, or is or was serving at the request of the Corporation
as a Director, Officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable for negligence or misconduct in the performance of
his duty to the Corporation unless and only to the extent that the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses which such court shall deem proper.
5
<PAGE>
3. To the extent that a Director, Officer, employee, fiduciary or agent of
the Corporation has been wholly successful on the merits or otherwise in defense
of any action, suit or proceeding referred to in paragraphs 1 and 2 of this
Article, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
4. Any indemnification under paragraphs 1 and 2 of this Article (unless
ordered by a court) shall be made by the Corporation only as authorized in the
specific case upon a determination that indemnification of the Director,
Officer, employee, fiduciary or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in paragraphs 1 and 2. Such
determination shall be made (1) by the Board of Directors by a majority vote of
a quorum consisting of Directors who were not parties to such action, suit or
pending, or (2) if such a quorum is not attainable, or, even if obtainable a
quorum of disinterested Directors so directs, by independent legal counsel in a
written opinion, or (3) by the stockholders.
5. Expenses (including attorneys' fees) incurred in defending a civil or
criminal action, suit or pending may be paid by the Corporation in advance of
the final disposition of such action, suit or proceeding as authorized in the
manner provided in paragraph 4 of this Article upon receipt of an undertaking by
or on behalf of the Director, Officer, employee, fiduciary or agent to repay
such amount unless it shall ultimately be determined that he is entitled to be
indemnified by the Corporation as authorized in this section.
6. The Corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a Director, Officer, employee, fiduciary or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise against any
liability asserted against him and incurred by him in any such capacity or
arising out of his status as such, whether or not the Corporation would have the
power to indemnify him against such liability under the provisions of this
section.
6
<PAGE>
7. In addition to the foregoing, the Corporation shall have the power to
indemnify current or former directors, officers, employees and agents to the
fullest extent provided by the laws of the State of Colorado.
ARTICLE X
---------
DIRECTOR LIABILITY
------------------
To the fullest extent permitted by the Colorado Corporation Code, as the
same exists or may hereafter be amended, a director of this Corporation shall
not be liable to the Corporation or its shareholders for monetary damages for
breach of fiduciary duty as a director.
ARTICLE XI
----------
REGISTERED OFFICE AND REGISTERED AGENT
--------------------------------------
The address of the initial registered office of the Corporation is 1800
Glenarm Place, Suite 700, Denver, Colorado 80202 and the name of the initial
registered agent at such address is R. Steven Adams. Either the registered
office or the registered agent may be changed in the manner permitted by law.
ARTICLE XII
-----------
INCORPORATOR
------------
The name and address of the incorporator is as follows:
NAME MAILING ADDRESS
- ---- ---------------
Kim P. Castillo 1800 Glenarm Place, Suite 700
Denver, Colorado 80202
IN WITNESS WHEREOF, the above-named incorporator has signed these Articles
of Incorporation this 22nd day of March 1994.
/s/ Kim P. Castillo
--------------------------------------------------
Kim P. Castillo
STATE OF COLORADO )
ss.
COUNTY OF DENVER )
I, the undersigned, a Notary Public, hereby certify that on the 22nd day of
March 1994, personally appeared before me, Kim P. Castillo, who being by me
first duly sworn, severally declared that she is the person who signed the
foregoing document as incorporator, and the statements therein contained are
true.
7
<PAGE>
WITNESS my hand and official seal
[SEAL]
/s/ Colleen K. Overocker
---------------------------------------------
Notary Public
My Commission Expires: May 17, 1995
------------
8
<PAGE>
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
ONLINE SYSTEM SERVICES, INC.
The undersigned, R. Steven Adams, President of Online System Services,
Inc., a Colorado corporation (the "Corporation"), DOES HEREBY CERTIFY that the
number of votes cast for the following amendment by each voting group entitled
to vote separately on the amendment was sufficient for approval by that group,
in that the sole shareholder of the Corporation approved and adopted the
amendment in all respects:
ARTICLE IV of the Articles of Incorporation of the Corporation is amended
----------
and replaced in its entirety to read as follows:
ARTICLE IV
----------
CAPITAL
-------
1. Authorized Shares. The aggregate number of shares that the Corporation
has authority to issue is 15,000,000. The shares are classified in two classes,
consisting of 10,000,000 shares of Common Stock , no par value, and 5,000,000
shares of Preferred Stock, with such par value as the Board of Directors of the
Corporation may designate. The Board of Directors of the Corporation is
authorized to establish one or more series of Preferred Stock, setting forth the
designation of each such series, and fixing the preferences, limitations and
relative rights of each such series of Preferred Stock.
2. Transfer Restrictions. The Corporation shall have the right to impose
restrictions on the transfer of shares of the Corporation.
3. Dividends. The Board of Directors of the Corporation may from time to
time distribute to shareholders in partial liquidation, or out of stated capital
or capital surplus of the Corporation, a portion of its assets, in cash or
property, subject to the limitations contained within the statutes of the State
of Colorado.
4. Distributions in Liquidation. Upon any liquidation, dissolution or
winding up of the Corporation, and after paying or adequately providing for the
payment of all its obligations, the remainder of the assets of the Corporation
shall be distributed, either in cash or in kind, and subject to any preferences
of any series of Preferred Stock, to the shareholders of the Corporation.
I FURTHER CERTIFY that the foregoing amendment was approved and adopted by
the Corporation's sole shareholder effective as of the 17th day of March, 1995.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment this 31st day of July, 1995.
/s/ R. Steven Adams
--------------------------------------------
R. Steven Adams, President
9
<PAGE>
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
ONLINE SYSTEM SERVICES, INC.
The undersigned, Thomas S. Plunkett, Chief Financial Officer of Online
System Services, Inc., a Colorado corporation (the "Corporation"), DOES HEREBY
CERTIFY that pursuant to actions taken by the Board of Directors on December 16,
1997 in accordance with Sections 7-106-101, 7-106-102 and 7-110-102 of the
Colorado Business Corporation Act, the following amendment was duly adopted by
the Board of Directors without shareholder approval as permitted by Section 7-
106-102(4) of the Colorado Business Corporation Act:
ARTICLE IV of the Articles of Incorporation of the Corporation, as amended,
----------
is further amended by adding a new Section 5, the text of which is set forth on
Exhibit A attached hereto.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment this 30th day of December, 1997.
/s/ Thomas S. Plunkett
--------------------------------------------
Thomas S. Plunkett, Chief
Financial Officer
10
<PAGE>
EXHIBIT A
5. Designation of 10% Preferred Stock. The Corporation shall establish
and reserve for issuance from its 5,000,000 authorized shares of Preferred Stock
a class of preferred stock consisting of 500,000 shares to be known as the 10%
Preferred Stock (the "10% Preferred Stock"). The 10% Preferred Stock shall have
a stated value of $10.00 per share. The preferences, limitations and relative
rights of the 10% Preferred Stock shall be as provided in this Section 5.
A. Voting Rights.
(1) Each outstanding share of the 10% Preferred Stock is
entitled to one vote on each matter submitted to a vote of
shareholders. The holders of the 10% Preferred Stock shall be entitled
to vote on all matters voted upon by the holders of the Corporation's
Common Stock. Unless otherwise required by law, the holders of the
Common Stock and the holders of the 10% Preferred Stock shall vote as
a single class on all matters submitted to a vote of shareholders.
(2) The holders of the 10% Preferred Stock shall not be entitled
to any rights of cumulative voting with respect to their shares.
B. Preemptive Rights. No holder of the 10% Preferred Stock shall
have any preemptive or similar right to acquire any additional unissued or
treasury shares of stock or securities of any class or rights, warrants or
options to purchase stock or scrip or securities in any kind, including
shares or securities convertible into shares or carrying stock purchase
warrants or privileges.
C. Dividends.
(1) Dividends shall accrue on the 10% Preferred Stock at the
rate of ten percent (10%) per annum on the stated value of the 10%
Preferred Stock and shall be paid quarterly on the first of each
January, April, July and October, beginning July 1, 1998, to the
record holder thereof on the 15th of the previous month, subject to
the limitations contained within the statutes of the State of
Colorado. Dividends not paid in any quarter shall accumulate until
paid, with interest on the unpaid balance, if any, accruing simple
interest at the rate stated above. Subject to the foregoing
limitations, dividends may be paid out of any funds legally available
for such purpose.
(2) Dividends on the 10% Preferred Stock shall be declared and
paid before dividends of any kind may be declared and paid on the
Common Stock or any inferior class or series of stock and before
distribution or any liquidation or distribution of any kind may be
made upon the issued and outstanding Common Stock or any inferior
class of stock.
(3) Upon any redemption or conversion of the 10% Preferred Stock
pursuant to paragraphs G and H below, the Corporation shall pay all
accrued but unpaid dividends on the 10% Preferred Stock called for
redemption or converted, as the case may be. The Corporation may pay
such accrued but unpaid dividends either (i) in cash or (ii) by
issuing shares of Common Stock at a price per share equal to the
lesser of (a) $10.00 or (b) if a redemption or a conversion occurring
with respect to shares of the 10% Preferred Stock for which the
Corporation has given a Notice of Redemption (as that term is defined
in subparagraph G(2), below), the Average Per Share Closing Bid Price
(as defined below) for the five trading days immediately preceding the
date on which the Notice of Redemption was first given to the holders
of the 10% Preferred Stock called for redemption, or, if a conversion
occurring with respect to shares of the 10% Preferred
11
<PAGE>
Stock for which the Corporation has not given a Notice of Redemption,
the Average Per Share Closing Bid Price for the five trading days
immediately preceding the date on which the Conversion Notice (as that
term is defined in subparagraph H(3), below) was first given to the
Corporation.
(4) Upon payment by the Corporation of dividends on the basis
described in subparagraphs C(1)-C(3), the holders of the 10% Preferred
Stock shall have no further right to dividends and shall not
participate in any manner in dividends declared and paid or other
distributions on the Common Stock or any inferior class or series of
stock.
D. Liquidation Preference. In the event of the liquidation,
dissolution or winding up of the affairs of the Corporation, whether
voluntary or involuntary, the holders of the 10% Preferred Stock shall be
entitled to receive, after payment by the Corporation of its debts and
liabilities, the stated value of all shares of the 10% Preferred Stock in
cash plus any all accrued but unpaid dividends out of the assets of the
Corporation before any payment shall be made or any assets distributed to
the holders of the Common Stock or any other inferior class or series of
stock. If sufficient assets are not available to pay all holders of the 10%
Preferred Stock in full, the available assets shall be distributed to the
holders of the 10% Preferred Stock on a pro rata basis. Except as provided
in this paragraph D, the holders of the 10% Preferred Stock shall not be
entitled to receive any other payments from the Corporation in the event of
the liquidation, dissolution or winding up of the affairs of the
Corporation.
E. Other Securities, Obligations.
(1) Subject to any limitations contained in these Articles of
Incorporation, the Board of Directors of the Corporation reserves the
right to establish additional classes and/or series of capital stock
of the Corporation and to designate the preferences, limitations and
relative rights of any such classes and/or series; provided, however,
that no such class and/or series may have preferences, limitations and
relative rights which are superior to or senior to the preferences,
limitations and relative rights granted to the holders of the 10%
Preferred Stock.
(2) At any time during which any shares of the 10% Preferred
Stock are outstanding, the Corporation shall not incur any obligation
or liability other than trade payables and other short-term
indebtedness incurred in the ordinary course of business that is
superior to or senior to the 10% Preferred Stock in any respects,
including liquidation preferences.
F. Capital Reorganization. If the Corporation shall at any time
hereafter subdivide or combine its outstanding shares of Common Stock,
declare a dividend payable in Common Stock, or in case of any capital
reorganization or reclassification of the shares of Common Stock of the
Corporation, the number of shares and stated value of the 10% Preferred
Stock shall be adjusted appropriately to allow the holders of the 10%
Preferred Stock, as nearly as reasonably possible, to maintain (i) the
aggregate stated value of their 10% Preferred Stock and (ii) their pro rata
interest in the Corporation and in the Common Stock upon conversion of the
10% Preferred Stock, that they had prior to any such subdivision,
combination, stock dividend, reorganization or reclassification.
G. Redemption.
(1) The 10% Preferred Stock may be redeemed by the Corporation,
in whole or in part, at any time for $10.00 per share (the "Redemption
Price"). It is the Corporation's intent to use its best efforts to
raise sufficient capital to both fund its operations and to permit it
to redeem the 10% Preferred Stock as soon as is reasonably
12
<PAGE>
possible. In addition, if the Corporation completes a public offering
of its securities that raises net proceeds of at least $5,000,000 (the
"Public Offering") within nine months from the date on which the
initial closing of the offering of the 10% Preferred Stock occurs (the
"Closing Date"), then the Corporation shall redeem all of the
outstanding 10% Preferred Stock.
(2) The Corporation shall give not more than sixty (60) nor less
than thirty (30) days notice (the "Notice of Redemption") of the date
fixed for any redemption (as fixed, the "Redemption Date") of the 10%
Preferred Stock by mailing the Notice of Redemption to the record
holders of the 10% Preferred Stock to such holder's address as it
appears on the records of the Corporation; provided, however, that the
Corporation shall not be required to give notice of any redemption of
the 10% Preferred Stock that occurs within nine months from the
Closing Date. In the case of a partial redemption of the 10%
Preferred Stock, the shares to be redeemed shall be selected in any
manner the Corporation may determine. The Notice of Redemption shall
be deemed given when it is deposited in the United States mail with
sufficient postage affixed or when it is delivered to the record
holder at such holder's address as it appears on the records of the
Corporation.
(3) On the Redemption Date, all rights of the holders of the 10%
Preferred Stock called for redemption shall cease and terminate with
respect to such shares except (i) the right to receive the Redemption
Price upon surrender of the certificates representing the shares of
the 10% Preferred Stock called for redemption and (ii) the right to
receive payment of all dividends with respect to the shares of 10%
Preferred Stock called for redemption which are accrued but unpaid on
the Redemption Date.
H. Conversion.
(1) If the 10% Preferred Stock is not redeemed within nine
months from the Closing Date, each share of the outstanding 10%
Preferred Stock shall become convertible, at the election of the
holder thereof (the "Conversion Right"), into the number of shares of
Common Stock of the Corporation equal to $10.00 divided by the lesser
of (i) $10.00 or (ii) 80% of the Average Per Share Closing Bid Price
of the Corporation's Common Stock as calculated pursuant to the next
sentence The "Average Per Share Closing Bid Price" shall be (a) if the
conversion occurs with respect to shares of the 10% Preferred Stock
for which the Corporation has given a Notice of Redemption, the
average per share closing bid price for the Corporation's Common Stock
for the five trading days immediately preceding the date on which the
Notice of Redemption was first given to the holders of the 10%
Preferred Stock called for redemption or (b) if the conversion occurs
with respect to shares of the 10% Preferred Stock for which the
Corporation has not given a Notice of Redemption, the average closing
bid price for the five trading days immediately preceding the date on
which the holder gives the Conversion Notice (as that term is defined
in subparagraph H(3), below) to the Corporation. The Closing Bid Price
for the Common Stock at any date shall be (i) the Closing Bid Price of
the Common Stock as reported in The Wall Street Journal (or, if not so
reported, as otherwise reported by The Nasdaq Stock Market or, (ii) in
the event that the Common Stock is listed on a stock exchange or on
the Nasdaq National Market (or other national market), the Closing Bid
Price shall be the closing price on the exchange or the Nasdaq
National Market (or other national market), as the case may be, as
reported in The Wall Street Journal (or, if not so reported, as
otherwise reported by the stock exchange, Nasdaq or other national
market). In the event that there is no reported Closing Bid Price or
sale price, as the case may be, for a given day, the Closing Bid Price
or sale price, as the case may be, for that day shall be deemed to be
the Closing Bid Price
13
<PAGE>
or sale price, as the case may be, for the first day preceding such
day for which there was a reported Closing Bid Price or sale price, as
the case may be.
(2) The Conversion Right shall expire and terminate five (5)
days prior to the Redemption Date. In the case of a partial redemption
of the 10% Preferred Stock, the Conversion Right shall so expire and
terminate only with respect to the shares of the 10% Preferred Stock
called for redemption.
(3) In order to exercise the Conversion Right, the holder of the
10% Preferred Stock to be converted shall give written notice (the
"Conversion Notice") to the Corporation at its principal office or, at
the option of the Corporation, at the offices of a conversion agent
which the Corporation may designate from time to time by giving
written notice of such designation to the holders of the 10% Preferred
Stock, that the holder elects to convert such shares. The Conversion
Notice shall be accompanied by the certificate or certificates
representing the shares of the 10% Preferred Stock to be converted,
duly endorsed to the Corporation. The Conversion Notice shall be
deemed given when it is deposited in the United States mail with
sufficient postage affixed or when it is delivered to the Corporation
at its principal office (or to the offices of such conversion agent,
if one be designated).
(4) As soon as practicable after the receipt of the Conversion
Notice and the certificates representing the shares of the 10%
Preferred Stock to be converted, the Corporation shall issue and shall
deliver to the record holder of the shares so surrendered for
conversion by mail to the address of such record holder as it appears
on the records of the Corporation, a certificate or certificates for
the number of shares of Common Stock issuable upon conversion of the
shares of the 10% Preferred Stock and a residual certificate for
shares of the 10% Preferred Stock, if any, not converted. Such
conversion shall be deemed to have been effected on the date on which
the Corporation (or the conversion agent, if one be designated), shall
have received the Conversion Notice and the certificate or
certificates representing shares of the 10% Preferred Stock to be
converted, and the record holder shall be deemed to have become on
such date the holder of record of the shares of Common Stock to be
received upon conversion; provided, however, that any such surrender
on any date when the stock transfer books of the Corporation shall be
closed in accordance with the bylaws of the Corporation shall not be
deemed to constitute the record holder as the holder of shares of
Common Stock to be received upon conversion for any purpose until the
close of business on the day succeeding the day on which such stock
transfer books shall become open.
(5) The Corporation shall not be required to issue fractional
shares of Common Stock upon conversion of shares of the 10% Preferred
Stock. If any fractional interest in a share of Common Stock would be
deliverable upon conversion of any shares of the 10% Preferred Stock,
the Corporation shall make an adjustment therefor in cash at the
current market value thereof, computed on the basis determined by the
Corporation in its sole discretion.
14
<PAGE>
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
ONLINE SYSTEM SERVICES, INC.
The undersigned, Thomas S. Plunkett, Chief Financial Officer of Online
System Services, Inc., a Colorado corporation (the "Corporation"), DOES HEREBY
CERTIFY that pursuant to actions taken by the Board of Directors on May 7, 1998
in accordance with Sections 7-106-101, 7-106-102 and 7-110-102 of the Colorado
Business Corporation Act, the following amendment was duly adopted by the Board
of Directors without shareholder approval as permitted by Section 7-106-102(4)
of the Colorado Business Corporation Act:
ARTICLE IV of the Articles of Incorporation of the Corporation, as amended,
----------
is further amended by adding a new Section 6, the text of which is set forth on
Exhibit A attached hereto.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment this 22nd day of May, 1998.
/s/ Thomas S. Plunkett
-----------------------------
Thomas S. Plunkett
Chief Financial Officer
15
<PAGE>
EXHIBIT A
6. Designation of Preferred Stock. The Corporation shall establish and
reserve for issuance from its 5,000,000 authorized shares of Preferred Stock a
class of convertible preferred stock consisting of 3,000 shares to be designated
as the 5% Preferred Stock (the "5% Preferred Stock"). The 5% Preferred Stock
shall have a stated value of the Liquidation Preference (as hereinafter
defined). Except as otherwise expressly stated in this Section 6, all shares of
the 5% Preferred Stock shall be identical to the shares of 10% Preferred Stock,
and the holders of 5% Preferred Stock shall be entitled to the same preferences,
limitations and relative rights as the holders of 10% Preferred Stock.
A. Dividends.
(1) Holders of the 5% Preferred Stock shall be entitled to
receive, out of funds legally available therefor, dividends at a rate
equal to 5% (the "Dividend Rate") of the Liquidation Preference per
share per annum (subject to appropriate adjustments in the event of
any stock dividend, stock split, combination or other similar
recapitalization affecting such shares), and no more, payable in
accordance with the provisions of this Section 6. Notwithstanding the
foregoing sentence of this Subsection A(1), in the event the
Registration Statement (as hereinafter defined) is not declared
effective by the Securities and Exchange Commission (the "Commission")
within 90 days following the Initial Closing Date (as defined in that
certain Securities Purchase Agreement (the "Securities Purchase
Agreement"), dated as of May 22, 1998, among the Corporation, the
purchasers named therein and West End Capital LLC), then the Dividend
Rate shall increase to 18% until the Registration Statement is
declared effective; provided, however, that if the Commission conducts
a review of the Registration Statement, the Dividend Rate shall not
increase unless it is not declared effective by the Commission within
120 days following the Initial Closing Date, at which time the
Dividend Rate shall increase to 18% until the Registration Statement
is declared effective.
(2) At the election of the Corporation, each dividend on 5%
Preferred Stock shall be paid either in shares of Common Stock or in
cash on the Delivery Date (as defined in Subsection H(2)(a) of this
Section 6) with respect to any shares of 5% Preferred Stock which are
the subject of a Notice of Conversion (as defined in Subsection
H(2)(a) of this Section 6). Dividends paid in shares of Common Stock
shall be paid (based on an assumed value of $1,000 per share) in full
shares only, with a cash payment equal to the value of any fractional
shares. Each dividend paid in cash shall be mailed to the holders of
record of the 5% Preferred Stock as their names and addresses appear
on the share register of the Corporation or at the office of the
transfer agent on the corresponding dividend payment date. Holders of
5% Preferred Stock will receive written notification from the
Corporation or the transfer agent if a dividend is paid in kind, which
notification will specify the number of shares of Common Stock paid as
a dividend and the recipient's aggregate holdings of Common Stock as
of that dividend payment date and after giving effect to the dividend.
All holders of shares of Common Stock issued as dividends shall be
entitled to all of the rights and benefits relating to shares of
Common Stock as set forth in the Corporation's Articles of
Incorporation, as amended, and By-laws.
(3) Holders of the 5% Preferred Stock shall be entitled to
payment of any dividends in preference and priority to any payment of
any cash dividend on Common Stock or any other class or series of
capital stock of the Corporation other than any other class or series
of stock ranking senior ("Senior Preferred Stock") to the 5% Preferred
Stock in respect of dividends, when and as declared by the Board of
Directors of the Corporation. The rights of the holders of 5%
Preferred Stock and 10% Preferred Stock to receive any dividends shall
be equal in preference and priority. Dividends on the 5%
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Preferred Stock shall accrue with respect to each share of the 5%
Preferred Stock from the date on which such share is issued and
outstanding and thereafter shall be deemed to accrue from day to day
whether or not earned or declared and whether or not there exists
profits, surplus or other funds legally available for the payment of
dividends, and shall be cumulative so that if such dividends on the 5%
Preferred Stock shall not have been paid, or declared and set apart
for payment, the deficiency shall be fully paid or declared and set
apart for payment before any dividend shall be paid or declared or set
apart for any Common Stock or other class or series of capital stock
ranking junior to the 5% Preferred Stock (such stock being
collectively referred to herein as the "Junior Stock") and before any
purchase or acquisition of any Junior Stock is made by the
Corporation, except the repurchase of Junior Stock from employees of
the Corporation upon termination of employment. At the earlier of: (1)
the redemption or conversion of the 5% Preferred Stock or (2) the
liquidation of the Corporation, any accrued but undeclared dividends
shall be paid to the holders of record of outstanding shares of the 5%
Preferred Stock in accordance with the provisions of this Section 6.
No accumulation of dividends on the 5% Preferred Stock shall bear
interest.
B. Liquidation, Dissolution or Winding Up.
(1) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of
the 5% Preferred Stock then outstanding shall be entitled to be paid
out of the assets of the Corporation available for distribution to its
stockholders, after and subject to the payment in full of all amounts
required to be distributed to the holders of any Senior Preferred
Stock ranking on liquidation prior and in preference to the Preferred
Stock, but before any payment shall be made to the holders of Junior
Stock by reason of their ownership thereof, an amount equal to $1,000
per share of 5% Preferred Stock (the "Liquidation Preference") plus
any accrued but unpaid dividends (whether or not declared). The
rights of the holders of 5% Preferred Stock and 10% Preferred Stock to
receive any such distributions shall be equal in preference and
priority. If upon any such liquidation, dissolution or winding up of
the Corporation the remaining assets of the Corporation available for
distribution to its shareholders shall be insufficient to pay the
holders of shares of the 5% Preferred Stock the full amount to which
they shall be entitled, the holders of shares of the 5% Preferred
Stock shall share ratably in any distribution of the remaining assets
and funds of the Corporation in proportion to the respective amounts
which would otherwise be payable in respect of the shares held by them
upon such distribution if all amounts payable on or with respect to
such shares were paid in full.
(2) After the payment of all preferential amounts required to be
paid to the holders of the 5% Preferred Stock and the 10% Preferred
Stock upon the dissolution, liquidation, or winding up of the
Corporation, all of the remaining assets and funds of the Corporation
available for distribution to its shareholders shall be distributed
ratably among the holders of the 5% Preferred Stock and the Junior
Stock, with each share of 5% Preferred Stock being deemed, for such
purpose, to be equal to the number of shares of Common Stock,
including fractions of a share, into which such share of 5% Preferred
Stock is convertible immediately prior to the close of business on the
business day fixed for such distribution.
C. Voting.
(1) Each holder of outstanding shares of 5% Preferred Stock
shall be entitled, at each meeting of shareholders of the Corporation
(and with respect to written consents of shareholders in lieu of
meetings) with respect to any and all matters presented to the
shareholders of the Corporation for their action or consideration, to
the
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number of votes equal to the number of whole shares of Common Stock
into which the shares of 5% Preferred Stock held by such holder are
convertible (as adjusted from time to time pursuant to Subsection H
hereof) immediately after the close of business on the record date
fixed for such meeting or the effective date of such written consent.
Except as provided by law, by the provisions of Section J below, or by
the provisions establishing any other series of preferred stock,
holders of 5% Preferred Stock shall vote together with the holders
Common Stock as a single class.
(2) The holders of the 5% Preferred Stock shall not be entitled
to any rights of cumulative voting with respect to their shares.
D. Preemptive Rights. No holder of Preferred Stock shall have any
preemptive or similar right to acquire any additional unissued or treasury
shares of stock or securities of any class or rights, warrants or options
to purchase stock or scrip or securities in any kind, including shares or
securities convertible into shares or carrying stock purchase warrants or
privileges.
E. Other Securities. Subject to any limitations contained in these
Articles of Incorporation, the Board of Directors of the Corporation
reserves the right to establish additional classes and/or series of capital
stock of the Corporation and to designate the preferences, limitations and
relative rights of any such classes and/or series; provided, however, that
no such class and/or series may have preferences, limitations and relative
rights which are superior to or senior to the preferences, limitations and
relative rights granted to the holders of the 5% Preferred Stock.
F. Capital Reorganization. If the Corporation shall at any time
hereafter subdivide or combine its outstanding shares of Common Stock,
declare a dividend payable in Common Stock, or in case of any capital
reorganization or reclassification of the shares of Common Stock of the
Corporation, the number of shares of the 5% Preferred Stock and the stated
value of the 5% Preferred Stock shall be adjusted appropriately to allow
the holders of the 5% Preferred Stock, as nearly as reasonably possible, to
maintain (i) the aggregate stated value of the 5% Preferred Stock and (ii)
their pro rata interest in the Corporation and in the Common Stock upon
conversion of the 5% Preferred Stock, that each holder had prior to any
such subdivision, combination, stock dividend, reorganization or
reclassification.
G. Optional Redemption
(1) At any time within the 120 days following the Initial
Closing Date, the Corporation may, at its option, redeem all or any
portion of the shares of 5% Preferred Stock then outstanding upon not
less than ten (10) days' notice at a redemption price per share equal
to (A) the quotient of (i) the Liquidation Preference per share of 5%
Preferred Stock plus all accrued but unpaid dividends on such shares
of 5% Preferred Stock and (ii) the Conversion Price as if the 5%
Preferred Stock has been converted on the 5% Preferred Stock
Redemption Date (as hereinafter defined) multiplied by (B) the average
Closing Bid Price (as hereinafter defined) of shares of Common Stock
for the five (5) trading days immediately preceding the 5% Preferred
Stock Redemption Date. Notwithstanding the foregoing, a redemption
shall not occur pursuant to this Subsection G(1) with respect to any
5% Preferred Stock for which a holder has previously submitted a
Notice of Conversion pursuant to Subsection H of this Section 6. For
purposes of this Section 6, the term "Closing Bid Price" means, for
any security as of any date, the closing bid price on the principal
securities exchange or trading market where the Common Stock is listed
or traded as reported by Bloomberg, L.P. ("Bloomberg") or, if
applicable, the closing bid price of the Common Stock in the over-the-
counter market on the electronic bulletin board for such security as
reported by Bloomberg, or, if no closing bid price is reported for the
Common Stock by Bloomberg, then the average of the bid
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<PAGE>
prices of any market makers for such security as reported in the "pink
sheets" by the National Quotation Bureau, Inc. If the Closing Bid
Price of the Common Stock can not be calculated on such date on any of
the foregoing bases, the Closing Bid Price of the Common Stock on such
date shall be the fair market value as mutually determined by the
Corporation and the holders of a majority of the outstanding shares of
Series A Preferred Stock being converted for which the calculation of
the Closing Bid Price is required in order to determine the Conversion
Price of such shares. "Trading day" shall mean any day on which the
Corporation's Common Stock is traded for any period on the principal
securities exchange or other securities market on which the Common
Stock is then being traded.
(2) Upon receipt of a notice given pursuant to Subsection G(1),
each holder of Series A Preferred Stock shall have thirty days to
decide whether to accept its ratable portion (based on its holdings of
Series A Preferred Stock as compared to the aggregate number of shares
of Series A Preferred Stock then outstanding) of such offer by
tendering such holder's shares to the Corporation for redemption, at
an address to be set forth in such notice, at any time prior to 5:00
p.m. New York time on the 30th day following the mailing of such
notice (the "Series A Preferred Stock Redemption Date") or to convert
all or a portion of the Series A Preferred Stock. Notwithstanding the
foregoing, nothing herein shall limit the rights of the holders of the
Series A Preferred Stock to convert the Series A Preferred Stock in
whole or in part, prior to the Series A Preferred Stock Redemption
Date. Within three (3) business days after the Series A Preferred
Stock Redemption Date, the Corporation shall remit the applicable
redemption price, calculated pursuant to Subsection G(1) of this
Section 7, by wire transfer to each holder of the Series A Preferred
Stock to the most recent address of each holder as set forth on the
records of the Corporation or its transfer agent.
(3) Any shares of Series A Preferred Stock redeemed pursuant to
this Subsection G or otherwise acquired by the Corporation in any
manner whatsoever shall be canceled and shall not under any
circumstances be reissued. The Corporation may from time to time take
such appropriate corporate action as may be necessary to reduce
accordingly the number of authorized shares of the Corporation's
capital stock.
H. Conversion.
(1) Subject to Subsection G(2) of this Section 7, the holders of
the Series A Preferred Stock shall have conversion rights as follows
(the "Series A Preferred Stock Conversion Rights"):
(a) Each share of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time and
from time to time, into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing
$1,000, plus the amount of any accrued and unpaid dividends the
Corporation elects to pay in Common Stock, by the Conversion
Price in effect at the time of conversion. The Conversion Price
at which shares of Common Stock shall be deliverable upon
conversion of Series A Preferred Stock without the payment of
additional consideration by the holder thereof (the "Conversion
Price") shall be the lower of (i) 105% of the average Closing Bid
Price of the shares of Common Stock for the five (5) trading days
between November 2 through November 6 ($5.71) or (ii) 80% of the
average Closing Bid Price of the shares of Common Stock for any
five (5) consecutive trading days during the twenty (20)
consecutive trading days immediately preceding the Series A
Preferred Stock Conversion Date (as hereinafter defined).
(b) At any time that the number of shares of Common Stock
issued (A) upon conversion of the Series A Preferred Stock and
(B) in lieu of
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<PAGE>
dividend payments on the Series A Preferred Stock, shall equal 630,000
(a "Common Stock Redemption Event"), the Corporation shall (x) redeem,
at a price determined in accordance with Subsection G(1) of this
Section 7, all of the outstanding Series A Preferred Stock in
accordance with the provisions of Subsection G(2) or (y) call a
special meeting of its shareholders for the purpose of approving the
transactions contemplated by the Securities Purchase Agreement,
including the issuance of the Series A Preferred Stock on the terms
set forth therein, together with any other approvals that shall be
required so as to cause the transactions contemplated by the
Securities Purchase Agreement to remain in compliance with the Rules
and Regulations of The Nasdaq Stock Market (including Rule 4320 of
Nasdaq's Non-Qualitative Designation Criteria in connection with
conversions of Series A Preferred Stock; such approvals are referred
to herein as the "Required Approvals"). The Corporation shall
determine within five (5) business days following the receipt of a
Notice of Conversion which of such actions it shall take, and shall
promptly furnish notice to each of the holders of Series A Preferred
Stock as to such determination, including, if applicable, a notice of
redemption. In no event shall the Corporation issue shares of Common
Stock upon conversion of, or in lieu of interest payments on, the
Series A Preferred Stock, after the occurrence of a Common Stock
Redemption Event until the Required Approvals, if any, are obtained.
(c) If the Corporation elects to call a special meeting of its
shareholders pursuant to Subsection H(1)(b) of this Section 7 to
obtain the Required Approvals, the Corporation shall use its best
efforts to obtain such Required Approvals within thirty (30) days of
the Common Stock Redemption Event (such thirty (30) day period is
referred to herein as an "Approval Period"). If the Corporation does
not obtain the Required Approvals within the Approval Period and the
Corporation receives a Notice of Conversion after the termination of
the Approval Period, the Corporation must redeem, in accordance with
this Subsection H of this Section 7, any shares of Series A Preferred
Stock outstanding after the Corporation has issued in excess of
630,000 shares of Common Stock in connection with conversions of the
Series A Preferred Stock.
(d) If the Corporation elects, pursuant to this Subsection H, to
redeem the Series A Preferred Stock on the occurrence of a Common
Stock Redemption Event, it shall redeem such Series A Preferred Stock
at the price determined in accordance with Subsection G(1) of this
Section 7. If the Corporation shall have elected, pursuant to this
Subsection H(1), to obtain the Required Approvals but shall not have
done so by the later of the occurrence of the Common Stock Redemption
Event or the expiration of the Approval Period, it shall furnish a
redemption notice to the Purchasers within three (3) business days
after the expiration of the Approval Period.
(2) The Series A Preferred Stock Conversion Rights shall be exercised
as follows:
(a) The Corporation will permit each holder of Series A
Preferred Stock to exercise its right to convert the Series A
Preferred Stock by faxing an executed and completed notice of
conversion (the "Notice of Conversion") to the Corporation, and
delivering within three (3) business days thereafter, the original
Notice of Conversion (and the certificates representing the related
shares of Series A Preferred Stock) to the Corporation by hand
delivery or by express courier, duly endorsed. Each date on which a
Notice of Conversion is faxed to and received in accordance with the
provisions hereof shall be deemed a "5%
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<PAGE>
Preferred Stock Conversion Date." The Corporation will transmit the
certificates representing the Common Stock issuable upon conversion of
the Series A Preferred Stock (together with certificates representing
the related shares of Series A Preferred Stock not so converted and,
if applicable, a check representing any fraction of a share not
converted) to such holder via express courier as soon as practicable,
but in all events no later than the later to occur of (the "Delivery
Date") (i) three (3) business days after the Series A Preferred Stock
Conversion Date, or (ii) three (3) business days after receipt by the
Corporation of the original Notice of Conversion (and the certificates
representing the related shares of Series A Preferred Stock). For
purposes of this Section 7, such conversion of the Series A Preferred
Stock shall be deemed to have been made immediately prior to the close
of business on the Series A Preferred Stock Conversion Date.
(b) In lieu of delivering physical certificates representing the
Common Stock issuable upon the conversion of the Series A Preferred
Stock, provided that the Corporation's transfer agent is participating
in the Depository Trust Corporation ("DTC") Fast Automated Securities
Transfer program, on the written request of a holder of Series A
Preferred Stock who shall have previously instructed such holder's
prime broker to confirm such request to the Corporation's transfer
agent, the Corporation shall use commercially reasonable efforts to
cause its transfer agent to electronically transmit such Common Stock
to such holder by crediting the account of the holder's prime broker
with DTC through its Deposit Withdrawal Agent Commission system no
later than the applicable Delivery Date.
(c) The Corporation will at all times have authorized and
reserved for the purpose of issuance a sufficient number of shares of
Common Stock to provide for the conversion of the Series A Preferred
Stock. The Corporation will use its best efforts at all times to
maintain a number of shares of Common Stock so reserved for issuance
that is no less than one and one-half (1.5) times the number that is
then actually issuable upon the conversion of the Series A Preferred
Stock and the exercise of the Warrants issued pursuant to that certain
Securities Purchase Agreement (the "Securities Purchase Agreement")
dates as of November 9, 1998, between the Corporation and the
purchasers named therein. Before taking any action which would cause
an adjustment reducing the Conversion Price below the established par
value of the shares of Common Stock issuable upon conversion of the
Series A Preferred Stock, the Corporation will take any corporate
action which may, in the opinion of its counsel, be necessary in order
that the Corporation may validly and legally issue fully paid and
nonassessable shares of Common Stock at such adjusted Conversion
Price.
(d) All shares of Series A Preferred Stock, which shall have
been surrendered for conversion as herein provided shall no longer be
deemed to be outstanding, and all rights with respect to such shares,
including the rights, if any, to receive dividends, notices and to
vote, shall immediately cease and terminate on the Series A Preferred
Stock Conversion Date, except only the right of the holders thereof to
receive shares of Common Stock in exchange therefor. Any shares of
Series A Preferred Stock so converted shall be retired and canceled
and shall not be reissued, and the Corporation may from time to time
take such appropriate action as may be necessary to reduce the number
of shares of authorized Series A Preferred Stock accordingly.
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(3) In the event of a liquidation of the Corporation, the Series A
Preferred Stock Conversion Rights shall terminate at the close of business
on the first full day preceding the date fixed for the payment of any
amounts distributable on liquidation to the holders of the Series A
Preferred Stock.
(4) If the conversion is in connection with an underwritten offer of
securities registered pursuant to the Securities Act of 1933, as amended,
the conversion may, at the option of any holder tendering Series A
Preferred Stock for conversion, be conditioned upon the closing with the
underwriter of the sale of securities pursuant to such offering, in which
event the person(s) entitled to receive the Common Stock issuable upon such
conversion of the Series A Preferred Stock shall not be deemed to have
converted such Series A Preferred Stock until immediately prior to the
closing of the sale of securities.
(5) At no time shall any holder (including any of its affiliates) of
the Series A Preferred Stock convert such amount of Series A Preferred
Stock as shall result in such Purchaser's (together with its affiliate's)
ownership, after such conversion, exceeding 9.9% of the Corporation's
outstanding Common Stock.
(6) No fractional shares of Common Stock shall be issued upon
conversion of the Preferred Stock. In lieu of fractional shares, the
Corporation shall pay cash equal to such fraction multiplied by the then
effective and applicable Conversion Price.
(7) The Corporation will not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed under this
Subsection H by the Corporation, but will at all times in good faith assist
in the carrying out of all the provisions of this Subsection H and in the
taking of all such action as may be necessary or appropriate in order to
protect the Series A Preferred Stock Conversion Rights of the holders of
the Series A Preferred Stock against impairment.
(8) In the event (a) that the Corporation declares a dividend (or any
other distribution) on its Common Stock payable in Common Stock or other
securities of the Corporation, (b) that the Corporation subdivides or
combines its outstanding shares of Common Stock, (c) of any
reclassification of the Common Stock of the Corporation (other than a
subdivision or combination of its outstanding shares of Common Stock or a
stock dividend or stock distribution thereon), (d) of any consolidation or
merger of the Corporation into or with another corporation, (e) of the sale
of all or substantially all of the assets of the Corporation, or (f) of the
involuntary or voluntary dissolution, liquidation or winding up of the
Corporation, then the Corporation shall cause to be filed at its principal
office or at the office of the transfer agent of the Preferred Stock, and
shall cause to be mailed to each holder of the Preferred Stock at their
last address as shown on the records of the Corporation or such transfer
agent, at least ten (10) days prior to the record date specified in (i)
below or twenty (20) days before the date specified in (ii) below, a notice
stating
(i) the record date of such dividend, distribution, subdivision
or combination, or, if a record is not to be taken, the date as of
which the holders of Common Stock of record to be entitled to such
dividend, distribution, subdivision or combination are to be
determined, or
(ii) the date on which such reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up is expected to
become effective, and the date as of which it is expected that holders
of Common Stock of record shall
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be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such
reclassification, consolidation, merger, sale, dissolution or
winding up.
I. Sinking Fund. There shall be no sinking fund for the payment of
dividends, or liquidation preferences on the Series A Preferred Stock or
the redemption of any shares thereof.
J. Amendment. This Section 7 constitutes an agreement between the
Corporation and the holders of the Series A Preferred Stock. The
Corporation shall not amend this Section 7 or alter or repeal the
preferences, rights, powers or other terms of the Series A Preferred Stock
so as to affect adversely the Series A Preferred Stock, without the written
consent or affirmative vote of the holders of at least sixty-six and two-
thirds percent (662/3%) of the then outstanding shares of Series A
Preferred Stock, given in writing or by vote at a meeting, consenting or
voting (as the case may be) separately as a class.
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ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
ONLINE SYSTEM SERVICES, INC.
The undersigned, Thomas S. Plunkett, Chief Financial Officer of Online
System Services, Inc., a Colorado corporation (the "Corporation"), DOES HEREBY
CERTIFY that pursuant to actions taken by the Board of Directors on December 22,
1998 in accordance with Sections 7-106-101, 7-106-102 and 7-110-102 of the
Colorado Business Corporation Act, the following amendment was duly adopted by
the Board of Directors without shareholder approval as permitted by Section 7-
106-102(4) of the Colorado Business Corporation Act:
ARTICLE IV of the Articles of Incorporation of the Corporation, as amended,
----------
is further amended by adding a new Section 8, the text of which is set forth on
Exhibit A attached hereto.
1. Authorized Shares. The aggregate number of shares that the
Corporation has authority to issue 25,000,000. The shares are classified in
two classes, consisting of 20,000,000 shares of Common Stock, no par value,
and 5,000,000 shares of Preferred Stock, with such par value as the Board
of Directors of the Corporation may designate. The Board of Directors of
the Corporation is authorized to establish one or more series of Preferred
Stock, setting forth the designation of each such series, and fixing the
preferences, limitations and relative rights of each such series of
Preferred Stock.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment this 11th day of January, 1999.
/s/ Thomas S. Plunkett
----------------------
Thomas S. Plunkett
Chief Financial Officer
24
<PAGE>
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
ONLINE SYSTEM SERVICES, INC.
The undersigned, Thomas S. Plunkett, Chief Financial Officer of Online
System Services, Inc., a Colorado corporation (the "Corporation"), DOES HEREBY
CERTIFY that pursuant to actions taken by the Board of Directors on November 9,
1998 in accordance with Sections 7-106-101, 7-106-102 and 7-110-102 of the
Colorado Business Corporation Act, the following amendment was duly adopted by
the Board of Directors without shareholder approval as permitted by Section 7-
106-102(4) of the Colorado Business Corporation Act:
ARTICLE IV of the Articles of Incorporation of the Corporation, as amended,
----------
is further amended by adding a new Section 7, the text of which is set forth on
Exhibit A attached hereto.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment this 10th day of November, 1998.
/s/ Thomas S. Plunkett
----------------------------------------
Thomas S. Plunkett
Chief Financial Officer
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<PAGE>
EXHIBIT A
7. Designation of Preferred Stock. The Corporation shall establish and
reserve for issuance from its 5,000,000 authorized shares of Preferred Stock a
class of convertible preferred stock consisting of 1,400 shares to be designated
as the Series A Preferred Stock (the "Series A Preferred Stock"). The Series A
Preferred Stock shall have a stated value of the Liquidation Preference (as
hereinafter defined). Except as otherwise expressly stated in this Section 7,
all shares of the Series A Preferred Stock shall be identical to the shares of
5% Preferred Stock and 10% Preferred Stock, and the holders of Series A
Preferred Stock shall be entitled to the same preferences, limitations and
relative rights as the holders of 5% Preferred Stock and 10% Preferred Stock.
A. Dividends.
(1) Holders of the Series A Preferred Stock shall be entitled to
receive, out of funds legally available therefor, dividends at a rate
equal to 5% (the "Dividend Rate") of the Liquidation Preference per
share per annum (subject to appropriate adjustments in the event of
any stock dividend, stock split, combination or other similar
recapitalization affecting such shares), and no more, payable in
accordance with the provisions of this Section 7.
(2) At the election of the Corporation, each dividend on Series
A Preferred Stock shall be paid either in shares of Common Stock or in
cash on the Delivery Date (as defined in Subsection H(2)(a) of this
Section 7) with respect to any shares of Series A Preferred Stock
which are the subject of a Notice of Conversion (as defined in
Subsection H(2) of this Section 7). Dividends paid in shares of Common
Stock shall be paid (based on an assumed value of $1,000 per share) in
full shares only, with a cash payment equal to the value of any
fractional shares. Each dividend paid in cash shall be mailed to the
holders of record of the Series A Preferred Stock as their names and
addresses appear on the share register of the Corporation or at the
office of the transfer agent on the corresponding dividend payment
date. Holders of Series A Preferred Stock will receive written
notification from the Corporation or the transfer agent if a dividend
is paid in kind, which notification will specify the number of shares
of Common Stock paid as a dividend and the recipient's aggregate
holdings of Common Stock as of that dividend payment date and after
giving effect to the dividend. All holders of shares of Common Stock
issued as dividends shall be entitled to all of the rights and
benefits relating to shares of Common Stock as set forth in the
Corporation's Articles of Incorporation, as amended, and By-laws.
(3) Holders of the Series A Preferred Stock shall be entitled to
payment of any dividends in preference and priority to any payment of
any cash dividend on Common Stock or any other class or series of
capital stock of the Corporation other than any other class or series
of stock ranking senior ("Senior Preferred Stock") to the Series A
Preferred Stock in respect of dividends, when and as declared by the
Board of Directors of the Corporation. The rights of the holders of
Series A Preferred Stock, 5% Preferred Stock and 10% Preferred Stock
to receive any dividends shall be equal in preference and priority.
Dividends on the Series A Preferred Stock shall accrue with respect to
each share of the Series A Preferred Stock from the date on which such
share is issued and outstanding and thereafter shall be deemed to
accrue from day to day whether or not earned or declared and whether
or not there exists profits, surplus or other funds legally available
for the payment of dividends, and shall be cumulative so that if such
dividends on the Series A Preferred Stock shall not have been paid, or
declared and set apart for payment, the deficiency shall be fully paid
or declared and set apart for payment before any dividend shall be
paid or declared or set apart for any Common Stock or other class or
series of capital stock ranking junior to the Series A Preferred Stock
(such stock
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<PAGE>
being collectively referred to herein as the "Junior Stock") and
before any purchase or acquisition of any Junior Stock is made by the
Corporation, except the repurchase of Junior Stock from employees of
the Corporation upon termination of employment. At the earlier of: (1)
the redemption or conversion of the Series A Preferred Stock or (2)
the liquidation of the Corporation, any accrued but undeclared
dividends shall be paid to the holders of record of outstanding shares
of the Series A Preferred Stock in accordance with the provisions of
this Section 7. No accumulation of dividends on the Series A Preferred
Stock shall bear interest.
B. Liquidation, Dissolution or Winding Up.
(1) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of
the Series A Preferred Stock then outstanding shall be entitled to be
paid out of the assets of the Corporation available for distribution
to its stockholders, after and subject to the payment in full of all
amounts required to be distributed to the holders of any Senior
Preferred Stock ranking on liquidation prior and in preference to the
Preferred Stock, but before any payment shall be made to the holders
of Junior Stock by reason of their ownership thereof, an amount equal
to $1,000 per share of Series A Preferred Stock (the "Liquidation
Preference") plus any accrued but unpaid dividends (whether or not
declared). The rights of the holders of Series A Preferred Stock, 5%
Preferred Stock and 10% Preferred Stock to receive any such
distributions shall be equal in preference and priority. If upon any
such liquidation, dissolution or winding up of the Corporation the
remaining assets of the Corporation available for distribution to its
shareholders shall be insufficient to pay the holders of shares of the
Series A Preferred Stock the full amount to which they shall be
entitled, the holders of shares of the Series A Preferred Stock shall
share ratably in any distribution of the remaining assets and funds of
the Corporation in proportion to the respective amounts which would
otherwise be payable in respect of the shares held by them upon such
distribution if all amounts payable on or with respect to such shares
were paid in full.
(2) After the payment of all preferential amounts required to be
paid to the holders of the Series A Preferred Stock, 5% Preferred
Stock and the 10% Preferred Stock upon the dissolution, liquidation,
or winding up of the Corporation, all of the remaining assets and
funds of the Corporation available for distribution to its
shareholders shall be distributed ratably among the holders of the
Series A Preferred Stock, 5% Preferred Stock and the Junior Stock,
with each share of Series A Preferred Stock being deemed, for such
purpose, to be equal to the number of shares of Common Stock,
including fractions of a share, into which such share of Series A
Preferred Stock and 5% Preferred Stock are convertible immediately
prior to the close of business on the business day fixed for such
distribution.
C. Voting.
(1) Each holder of outstanding shares of Series A Preferred
Stock shall be entitled, at each meeting of shareholders of the
Corporation (and with respect to written consents of shareholders in
lieu of meetings) with respect to any and all matters presented to the
shareholders of the Corporation for their action or consideration, to
the number of votes equal to the number of whole shares of Common
Stock into which the shares of Series A Preferred Stock held by such
holder are convertible (as adjusted from time to time pursuant to
Subsection H hereof) immediately after the close of business on the
record date fixed for such meeting or the effective date of such
written consent. Except as provided by law, by the provisions of
Section J below, or by the provisions establishing any other series of
preferred stock, holders of Series A Preferred Stock shall vote
together with the holders Common Stock as a single class.
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<PAGE>
(2) The holders of the Series A Preferred Stock shall not be
entitled to any rights of cumulative voting with respect to their
shares.
D. Preemptive Rights. No holder of Preferred Stock shall have any
preemptive or similar right to acquire any additional unissued or treasury
shares of stock or securities of any class or rights, warrants or options
to purchase stock or scrip or securities in any kind, including shares or
securities convertible into shares or carrying stock purchase warrants or
privileges.
E. Other Securities. Subject to any limitations contained in these
Articles of Incorporation, the Board of Directors of the Corporation
reserves the right to establish additional classes and/or series of capital
stock of the Corporation and to designate the preferences, limitations and
relative rights of any such classes and/or series; provided, however, that
no such class and/or series may have preferences, limitations and relative
rights which are superior to or senior to the preferences, limitations and
relative rights granted to the holders of the Series A Preferred Stock.
F. Capital Reorganization. If the Corporation shall at any time
hereafter subdivide or combine its outstanding shares of Common Stock,
declare a dividend payable in Common Stock, or in case of any capital
reorganization or reclassification of the shares of Common Stock of the
Corporation, the number of shares of the Series A Preferred Stock and the
stated value of the Series A Preferred Stock shall be adjusted
appropriately to allow the holders of the Series A Preferred Stock, as
nearly as reasonably possible, to maintain (i) the aggregate stated value
of the Series A Preferred Stock and (ii) their pro rata interest in the
Corporation and in the Common Stock upon conversion of the Series A
Preferred Stock, that each holder had prior to any such subdivision,
combination, stock dividend, reorganization or reclassification.
G. Optional Redemption
(1) At any time within the 90 days following November 9, 1998,
the Corporation may, at its option, redeem all or any portion of the
shares of Series A Preferred Stock then outstanding upon not less than
thirty (30) days' written notice at a redemption price per share equal
to the Liquidation Preference of the Series A Preferred Stock plus any
accrued but unpaid dividends (whether or not declared); provided, that
if at the time of the notice of any such redemption, the Registration
Statement to be filed by the Corporation pursuant to Section 2(a) of
that certain Registration Rights Agreement dated November 9, 1998,
between the Corporation and Archer Investors LLC has not been declared
effective by the Securities and Exchange Commission and remains
effective until the Series A Preferred Stock Redemption Date, the
redemption price per share shall be equal to 115% of the Liquidation
Preference of the Series A Preferred Stock plus any accrued but unpaid
dividends (whether or not declared). Notwithstanding the foregoing, a
redemption shall not occur pursuant to this Subsection G(1) with
respect to any Series A Preferred Stock for which a holder has
previously submitted a Notice of Conversion pursuant to Subsection H
of this Section 7. For purposes of these Articles of Amendment, the
term "Closing Bid Price" means, for any security as of any date, the
closing bid price on the principal securities exchange or trading
market where the Common Stock is listed or traded as reported by
Bloomberg, L.P. ("Bloomberg") or, if applicable, the closing bid price
of the Common Stock in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or, if no
closing bid price is reported for the Common Stock by Bloomberg, then
the average of the bid prices of any market makers for such security
as reported in the "pink sheets" by the National Quotation Bureau,
Inc. If the Closing Bid Price of the Common Stock can not be
calculated on such date on any of the foregoing bases, the Closing Bid
Price of the Common Stock on such date shall be the fair market value
as mutually determined by the Corporation and the holders of a
majority of the outstanding shares of Series A Preferred
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<PAGE>
Stock being converted for which the calculation of the Closing Bid
Price is required in order to determine the Conversion Price of such
shares. "Trading day" shall mean any day on which the Corporation's
Common Stock is traded for any period on the principal securities
exchange or other securities market on which the Common Stock is then
being traded.
(2) Upon receipt of a notice given pursuant to Subsection G(1),
each holder of Series A Preferred Stock shall have thirty days to
decide whether to accept its ratable portion (based on its holdings of
Series A Preferred Stock as compared to the aggregate number of shares
of Series A Preferred Stock then outstanding) of such offer by
tendering such holder's shares to the Corporation for redemption, at
an address to be set forth in such notice, at any time prior to 5:00
p.m. New York time on the 30th day following the mailing of such
notice (the "Series A Preferred Stock Redemption Date") or to convert
all or a portion of the Series A Preferred Stock. Notwithstanding the
foregoing, nothing herein shall limit the rights of the holders of the
Series A Preferred Stock to convert the Series A Preferred Stock in
whole or in part, prior to the Series A Preferred Stock Redemption
Date. Within three (3) business days after the Series A Preferred
Stock Redemption Date, the Corporation shall remit the applicable
redemption price, calculated pursuant to Subsection G(1) of this
Section 7, by wire transfer to each holder of the Series A Preferred
Stock to the most recent address of each holder as set forth on the
records of the Corporation or its transfer agent.
(3) Any shares of Series A Preferred Stock redeemed pursuant to
this Subsection G or otherwise acquired by the Corporation in any
manner whatsoever shall be canceled and shall not under any
circumstances be reissued. The Corporation may from time to time take
such appropriate corporate action as may be necessary to reduce
accordingly the number of authorized shares of the Corporation's
capital stock.
H. Conversion.
(1) Subject to Subsection G(2) of this Section 7, the holders of
the Series A Preferred Stock shall have conversion rights as follows
(the "Series A Preferred Stock Conversion Rights"):
(a) Each share of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time and
from time to time, into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing
$1,000, plus the amount of any accrued and unpaid dividends the
Corporation elects to pay in Common Stock, by the Conversion
Price in effect at the time of conversion. The Conversion Price
at which shares of Common Stock shall be deliverable upon
conversion of Series A Preferred Stock without the payment of
additional consideration by the holder thereof (the "Conversion
Price") shall be the lower of (i) 105% of the average Closing Bid
Price of the shares of Common Stock for the five (5) trading days
between November 2 through November 6 ($5.71) or (ii) 80% of the
average Closing Bid Price of the shares of Common Stock for any
five (5) consecutive trading days during the twenty (20)
consecutive trading days immediately preceding the Series A
Preferred Stock Conversion Date (as hereinafter defined).
(b) At any time that the number of shares of Common Stock
issued (A) upon conversion of the Series A Preferred Stock and
(B) in lieu of dividend payments on the Series A Preferred Stock,
shall equal 630,000 (a "Common Stock Redemption Event"), the
Corporation shall (x) redeem, at a price determined in accordance
with Subsection G(1) of this Section 7, all of the outstanding
Series A Preferred Stock in accordance with the provisions of
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<PAGE>
Subsection G(2) or (y) call a special meeting of its shareholders
for the purpose of approving the transactions contemplated by the
Securities Purchase Agreement, including the issuance of the
Series A Preferred Stock on the terms set forth therein, together
with any other approvals that shall be required so as to cause
the transactions contemplated by the Securities Purchase
Agreement to remain in compliance with the Rules and Regulations
of The Nasdaq Stock Market (including Rule 4320 of Nasdaq's Non-
Qualitative Designation Criteria in connection with conversions
of Series A Preferred Stock; such approvals are referred to
herein as the "Required Approvals"). The Corporation shall
determine within five (5) business days following the receipt of
a Notice of Conversion which of such actions it shall take, and
shall promptly furnish notice to each of the holders of Series A
Preferred Stock as to such determination, including, if
applicable, a notice of redemption. In no event shall the
Corporation issue shares of Common Stock upon conversion of, or
in lieu of interest payments on, the Series A Preferred Stock,
after the occurrence of a Common Stock Redemption Event until the
Required Approvals, if any, are obtained.
(c) If the Corporation elects to call a special meeting of
its shareholders pursuant to Subsection H(1)(b) of this Section 7
to obtain the Required Approvals, the Corporation shall use its
best efforts to obtain such Required Approvals within thirty (30)
days of the Common Stock Redemption Event (such thirty (30) day
period is referred to herein as an "Approval Period"). If the
Corporation does not obtain the Required Approvals within the
Approval Period and the Corporation receives a Notice of
Conversion after the termination of the Approval Period, the
Corporation must redeem, in accordance with this Subsection H of
this Section 7, any shares of Series A Preferred Stock
outstanding after the Corporation has issued in excess of 630,000
shares of Common Stock in connection with conversions of the
Series A Preferred Stock.
(d) If the Corporation elects, pursuant to this Subsection
H, to redeem the Series A Preferred Stock on the occurrence of a
Common Stock Redemption Event, it shall redeem such Series A
Preferred Stock at the price determined in accordance with
Subsection G(1) of this Section 7. If the Corporation shall have
elected, pursuant to this Subsection H(1), to obtain the Required
Approvals but shall not have done so by the later of the
occurrence of the Common Stock Redemption Event or the expiration
of the Approval Period, it shall furnish a redemption notice to
the Purchasers within three (3) business days after the
expiration of the Approval Period.
(2) The Series A Preferred Stock Conversion Rights shall be
exercised as follows:
(a) The Corporation will permit each holder of Series A
Preferred Stock to exercise its right to convert the Series A
Preferred Stock by faxing an executed and completed notice of
conversion (the "Notice of Conversion") to the Corporation, and
delivering within three (3) business days thereafter, the
original Notice of Conversion (and the certificates representing
the related shares of Series A Preferred Stock) to the
Corporation by hand delivery or by express courier, duly
endorsed. Each date on which a Notice of Conversion is faxed to
and received in accordance with the provisions hereof shall be
deemed a "Series A Preferred Stock Conversion Date." The
Corporation will transmit the certificates representing the
Common Stock issuable upon conversion of the Series A Preferred
Stock (together with certificates representing the related
30
<PAGE>
shares of Series A Preferred Stock not so converted and, if
applicable, a check representing any fraction of a share not
converted) to such holder via express courier as soon as
practicable, but in all events no later than the later to occur
of (the "Delivery Date") (i) three (3) business days after the
Series A Preferred Stock Conversion Date, or (ii) three (3)
business days after receipt by the Corporation of the original
Notice of Conversion (and the certificates representing the
related shares of Series A Preferred Stock). For purposes of this
Section 7, such conversion of the Series A Preferred Stock shall
be deemed to have been made immediately prior to the close of
business on the Series A Preferred Stock Conversion Date.
(b) In lieu of delivering physical certificates
representing the Common Stock issuable upon the conversion of the
Series A Preferred Stock, provided that the Corporation's
transfer agent is participating in the Depository Trust
Corporation ("DTC") Fast Automated Securities Transfer program,
on the written request of a holder of Series A Preferred Stock
who shall have previously instructed such holder's prime broker
to confirm such request to the Corporation's transfer agent, the
Corporation shall use commercially reasonable efforts to cause
its transfer agent to electronically transmit such Common Stock
to such holder by crediting the account of the holder's prime
broker with DTC through its Deposit Withdrawal Agent Commission
system no later than the applicable Delivery Date.
(c) The Corporation will at all times have authorized and
reserved for the purpose of issuance a sufficient number of
shares of Common Stock to provide for the conversion of the
Series A Preferred Stock. The Corporation will use its best
efforts at all times to maintain a number of shares of Common
Stock so reserved for issuance that is no less than one and one-
half (1.5) times the number that is then actually issuable upon
the conversion of the Series A Preferred Stock and the exercise
of the Warrants issued pursuant to that certain Securities
Purchase Agreement (the "Securities Purchase Agreement") dates as
of November 9, 1998, between the Corporation and the purchasers
named therein. Before taking any action which would cause an
adjustment reducing the Conversion Price below the established
par value of the shares of Common Stock issuable upon conversion
of the Series A Preferred Stock, the Corporation will take any
corporate action which may, in the opinion of its counsel, be
necessary in order that the Corporation may validly and legally
issue fully paid and nonassessable shares of Common Stock at such
adjusted Conversion Price.
(d) All shares of Series A Preferred Stock, which shall
have been surrendered for conversion as herein provided shall no
longer be deemed to be outstanding, and all rights with respect
to such shares, including the rights, if any, to receive
dividends, notices and to vote, shall immediately cease and
terminate on the Series A Preferred Stock Conversion Date, except
only the right of the holders thereof to receive shares of Common
Stock in exchange therefor. Any shares of Series A Preferred
Stock so converted shall be retired and canceled and shall not be
reissued, and the Corporation may from time to time take such
appropriate action as may be necessary to reduce the number of
shares of authorized Series A Preferred Stock accordingly.
(3) In the event of a liquidation of the Corporation, the Series
A Preferred Stock Conversion Rights shall terminate at the close of
business on the first full day preceding the date fixed for the
payment of any amounts distributable on liquidation to the holders of
the Series A Preferred Stock.
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<PAGE>
(4) If the conversion is in connection with an underwritten
offer of securities registered pursuant to the Securities Act of 1933,
as amended, the conversion may, at the option of any holder tendering
Series A Preferred Stock for conversion, be conditioned upon the
closing with the underwriter of the sale of securities pursuant to
such offering, in which event the person(s) entitled to receive the
Common Stock issuable upon such conversion of the Series A Preferred
Stock shall not be deemed to have converted such Series A Preferred
Stock until immediately prior to the closing of the sale of
securities.
(5) At no time shall any holder (including any of its
affiliates) of the Series A Preferred Stock convert such amount of
Series A Preferred Stock as shall result in such Purchaser's (together
with its affiliate's) ownership, after such conversion, exceeding 9.9%
of the Corporation's outstanding Common Stock.
(6) No fractional shares of Common Stock shall be issued upon
conversion of the Preferred Stock. In lieu of fractional shares, the
Corporation shall pay cash equal to such fraction multiplied by the
then effective and applicable Conversion Price.
(7) The Corporation will not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed under this
Subsection H by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Subsection H
and in the taking of all such action as may be necessary or
appropriate in order to protect the Series A Preferred Stock
Conversion Rights of the holders of the Series A Preferred Stock
against impairment.
(8) In the event (a) that the Corporation declares a dividend
(or any other distribution) on its Common Stock payable in Common
Stock or other securities of the Corporation, (b) that the Corporation
subdivides or combines its outstanding shares of Common Stock, (c) of
any reclassification of the Common Stock of the Corporation (other
than a subdivision or combination of its outstanding shares of Common
Stock or a stock dividend or stock distribution thereon), (d) of any
consolidation or merger of the Corporation into or with another
corporation, (e) of the sale of all or substantially all of the assets
of the Corporation, or (f) of the involuntary or voluntary
dissolution, liquidation or winding up of the Corporation, then the
Corporation shall cause to be filed at its principal office or at the
office of the transfer agent of the Preferred Stock, and shall cause
to be mailed to each holder of the Preferred Stock at their last
address as shown on the records of the Corporation or such transfer
agent, at least ten (10) days prior to the record date specified in
(i) below or twenty (20) days before the date specified in (ii) below,
a notice stating
(i) the record date of such dividend, distribution,
subdivision or combination, or, if a record is not to be taken,
the date as of which the holders of Common Stock of record to be
entitled to such dividend, distribution, subdivision or
combination are to be determined, or
(ii) the date on which such reclassification,
consolidation, merger, sale, dissolution, liquidation or winding
up is expected to become effective, and the date as of which it
is expected that holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities
or other property deliverable upon such reclassification,
consolidation, merger, sale, dissolution or winding up.
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<PAGE>
I. Sinking Fund. There shall be no sinking fund for the payment of
dividends, or liquidation preferences on the Series A Preferred Stock or
the redemption of any shares thereof.
J. Amendment. This Section 7 constitutes an agreement between the
Corporation and the holders of the Series A Preferred Stock. The
Corporation shall not amend this Section 7 or alter or repeal the
preferences, rights, powers or other terms of the Series A Preferred Stock
so as to affect adversely the Series A Preferred Stock, without the written
consent or affirmative vote of the holders of at least sixty-six and two-
thirds percent (662/3%) of the then outstanding shares of Series A
Preferred Stock, given in writing or by vote at a meeting, consenting or
voting (as the case may be) separately as a class.
33
<PAGE>
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
ONLINE SYSTEM SERVICES, INC.
The undersigned, Thomas S. Plunkett, Chief Financial Officer of Online
System Services, Inc., a Colorado corporation (the "Corporation"), DOES HEREBY
CERTIFY that pursuant to actions taken by the Board of Directors on December 22,
1998 in accordance with Sections 7-106-101, 7-106-102 and 7-110-102 of the
Colorado Business Corporation Act, the following amendment was duly adopted by
the Board of Directors without shareholder approval as permitted by Section 7-
106-102(4) of the Colorado Business Corporation Act:
ARTICLE IV of the Articles of Incorporation of the Corporation, as amended,
----------
is further amended by adding a new Section 8, the text of which is set forth on
Exhibit A attached hereto.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment this 11th day of January, 1999.
/s/ Thomas S. Plunkett
--------------------------------------
Thomas S. Plunkett
Chief Financial Officer
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<PAGE>
EXHIBIT A
8. DESIGNATION OF PREFERRED STOCK. The Corporation shall establish and
reserve for issuance from its 5,000,000 authorized shares of Preferred Stock a
class of convertible preferred stock consisting of 5,000 shares to be designated
as the Series C Preferred Stock (the "Series C Preferred Stock"). The Series C
Preferred Stock shall have a stated value of the Liquidation Preference (as
hereinafter defined). Except as otherwise expressly stated in this Section 8,
all shares of the Series C Preferred Stock shall be identical to the shares of
10% Preferred Stock and Series A Preferred Stock, and the holders of Series C
Preferred Stock shall be entitled to the same preferences, limitations and
relative rights as the holders of 10% Preferred Stock and Series A Preferred
Stock.
A. Dividends.
---------
(1) Dividend Rate. Holders of the Series C Preferred Stock
-------------
shall be entitled to receive, out of funds legally available therefor,
dividends at a rate equal to 4% (the "Dividend Rate") of the
Liquidation Preference per share per annum (subject to appropriate
adjustments in the event of any stock dividend, stock split,
combination or other similar recapitalization affecting such shares),
and no more, payable in accordance with the provisions of this Section
8.
(2) Payment of Dividend. At the election of the Corporation,
-------------------
each dividend on Series C Preferred Stock shall be paid either in
shares of Common Stock or in cash on the Delivery Date (as defined in
Subsection H(2)(a) of this Section 8) with respect to any shares of
Series C Preferred Stock which are the subject of a Notice of
Conversion (as defined in Subsection H(2) of this Section 8).
Dividends paid in shares of Common Stock shall be paid (based on an
assumed value equal to the effective Conversion Price as defined
below) in full shares only, with a cash payment equal to the value of
any fractional shares. Each dividend paid in cash shall be mailed to
the holders of record of the Series C Preferred Stock as their names
and addresses appear on the share register of the Corporation or at
the office of the transfer agent on the corresponding dividend payment
date. Holders of Series C Preferred Stock will receive written
notification from the Corporation or the transfer agent if a dividend
is paid in kind, which notification will specify the number of shares
of Common Stock paid as a dividend and the recipient's aggregate
holdings of Common Stock as of that dividend payment date and after
giving effect to the dividend. All holders of shares of Common Stock
issued as dividends shall be entitled to all of the rights and
benefits relating to shares of Common Stock as set forth in the
Corporation's Articles of Incorporation, as amended, and By-laws.
(3) Payment of Dividends on Other Capital Stock. Holders of the
-------------------------------------------
Series C Preferred Stock shall be entitled to payment of any dividends
in preference and priority to any payment of any cash dividend on
Common Stock or any other class or series of capital stock of the
Corporation other than any other class or series of stock ranking
senior ("Senior Preferred Stock") to the Series C Preferred Stock in
respect of dividends, when and as declared by the Board of Directors
of the Corporation. The rights of the holders of Series C Preferred
Stock, 10% Preferred Stock and Series A Preferred Stock to receive any
dividends shall be equal in preference and priority. Dividends on the
Series C Preferred Stock shall accrue with respect to each share of
the Series C Preferred Stock from the date on which such share is
issued and outstanding and thereafter shall be deemed to accrue from
day to day whether or not earned or declared and whether or not there
exists profits, surplus or other funds legally available for the
payment of dividends, and shall be cumulative so that if such
dividends on the Series C Preferred Stock shall not have been paid, or
declared and set apart for payment, the deficiency shall be fully paid
or declared and set apart for payment before any dividend shall be
paid or declared or set apart for any Common Stock or other class or
series of capital stock ranking junior to the Series C Preferred Stock
(such stock being collectively referred to herein as the "Junior
Stock") and before any purchase or acquisition of any Junior Stock is
made by
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<PAGE>
the Corporation, except the repurchase of Junior Stock from employees
of the Corporation upon termination of employment. At the earlier of:
(1) the redemption or conversion of the Series C Preferred Stock or
(2) the liquidation of the Corporation, any accrued but unpaid
dividends (whether or not declared) shall be paid to the holders of
record of outstanding shares of the Series C Preferred Stock in
accordance with the provisions of this Section 8. No accumulation of
dividends on the Series C Preferred Stock shall bear interest.
B. Liquidation, Dissolution or Winding Up.
--------------------------------------
(1) Priority on Payment. In the event of any voluntary or
-------------------
involuntary liquidation, dissolution or winding up of the Corporation,
the holders of shares of the Series C Preferred Stock then outstanding
shall be entitled to be paid out of the assets of the Corporation
available for distribution to its stockholders, after and subject to
the payment in full of all amounts required to be distributed to the
holders of any Senior Preferred Stock ranking on liquidation prior and
in preference to the Series C Preferred Stock, but before any payment
shall be made to the holders of Junior Stock by reason of their
ownership thereof, an amount equal to $1,000 per share of Series C
Preferred Stock (the "Liquidation Preference") plus any accrued but
unpaid dividends (whether or not declared). The rights of the holders
of Series C Preferred Stock, 10% Preferred Stock and Series A
Preferred Stock to receive any such distributions shall be equal in
preference and priority. If upon any such liquidation, dissolution or
winding up of the Corporation the remaining assets of the Corporation
available for distribution to its shareholders shall be insufficient
to pay the holders of shares of the Series C Preferred Stock the full
amount to which they shall be entitled, the holders of shares of the
Series C Preferred Stock shall share ratably in any distribution of
the remaining assets and funds of the Corporation in proportion to the
respective amounts which would otherwise be payable in respect of the
shares held by them upon such distribution if all amounts payable on
or with respect to such shares were paid in full.
(2) Payments After Preferential Amounts. After the payment of
-----------------------------------
all preferential amounts required to be paid to the holders of the
Series C Preferred Stock, the 10% Preferred Stock and Series A
Preferred Stock upon the dissolution, liquidation, or winding up of
the Corporation, all of the remaining assets and funds of the
Corporation available for distribution to its shareholders shall be
distributed ratably among the holders of the Series A Preferred Stock,
Series C Preferred Stock and the Junior Stock, with each share of
Series C Preferred Stock being deemed, for such purpose, to be equal
to the number of shares of Common Stock, including fractions of a
share, into which such share of Series C Preferred Stock are
convertible immediately prior to the close of business on the business
day fixed for such distribution.
C. Voting.
------
(1) Number of Votes; Voting as a Class. Each holder of
----------------------------------
outstanding shares of Series C Preferred Stock shall be entitled, at
each meeting of shareholders of the Corporation (and with respect to
written consents of shareholders in lieu of meetings) with respect to
any and all matters presented to the shareholders of the Corporation
for their action or consideration, to the number of votes equal to the
number of whole shares of Common Stock into which the shares of Series
C Preferred Stock held by such holder are convertible (as adjusted
from time to time pursuant to Subsection H hereof) immediately after
the close of business on the record date fixed for such meeting or the
effective date of such written consent. Except as provided by law, by
the provisions of Section J below, or by the provisions establishing
any other series of preferred stock, holders of Series C Preferred
Stock shall vote together with the holders Common Stock as a single
class.
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<PAGE>
(2) No Cumulative Voting. The holders of the Series C Preferred
--------------------
Stock shall not be entitled to any rights of cumulative voting with
respect to their shares.
D. Preemptive Rights. No holder of Series C Preferred Stock shall
-----------------
have any preemptive or similar right to acquire any additional unissued or
treasury shares of stock or securities of any class or rights, warrants or
options to purchase stock or scrip or securities in any kind, including
shares or securities convertible into shares or carrying stock purchase
warrants or privileges.
E. Other Securities. Subject to any limitations contained in these
----------------
Articles of Incorporation, the Board of Directors of the Corporation
reserves the right to establish additional classes and/or series of capital
stock of the Corporation and to designate the preferences, limitations and
relative rights of any such classes and/or series; provided, however, that
no such class and/or series may have preferences, limitations and relative
rights which are superior to or senior to the preferences, limitations and
relative rights granted to the holders of the Series C Preferred Stock.
F. Capital Reorganization. If the Corporation shall at any time
----------------------
hereafter subdivide or combine its outstanding shares of Common Stock,
declare a dividend payable in Common Stock, or in case of any capital
reorganization or reclassification of the shares of Common Stock of the
Corporation, the number of shares of the Series C Preferred Stock and the
stated value of the Series C Preferred Stock shall be adjusted
appropriately to allow the holders of the Series C Preferred Stock, as
nearly as reasonably possible, to maintain (i) the aggregate stated value
of the Series C Preferred Stock and (ii) their pro rata interest in the
Corporation and in the Common Stock upon conversion of the Series C
Preferred Stock, that each holder had prior to any such subdivision,
combination, stock dividend, reorganization or reclassification.
G. Redemption.
----------
(1) Redemption at Corporation's Option. At any time, the
----------------------------------
Corporation may, at its option, redeem all or any portion of the
shares of Series C Preferred Stock then outstanding upon not less than
thirty (30) days' written notice at a redemption price per share equal
to the following:
(a) Redemption Prior to Effectiveness Deadline. On any date
------------------------------------------
during the period beginning on the Initial Closing Date (as
defined in the Securities Purchase Agreement between the
Corporation and Arrow Investors II LLC, dated January 11, 1999--
the "Securities Purchase Agreement") and ending on the earlier of
(i) the date the Initial Registration Statement (as defined in
the Registration Rights Agreement between the Corporation and
Arrow Investors II LLC, dated January 11, 1999--the "Registration
Rights Agreement") is declared effective by the Securities and
Exchange Commission ("SEC"), and (ii) the Effectiveness Deadline
(as defined in the Registration Rights Agreement) for the Initial
Registration Statement, the redemption price shall be equal to
115% of the Liquidation Preference of the Series C Preferred
Stock plus any accrued but unpaid dividends (whether or not
declared), payable in cash, plus the delivery to each holder of
such shares a warrant (substantially in the form attached to the
Securities Purchase Agreement as Exhibit B) (the "Warrant") to
purchase such holder's pro-rata allocation (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) of 100,000 shares of Common Stock (adjusted for any stock
splits, stock dividends, stock combinations or other similar
transactions), which Warrant shall have a term of three years
from the delivery by the Corporation to such holder of such
Warrant and a per share exercise price equal to the applicable
Maximum Conversion Price (as defined below) for the Series C
Preferred Stock being redeemed.
37
<PAGE>
(b) Redemption After Effectiveness Deadline. On any date
---------------------------------------
after the earlier of (i) the date the Initial Registration
Statement is declared effective by the SEC, and (ii) the
Effectiveness Deadline for the Initial Registration Statement,
the redemption price shall be equal to 120% of the Liquidation
Preference of the Series C Preferred Stock plus any accrued but
unpaid dividends (whether or not declared), payable in cash, plus
the delivery to each holder of such shares a Warrant to purchase
such holder's pro-rata allocation (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) of
100,000 shares of Common Stock (adjusted for any stock splits,
stock dividends, stock combinations or other similar
transactions), which Warrant shall have a term of three years
from the delivery by the Corporation to such holder of such
Warrant and a per share exercise price equal to the applicable
Maximum Conversion Price for the Series C Preferred Stock being
redeemed.
Notwithstanding the foregoing, a redemption shall not occur
pursuant to this Subsection G(1) with respect to any Series C
Preferred Stock for which a holder has previously submitted a Notice
of Conversion pursuant to Subsection 8H.
(2) Corporation's Right to Redeem in Lieu of Conversion. Subject
---------------------------------------------------
to the terms and conditions of this Subsection 8G(2), at any time
after the Initial Closing Date (as defined in the Securities Purchase
Agreement) the Corporation may elect to redeem Series C Preferred
Stock submitted for conversion in lieu of converting such preferred
shares, provided that the Conversion Price for such preferred shares
(as defined below) on the Conversion Date is less than a price (the
"Redemption in Lieu of Conversion Trigger Price") equal to $5.40
(appropriately adjusted for any stock split, stock dividend,
combination or other similar transaction) (a "Corporation Redemption
in Lieu of Conversion"). If the Corporation elects to redeem some, but
not all, of the Series C Preferred Stock submitted for conversion, the
Corporation shall redeem a number of shares of Series C Preferred
Stock from each holder of Series C Preferred Stock submitted for
conversion on the applicable date equal to such holder's pro-rata
amount (based on the number of shares of Series C Preferred Stock held
by such holder relative to the number of Series C Preferred Stock
outstanding) of all shares of Series C Preferred Stock submitted for
conversion which the Corporation elects to redeem.
(a) Redemption Price of Corporation Redemption in Lieu of
-----------------------------------------------------
Conversion. The "Redemption Price of Corporation Redemption in
----------
Lieu of Conversion" shall be an amount per share of Series C
Preferred Stock 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 applicable Conversion Date,
and (ii) the Closing Bid Price (as defined below) of the Common
Stock on the Conversion Date.
(b) Mechanics of Corporation Redemption in Lieu of
----------------------------------------------
Conversion. The Corporation shall exercise its right to redeem
----------
by delivering written notice by facsimile and overnight courier
("Notice of Corporation Redemption in Lieu of Conversion") to (i)
each holder of the Series C Preferred Stock, and (ii) the
Transfer Agent. Such Notice of Corporation Redemption in Lieu of
conversion shall indicate (A) the maximum, if any, aggregate
number of Series C Preferred Stock which the Corporation will
redeem for Corporation Redemption in Lieu of Conversion, and (B)
confirm the time period during which the Corporation may effect
Corporation Redemption in Lieu of Conversion, which period shall
begin on and include the date which is five (5) trading days
after the date of receipt by all of the holders' of the Notice of
Redemption in Lieu of Conversion and shall end on and include the
date which is thirty (30) calendar days after the fifth (5th)
trading day following the date of receipt by all of the holders
of the Notice of Redemption in Lieu of Conversion (the
"Redemption in Lieu of
38
<PAGE>
Conversion Period"). If the Corporation elects to limit the
number of Series C Preferred Stock which it will redeem during
the Redemption in Lieu of Conversion Period, the Corporation
shall allocate for redemption from each holder of Series C
Preferred Stock a number of shares of Series C Preferred Stock
equal to such holder's pro-rata amount (based on the number of
shares of Series C Preferred Stock held by such holder on the
date of the Notice of Corporation Redemption in Lieu of
Conversion relative to the total number of shares of Series C
Preferred Stock outstanding on such date). The Corporation may
terminate a Redemption in Lieu of Conversion Period at any time
with respect to Series C Preferred Stock which has not been
submitted for conversion by delivering written notice of such
termination to each holder of Series C Preferred Stock by
facsimile and overnight courier at least five (5) business days
prior to the effective date of such termination. Notwithstanding
anything to the contrary in this Subsection 8G(2), the
Corporation shall convert Series C Preferred Stock pursuant to
Subsection 8H if (A) such Series C Preferred Stock are submitted
for conversion (i) before the beginning, or after the effective
date of the termination, of the Redemption in Lieu of Conversion
Period, or (ii) at a Conversion Price greater than or equal to
the Redemption in Lieu of Conversion Trigger Price or (B) such
Series C Preferred Stock is in excess of such holder's pro-rata
allocation of the maximum number of Series C Preferred Stock the
Corporation indicated that it would redeem in its Notice of
Corporation Redemption in Lieu of Conversion. If the Company
fails to timely effect a Company Redemption in Lieu of Conversion
in accordance with this Subsection 8G(2), the Company shall not
be allowed to submit another Notice of Company Redemption in Lieu
of Conversion without the prior written consent of the holders of
at least two-thirds (2/3) of the Series C Preferred Stock then
outstanding.
(3) Mechanics of Redemption. Upon receipt of a notice given
-----------------------
pursuant to this Subsection 8G, unless such redemption is pursuant to
Subsection 8G(2), each holder of Series C Preferred Stock shall have
thirty (30) days to decide whether to accept its ratable portion
(based on its holdings of Series C Preferred Stock as compared to the
aggregate number of shares of Series C Preferred Stock then
outstanding) of such offer by tendering such holder's shares to the
Corporation for redemption, at an address to be set forth in such
notice, at any time prior to 5:00 p.m. New York time on the 30th day
following the mailing of such notice (the "Series C Preferred Stock
Redemption Date") or to convert all or a portion of the Series C
Preferred Stock. Within three (3) business days after the Series C
Preferred Stock Redemption Date, the Corporation shall remit the
applicable redemption price, calculated pursuant to Subsection G of
this Section 8, by wire transfer to each holder of the Series C
Preferred Stock to the most recent address of each holder as set forth
on the records of the Corporation or its transfer agent, together with
all applicable Warrants.
(4) Cancellation of Shares. Any shares of Series C Preferred
----------------------
Stock redeemed pursuant to this Subsection G or otherwise acquired by
the Corporation in any manner whatsoever shall be canceled and shall
not under any circumstances be reissued. The Corporation may from time
to time take such appropriate corporate action as may be necessary to
reduce accordingly the number of authorized shares of the
Corporation's capital stock.
H. Conversion.
----------
(1) Conversion Rights. Subject to Subsection 8G(2), the holders
-----------------
of the Series C Preferred Stock shall have conversion rights as
follows (the "Series C Preferred Stock Conversion Rights"):
39
<PAGE>
(a) Conversion Price. Each share of Series C Preferred
----------------
Stock shall be convertible, at the option of the holder thereof,
at any time and from time to time after February 1, 1999, into
such number of fully paid and nonassessable shares of Common
Stock as is determined by dividing $1,000, plus the amount of any
accrued and unpaid dividends (whether or not declared) the
Corporation elects to pay in Common Stock, by the Conversion
Price in effect at the time of conversion. The Conversion Price
at which shares of Common Stock shall be deliverable upon
conversion of Series C Preferred Stock without the payment of
additional consideration by the holder thereof (the "Conversion
Price") shall be the lower of (i) 140% of the Closing Bid Price
of the Common Stock at the Initial Closing Date or Mandatory
Closing Date (as defined in the Securities Purchase Agreement)
whichever is the original issuance date for the Series C
Preferred Stock being converted or, if less and if the Series C
Preferred Stock is being converted 120 days or more after the
Initial Closing Date in the case of the conversion of Initial
Preferred Shares (as defined in the Securities Purchase
Agreement) or the Mandatory Closing Date in the case of the
conversion of Mandatory Preferred Shares (as defined in the
Securities Purchase Agreement), 100% of the Closing Bid Price of
the Common Stock on the trading day closest to the date 120 days
after the Initial Closing Date in the case of the conversion of
the Initial Preferred Shares or the Mandatory Closing Date in the
case of the conversion of the Mandatory Preferred Shares,
whichever is applicable (such price being the "Maximum Conversion
Price"); or (ii) 100% (the "Conversion Percentage") of the Market
Price (as defined below) on the date of the Notice of Conversion
(as defined below). The Market Price means the average of the
five (5) lowest Closing Bid Prices of the Common Stock during the
forty-four (44) consecutive trading days immediately preceding a
date of determination.
For purposes of these Articles of Amendment, the term
"Closing Bid Price" means, for any security as of any date, the
closing bid price on the principal securities exchange or trading
market where the Common Stock is listed or traded as reported by
Bloomberg, L.P. ("Bloomberg") or, if applicable, the closing bid
price of the Common Stock in the over-the-counter market on the
electronic bulletin board for such security as reported by
Bloomberg, or, if no closing bid price is reported for the Common
Stock by Bloomberg, then the average of the bid prices of any
market makers for such security as reported in the "pink sheets"
by the National Quotation Bureau, Inc. If the Closing Bid Price
of the Common Stock can not be calculated on such date on any of
the foregoing bases, the Closing Bid Price of the Common Stock on
such date shall be the fair market value as mutually determined
by the Corporation and the holders of a majority of the
outstanding shares of Series C Preferred Stock being converted
for which the calculation of the Closing Bid Price is required in
order to determine the Conversion Price of such shares. "Trading
day" shall mean any day on which the Corporation's Common Stock
is traded for any period on the principal securities exchange or
other securities market on which the Common Stock is then being
traded.
(b) Mandatory Conversion. If any Series C Preferred Stock
--------------------
remain outstanding on the Maturity Date (as defined below), then
all such Series C Preferred Stock shall be converted as of such
date in accordance with this Subsection H as if the holders of
such Series C Preferred Stock had given the Notice of Conversion
on the Maturity Date. All holders of Series C Preferred Stock
shall, on the Maturity Date, surrender all Series C Preferred
Stock Certificates, duly endorsed for conversion, to the
Corporation. Notwithstanding the foregoing, if on the Maturity
Date the Common Stock is not designated for quotation on The
Nasdaq SmallCap Market or the Nasdaq National Market or listed on
The New York Stock Exchange, Inc. or The American Stock
40
<PAGE>
Exchange, Inc., then the Maturity Date shall be extended until
the Common Stock is so designated or listed. "Maturity Date"
means the date which is five (5) years after the Initial Closing
Date, or the Mandatory Closing Date (as those terms are defined
in the Securities Purchase Agreement), whichever is applicable,
subject to extension as described in the immediately preceding
sentence.
(d) Conversion at the Corporation's Election. On any day
----------------------------------------
within twenty (20) trading days immediately following any twenty
(20) consecutive trading days during which the Closing Bid Price
of the Common Stock on each trading day during such twenty (20)
consecutive trading days is not less than 200% of the Maximum
Conversion Price applicable to an outstanding share of Series C
Preferred Stock in effect on the first day of such twenty (20)
consecutive trading days, the Corporation shall have the right,
in its sole discretion, to require that any or all of such
outstanding Series C Preferred Stock be converted ("Conversion at
Corporation's Election") at the Conversion Price; provided that
the Conditions to Conversion at the Corporation's Election (as
set forth below) and the other terms of this Subsection 8H(1)(d)
are satisfied. The Corporation shall exercise its right to
Conversion at Corporation's Election by providing each holder of
Series C Preferred Stock that is then subject to the Conversion
at Corporation's Election written notice ("Notice of Conversion
at Corporation's Election") at least ten (10) trading days prior
to the date selected by the Corporation for such conversion
("Corporation's Election Conversion Date"). If the Corporation
elects to require conversion of some, but not all, of such Series
C Preferred Stock, the Corporation shall convert an amount from
each holder of such Series C Preferred Stock equal to such
holder's pro-rata amount (based on the number of such Series C
Preferred Stock held by such holder relative to the total number
of such Series C Preferred Stock outstanding on the date of the
Corporation's delivery of the Notice of Conversion at
Corporation's Election) of all such Series C Preferred Stock the
Corporation is requiring to be converted. The Notice of
Conversion at Corporation's Election shall indicate (x) the
number of shares of Series C Preferred Stock subject to this
subsection that the Corporation has selected for conversion, (y)
the Corporation's Election Conversion Date, which date shall be
not less than ten (10) or more than thirty (30) trading days
after each holder's receipt of such notice, and (z) each holder's
pro-rata share of such outstanding Series C Preferred Stock the
Corporation is requiring to be converted. All Series C Preferred
Stock selected for conversion in accordance with the provision of
this Subsection 8H(1)(d) and which have not been converted prior
to the Corporation's Election Conversion Date shall be converted
as of the Corporation's Election Conversion Date in accordance
with this Subsection 8(H) as if the holders of such Series C
Preferred Stock selected by the Corporation to be converted had
given a Notice of Conversion on the Corporation's Election
Conversion Date. "Conditions to Conversion at the Corporation's
Election" means the following conditions: (i) the Registration
Statement(s) relating to the shares of Common Stock issuable upon
such conversion shall be effective and available for the sale of
all such shares (without regard to any limitations on conversion
herein or elsewhere); (ii) on each day during the period
beginning on and including the date which is twenty (20) trading
days prior to the date of the Corporation's Notice of Conversion
at Corporation's Election and ending on and including the
Corporation's Election Conversion Date, the Common Stock is
designated for quotation on The Nasdaq SmallCap Market or the
Nasdaq National Market or listed on The New York Stock Exchange,
Inc. or The American Stock Exchange, Inc. and is not suspended
from trading; and (iii) on each day during the twenty (20)
consecutive trading days immediately preceding the date of the
receipt by the holders of Maximum Conversion Price of the Notice
of Conversion at Corporation's Election, the Closing Bid Price of
41
<PAGE>
the Common Stock is at least 200% of the Maximum Conversion Price
in effect on the first day of such twenty (20) consecutive
trading days.
(e) Common Stock Redemption Event; Required Approvals. At
-------------------------------------------------
any time that the number of shares of Common Stock issued (A)
upon conversion of the Series C Preferred Stock and (B) in lieu
of dividend payments on the Series C Preferred Stock, shall equal
930,000 shares of Common Stock less the number of shares, if any,
subject to Warrants issued pursuant to Subsection 8G (a "Common
Stock Redemption Event"), the Corporation shall (x) redeem, at a
price determined in accordance with Subsection 8G(1)(b), all of
the outstanding Series C Preferred Stock in accordance with the
provisions of Subsection 8G(2) or (y) call a special meeting of
its shareholders for the purpose of approving the transactions
contemplated by the Securities Purchase Agreement, including the
issuance of the Series C Preferred Stock on the terms set forth
therein, together with any other approvals that shall be required
so as to cause the transactions contemplated by the Securities
Purchase Agreement to remain in compliance with the Rules and
Regulations of The Nasdaq Stock Market (including Rule 4320 of
Nasdaq's Non-Qualitative Designation Criteria in connection with
conversions of Series C Preferred Stock; such approvals are
referred to herein as the "Required Approvals"). The Corporation
shall determine within five (5) business days following the
receipt of a Notice of Conversion which of such actions it shall
take, and shall promptly furnish notice to each of the holders of
Series C Preferred Stock as to such determination, including, if
applicable, a notice of redemption. In no event shall the
Corporation issue shares of Common Stock upon conversion of, or
in lieu of interest payments on, the Series C Preferred Stock,
after the occurrence of a Common Stock Redemption Event until the
Required Approvals, if any, are obtained.
(f) Shareholders' Meeting. If the Corporation elects to
---------------------
call a special meeting of its shareholders pursuant to Subsection
8H(1)(e) to obtain the Required Approvals, the Corporation shall
use its best efforts to obtain such Required Approvals within
thirty (30) days of the Common Stock Redemption Event (such
thirty (30) day period is referred to herein as an "Approval
Period"). If the Corporation does not obtain the Required
Approvals within the Approval Period and the Corporation receives
a Notice of Conversion after the termination of the Approval
Period, the Corporation must redeem, in accordance with this
Subsection 8H, any shares of Series C Preferred Stock outstanding
after the Corporation has issued in excess of 930,000 shares of
Common Stock less the number of shares, if any, subject to
Warrants issued pursuant to Subsection 8G in connection with
redemptions of the Series C Preferred Stock.
(g) Redemption Upon Common Stock Redemption Event. If the
---------------------------------------------
Corporation elects, pursuant to this Subsection 8H, to redeem the
Series C Preferred Stock on the occurrence of a Common Stock
Redemption Event, it shall redeem such Series C Preferred Stock
at the price determined in accordance with Subsection 8G(1)(b).
If the Corporation shall have elected, pursuant to this
Subsection 8H(1), to obtain the Required Approvals but shall not
have done so by the later of the occurrence of the Common Stock
Redemption Event or the expiration of the Approval Period, it
shall furnish a redemption notice to the holders of the Series C
Preferred Stock within three (3) business days after the
expiration of the Approval Period.
(2) Exercise of Conversion Rights. The Series C Preferred Stock
-----------------------------
Conversion Rights shall be exercised as follows:
42
<PAGE>
(a) Notice of Conversion; Delivery of Certificates. The
----------------------------------------------
Corporation will permit each holder of Series C Preferred Stock
to exercise its right to convert the Series C Preferred Stock by
faxing an executed and completed notice of conversion (the
"Notice of Conversion") to the Corporation, and delivering within
three (3) business days thereafter, the original Notice of
Conversion (and the certificates representing the related shares
of Series C Preferred Stock) to the Corporation by hand delivery
or by express courier, duly endorsed. Each date on which a Notice
of Conversion is faxed to and received in accordance with the
provisions hereof shall be deemed a "Series C Preferred Stock
Conversion Date." The Corporation will transmit the certificates
representing the Common Stock issuable upon conversion of the
Series C Preferred Stock (together with certificates representing
the related shares of Series C Preferred Stock not so converted
and, if applicable, a check representing any fraction of a share
not converted) to such holder via express courier as soon as
practicable, but in all events no later than the later to occur
of (the "Delivery Date") (i) three (3) business days after the
Series C Preferred Stock Conversion Date, or (ii) three (3)
business days after receipt by the Corporation of the original
Notice of Conversion (and the certificates representing the
related shares of Series C Preferred Stock). For purposes of this
Section 8, such conversion of the Series C Preferred Stock shall
be deemed to have been made immediately prior to the close of
business on the Series C Preferred Stock Conversion Date.
(b) DTC Fast Automated Securities Transfer. In lieu of
--------------------------------------
delivering physical certificates representing the Common Stock
issuable upon the conversion of the Series C Preferred Stock,
provided that the Corporation's transfer agent is participating
in the Depository Trust Corporation ("DTC") Fast Automated
Securities Transfer program, on the written request of a holder
of Series C Preferred Stock who shall have previously instructed
such holder's prime broker to confirm such request to the
Corporation's transfer agent, the Corporation shall use
commercially reasonable efforts to cause its transfer agent to
electronically transmit such Common Stock to such holder by
crediting the account of the holder's prime broker with DTC
through its Deposit Withdrawal Agent Commission system no later
than the applicable Delivery Date.
(c) Reservation of Shares. The Corporation will at all
---------------------
times have authorized and reserved for the purpose of issuance a
sufficient number of shares of Common Stock to provide for the
conversion of the Series C Preferred Stock. The Corporation will
use its best efforts at all times to maintain a number of shares
of Common Stock so reserved for issuance that is no less than one
and two (2) times the number that is then actually issuable upon
the conversion of the Series C Preferred Stock and the exercise
of any Warrants issued pursuant hereto. Before taking any action
which would cause an adjustment reducing the Conversion Price
below the established par value of the shares of Common Stock
issuable upon conversion of the Series C Preferred Stock, the
Corporation will take any corporate action which may, in the
opinion of its counsel, be necessary in order that the
Corporation may validly and legally issue fully paid and
nonassessable shares of Common Stock at such adjusted Conversion
Price.
(d) Cancellation of Converted Shares. All shares of Series
--------------------------------
C Preferred Stock, which shall have been surrendered for
conversion as herein provided shall no longer be deemed to be
outstanding, and all rights with respect to such shares,
including the rights, if any, to receive dividends, notices and
to vote, shall immediately cease and terminate on the Series C
Preferred Stock Conversion Date, except only the right of the
holders thereof to receive shares of Common Stock in exchange
therefor. Any shares of Series C Preferred Stock
43
<PAGE>
so converted shall be retired and canceled and shall not be
reissued, and the Corporation may from time to time take such
appropriate action as may be necessary to reduce the number of
shares of authorized Series C Preferred Stock accordingly.
(3) Cancellation of Conversion Rights on Liquidation. In the
------------------------------------------------
event of a liquidation of the Corporation, the Series C Preferred
Stock Conversion Rights shall terminate at the close of business on
the first full day preceding the date fixed for the payment of any
amounts distributable on liquidation to the holders of the Series C
Preferred Stock.
(4) Conversion With an Underwritten Offering. If the conversion
----------------------------------------
is in connection with an underwritten offer of securities registered
pursuant to the Securities Act of 1933, as amended, the conversion
may, at the option of any holder tendering Series C Preferred Stock
for conversion, be conditioned upon the closing with the underwriter
of the sale of securities pursuant to such offering, in which event
the person(s) entitled to receive the Common Stock issuable upon such
conversion of the Series C Preferred Stock shall not be deemed to have
converted such Series C Preferred Stock until immediately prior to the
closing of the sale of securities.
(5) Limitation on Conversion Right. At no time shall any holder
------------------------------
(including any of its affiliates) of the Series C Preferred Stock
convert such amount of Series C Preferred Stock as shall result in
such holder's (together with its affiliate's) ownership, after such
conversion, exceeding 9.9% of the Corporation's outstanding Common
Stock.
(6) No Fractional Shares. No fractional shares of Common Stock
--------------------
shall be issued upon conversion of the Series C Preferred Stock. In
lieu of fractional shares, the Corporation shall pay cash equal to
such fraction multiplied by the then effective and applicable
Conversion Price.
(7) Maintenance of Rights. The Corporation will not, by
---------------------
amendment of its Articles of Incorporation or through any
reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed under this Subsection 8H by the
Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Subsection 8H and in the
taking of all such action as may be necessary or appropriate in order
to protect the Series C Preferred Stock Conversion Rights of the
holders of the Series C Preferred Stock against impairment.
(8) Notice of Certain Events. In the event (a) that the
------------------------
Corporation declares a dividend (or any other distribution) on its
Common Stock payable in Common Stock or other securities of the
Corporation, (b) that the Corporation subdivides or combines its
outstanding shares of Common Stock, (c) of any reclassification of the
Common Stock of the Corporation (other than a subdivision or
combination of its outstanding shares of Common Stock or a stock
dividend or stock distribution thereon), (d) of any consolidation or
merger of the Corporation into or with another corporation, (e) of the
sale of all or substantially all of the assets of the Corporation, or
(f) of the involuntary or voluntary dissolution, liquidation or
winding up of the Corporation, then the Corporation shall cause to be
filed at its principal office or at the office of the transfer agent
of the Series C Preferred Stock, and shall cause to be mailed to each
holder of the Series C Preferred Stock at their last address as shown
on the records of the Corporation or such transfer agent, at least ten
(10) days prior to the record date specified in (i) below or twenty
(20) days before the date specified in (ii) below, a notice stating
(i) the record date of such dividend, distribution,
subdivision or combination, or, if a record is not to be taken,
the date as of which the holders of Common Stock of record to be
entitled to such dividend, distribution, subdivision or
combination are to be determined, or
(ii) the date on which such reclassification,
consolidation, merger, sale, dissolution, liquidation or winding
up is expected to become effective, and the date as of which it
is expected that holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities
or other property deliverable upon such reclassification,
consolidation, merger, sale, dissolution or winding up.
I. Sinking Fund. There shall be no sinking fund for the payment of
------------
dividends, or liquidation preferences on the Series C Preferred Stock or
the redemption of any shares thereof.
J. Amendment. This Section 8 constitutes an agreement between the
---------
Corporation and the holders of the Series C Preferred Stock. The
Corporation shall not amend this Section 8 or alter or repeal the
preferences, rights, powers or other terms of the Series C Preferred Stock
so as to affect adversely the Series C Preferred Stock, without the written
consent or affirmative vote of the holders of at least sixty-six and two-
thirds percent (662/3%) of the then outstanding shares of Series C
Preferred Stock, given in writing or by vote at a meeting, consenting or
voting (as the case may be) separately as a class.
44
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF GRAY, PLANT, MOOTY, MOOTY & BENNETT, P.A.]
LINDLEY S. BRANSON
612 343-2827
January 29, 1999
Online System Services, Inc.
1800 Glenarm Place
Suite 800
Denver, CO 80202
RE: Form S-3 Registration Statement
Ladies/Gentlemen:
This opinion is furnished in connection with the registration,
pursuant to the Securities Act of 1933, as amended, of up to 840,000 shares of
common stock, no par value (the "Shares"), of Online System Services, Inc. (the
"Company" or "OSS") issuable upon (i) conversion of the Company's Series C
Preferred Stock (the "Series A Preferred Stock") and (ii) exercise of
outstanding transferable warrants of OSS which may sold from time to time by
various selling shareholders for their own account.
We have acted as counsel to the Company in connection with the
preparation of the Form S-3 Registration Statement (the "Registration
Statement"). We have examined the Articles of Incorporation, as amended, the
Bylaws of the Company, such records of proceedings of the Company as we deemed
material and such other certificates, records and documents as we considered
necessary for the purposes of this opinion.
Based on the foregoing, we are of the opinion that the Shares will be,
when issued, legally issued, fully paid and non-assessable securities of the
Company. We understand that this opinion is to be issued in connection with the
Registration Statement. We consent to a filing of a copy of this opinion with
the Registration Statement.
Very truly yours,
GRAY, PLANT, MOOTY,
MOOTY & BENNETT, P.A.
By /s/ Lindley S. Branson
-----------------------------------
Lindley S. Branson
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement on Form S-3, to be filed on January 29,
1999, of our report dated February 27, 1998 (except with respect to the matter
discussed in Note 12 as to which the date is March 12, 1998), included in Online
System Services, Inc. Form 10-KSB for the year ended December 31, 1997 and to
all references to our Firm included in the Registration Statement.
/s/ Arthur Andersen LLP
Denver, Colorado
January 29, 1999
