-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WrCgXwlwVou1Dw4qbChMcPual2L9g+7keWft2hpp1qpsW/Dng2EDGjOfRsqiZOAG 0lUr1k2TeojU6XFEq0wiPg== 0000927356-98-000517.txt : 19980629 0000927356-98-000517.hdr.sgml : 19980629 ACCESSION NUMBER: 0000927356-98-000517 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980402 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ONLINE SYSTEM SERVICES INC CENTRAL INDEX KEY: 0001011901 STANDARD INDUSTRIAL CLASSIFICATION: 7373 IRS NUMBER: 841293864 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-28462 FILM NUMBER: 98586454 BUSINESS ADDRESS: STREET 1: 1800 GLENARM PLACE STREET 2: STE 800 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3032969200 MAIL ADDRESS: STREET 1: 1800 GLENARM PL STREET 2: SUITE 800 CITY: DENVER STATE: CO ZIP: 80202 10KSB 1 FORM 10KSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number DECEMBER 31, 1997 0-28462 ONLINE SYSTEM SERVICES, INC. (Exact name of registrant as specified in its charter) COLORADO 84-1293864 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1800 GLENARM PLACE, DENVER, CO 80202 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 296-9200 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Units, consisting of one share of Common Stock, no par value and one Warrant Common Stock, no par value Warrants for the purchase of Common Stock, no par value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No - - Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained herein, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB [__]. Registrant's revenues for fiscal year ended December 31, 1997: $2,791,556 Aggregate market value of voting stock held by non-affiliates of registrant as of February 28, 1998: Approximately $22,598,163. Number of shares outstanding as of February 28, 1998: 3,333,577 shares of Common Stock, no par value, and 1,359,250 common stock purchase warrants. Documents incorporated by reference: Portions of the registrant's definitive Proxy Statement, for the 1998 Annual Meeting of Shareholders to be filed with the Commission, are incorporated by reference in Part III of this Form 10-KSB. 1 PART I Item 1. DESCRIPTION OF BUSINESS. GENERAL Online System Services, Inc. ("OSS" or the "Company") develops, markets and supports products and services that enable broadband operators to provide high- speed Internet access to their customers. The Company's objective is to partner with cable television companies (wired and wireless), telephone companies and other broadband operators, both domestically and internationally, to create online communities that drive commerce and communications. The Company's i2u(TM) software further permits the broadband operators to offer a wide range of online services. The broadband operator, its subscribers and local merchants can develop and update local content on the Internet. The local content portion of i2u promotes the sharing of local information and the fostering of e-commerce and e-banking through data-based Internet Web sites. A time-saving and cost advantage to the broadband operators, from the use of the Company's software, is that a significant portion of the local content is generated by the people actually using the Internet, thus enhancing content quality and developing a commitment to the local community of Internet Web sites. Prior to the quarter ended September 30, 1997, the Company's focus generally was on three markets: general Web site development, maintenance and hosting; rural or small market Internet service providers ("ISPs"); and healthcare information services and continuing medical education ("CME"). These activities were divided into three separate units early in fiscal 1997, the Business Resource Group ("BRG") for Web site-related activities; Community Access America ("CAA") for the ISP activities; and Healthcare for the CME and healthcare information activities. Each of these activities involved in varying degrees the establishment of online communities. As an outgrowth of the Company's BRG and CAA activities, and in recognition of the need to increase the availability of high-speed Internet access, the Company's focus during fiscal 1997 increasingly was on the development of online communities for broadband (high bandwidth or high data transmission capabilities) operators such as cable TV operators (wired and wireless) who the Company believes are in the best position today to provide high-speed Internet access. This focus has resulted in the introduction of the Company's i2u (formerly "CAP" or "Community Access Partnership") products and services which include a wide range of online services which enable operators and operators' customers to generate online local content, create Web pages and conduct online commerce and banking and a turnkey product and service package which provides the equipment, training and systems necessary for the broadband operator to become a fully operational ISP. The Company intends to focus its future efforts primarily on its i2u products and services. During November 1997, the Company announced to its customers that it was terminating Web site development, maintenance and hosting activities and began to transition this business to other companies. OSS is ceasing Web site development activities which are not related to the development of products for its i2u products and services or which do not involve the creation of online communities for particular businesses or information purposes. In addition, during October 1997, the Company licensed its MD Gateway Web site to Medical Education Collaborative ("MEC") and is no longer developing products for the healthcare market. In the future, revenues from the healthcare market are expected to be limited to license fees received from MEC in connection with the use of MD Gateway. As discussed more fully in the sections that follow and in "Item 7 - Financial Statements - Note 1 to the Financial Statements," the Company's cash on hand and working capital will be sufficient to fund operations only through May 1998. See Note 1 to the Financial Statements and "Item 6 Management's Discussion and Analysis or Plan of Operations - Liquidity and Capital Resources." The Company was incorporated in March 1994 and commenced operations in February 1995. INVESTMENT CONSIDERATIONS Investors should consider all of the information contained in this report including the factors discussed under "Item 1 - Description of Business - General, Competition and Factors That May Affect Future Results," and "Item 6 - Management Discussion and Analysis or Plan of Operations," and "Item 7 - Finanical Statements" before making an investment decision with regard to the Company's stock. 2 Information contained in this report, other than historical information, should be considered forward looking and reflects management's current view of future events and financial performance that involve a number of risks and uncertainties. The factors that could cause actual results to differ materially include, but are not limited to, the following: availability of additional working capital, general economic product development and technology changes; competition and pricing pressures; length of sales cycle; variability of sales order flow; and management growth. THE INTERNET The Internet is a global web of computer networks. Developed over 25 years ago, this "network of networks" allows any computer attached to the Internet to talk to any other using Internet protocols. Individuals connect directly to the Internet through Internet Service Providers ("ISPs"). The rapid growth in popularity of the Internet is in large part due to the increasing availability of user-friendly navigational and utility tools designed to enable easier access to the Internet; continued penetration of computers and modems into U.S. households; the growth of Internet applications and the awareness of those applications; and the emergence of the World Wide Web. The World Wide Web ("Web") is the term commonly used to describe the network of services and information available on the Internet. This technology uses Web browser software that allows non-technical users to exploit the capabilities of the Internet. The Web enables users to find, retrieve and link information on the Internet with easy to use graphical interfaces. The term "Web site" is commonly used to describe the computer screen layouts and the file server computer that are accessible by users of the Web. A Web site typically has a collection of "Web pages" which may contain text, graphics, pictures, sound, animation, video or other multimedia content. Increased Internet use and the availability of powerful new tools for the development and distribution of Internet content have led to a proliferation of Internet based services, such as advertising, online magazines, specialized news feeds, interactive games, electronic commerce, electronic banking and educational and entertainment applications, that are increasingly incorporating multimedia information such as video and near-CD-quality audio clips. The Internet has the potential of becoming a platform through which consumers and businesses can easily access rich multimedia information and entertainment and conduct business, creating new sources of revenue for broadband operators, advertisers, content providers and other businesses. However, multimedia content and other data-intensive applications require high bandwidth. Today, the average Internet user accesses the Internet via telephone connection. Telephone modems are edging toward 56 kilobits per second ("Kbps") transfer rates, but most current users are still using transfer rates of 14.4 Kbps. At these rates, to send an image filling a computer screen with a color photograph requires about 16 seconds. To download a 10 megabyte ("Mb") software file requires upwards of an hour or more. Despite the frustration of lengthy downloading, Internet and PC usage is growing rapidly. It is estimated that by the year 2,000, 63% of U.S. households will have PCs and 34% of U.S. households will be online. Demand for high-speed Internet access is increasing due to the growing number of telecommuters, home businesses, home PCs, Internet-literate students entering the work place and an increase in the availability and complexity of multimedia. Several new technologies attempt to address the performance problems of the Internet. These include Integrated Services Digital Network ("ISDN") technology with data transmission speeds of 128 Kbps and Asymmetric Digital Subscriber Line ("ADSL") technology with peak data transmission speeds of 8.4 megabits per second ("Mbps"), both telecommunications based offerings which are relatively expensive to implement. Wireless offerings include satellite-delivered approaches such as direct broadcast satellite ("DBS") which currently provide peak data transmission speeds of approximately 400 Kbps downstream (delivering information from Web sites) and rely on dial-up modems and the telephone network for upstream transmission ("telephone return") and multichannel multipoint distribution service ("MMDS") and local multipoint distribution service ("LMDS"). MMDS and LMDS are one-way and two-way high-bandwidth wireless digital broadcasting systems, respectively. In recent years, cable system operators have been upgrading to hybrid fiber-coaxial cable infrastructure both to compete more effectively with DBS television providers, which offer a large number of television channels with digital audio and video, and to increase revenue by offering digital television, telephone and data transmission using cable modems through the upgraded infrastructure. In addition, new cable modems have been introduced which can be used with the cable 3 infrastructure currently in place in most systems to provide data transmission speeds of 10 Mbps and more downstream and rely on dial-up telephone modems for upstream transmission ("hybrid access"). For most Internet users, it is more important to have high bandwidth for obtaining information from Web sites (downstream transmission) than it is for sending information over the Internet (upstream transmission). The following table demonstrates comparative data transmission speeds. COMPARATIVE DATA TRANSMISSION SPEEDS
TIME TO TRANSMIT A SINGLE 1MB GRAPHIC IMAGE (SUCH AS A HIGH RESOLUTION COLOR PHOTOGRAPH) Telephone Modem (28.8 Kbps) Approximately 5 minutes ISDN (64 Kbps) Approximately 2 minutes Cable Modem (10 Mbps) Approximately 1 second - - ---------------------------------------------------------------------------------------------------------
TIME TO TRANSMIT A 5MB AUDIO/VIDEO CLIP (APPROXIMATELY 1.5 MINUTES IN LENGTH) Telephone Modem (28.8 Kbps) Approximately 22 minutes ISDN (64 Kbps) Approximately 10 minutes Cable Modem (10 Mbps) Approximately 4 seconds - - ---------------------------------------------------------------------------------------------------------
OSS'S STRATEGY OSS believes technological convergence is occurring rapidly in the areas of television, telecommunications, PCs and the Internet and that with improving data transmission speeds, the Internet will become the global communications medium enabling millions of people to share information and conduct business electronically. As multiple solutions to the data transmission speed problem are developed, OSS believes the ISPs that will be most successful will be those that provide unique services to their subscribers. OSS emphasizes the development of local communities which will drive online commerce and communications and enable ISPs to distinguish their services from competing services. The Company's strategies to achieve its growth objective include: (i) expanding its marketing and sales resources to gain early market share; (ii) implementing the i2u program by providing the capital equipment in exchange for a larger share of the revenues from Internet access and commerce; (iii) continuing to expand and improve the i2u program; and (iv) developing strategic alliances, both domestically and internationally, with multiple system broadband operators and other partners. There are two types of electronic communities. One is a physical community that represents all the people and businesses in a specific town or city. A broadband customer utilizing the operator for Internet access begins his journey at the operator's Web site. While providing Internet access, the operator drives traffic to its Web site. This is built-in traffic flow that creates a significant opportunity for the operator to provide information and services to the local community, everything from business directories, online shopping at stores that serve the community, online cable customer billing statements and ordering of services to program guides. A second type of community is an online community. The people who use the broadband operator's Web site become a community. They share ideas and messages and participate in an online experience. OSS's software systems can also be used to create virtual communities that encompass individuals who live in geographically disbursed regions of the country or world. An online community can represent any group of individuals who share a common interest. For example, real estate agents that work for a national brokerage firm, sales representatives or distributors of an international manufacturing firm, or physicians of a large health maintenance organization. OSS has developed software designed to assist in the development of online communities, both for those which are local in scope and those which are geographically disbursed. Of the various broadband operators, OSS believes that cable operators (wired and wireless) are in the best position to solve the data transmission speed problem the soonest, as they already have the infrastructure in place needed to deliver high-speed Internet access at competitive rates. For this reason, OSS has developed a turnkey product and service package featuring the use of two-way and hybrid modem technology designed to put cable television operators in the Internet service provisioning business. As well as providing cable operators with local 4 content, this package provides them with the equipment, all or a portion of which OSS may fund, the training and the systems required to become a fully operational ISP. OSS INTERNET ACCESS PRODUCTS AND SERVICES OSS's i2u products and services, which may be marketed and sold together or individually, fall within four main areas: . High-speed Internet access; . A virtual online community of user-generated content; . Online commerce; and . Online banking. For operators who wish to learn more about Internet service provisioning, OSS offers two Internet Clinics - one for cable and one for wireless operators. These informative educational sessions show interested operators what the Internet is, what it means to be an ISP, financial models, the value of Web content, and how OSS can assist them in successfully deploying the business. OSS licenses its i2u products and services to broadband operators in return for and up-front fee and for a percentage of the operator's Internet related revenues. The percentage varies based on the package of services used and the extent to which OSS provides the equipment required to provide high-speed Internet access. HIGH-SPEED INTERNET ACCESS. The Company's i2u products and services include a complete, turnkey system that facilitates a broadband operator's entry into a new business, providing its customers high-speed access to the Internet. This system includes all necessary hardware, software, training and ongoing support required for the Internet service provisioning business. Hardware. The hardware products OSS provides includes routers, interface equipment, terminal servers, and telephone modems, for which the Company is an authorized reseller. Typical packages will cost from $124,000 to $300,000 for headend (a cable distribution center) equipment and license fees plus $200 to $800 per customer modem. In most cases, a complete system, including cable modem headend interface hardware, can fit inside a single, standard equipment rack at the headend. Software. Software includes servers for the Web, electronic mail, Usenet news, file transfer (FTP), domain name service (DNS), among others. OSS has also developed a proprietary system management and customer billing package known as Sage(TM). With Sage, a cable or wireless operator can handle all routine operational and administrative tasks with minimal effort and training. Account setup, customer management, statement generation, automated credit card billing, customized service setup and report generation are all streamlined for the operator with the Sage package. OSS also offers the ability to interface Sage with operators' existing systems, such as cable television billing systems. Training and Ongoing Support. With the wide range of hardware and software needed to provide competitive Internet services, effective assistance and guidance is essential. To meet this need, OSS provides consulting, training, technical support and comprehensive documentation, including documentation covering general system administration, technical documentation for the equipment and system configuration, sales and marketing manuals and documentation for the various training programs. OSS advises the broadband operator on implementation schedules, product offerings, pricing of services, marketing and sales; everything the operator needs to know to implement effectively and profitably the business. Specific training and after-sale ongoing support includes: . Product knowledge and sales techniques for customer service representatives; . How to respond to end-user technical queries for technical support representatives; and . Operation and troubleshooting system software. ONLINE COMMUNITIES (I2U FOUNDATION SOFTWARE). OSS's i2u Foundation software enables broadband operators to create complex Web sites where content itself is generated and updated by the people who use the operator's Web site. Using very simple, on-screen templates, individuals and businesses can post information about their interests 5 and services. Furthermore, by allowing users to participate in the development of the community, OSS believes users will develop "ownership" in the site and be more interested in using the site on an ongoing basis. The trend towards local content delivered via the Internet is significant. A recent study by New York City-based FIND/SVP predicts that in 1998 more than 24 million adults will be using the Internet to obtain local news, sports, weather and yellow pages, and to locate community resources. The report concludes that, if successful, local online advertising revenues could rise to more than $500 million by the year 2000. Similarly, The Yankee Group forecasts $1.1 billion in online classifieds and local banner ads by the year 2000. Local-Revenue Opportunities. User-generated content reduces the broadband operator's expense of creating local content. OSS believes that high- value, useful local content offers the opportunity for additional, and potentially significant, revenue streams for the broadband operator. The operator can obtain a valuable database on its customers including their interests, purchasing history and viewing habits which can be used for highly-targeted marketing campaigns. This information may be used by the operator or sold to outside organizations and advertisers for their use. Local Content Development Areas. The current i2u Foundation system provides six specific areas that generate local content: . Personal home pages; . Enhanced business Web pages; . Business directory listings; . Community and events listings; . Online discussion forums; and . A local cable channel programming guide. To use the Web site, users must first complete an online registration. At this time the system collects detailed profile information about their interests and hobbies. In exchange for providing this information, users may create a free personal Web page. Using a template, the user can input text and chose from a variety of visuals to create their signature Web site. OSS believes this is a powerful incentive for registration, as having a personal Web site is attractive to many people. The data obtained from the online registration can then be used to develop a data-base marketing system for advertising and other revenue-generating activities. The i2u system provides businesses with a low-cost means for preparing a business Web page while also providing a new revenue stream for the broadband operator. Business owners need only fill out on-screen forms to self-create their Web page. Billing information is automatically routed to the operator. Since the i2u system does not require interaction of the broadband operator for updating information, the store owner can change information as needed. Any business in the community can add a "Yellow Pages" type listing to the system. This free listing is added to a comprehensive database that users of the site can search, both by category and keyword, to quickly locate a business that may fit their needs. Communities have many events that can be shared easily with the i2u system. Users can search for information on current and upcoming events while out- of-date events are automatically deleted from the system. The i2u software lets users communicate online about any subject. They can share ideas and concerns with other members of the local community. i2u ties the content of these open discussion areas into electronic commerce opportunities. The i2u system automatically serves both banner advertising (animated, rolling advertising) and direct purchasing opportunities to users based upon the local content they are viewing. For example, a user might be viewing a discussion forum on gardening. The i2u system would automatically present an ad for a local gardening store where users could "click through" to visit the store, or present an ad for a bouquet 6 of flowers where the user can click and instantly order the bouquet for delivery from a local florist. The i2u software enables the broadband operator to add its channel guide to this online service. The operator can promote special pay-per-view events and enhanced services such as pay channels. If the operator purchases ordering capabilities through an addressable system, users can instantly purchase and pay for services. Site Monitoring. The i2u software also provides a number of features that enable the operator to modify and monitor the site. The operator can provide rights to individual users, monitor site traffic, create new online forums and assign moderators to these forums, and process orders for services and enhanced business listings on the site. ONLINE COMMERCE. Although there have been concerns in the past about the viability of online or e-commerce, particularly because of security issues, technological developments have helped make electronic commerce an effective, safe and profitable way of doing business. At the end of June 1997, an estimated 17% of Internet users were making purchases online, with a median monthly expenditure of $50. About 75% of product and service trade on the Internet belongs to companies based in the U.S. Online e-commerce is expected to increase dramatically over the next few years. Input, a California-based research firm, predicts that e-commerce will grow from approximately $57 million in 1995 to more than $2 billion at the turn of the century. Microsoft has introduced software that is integrated into i2u which provides both security for online transactions and helps the users and merchants quickly enter and process credit card information. The i2u system has the ability to simultaneously compare a user's personal preferences (based upon information the user supplies), the nature of the content that the user is viewing, and the sales opportunities which merchants and advertisers offer. This instant personalization of sales opportunities facilitates electronic commerce because it presents items of interest to the user and also makes the purchasing process immediate and simple. OSS helps businesses that do not have online stores create them. The inventory and product descriptions are automatically added to the database which creates, personalized, just-in-time purchasing messages for the site users. Once the cable operator has a critical mass of stores, they can be combined into an online, community-based shopping mall. ONLINE BANKING. Online or e-banking represents a key element in the i2u system as it offers inexpensive and easy startup for the broadband operator as well as a potential revenue stream for OSS. OSS has taken a service bureau approach to e-banking. OSS's e-banking system includes access to account activity, history and current account balance information 24 hours a day, seven days a week, the ability to obtain electronic statements and transfer funds between accounts, pay bills, make loan applications and download transactions into personal financial software such as Quicken or Microsoft Money. By providing online banking capabilities, OSS plans to "close the loop" on online transactions. According to a recent FIND/SVP survey, 14% of Internet users have searched the Internet for online banking services. CURRENT PROJECTS AND TECHNOLOGY DEVELOPMENT OSS is working with domestic and international customers on such projects as developing high-speed turnkey Internet access systems, e-commerce, e-banking, and an online retail showroom, including the following: FiberTel. The FiberTel TCI2 S.A. ("FiberTel") system located in Buenos Aires, Argentina has more than 600,000 subscribers. OSS has signed an agreement to provide this international cable operator its i2u turnkey Internet access product and services, including all necessary equipment to offer FiberTel's subscriber base high-speed Internet access and related services. The system offers both two-way and hybrid access. OSS is providing headend hardware and software necessary to connect FiberTel's system to the Internet; customer support in the areas of local content, marketing and business development; as well as training and technical services. An i2u license enables FiberTel to create a system for providing localized Internet content from subscribers, local newspapers, schools, government and businesses. For the services 7 provided, OSS received an up-front fee and shares in ongoing revenues from both Internet access and content services. InterMedia Partners. InterMedia Partners, based in Nashville, is the nation's fifteenth largest multiple cable system operator (MSO), serving more than 930,000 subscribers in the Southeastern United States. InterMedia's Kingsport system is currently providing telephone dial-up Internet access services to consumers in the Kingsport market using OSS's i2u products and services. OSS has installed an i2u Web site for Intermedia in Kingsport and is working with the Company to access and begin implementation of e-commerce in this marketplace. Rockwell Federal Credit Union. OSS has developed a state-of-the-art system for providing online banking services for Rockwell Federal Credit Union's (RFCU) 54,000 members. RFCU is a non-profit organization that provides a wide range of financial services for employees of Rockwell International, Boeing North America, and approximately 100 other companies. RFCU has entered into a three-year agreement with OSS whereby OSS has developed the Internet solution with applications customized specifically for the needs of the RFCU membership, and has integrated Edify's Electronic Banking System(TM) and CheckFree's bill payment system with RFCU's host system. Under the terms of the agreement, OSS has received income for system development and is receiving a monthly fee per member for providing the online banking services. The e-banking system includes a comprehensive suite of features including access to account activity, history and current account balance information 24 hours a day, seven days a week, and the ability to obtain electronic statements for accounts and transfer funds in member accounts and download transactions into personal financial software such as Quicken or Microsoft Money. In addition, users can pay their bills electronically and in real- time through CheckFree, the industry leader in bill paying systems. American Telecasting, Inc.. OSS has an agreement with American Telecasting, Inc. (ATI) to provide six markets with high speed internet access equipment and software and local content software using the i2u product suite. Four markets, Denver, Portland, Colorado Springs and Seattle are operational with two additional markets to be determined at a later date. ATI is one of the largest wireless cable operators in the United States. They are marketing the high speed access services under the brand WantWEB. In addition to fees associated with the design and installation of the equipment, OSS will receive a percentage of access and content roylaties over the five-year term of the agreement. RE/MAX International, Inc.. RE/MAX International, Inc. (RE/MAX) is currently testing a sophisticated internet/intranet system called "RE/MAX Mainstreet" which was designed and built by OSS. The system is designed to be REMAX's primary communication tool linking agents, management and approved suppliers worldwide. The password protected site utilizes many of the features of OSS's standard i2u product but is customized to meet RE/MAX's unique requirements. OSS will receive a monthly fee from RE/MAX subscribers over the term of the three-year agreement. Kaufman's Tall and Big Men's Shop. Kaufman's Tall & Big Men's Shop has an online, virtual showroom of business, casual, and formal clothing for tall, big, and athletically built men. The Web site, http:www.kaufmans.com, --------------------- offers a comprehensive online catalog of suits, sportswear, shirts, ties, shoes, accessories, sleepwear, and complete lines of golf, skiing, and outdoor gear. The virtual store joins two other brick-and-mortar showrooms operated by the Kaufman family in Englewood, Colorado and Bellevue, Washington. The site, developed by OSS with Microsoft's platform for electronic ordering, will be upgraded to the latest version of Microsoft Commerce which offers features such as new order pipeline process and the Microsoft Wallet for ordering. The site also uses vPos, Veriphone's product for credit card processing on the Internet. OSS incorporated these products into the design of a comprehensive Internet presence that facilitates secure ordering and real-time credit card purchasing via the Web. The user interface was designed with easy, intuitive shopping in mind. 8 RECENT EVENTS On March 19, 1998, the Company entered into an Agreement and Plan of Merger with Durand Acquisition Corporation (a wholly owned subsidiary of the Company) and Durand Communications, Inc. ("Durand"), pursuant to which Durand would become a wholly owned subsidiary of the Company. The consummation of the merger is subject to a number of conditions, including approval by the Company's shareholders. The Agreement contemplates the issuance of approximately 970,000 shares of the Company's Common Stock to acquire Durand. Durand, a privately held company located in Santa Barbara, California, develops and markets internet "community" building tools and services, training in the use of these tools and services and an on-line service for hosting these communities. Durand's target markets are businesses, associations, schools, educational organizations and social organizations which will benefit from using the Internet to facilitate and promote communications, information sharing and commerce. Using Durand's new Internet service, CommunityWare(TM), an Internet community-building and hosting service, users can create and manage their own public or private on-line communities with no additional hardware or software purchases, no technical expertise, no specific operating system, and no integration time, all at a monthly rate below the cost of purchasing and integrating these services or capabilities individually. Durand also offers accredited long-distance on-line courses for colleges and universities through America Online, Inc. During the fiscal year ended December 31, 1997, Durand and an acquired business reported combined revenues of $773,237 (unaudited) and incurred a combined net loss of ($2,419,210)(unaudited). At December 31, 1997, Durand had a shareholder's deficit of ($1,523,102)(unaudited). Assuming all of the contingencies are satisfied, the Company expects to close the acquisition of Durand during June or July, 1998. There can be no assurance that the Company will successfully complete the acquisition of Durand. MARKETING OSS's potential market includes most broadband operators. In an effort to obtain early market share, the Company's initial focus is on domestic and international cable television (wired and wireless) operators who the Company believes are best positioned today to provide high-speed Internet access at competitive rates. Domestically, OSS is focusing on wired cable operators and is targeting the top twenty-five multiple system operators (MSOs), promoting its i2u products and services to their second-tier markets (typically markets with 150,000 or fewer subscribers), areas that generally will not have the hybrid fiber cable required for two-way services for years. These systems are best suited for the i2u products and services which rely on dial-up modems and telephone return for upstream transmission. OSS will also market its i2u products and services in first-tier markets which do not have affiliations with @ Home Corporation or other national cable access networks. Internationally, OSS is focusing primarily on larger markets in Latin America, Europe and parts of Asia. The Company's marketing activities will include advertising in trade publications, developing advertising campaigns and materials for use by broadband operators to promote the use of the Internet to their subscribers, developing public relations programs featuring the Company and its products and services and attendance at trade shows. The Company's marketing message will emphasize that its i2u products and services, based on its local community content, can help operators establish strong early market shares thereby improving their ability to withstand competition from other sources of high- speed Internet access. A substantial portion of the Company's sales is derived from a limited number of customers. During fiscal 1997, one customer accounted for 26% of sales and one customer accounted for 14% of sales for the year. During fiscal 1996, one customer accounted for in excess of 10% of sales for the year. While major customers in one fiscal period are not necessarily likely to be major customers in future fiscal periods, the loss of a major customer could have an adverse effect on the Company's business. 9 WEB SITE DEVELOPMENT AND MAINTENANCE The set up and operation of a Web site requires a computer file server, software resident on that file server and dedicated telephone communication access to the file server. The file server is given an Internet address for each of the Web sites located on that server. When an Internet user enters that address, they are then connected to that customer's file server where the resident Web pages are located. Once connected, the user can view and interact with the information and content of the customer's Web pages. Web sites vary significantly in their complexity and interactivity. A simple Web site may have only text in outline form. More complex sites may have colored text, graphics, pictures, sound, animation, video or other multi-media content. A limiting factor on the content for a site is that as sites get more complex, significantly more data must be transmitted, making transmission speed an issue. The speed at which a user can access a Web site will vary based on the user's modem speed or type of connection to the Internet. As the availability of increased transmission speeds grows, more complex presentations of information will become practical at Web sites. Web sites may also vary in their level of interactivity with the user. Many Web sites are for inquiry only, while others allow the user to interact with, enter and process information. A properly designed Web site shares many attributes of the telephone, namely, widespread connectivity, widespread access to services, and a simple, easy-to-use interface. However, because of the computer keyboard and screen, a Web site has the added capabilities of communicating text, graphics, pictures, animation, video or other multimedia content. During November 1997, in connection with the Company's strategic decision to focus on its i2u products and services, the Company ceased its general Web site development business. OSS will continue to develop Web sites to the extent that they support the development and implementation of the Company's i2u products and services. During November 1997, the Company notified its Web site customers that it was terminating the development and maintenance of Web sites due to the strategic decision to focus on its i2u product offerings and that OSS would cease providing these services by early 1998. During fiscal 1997 and 1996, the Company's revenues from this business were $905,649 and $1,063,509, respectively, and 32% and 74%, respectively, of the Company's total revenues for such periods. HEALTHCARE MARKET One of the markets first targeted by the Company was the healthcare medical education and information market. The Company offered Internet-based products designed to help physicians and other healthcare professionals obtain access to timely and mission-critical education and information via the Internet. MD Gateway, introduced by the Company in 1996, is a central clearing house for education and information about conferences, associations, relevant sites and other useful content. This marketspace integrates the professional and educational needs of physicians with the unique interests of professional associations, multimedia publishers, managed care organizations and pharmaceutical and medical device companies. The Company had a joint development and marketing arrangement with Charles Spickert, a director of the Company, and Medical Education Collaborative ("MEC"). MEC is a nonprofit medical education firm founded by Mr. Spickert in 1988 and is a nationally accredited provider of continuing medical education credits for physicians. Mr. Spickert has worked in continuing medical education for over 15 years. During November 1997, in connection with the Company's strategic decision to focus on the i2u product and service offerings, OSS licensed to MEC the Company's rights in MD Gateway, in return for a royalty fee of 35% of the amount by which MEC's MD Gateway related revenues exceed certain expenses. Included in the license were the hardware and software which comprised the MD Gateway Web site. 10 TRADEMARKS AND PROPRIETARY PROTECTION The Company does not believe that its current products or services are patentable. The Company plans to rely on a combination of copyright, trade secret, trademark laws, and nondisclosure and other contractual provisions to protect its proprietary rights. As a part of its confidentiality procedures, the Company generally enters into written nondisclosure and nonsolicitation agreements with its officers and employees which restrict the use and disclosure of proprietary information and the solicitation of customers for the purpose of selling competing products or services. The Company has not entered into noncompetition agreements with its officers, directors or employees. Because the policing of proprietary rights may be difficult and the ideas and other aspects underlying the Company's products and services may not in all cases be protectable under intellectual property laws, there can be no assurance that the Company can prevent competitors from marketing the same or similar products and services. In addition, competitors may independently develop products and services that compete with the Company. COMPETITION The market for Internet products and services is highly competitive and the Company expects that this competition will continue to intensify in the future. The Company's current and prospective competitors include many companies that have substantially greater financial, technical, marketing, and other resources than the Company. Increased competition could result in price reductions and increased spending on marketing and product development. Any of these events could have a material adverse effect on the Company's financial condition and operating results. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not materially adversely affect its business, financial condition, and results of operations. Competitors for the Company's i2u offering fall into one of three primary categories: first-tier MSO backed services; broadband operators; and other companies which like OSS provide hardware, service, support and management of online customers. MSO backed companies such as @ Home Corporation and Time Warner (through its RoadRunner(TM) product) are focusing their activities on major markets as they generally require systems with two-way high-speed data transmission to fully implement their high-speed Internet access programs. For this reason, OSS is emphasizing second-tier markets of the major MSOs and is exploring partnerships with national content providers who the Company believes can benefit from OSS's local content offering. While broadband operators may enter the high-speed Internet access business on their own, the Company believes that most broadband operators do not currently have the knowledge and systems required to undertake this new business development activity. OSS is aware of two companies, Internet Ventures, Inc. and Community Networks, Inc., which are offering Internet access services which may compete with the Company's i2u products and services. The Company believes that Internet Ventures, Inc. commenced its first high-speed service early in 1997 and that Community Networks, Inc. is focusing on cable systems with two-way communication capabilities. In addition, the Company is aware of a number of companies specializing in the creation of local content but does not believe that any of these companies also are providing Internet access provisioning services. National ISPs, including companies such as MCI Telecommunications Corporation, AT&T, Sprint Corp., Netcom Online Communications Services, Inc. and Performance Systems International, Inc. and Internet access providers such as America Online, Inc. could also develop products which compete with the Company's i2u products and services. Further, the market for the Company's products and services is characterized by rapidly changing technology, evolving industry standards, emerging competition and frequent new product and service introductions. There can be no assurance that the Company can successfully identify new product and service opportunities or develop and bring new products and services to market in a timely manner, or that products and services or technologies developed by others will not render the Company's products and services noncompetitive or obsolete. 11 GOVERNMENT REGULATION The Company's products and services pertaining to Web site content and development are not currently subject to direct regulation by the Federal Communications Commission or any other federal or state agency, other than regulations applicable to businesses generally. Changes in the regulatory environment relating to the Internet content or connectivity industries, including regulatory changes that directly or indirectly affect telecommunication costs or increase the likelihood or scope of competition from regional telephone companies or others, could have a material adverse effect on the Company's business. The Company cannot predict the impact, if any, that future regulation or regulatory changes may have on its business. FACTORS THAT MAY AFFECT FUTURE RESULTS Factors that may affect the Company's future results include, but are not limited to, the following items as well as the information in "Item 1 - Description of Business - General and Competition," "Item 6 - Managements Discussion and Analysis or Plan of Operations," and "Item 7 - Financial Statements - Note 1 to the Financial Statements." New and Uncertain Markets. The market for Internet products and services has only recently developed. Since this market is relatively new and because current and future competitors are likely to introduce competing Internet products and services, it is difficult to predict the rate at which the market will grow or at which new or increased competition will result in market saturation. If the Internet markets fail to grow, grow more slowly than anticipated or become saturated with competitors, the Company's business, operating results and financial condition will be materially adversely affected. Product Development; Technological Change. The Company's success depends upon its ability to develop new products and services that meet changing customer requirements. The market for the Company's products and services is characterized by rapidly changing technology, evolving industry standards, emerging competition and frequent new product and service introductions. There can be no assurance that the Company can successfully identify new product and service opportunities or develop and bring new products and services to market in a timely manner, or that products and services or technologies developed by others will not render the Company's products and services or technologies noncompetitive or obsolete. General Risks of Business. The Company has formulated its business plans and strategies based on the rapidly increasing size of the Internet markets, the Company's anticipated participation in those markets, and the estimated sales cycle, price and acceptance of the Company's products and services. Although these assumptions are based on the best estimates of management, there can be no assurance that these assumptions will prove to be correct. No independent marketing studies have been conducted on behalf of or otherwise obtained by the Company, nor are any such studies planned. Any future success that the Company might enjoy will depend upon many factors including some beyond the control of the Company or that it cannot predict at this time. Limited Availability of Proprietary Protection. The Company does not believe that its current products or services are patentable. The Company relies on a combination of copyright, trade secret and trademark laws, and nondisclosure and other contractual provisions to protect its proprietary rights. Notwithstanding these safeguards, it may be possible for competitors of the Company to imitate the Company's products and services or to develop independently competing products and services. See "Business-Trademarks and Proprietary Protection." Security Risks. The Company's software and equipment are vulnerable to computer viruses or similar disruptive problems caused by OSS customers or other Internet users. Computer viruses or problems caused by third parties could lead to interruptions, delays or cessation in service to the Company's customers. Furthermore, inappropriate use of the Internet by third parties could also potentially jeopardize the security of confidential information stored in the computer systems of the Company's customers. The Company has information technology insurance which provides limited coverage for losses caused by computer viruses. However, certain losses resulting from misuse of software or equipment by third parties or losses from computer viruses which exceed the liability limits under such insurance may not be protected. Although the Company attempts to limit its liability to customers for these types of risks through contractual provisions, there is no assurance that these limitations will be enforceable. Dependence on the Internet. Sales of the Company's Internet related products and services will depend in large part upon a robust industry and infrastructure for providing Internet access and carrying Internet traffic. The 12 Internet may not prove to be a viable commercial marketplace because of inadequate development of the necessary infrastructure, such as a reliable network backbone or timely development of complementary products. Because global commerce and online exchange of information on the Internet and other similar open wide area networks are new and evolving, it is difficult to predict with any assurance whether the Internet will prove to be a viable commercial marketplace. There can be no assurance that the infrastructure or complementary products necessary to make the Internet a viable commercial marketplace will be developed, or, if developed, that the Internet will become a viable commercial marketplace. If the necessary infrastructure or complementary products are not developed, or if the Internet does not become a viable commercial marketplace, the Company's business, operating results and financial condition will be materially impaired. See "Business-The Internet." EMPLOYEES At February 28, 1998, the Company employed 54 people, all of whom are full time employees. In addition to these Company personnel, OSS contracts with other creative and production resources, as required for peak load situations, to create Web pages. None of the Company's employees are represented by a labor union and the Company considers its employee relations to be good. The directors and officers of the Company are as follows:
Director Name Age Since Position - - ---- ------- ----------- -------- R. Steven Adams............... 45 1994 President, Chief Executive Officer and a Director William R. Cullen............. 56 1998 Chief Operating Officer and a Director Thomas S. Plunkett............ 44 ----- Chief Financial Officer Robert M. Geller.............. 45 1995 Secretary and a Director Edward C. Robinson............ 38 ---- Vice President-Business Development Paul H. Spieker............... 54 1995 Vice President-Technical Operations and a Director Vincent D. Bradshaw........... 57 ----- Vice President-Sales Michael S. Murphy............. 46 ---- Vice President-Operations Donald L. Smith, III.......... 48 ---- Vice President-Product Development Robert J. Lewis............... 67 1995 Director H. Robert Gill................ 61 1996 Director Richard C. Jennewine.......... 59 1996 Director Charles P. Spickert........... 44 1997 Director
R. STEVEN ADAMS, founder of the Company, has served as President, Chief Executive Officer and a director since the Company's incorporation in March 1994. From 1985 to 1994, Mr. Adams was President-Sheridan Hotel Management, a full service hotel management company. Mr. Adams was the creator and founder of HotelNet, which was an online information system for the hospitality industry. Mr. Adams' experience includes software development, personal computer manufacturing and management of online information systems. WILLIAM R. CULLEN, has served as the Chief Operating Officer of the Company since March 1998. From 1994 to 1997, Mr. Cullen was Chairman and CEO of Access Television Network, Inc., a privately held company specializing in providing paid programming to local cable systems. From 1992 to 1994, Mr. Cullen was President and CEO of California News Channel, a programming project of Cox Cable Communications. Previously, Mr. Cullen was Senior Vice President of the Southwest division of Untied Artist Cable Corporation. Following an early career in banking, he served as a top financial officer of three companies. Prior to joining United Cable as Vice President of Operations and President of United Cable of Los Angeles, Inc., he served as President of Tribune Company Cable of California, Inc. and CEO of United-Tribune Cable of Sacramento. 13 THOMAS S. PLUNKETT, has served as Vice President-Chief Financial Officer of the Company since October 1996. From 1995 to 1996 Mr. Plunkett was the Vice President of Business Management at Maxtor Corporation, a manufacturer of disk drives. From 1994 to 1995 Mr. Plunkett was the Vice President of Operations for Hi-Tech Manufacturing, an electronic manufacturing services company. From 1992 to 1994 he was a Controller at Conner Peripherals, a manufacturer of disk drives. From 1989 to 1992, Mr. Plunkett served as Vice President and C.F.O. of Discovery Technologies, a manufacturer of high resolution medical image transmission equipment. Prior to joining Discovery Technologies, Mr. Plunkett held various senior operations and financial management positions with Miniscribe Corporation from 1982 to 1989. ROBERT M. GELLER, has been a director and corporate secretary of the Company since May 1995. He also served as Vice President-Chief Financial Officer of the Company on a one-half time basis from May 1995 to October 1996. Mr. Geller currently provides consulting services to the Company on a one-half time basis. From 1986 to the present, Mr. Geller has been President of The Growth Strategies Group, a consulting company specializing in board and executive services for emerging growth companies. Mr. Geller is a director of Integral Peripherals, Inc., a privately held manufacturer of computer disk drives; Renaissance Entertainment Corporation, a publicly held owner and operator of renaissance fairs; and Armanino Foods of Distinction, Inc., a publicly held producer of Italian foods. EDWARD C. ROBINSON, joined OSS in May 1997 and is responsible for business development for the i2u products and services. From 1992 to 1994, Mr. Robinson was Director of Marketing and Sales, New Media for U S WEST Marketing Resources, responsible for preparing the $1.0 Billion division of U S WEST for entrance into the interactive services/Internet content businesses. From 1994-1996, Mr. Robinson was the Director of Business Development for U S WEST Interactive Services, responsible for negotiating and finalizing content and distribution agreements worldwide for U S WEST in it's broadband ventures. From 1996 to 1997 Mr. Robinson was the Director of Business Development for Broadvision an Internet software company in Los Altos, CA. PAUL H. SPIEKER, has been Vice President-Technical Operations and a director of the Company since February 1995. From 1992 to 1994 Mr. Spieker was President of Business Regulatory Coalition-Colorado, a public affairs company responsible for policy formulation and activities primarily dealing with regulatory matters representing companies before the Colorado Public Utilities Commission. From 1991 to 1994, he was a private consultant primarily for businesses in voice and data communications. From 1990 to 1991, Mr. Spieker was President of Developers Cable Construction, a startup company providing contract construction services for residential developers and local telephone and cable companies. From 1987 to 1990, Mr. Spieker was employed by Volt Information Sciences, Inc., a New York based telecommunications company. Mr. Spieker was employed by U S WEST Communications, Inc. and its predecessor from 1966 to 1987 and served in several senior management capacities, including the head of the strategic business unit which served large telephone customers in a seven state territory. VINCENT D. BRADSHAW, joined the Company as Director-Sales in June 1996 and was promoted to Vice President-Sales and made an officer of the Company in September 1996. From May 1993 to May 1996, he was Director of Business Development for Source One Management, Inc., a privately held Denver based company in the business of providing technical operations, management and engineering services. From 1987 to 1996, Mr. Bradshaw was an independent, Denver based marketing and business consultant, doing business as Foresight Business Services. As a consultant, he provided marketing and business operations advice to a number of private and public companies. From May 1981 to December 1986, Mr. Bradshaw was employed by Mountain Bell and its parent company in different sales positions leading to his being named Vice President-Federal Services from 1985 to 1986. From August 1960 to April 1981, he held progressive technical operations, engineering and sales/marketing positions with AT&T Company in several eastern states. Mr. Bradshaw is currently a business advisor with the Boulder Technology Incubator, a not-for-profit corporation that assists inventors and firms in marketing their technologies. 14 MICHAEL S. MURPHY, joined the Company in April 1997 as Vice President - Operations. From November 1996 to April 1997, he was an independent management consultant. From May 1994 to November 1996, Mr. Murphy was co-founder and Vice President of Operations of Requisite Technology, Inc., a developer of software and electronic catalog publishing. From January 1993 to May 1994, Mr. Murphy was Director of Strategic Business Development for Ball Aerospace and Telecommunications Corporation and from July 1987 to January 1993, Manager, San Diego Operations of Ball System Engineering Division. DONALD L. SMITH, III, joined OSS in November, 1997 and is responsible for product development. He has worked the past eleven years in the software development area in a variety of industries. His most recent experience included establishing and growing the development organization at Jones Cyber Solutions from a single resource to one hundred persons working on the development and customization of subscriber management and customer care software being sold to the cable and telephony marketplaces. His previous position included developing performance measurement and project management applications for multi-billion dollar Martin Marietta defense contracts. ROBERT J. LEWIS, has been a director of the Company since February 1995. Mr. Lewis retired in October 1995 after having spent 37 years in the cable television industry as an owner and developer of cable systems and senior executive with several cable television companies. From 1987 until his retirement, Mr. Lewis was employed by TCI Telecommunications, Inc. ("TCI"), one of the largest cable television companies in the United States. Mr. Lewis served as a Senior Vice President of TCI from 1991 to 1993 and as a Senior Advisor to TCI from 1993 until his retirement. H. ROBERT GILL, has been a director of the Company since August 1996. From April 1996 to the present, Mr. Gill has been the President of The Topaz Group, a consulting company offering board of director services to high technology, emerging growth, public and private corporations. From March 1995 to March 1996, Mr. Gill was the Senior Vice President and President, Enhanced Products Group for Frontier Corporation, a telecommunications company. From January 1989 to March 1995 he was President, Chief Executive Officer and a director or Confer-Tech International, Inc. Mr. Gill is a director of TOPRO, Inc., a systems integration company offering equipment and services to a variety of growth manufacturing industries; QualMark Corporation, a provider of accelerated Life testing equipment and services; MOSAIX, Inc., a marketer of inbound and outbound call center systems and services; and Spatial Technologies, Inc., a developer and marketer of three dimensional modeling software for CAD applications. RICHARD C. JENNEWINE, has been a director of the Company since November 1996. From September 1995 to the present, Mr. Jennewine has been President- International Operations and Regional Manager-Western Operations for Computer Aid, Inc. a leader in strategic outsourcing and information services consulting. From December 1991 to February 1995, Mr. Jennewine served as the Senior Vice President of the CONCORD Group, a privately held entrepreneurial group of 40 international enterprises. From January 1994 to February 1995, he served as the President of the Concord Trading Corporation, a company focusing on trading and business ventures in Asia, Russia, the Middle East and South America. Prior to these positions, Mr. Jennewine spent 26 years with IBM Corporation, including startup operations in mainland China. Mr. Jennewine is a director of Easter Seals of Colorado and is a member of the Corporate Management Committee of Computer Aid, Inc. CHARLES P. SPICKERT, has been a director since April 1997. Mr. Spickert founded Medical Education Collaborative ("MEC"), a non-profit medical education organization, in March 1988 and currently serves as MEC's President and Chief Executive Officer. From June 1990 to July 1992 Mr. Spickert also served as the President and Chief Operating Officer of HealthWatch, Inc., a developer and manufacturer of medical supplies and devices. Prior to these positions, Mr. Spickert held marketing and sales management positions with Allertech, a provider of allergy products and services; International Medical Corporation, a manufacturer of cardiovascular devices and supplies; and Becton Dickinson, a provider of microbiology equipment and supplies. Mr. Geller currently provides services to the Company on a part-time basis. All of the other officers of the Company are full time employees of the Company. There are no family relationships among any of the directors or executive officers of the Company. 15 ITEM 2. DESCRIPTION OF PROPERTY. The Company's principal offices are located in approximately 16,800 square feet of space in Denver, Colorado, leased for a period of three years ending on September 30, 1999. The current base monthly rental is $18,208. The spouse of R. Steven Adams, President, Chief Executive Officer and a director of the Company, is an officer of the firm which manages the building where the Company's principal offices are located. See "Certain Transactions." ITEM 3. LEGAL PROCEEDINGS. Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 16 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The number of record holders of the Company's Common Stock ("Common Stock") and Common Stock Purchase Warrants ("Warrants") on February 28, 1998 was 63 and 14, respectively. The Company estimates that the number of beneficial owners of the Common Stock on February 28, 1998 exceeded 1,200. Prior to May 23, 1996 there was no public trading market for the Common Stock and Warrants. Since May 23, 1996, the high and low bid prices for the Common Stock and the Warrants as reported on the NASDAQ Small Cap Market are shown in the table below, based on information provided by the Nasdaq Stock Market. These quotations represent prices between dealers, and do not include retail markups, markdowns or commissions, and may not represent actual transactions.
COMMON STOCK WARRANTS ---------------------------------- ------------------------------------ Quarter Ended High Bid LOW BID HIGH LOW - - ------------- -------- ------- ---- --- 1996 - - ---- June 30 10 1/2 5 5/8 2 3/8 7/8 September 30 5 3/4 3 1/8 1 1/8 1/2 December 31 5 3 1/4 3/4 3/8 1997 - - ---- March 31 5 3 1/4 25/32 1/2 June 30 4 1 1/4 9/16 3/16 September 30 10 7/8 2 1/16 2 1/8 1/2 December 31 12 1/2 6 1/8 2 5/8 1
The Company has never paid a cash dividend on its Common Stock. The payment by the Company of dividends, if any, in the future rests within the discretion of its Board of Directors and will depend, among other things, upon the Company's earnings, capital requirements and financial condition. Dividends on the Company's 10% Cumulative, Convertible, Redeemable Preferred Stock shall be declared and paid before dividends can be paid on the Company's Common Stock. On December 31, 1997, the Company completed the sale of 24.5 units ("Units") of its securities to a total of 18 private investors for an aggregate consideration of $2,450,000 ($100,000 per Unit). An additional 2.25 Units ($225,000) were sold to four private investors during February 1998. Each unit consisted of 10,000 shares of the Company's 10% Cumulative, Convertible, Redeemable Preferred Stock, 2,500 shares of its Common Stock, and 2,000 Common Stock Purchase Warrants. Each Warrant entitled the holder thereof to purchase one share of Common Stock of the Company for the purchase price of $15.00 per share at any time during the three-year period ending on December 31, 2000. Cohig & Associates, Inc. served as the placement agent for the offering and received a commission equal to 8% of the gross proceeds of the offering and a non-accountable expense allowance of 2% of the gross proceeds. The Preferred Stock may be redeemed by the Company at any time for $10.00 per share. If the Preferred Stock is not redeemed prior to October 1, 1998, the Preferred Stock shall become convertible at the election of the holder thereof, into a number of shares of Common Stock of the Company equal to $10.00 divided by the lessor of $10.00 or 80% of the average per share closing bid price of the Company's Common Stock for the five trading days preceding the date of conversion (as defined). The securities were not registered under the Securities Act of 1933, as amended, based upon the exemption provided in Section 4(2) of such act and Regulation D promulgated thereunder. The securities were "restricted" securities as defined in Rule 144 promulgated by the Securities and Exchange Commission and were acquired for investment purposes. The certificates representing such securities contained restrictive legends. The securities are subject to a demand registration right granting the holders thereof the right to request that one registration statement covering certain of the securities be filed with the Securities and Exchange Commission, provided that the Company is not obligated to file the registration statement prior to September 30, 1998. See Note 6 of Notes to Financial Statements for additional information regarding this transaction. 17 On May 23, 1996 the Company's first registration statement under the Securities Act of 1933, as amended, was declared effective by the Securities and Exchange Commission (Commission File No. 333-3282-D). Pursuant to such registration statement, on May 23, 1996 the Company commenced an offering of 1,100,000 units (the "Units") (plus an over-allotment option of an additional 165,000 Units), each Unit composed of one share of the Company's Common Stock, no par value, and one common stock purchase warrant. Two warrants entitle the holder to purchase one share of the Company's Common Stock at a price of $9.00 per share. The aggregate offering price of the Units (including Units allocable to the over-allotment option) was $8,538,750. The managing underwriter for the offering was Cohig & Associates, Inc. The Company sold all 1,100,000 Units, plus the over-allotment option of 165,000 Units, for total aggregate proceeds of $8,538,750. Expenses for such offering were as follows: Payments to directors, officers of the Company or its associates, persons owning 10% or more of the Company's equity securities, or affiliates of the Company Payment to others ------------------------- ----------------- Underwriting discounts and commissions -- $ 768,488 Expenses paid to or for underwriters -- $ 256,163 Other expenses -- $ 282,118 - - -------------------------------------- --------------------------------------- ---------- Total expenses None $1,306,769
After deducting $1,306,769, in offering expenses, the net offering proceeds to the Company were $7,231,981. To date, the Company has used all of such proceeds as follows: Payments to directors, officers of the Company or its associates, persons owning 10% or more of the Company's equity securities, or affiliates of the Company Payments to others ------------------------- ------------------------- Purchase and installation of machinery and equipment -- $ 500,000 Repayment of indebtedness $50,000 $ 250,000 Working capital -- $3,771,981 Other purposes: Community Access America -- $1,500,000 Web Site development -- $1,000,000 Commitments -- $ 160,000 - - -------------------------------------- --------------------------------------- ---------- Total $50,000 $7,181,981
18 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS. GENERAL To date, the Company has generated revenues through the sale of design and consulting services for Web site development, resale of software licenses, mark- ups on computer hardware and software sold to customers, maintenance fees charged to customers to maintain computer hardware and Web sites, license fees based on a percentage of revenues from the i2u products and services, training course fees, and monthly fees paid by customers for Internet access provided by the Company. The Company commenced sales in February 1995, and was in the development stage through December 31, 1995. The Company has incurred losses from operations since inception. At December 31, 1997, the Company had an accumulated deficit of ($5,011,757). Prior to the quarter ended September 30, 1997, the Company's focus generally was on three markets: general Web site development, maintenance and hosting; rural or small market Internet service providers ("ISPs"); and healthcare information services and continuing medical education ("CME"). These activities were divided into three separate units early in fiscal 1997; the Business Resource Group ("BRG") for Web site-related activities; Community Access America ("CAA") for the ISP activities; and Healthcare for the CME and healthcare information activities. Each of these activities involved in varying degrees the establishment of online communities. As an outgrowth of the Company's BRG and CAA activities, and in recognition of the need to increase the availability of high-speed Internet access, the Company's focus during fiscal 1997 increasingly was on the development of online communities for broadband (high bandwidth or high data transmission capabilities) operators such as cable TV operators (wired and wireless) who the Company believes are in the best position today to provide high-speed Internet access. This focus has resulted in the introduction of the i2u products and services which include a wide range of online services which enable operators and operators' customers to generate online local content, create Web pages and conduct online commerce and banking and a turnkey product and service package which provides the equipment, training and systems necessary for the broadband operator to become a fully operational ISP. OSS's revenues for the i2u products and services include payments for hardware, software licenses, training and other implementation services as well as a percentage of Internet access fees paid by subscribers of the Company's broadband operator customers and in connection with e-commerce and e-banking transactions which these subscribers conduct on the broadband operator's systems. The Company intends to focus its future efforts primarily on its i2u products and services. During November 1997, the Company announced to its customers that it was terminating Web site development, maintenance and hosting activities and began to transition this business to other companies. OSS is ceasing Web site development activities which are not related to the development of products for its i2u products and services or do not involve the creation of online communities for particular businesses or information purposes. In addition, during October 1997, the Company licensed its MD Gateway Web site to Medical Education Collaborative ("MEC") and is no longer developing products for the healthcare market. In the future, revenues from the healthcare market are expected to be limited to license fees received from MEC in connection with the use of MD Gateway. Revenues for the businesses that the Company is no longer emphasizing represented $905,649 and $1,063,509 of the Company's revenues during the years ended December 31, 1997 and 1996, respectively, representing 32% and 74%, respectively, of the total revenues for such periods. The Company intends to increase its capital expenditures and operating expenses in order to expand its i2u products and services to support additional broadband operators in future markets and to market and provide the Company's products and services to a growing number of potential subscribers of the broadband operators who partner with the Company. As a result, OSS expects to incur additional substantial operating and net losses in fiscal 19 1998 and possibly for one or more fiscal years thereafter. There can be no assurance that such increase will result in increased revenue and/or customers. Based on applicable current accounting standards, the Company estimates that it will be required to record a non-operating expense of approximately $1,200,000 during fiscal 1998 in connection with the private placement of $2,675,000 of the Company's preferred stock which was completed during December, 1997 and February, 1998. While these charges will not affect the Company's operating loss or working capital, they will result in a decrease in the Company's net income available to common stockholders during 1998. In addition, the Company has signed an engagement letter for the private placement of an additional $2 million of preferred stock which, if completed as contemplated, would result in an additional non-operating expense during fiscal 1998. See note 6 of Notes to Financial Statements. RESULTS OF OPERATIONS The following table sets forth for the periods indicated the percentage of net sales by items contained in the statements of operations. All percentages are calculated as a percentage of total net sales, with the exception of cost of services and cost of hardware/software which are calculated as a percentage of service sales and hardware/software sales, respectively.
For the Twelve Months Ended December 31, 1997 1996 1995 ------------------- ------------------- ------------------- Net Sales: Service sales 60.0% 77.9% 59.4% Hardware/software sales 40.0% 22.1% 40.6% ------ ------ ------ Total net sales 100.0% 100.0% 100.0% Cost of sales: Cost of services (as percentage of service sales) 61.0% 63.7% 70.3% Cost of hardware/software (as percentage of hardware/software sales) 87.0% 72.8% 83.4% ------ ------ ------ Total cost of sales 71.4% 65.7% 75.6% Gross Margin 28.6% 34.3% 24.4% Operating expenses: Sales and marketing expenses 42.9% 43.8% 21.2% Product development expenses 39.7% 32.0% 20.1% General and administrative expenses 65.8% 61.8% 98.7% Depreciation and amortization expenses 7.1% 7.4% 5.3% ------ ------ ------ Total operating expenses 155.5% 145.0% 145.3% Loss from operations (126.9%) (110.7%) (120.9%) Net Loss (120.9%) (98.3%) (121.2%)
TWELVE MONTHS ENDED DECEMBER 31, 1997 AND 1996. Net sales for the twelve months ended December 31, 1997 totaled $2,791,556, including $1,674,198 for service sales and $1,117,358 for hardware and software sales. This represents an increase of 93% above 1996 net sales of $1,445,042 which consisted of $1,125,617 for service sales and $319,425 for hardware and software sales. The Company had one customer representing 26% of sales and one customer representing 14% of sales for the year ended December 31, 1997. In 1996, one customer accounted for sales in excess of 10% of net sales. 20 The increase in sales for the 1997 period compared to 1996, was due to the expanded development of the Company's i2u product and service offerings, and to a substantial increase in marketing and sales efforts in the broadband market. The sales increase includes Web site development revenue from three customers associated with electronic commerce, initial revenue from an online banking service bureau application and sales of the i2u product, including hardware, software and consulting services to a South American cable provider and a large domestic wireless operator. Cost of sales as a percentage of net sales was 71.4% for the twelve month 1997 period and 65.7% for the comparable 1996 period. Cost of sales on hardware and software sales are generally higher than on service sales. Therefore, the Company's overall gross profit margin is higher during periods when service sales are a greater percentage of total net sales. Sales of hardware and software as a percent of total sales increased significantly over the 1996 period which contributed to the higher overall cost of sales. The higher cost of sales on hardware and software for the 1997 period was due to equipment sales to larger customers, which were at lower margins. Sales and marketing expenses were $1,197,038 for the twelve months ended December 31, 1997 and $633,025 for the twelve months ended December 31, 1996. Sales and marketing expenses as a percentage of net sales decreased slightly from 43.8% in 1996 to 42.9% in 1997. The increase in dollars spent during the 1997 twelve-month period, was due to the hiring of new sales and marketing personnel and associated expenditures. The Company also developed initial marketing materials, began lead generation activity and began to sell its i2u and CME products and services. In addition the Company entered into an agreement with Telemedical Systems Integration, Inc. (TMED) during the fourth quarter of 1996 to serve as the Company's primary sales group for its healthcare products. The Company incurred significant expenses during the early part of the twelve-month period ended December 31, 1997 related to initial training of and lead generation for this sales force. During the last quarter of the 1997 period, the Company incurred expenses associated with marketing and trade shows directed towards the wireless cable market and began to market its i2u products and services to markets outside of the United States. Product development expenses were $1,108,456 for the twelve months ended December 31, 1997, compared to $462,108 for the 1996 period. Product development expense as a percentage of net sales increased from 32.0% in 1996 to 39.7% in 1997. The increase in these expenses, as well as the increase as a percentage of net sales during the 1997 period, reflect the continued development of the Company's products and services. Product development expenses during the 1997 period included the completion of the initial development of the Company's i2u product, addition of wireless cable capabilities, and initial product offerings targeted at the CME segment of the healthcare market. Product development expenses during the 1996 period included enhancements to the initial CAA product and early development of the Company's WebQuest process. Product development expenses are expected to continue to increase during 1998 as the Company continues to develop the i2u, e-banking and e-commerce products and services. General and administrative expenses were $1,837,330 for the twelve months ended December 31, 1997, compared to $892,799 for the 1996 period. General and administrative expenses as a percentage of net sales increased from 61.8% in 1996 to 65.8% in 1997. The dollar and percentage increases reflect the development of the Company's general and administrative infrastructure, including finance, accounting, business development and investor relations capabilities, as well as additional expenses related to being a public company. In addition, during the latter part of the twelve-month period ended December 31, 1997, the Company incurred expenses and developed capabilities to enter into the international market for its i2u products and services. Depreciation and amortization expenses were $198,788 for the twelve months ended December 31, 1997, compared to $106,814 for the 1996 period. This increase reflects the increase in fixed assets and equipment to support higher levels of Web site and Internet access services, i2u development and testing, as well as to support the growth in the number of employees. Interest income was $168,298 during the twelve-month period ended December 31, 1997, compared to $179,192 for the 1996 period. Upon completion of the Company's initial public offering, the Company paid a portion of its outstanding debt resulting in a reduction of future interest expense and began earning interest income 21 on the invested net proceeds. The Company's investments consist of U.S. Treasury bills, corporate bonds and cash equivalents. Net losses were $3,375,279 for the twelve-month period ended December 31, 1997 compared to $1,420,432 for the 1996 period. The increase in losses in the 1997 period reflect expenses in the marketing and sales, product development, and general and administrative areas that have increased at a faster rate than net sales. This is due to the time lag associated with product development and market introduction as well as the long sales cycle for most of the Company's products and services. The Company expects to continue to experience increased operating expenses and capital investments during fiscal 1998, as it continues to develop new product offerings and the infrastructure required to support its anticipated growth. The Company believes that, initially, these expenses will be greater than increases in net sales. The Company expects to report operating and net losses for fiscal 1998 and for one or more fiscal years thereafter. TWELVE MONTHS ENDED DECEMBER 31, 1996 AND 1995 Net sales for the twelve months ended December 31, 1996 total $1,445,042, including $1,125,617 for service sales and $319,425 for hardware and software sales. This represents an increase of 263.3% above 1995 net sales of $397,756, which consisted of $236,412 for service sales and $161,344 for hardware and software sales. Net sales for the 1995 period were predominantly from two initial customers. In 1996, one customer accounted for sales in excess of 10% of net sales. The increase in sales for the 1996 period, compared to 1995, was due to the expanded development of the Company's product and service offerings and to a substantial increase in marketing and sales activities in general. Cost of sales as a percentage of net sales was 65.7% for the 1996 period and 75.6% for the 1995 period. The Company's gross profit margin on service sales has fluctuated and has been lower during periods when the Company has hired additional service personnel and incurred other fixed costs in anticipation of future growth. Cost of sales on hardware and software sales are generally higher than on service sales. Therefore, the Company's overall gross profit margin is higher during periods when service sales are a greater percentage of total net sales. The decrease in the cost of sales as a percentage of net sales in the twelve-month period of 1996 is due to the higher percentage of service sales in the 1996 period, compared to the 1995 period, and the higher relative fixed costs associated with providing initial services during 1995. Sales and marketing expenses were $633,025 for the 1996 period and $84,444 for the 1995 period. Sales and marketing expenses as a percentage of net sales increased from 21.2% in 1995 to 43.8% in 1996. The increase in dollars spent, as well as the increase as a percentage of net sales during the 1996 period, were due to the hiring of new sales and marketing personnel and associated expenditures. The Company also increased the promotion and marketing of its MD Gateway and CAA products and services. Product development expenses were $462,108 for the twelve months ended December 31, 1996, compared to $79,760 for the 1995 period. Product development expense as a percentage of net sales increased from 20.1% in 1995 to 32.0% in 1996. The increase in these expenses, as well as the increase as a percentage of net sales during the 1996 period, reflects the continued development of the Company's products and services. Product development expenses during the 1996 period include enhancements to the CAA products with an emphasis during the fourth quarter on a line of new offerings targeted at the cable industry, continued development work on WebQuest, an interactive design process intended to expedite the design of Web sites, and initial feasibility studies on various broadband transmission products and services. During the fourth quarter of fiscal 1996, the Company also developed a group of Web-based products and services targeted to CME providers. Product development expenses during the 1995 period included the development of the Company's training courses entitled "The Internet Game" and "The Business Person's Guide to the Internet" which are primarily utilized as marketing tools to enhance Web development sales activity and the initial development of the CAA products and services. General and administrative expenses were $892,799 for the twelve months ended December 31, 1996, compared to $392,600 for the 1995 period. General and administrative expenses as a percentage of net sales decreased from 98.7% in 1995 to 61.8% in 1996. The dollar increase reflects the development of the Company's 22 general and administrative infrastructure, including finance, accounting, business development and investor relation capabilities, as well as additional expenses related to being a public company. The expenditures as a percentage of net sales decreased during 1996 compared to 1995 as a portion of the general and administrative infrastructure expenses represents fixed costs that do not increase at the same rate as increases in net sales. Depreciation and amortization expenses were $106,814 for the twelve months ended December 31, 1996, compared to $20,936 for the 1995 period. This increase reflects the increase in fixed assets and equipment to support higher levels of Web site and Internet access services, as well as to support the growth in the number of employees. During 1996, the Company enhanced its training facility utilized to educate potential customers. Interest income (expense) was $179,192 during the twelve-month period ended December 31, 1996 compared to ($1,635) for the 1995 period. Upon completion of the Company's initial public offering, the Company paid a portion of its outstanding debt resulting in a reduction of future interest expense and began earning interest income on the invested net proceeds. The Company's investments consist of U.S. treasury bills and cash equivalents. Net losses were $1,420,432 in the twelve-month period ended December 31, 1996 compared to $482,239 for the 1995 period. These losses reflect expenses incurred to develop and identify the Company's initial products and services, and to develop marketing and sales programs and operational and administrative expenses incurred to support its business. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1997, the Company had cash and cash equivalents of $3,680,282 and working capital of $3,868,172. The Company has financed its operations and capital equipment expenditures through a combination of public and private sales of common stock, issuing common stock for services, lease financing, short-term loans and the utilization of trade payables. During 1996, the Company completed an initial public offering which resulted in net proceeds to the Company of $7,231,981 and the issuance of an additional 1,265,000 shares of common stock. During the twelve months ended December 31, 1997, the Company purchased for the price of $75,000 from a consultant to the Company, a stock option to buy 100,000 shares of the Company's common stock at $.50 per share. Upon purchase, the options were canceled. During the twelve months ended December 31,1997, the Company completed a private placement which resulted in net proceeds to the Company of $2,137,321 and the issuance of 245,000 shares of 10% cumulative convertible redeemable preferred stock, 61,250 shares of common stock and 49,000 common stock purchase warrants. During the twelve months ended December 31, 1997, the Company purchased $727,094 of fixed assets. These purchases were primarily computer equipment, communications equipment, cable modems and software necessary to develop and demonstrate the recently introduced i2u products as well as for hardware and software necessary to provide online banking services. In anticipation of future growth, the Company expects to invest a minimum of $500,000 during fiscal 1998 to purchase additional computer equipment, software and office equipment. Accounts receivable balances increased from $229,350 at December 31, 1996 to $701,330 at December 31, 1997, due to the increased sales level during the 1997 twelve-month period and a concentration of billing towards the end of the fourth quarter. Due to the Company's utilization of the percentage of completion method of revenue recognition for its Web services, an asset of $143,543 representing revenue earned and not billed, is shown as accrued revenue receivables at December 31, 1997. This amount has increased from $90,337 at December 31, 1996, due to two large web development projects that require several months to complete. A liability for amounts invoiced but not earned of $9,321 is shown as deferred revenue at December 31, 1997. The Company's hardware and software inventory of $235,441 at December 31, 1997 increased from $195,941 at December 31, 1996, and consists of software licenses and computer hardware purchased by the Company for resale. Prepaid expenses increased to $249,510 at December 31, 1997, from $132,544 at December 31, 1996, primarily due to amounts prepaid for insurance for the Company and amounts paid to a consultant to the Company for services not yet rendered. The major portion of the remaining balance consists of a software license and inventory purchased at a discount which is anticipated to be consumed in 1998. Trade accounts payable at 23 December 31, 1997, increased to $792,908 from $331,809 at December 31, 1996, due to the increased level of business activity for the twelve-month period. The Company believes that its cash and cash equivalents and working capital at December 31, 1997, plus the net proceeds of the offering of preferred stock that was completed during February 1998 will be adequate to sustain operations through at least May 1998. In March 1998, the Company entered into an agreement with an underwriter to offer preferred stock which, if successfully closed, will result in net proceeds to the Company of approximately $1,800,000. In addition, the Company has entered into a letter of intent with an underwriter for a secondary offering of its securities for proceeds of $15 to $20 million, which is expected to occur during July or August 1998. The Company estimates that it needs to raise approximately $15 million through equity, debt or other external financing, to implement its business development plan. However, there can be no assurances that the Company and its underwriter will be able to complete such offerings in amounts required by the Company or upon terms acceptable to the Company. There is no assurance that any additional capital resources which the Company may need will be available when required, or, if available, available on terms acceptable to the Company. See Note 1 to Financial Statements for further discussion. YEAR 2000 The Company utilizes software and related technologies throughout its business and relies on suppliers of services and materials that will be affected by the date change in the year 2000 or prior. The Year 2000 issue exists because many computer systems and applications currently use two-digit fields to designate a year. As the century date change occurs, date-sensitive systems will recognize the year 2000 as 1900, or not at all. This inability to recognize or properly treat the Year 2000 may cause systems to process critical financial and operational information incorrectly. All computer hardware and software used, developed or sold by the Company, is Year 2000 compliant. An internal study is currently under way to determine the full scope and related costs, if any, to insure that the Company's vendors' systems continue to meet its internal needs and those of its customers. The Company does not anticipate incurring significant expenses related to this issue. LENGTH OF SALES CYCLE; POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS The decision to enter the Internet service provisioning business and the development and implementation of interactive Web sites are often enterprise- wide decisions by prospective customers and may require the Company to engage in lengthy sales cycles. The pursuit of sales leads typically involves an analysis of the prospective customer's needs, preparation of a written proposal, one or more presentations and contract negotiations. The Company often provides significant education to prospective customers regarding the use and benefits of the i2u product including pro forma financial modeling. While the sales cycle varies from customer to customer, it typically has ranged from one to six months for broadband customers evaluating the i2u product. The sales cycle may also be subject to a prospective customer's budgetary constraints and internal acceptance reviews, over which the Company has little or no control. Consequently, if sales forecasted from a specific customer for a particular quarter are not realized in that quarter, the Company is unlikely to be able to generate revenue from alternate sources in time to compensate for the shortfall. If a larger order is delayed or lost to a competitor, the Company's revenues for that quarter could be materially diminished. Moreover, to the extent that significant sales occur earlier than expected, operating results for subsequent quarters may be adversely affected. A significant portion of the Company's future sales are expected to come from Internet access fees paid by subscribers of the Company's broadband operator customers and in connection with e-commerce and e-banking transactions these subscribers conduct on the broadband operators' systems. OSS expects that it may take broadband operators several months or more to market and sell high-speed Internet access to their subscribers and that it will take even longer for these subscribers to conduct significant e-commerce or e-banking transactions. For these reasons, OSS does not expect to realize significant sales, if at all, from these activities until a significant time after OSS has licensed its i2u products and services to broadband operators. Further, as a result of the Company's limited operating history, the Company does not have historical financial data for a sufficient number of periods on which to base planned operating expenses. Accordingly, the Company's expense levels are based in part on its expectations as to future sales and to a large extent are fixed. The Company typically operates with little or no backlog and the sales cycles for its products and services may vary significantly. As a result, quarterly sales and operating results generally depend on the volume and timing of and ability to close customer contracts within the quarter, which are difficult to forecast. The Company may be unable 24 to adjust spending on a timely manner to compensate for any unexpected sales shortfalls. Accordingly, any significant shortfall of demand for the Company's products and services in relation to the Company's expectations would have an immediate adverse impact on the Company's business, operating results and financial condition. In addition, since a significant portion of the Company's future sales are expected to be based on Internet access fees and e-commerce and e-banking activities, OSS does not expect to realize significant sales, if at all, from these activities until a significant time after OSS has licensed its i2u products and services to broadband operators. Further, the Company plans to increase its operating expenses to fund product development and increase sales and marketing. To the extent that such expenses precede or are not subsequently followed by increased sales, the Company's business, operating results and financial condition will be materially adversely affected. 25 ITEM 7. FINANCIAL STATEMENTS. ONLINE SYSTEM SERVICES, INC. ---------------------------- INDEX TO FINANCIAL STATEMENTS ----------------------------- Page ----
Report of Independent Public Accountants 27 Balance Sheets as of December 31, 1997 and 1996 28 Statements of Operations for the Years Ended December 31, 1997 and 1996 29 Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1997 and 1996 30 Statements of Cash Flows for theYears Ended December 31, 1997 and 1996 31 Notes to Financial Statements 33
26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Online System Services, Inc.: We have audited the accompanying balance sheets of ONLINE SYSTEM SERVICES, INC. (a Colorado corporation) as of December 31, 1997 and 1996, and the related statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Online System Services, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As further discussed in Note 1 to the financial statements, among other factors, the Company has incurred significant and recurring losses from operations, and such losses are expected to continue in the near future, which raises substantial doubt about the ability of the Company to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. ARTHUR ANDERSEN LLP Denver, Colorado, February 27, 1998 (except with respect to the matter discussed in Note 12 as to which the date is March 12, 1998). 27 ONLINE SYSTEM SERVICES, INC. BALANCE SHEETS
DECEMBER 31, ----------------------------------------- 1997 1996 ------------------ ---------------- ASSETS CURRENT ASSETS: CASH AND CASH EQUIVALENTS $3,680,282 $1,645,163 SHORT-TERM INVESTMENTS - 3,855,343 ACCOUNTS RECEIVABLE, NET (NOTE 2) 701,330 229,350 ACCRUED REVENUE RECEIVABLES 143,543 90,337 INVENTORY, NET 235,441 195,941 PREPAID EXPENSES 249,510 132,544 SHORT-TERM DEPOSITS 77,372 61,015 ------------------ ---------------- TOTAL CURRENT ASSETS 5,087,478 6,209,693 EQUIPMENT, NET (NOTES 2 AND 3) 1,015,632 486,344 CAPITALIZED SOFTWARE COSTS, NET (NOTE 4) 122,029 - OTHER ASSETS 101,352 164,616 ------------------ ---------------- $6,326,491 $6,860,653 ================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES: ACCOUNTS PAYABLE $ 792,908 $ 331,809 ACCRUED EXPENSES 177,029 17,684 ACCRUED SALARIES AND TAXES PAYABLE 216,493 82,806 CURRENT PORTION OF NOTE AND CAPITAL LEASES PAYABLE (NOTES 5 AND 10) 23,555 30,437 DEFERRED REVENUE 9,321 48,669 ----------------- ----------------- TOTAL CURRENT LIABILITIES 1,219,306 511,405 ----------------- ----------------- NOTE AND CAPITAL LEASES PAYABLE (NOTES 5 AND 10) 585 32,647 COMMITMENTS AND CONTINGENCIES (NOTES 1, 10, 11, 12 AND 13) STOCKHOLDERS' EQUITY: REDEEMABLE, CONVERTIBLE PREFERRED STOCK, 10% CUMULATIVE RETURN; NO PAR VALUE, 5,000,000 SHARES AUTHORIZED, 245,000 AND NONE ISSUED AND OUTSTANDING, RESPECTIVELY 1,483,282 - COMMON STOCK; NO PAR VALUE, 10,000,000 SHARES AUTHORIZED, 3,315,494 AND 3,162,545 SHARES ISSUED AND OUTSTANDING, RESPECTIVELY 8,635,075 7,953,665 STOCK SUBSCRIPTIONS RECEIVABLE (NOTE 7) - (586) ACCUMULATED DEFICIT (5,011,757) (1,636,478) ----------------- ----------------- TOTAL STOCKHOLDERS' EQUITY 5,106,600 6,316,601 ----------------- ----------------- $ 6,326,491 $ 6,860,653 ================= =================
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE BALANCE SHEETS. 28 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------------------------- 1997 1996 NET SALES: SERVICE SALES $ 1,674,198 $ 1,125,617 HARDWARE AND SOFTWARE SALES 1,117,358 319,425 ----------------- ----------------- 2,791,556 1,445,042 COST OF SALES: COST OF SERVICES 1,021,261 717,409 COST OF HARDWARE AND SOFTWARE 972,260 232,511 ----------------- ----------------- 1,993,521 949,920 ----------------- ----------------- GROSS MARGIN 798,035 495,122 OPERATING EXPENSES: SALES AND MARKETING EXPENSES 1,197,038 633,025 PRODUCT DEVELOPMENT EXPENSES 1,108,456 462,108 GENERAL AND ADMINISTRATIVE EXPENSES 1,837,330 892,799 DEPRECIATION AND AMORTIZATION 198,788 106,814 ----------------- ----------------- 4,341,612 2,094,746 ----------------- ----------------- LOSS FROM OPERATIONS (3,543,577) (1,599,624) INTEREST INCOME, NET 168,298 179,192 ----------------- ----------------- NET LOSS $(3,375,279) $(1,420,432) ================= ================= LOSS PER SHARE, BASIC AND DILUTED (NOTE 2) $(1.05) $(.55) ================= ================= WEIGHTED AVERAGE SHARES OUTSTANDING (NOTE 2) 3,200,474 2,573,273 ================= =================
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 29 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
PREFERRED STOCK COMMON STOCK STOCK --------------------------- ---------------------------- SUBSCRIPTIONS ACCUMULATED STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT RECEIVABLE DEFICIT EQUITY (DEFICIT) ------ ------ ------ ------ ---------- ------- ---------------- Balances, December 31, 1995 - $ - 1,625,000 $ 272,864 $(57,269) $ (216,046) $ (451) Common stock issued in conjunction with private placement (Note 6) - - 182,245 410,000 - - 410,000 Less offering costs - - - (6,330) - - (6,330) Common stock issued in conjunction with initial public offering for cash at $6.75 per unit (Note 6) - - 1,265,000 8,538,750 - - 8,538,750 Less offering costs - - - (1,306,769) - - (1,306,769) Exercises of stock options and warrants (Note 6) - - 90,300 45,150 - - 45,150 Stock subscriptions receivable (Note 7) - - - - 56,683 - 56,683 Net loss - - - - - (1,420,432) (1,420,432) ------------ ------------ ----------- -------------- ------------ -------------- -------------- Balances, December 31, 1996 - - 3,162,545 7,953,665 (586) (1,636,478) 6,316,601 Preferred stock issued in conjunction with private placement (Note 6) 245,000 2,198,875 - - - - 2,198,875 Less offering costs - (280,629) - - - - (280,629) Common stock issued in conjunction with private placement (Note 6) - - 61,250 251,125 - - 251,125 Less offering costs - - - (32,050) - - (32,050) Guaranteed return on preferred stock (Note 6) - (434,964) - 434,964 - - - Exercises of stock options and warrants (Note 6) - - 91,699 65,611 - - 65,611 Repurchase of option to buy common stock (Note 6) - - - (75,000) - - (75,000) Stock options issued for services - - - 36,760 - - 36,760 Stock subscriptions receivable (Note 7) - - - - 586 - 586 Net loss - - - - - (3,375,279) (3,375,279) ------------ ------------ ----------- -------------- ------------ -------------- -------------- Balances, December 31, 1997 245,000 $1,483,282 3,315,494 $ 8,635,075 $ - $(5,011,757) $ 5,106,600 ============ ============ =========== ============== ============ ============== ==============
The accompanying notes to financial statements are an integral part of these statements. 30 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------- 1997 1996 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: NET LOSS $(3,375,279) $(1,420,432) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES: DEPRECIATION AND AMORTIZATION 198,788 106,814 GAIN ON SALE OF EQUIPMENT (1,535) - STOCK ISSUED FOR SERVICES 37,346 36,683 CHANGES IN OPERATING ASSETS AND LIABILITIES: INCREASE IN SHORT-TERM DEPOSIT (16,357) (61,015) INCREASE IN ACCOUNTS RECEIVABLE (471,980) (131,068) INCREASE IN ACCRUED REVENUE RECEIVABLES (53,206) (90,337) INCREASE IN INVENTORY (39,500) (195,941) INCREASE IN PREPAID EXPENSES (116,966) (127,544) (INCREASE) DECREASE IN OTHER ASSETS 63,264 (162,622) INCREASE IN ACCOUNTS PAYABLE 461,099 256,819 INCREASE IN ACCRUED EXPENSES 159,345 6,664 INCREASE IN ACCRUED SALARIES AND TAXES PAYABLE 133,687 63,403 INCREASE (DECREASE) IN DEFERRED REVENUE (39,348) 48,669 ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (3,060,642) (1,669,907) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: PURCHASE OF SHORT-TERM INVESTMENTS - (3,855,343) REDEMPTION OF SHORT-TERM INVESTMENTS 3,855,343 - PURCHASE OF EQUIPMENT (727,094) (459,997) CAPITALIZED SOFTWARE DEVELOPMENT COSTS (124,097) - PROCEEDS FROM SALE OF EQUIPMENT 2,621 - ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,006,773 (4,315,340) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: PAYMENTS ON NOTE PAYABLE AND CAPITAL LEASES (38,944) (32,111) PROCEEDS FROM ISSUANCE OF COMMON STOCK 316,736 8,993,900 PROCEEDS FROM ISSUANCE OF PREFERRED STOCK 2,198,875 - PAYMENTS ON SHORT-TERM NOTES PAYABLE - (50,814) RE-PURCHASE OF STOCK OPTIONS ISSUED TO CONSULTANT (75,000) - PAYMENTS ON NOTE PAYABLE RELATED PARTY - (12,707) PAYMENTS RECEIVED ON STOCK SUBSCRIPTIONS RECEIVABLE - 20,000 STOCK OFFERING COSTS (312,679) (1,313,099) ------------- ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 2,088,988 7,605,169 ------------- ------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 2,035,119 1,619,922 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,645,163 25,241 ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,680,282 $ 1,645,163 ============= =============
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 31 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, ---------------------------------- 1997 1996 -------------- --------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: CASH PAID FOR INTEREST $ 5,987 $12,100 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: STOCK ISSUED FOR SERVICES 37,346 36,683 CAPITAL LEASE FOR EQUIPMENT - 5,623 NOTE PAYABLE FOR FIXED ASSETS PURCHASED - 30,323
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 32 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (1) ORGANIZATION AND BUSINESS Online System Services, Inc. (the "Company") was incorporated on March 22, 1994, under the laws of Colorado, and principal operations began in 1995. To date, the Company has generated revenues through the sale of design and consulting services for Web site development, resale of software licenses, mark- ups on computer hardware and software sold to customers, maintenance fees charged to customers to maintain computer hardware and Web sites, license fees based on a percentage of revenues from the Company's flagship products and services (known as "i2u"), training course fees, and monthly fees paid by customers for Internet access provided by the Company. The Company commenced sales in February 1995, and was in the development stage through December 31, 1995. Prior to the quarter ended September 30, 1997, the Company's focus generally was on three markets: general Web site development, maintenance and hosting; rural or small market Internet service providers ("ISPs"); and healthcare information services and continuing medical education ("CME"). These activities were divided into three separate units early in fiscal 1997: the Business Resource Group ("BRG") for Web site-related activities: Community Access America ("CAA") for the ISP activities: and Healthcare for the CME and healthcare information activities. Each of these activities involved in varying degrees the establishment of online communities. As an outgrowth of the Company's BRG and CAA activities, and in recognition of the need to increase the availability of high-speed Internet access, the Company's focus during fiscal 1997 increasingly was on the development of online communities for broadband (high bandwidth or high data transmission capabilities) operators such as cable TV operators (wired and wireless). This focus has resulted in the introduction of the i2u products and services which include a wide range of online services that enable operators and operators' customers to generate online local content, create Web pages and conduct online commerce and banking and a turnkey product and service package which provides the equipment, training and systems necessary for the broadband operator to become a fully operational ISP. The Company intends to focus its future efforts primarily on its i2u products and services. The Company earns revenue for up-front fees paid for hardware, software licenses, training and other implementation services. The Company also earns revenue from access and consulting services and content software licenses through revenue sharing (royalties) based on a formula calculated on the gross income billed by the broadband operator to its customers for both Internet access and Internet content. To date, royalties earned by the Company from this program are not significant. In conjunction with its Web site services, the Company generated revenue from design and consulting services for Web site development, computer hardware and software sold to customers of its Web site development services, maintenance fees charged to customers to maintain computer hardware and Web sites, license fees based on a percentage of revenues from its CAA program, training course fees and monthly fees paid by customers for Internet access provided by the Company in the Denver, Colorado market. During November 1997, the Company announced that it was terminating Web site development, maintenance and hosting activities and began to transition this business to other companies. The Company is ceasing Web site development activities, which are not related to the development of products for its i2u products and services or do not involve the creation of online communities for particular businesses or information purposes. In addition, during October 1997, the Company licensed its MD Gateway Web site to Medical Education Collaborative ("MEC") and is no longer developing products for the healthcare market. In the future, revenues from the healthcare market are expected to be limited to license fees received from MEC in connection with the use of MD Gateway. 33 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (1) ORGANIZATION AND BUSINESS (CONTINUED) The Company has not been profitable since inception. The Company had at December 31, 1997, $3,680,282 in cash and cash equivalents and $3,868,172 in working capital, primarily resulting from the gross proceeds of a private placement of equity totaling $2,450,000 which closed on December 31, 1997 (See Note 6). The Company competes in an intensively competitive industry, which has been characterized by price erosion, rapid technological change, short product life cycles, and rapidly changing business models. Significant technological changes in the Internet access and broadband data delivery require that the Company expend significant funds in order to compete in a ever-changing marketplace. The Company has expended significant funds to develop its current product offerings. During 1998, the Company anticipates increased operating expenses and research and development expenditures, which are necessary for the Company to further develop and market its products, and to achieve market acceptance of its products in sufficient quantities to achieve positive cash flow from operations. The Company's current business plan is highly dependent on future revenues based on the extent to which the subscribers of the Company's broadband operator customers utilize the operators for Internet access and conduct business on the Internet. There can be no assurances that the Company will be successful in marketing its products or that it will be able to generate sufficient revenues to achieve positive cash flow from operations. The continued viability of the Company depends upon, in part, its ability to obtain additional profitable customer contracts and to obtain additional capital through debt or equity financing. The Company believes that its cash and cash equivalents and working capital plus the net proceeds of the offering of Preferred Stock that was completed during February 1998 (See Note 12) will be adequate to sustain operations through May 1998. In March of 1998, the Company entered into an agreement to offer Preferred Stock which, if successfully closed in April 1998, will result in net proceeds to the Company of approximately $1,800,000. The Company estimates that it will need to raise approximately $15,000,000 through equity, debt or other external financing, to implement its business development plan. The Company has entered into a letter of intent with an underwriter to raise $15,000,000 to $20,000,000 through an offering of common stock. There is no assurance that any additional capital resources, which the Company may need, will be available if and when required, or, if available, available on terms that will be acceptable to the Company, or that the above contemplated financings will be closed. As a result of the foregoing, substantial doubt exists about the ability of the Company to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition Revenue from Web site design and consulting fees is recognized on the percentage of completion method on an individual contract basis. Percentage complete is determined primarily based upon the ratio that labor costs incurred bear to total estimated labor costs. The Company's use of the percentage of completion method of revenue recognition requires estimates of the degree of project completion. To the extent these estimates prove to be inaccurate, the revenues and gross margin, if any, reported for periods during which work on the project is ongoing, may not accurately reflect the final results of the project, which can only be determined upon project completion. Provisions for any estimated losses on uncompleted contracts are made in the period in which such losses are determinable. Amounts earned but not billed under development contracts are shown as accrued revenue receivables in the accompanying balance sheets. Amounts invoiced but not earned are shown as deferred revenue in the accompanying balance sheets. 34 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenue from hardware and software sales is recognized upon shipment provided that the Company has no significant remaining obligations. Revenue from maintenance fees, training courses and Internet access fees are recognized as the services are performed. License fees are recognized when the Company has no further material obligations. Revenue from access and content royalties is recognized when earned, generally as the services are provided. Capitalized Software Development Costs and Research and Development Costs The Company capitalizes software development costs in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Capitalization of development costs of software products begins once the technological feasibility of the product is established. The establishment of technological feasibility is highly subjective and requires the exercise of judgment by management. Based on the Company's product development process, technological feasibility is established upon completion of a detailed program design. Capitalization ceases when such software is ready for general release, at which time amortization of the capitalized costs begins. Amortization of capitalized software development costs is computed using the greater of the straight-line method or the product's estimated useful life, generally five years, or based on relative current revenue. During 1997, the Company has used the straight-line method to amortize such capitalized costs, and recorded $2,068 of amortization expense. Product development costs relating principally to the design and development of non-software products are generally expensed as incurred. The cost of developing routine software enhancements are expensed as product development costs as incurred because of the short time between the determination of technological feasibility and the date of general release of related products. Cash and Cash Equivalents For purposes of reporting cash flows, the Company considers cash and cash equivalents to include highly liquid investments with original maturities of 90 days or less that are readily convertible into cash and are not subject to significant risk from fluctuations in interest rates. Short-Term Investments Short-term investments consist of U.S. Government Treasury Bills. These investments are classified as held-to-maturity securities and are measured at amortized cost. Accounts Receivable Accounts receivable are shown net of allowance for doubtful accounts of $58,059 and $64,851 at December 31, 1997 and 1996, respectively. Inventory Inventory is stated at the lower of cost (first-in, first-out) or market. Inventory consists of software licenses which the Company has purchased for the purpose of sub-licensing the software to its customers, and hardware purchased for resale. 35 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Equipment Equipment is stated at cost and depreciation is provided using the straight-line method over the estimated useful lives of the respective assets. Maintenance and repairs are expensed as incurred and improvements are capitalized. Concentration of Credit Risk The Company has no significant off balance-sheet concentrations of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. In addition, the Company maintains the majority of its cash with financial institutions in the form of demand deposits, and denominates the majority of its transactions in U.S. dollars. At December 31, 1997, the Company had contracted with an Argentine company to provide ongoing technical support to one of the Company's customers. The payment for these services is denominated in Argentine pesos. The Company performs ongoing evaluations of its customers' financial condition and generally does not require collateral, except for billings in advance of work performed. Its accounts receivable balances are primarily domestic. Income Taxes The Company recognizes deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets, liabilities and carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance for the amount of any tax benefits which, more likely than not, based on current circumstances, are not expected to be realized (See Note 9). Net Loss Per Share Net loss per share has been computed based upon the weighted average number of common shares outstanding. In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." Under SFAS 128, primary earnings per share previously required under Accounting Principles Board No. 15 is replaced with basic earnings per share. Basic earnings per share is computed by dividing reported earnings available to common stockholders by weighted average shares outstanding, excluding the dilution for any potentially dilutive securities. Fully diluted earnings per share as defined under Accounting Principles Board No. 15 is called diluted earnings per share under SFAS 128. Diluted earnings per share reflects the potential dilution assuming the issuance of common shares for all dilutive potential common shares outstanding during the period. As a result of the Company's net losses, all potentially dilutive securities, 1,002,910 stock options and 1,359,250 warrants in 1997, and 719,258 stock options and 1,303,450 warrants in 1996, would be anti-dilutive. Pursuant to Securities and Exchange Commission ("SEC") rules, common stock and common stock equivalent shares issued by the Company at prices below the initial public offering during the twelve- month period prior to the offering ("cheap stock") were included in the calculation as if they were outstanding for 1996, regardless of whether they were antidilutive. In Staff Accounting Bulletin 98, the SEC redefined cheap stock. As a result, 169,381 shares, which were originally treated as cheap stock and included in the 1996 weighted average 36 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) shares outstanding of 2,742,654, have been excluded in the restated 1996 weighted average shares outstanding of 2,573,273. This change in weighted average shares had a (.03) increase to (.55) net loss per share when compared to the previously reported net loss per share of (.52). Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions may affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Long-Lived Assets Long-lived assets and certain identifiable intangibles to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Any long-lived assets and certain identifiable intangibles to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. Fair Value of Financial Instruments The Company's financial instruments consist of cash and cash equivalents, short-term trade receivables and payables, short-term investments and notes payable. As of December 31, 1997 and 1996, the carrying values of such instruments approximated their fair value. (3) EQUIPMENT Equipment consists of the following:
DECEMBER 31, 1997 1996 --------------- ---------------- Computer equipment $1,082,097 $ 450,743 Office furniture and equipment 131,121 85,558 Software 85,850 83,387 Leasehold improvements 58,410 52,608 Assets under construction 12,525 - --------------- ---------------- 1,370,003 672,296 Less accumulated depreciation (354,371) (185,952) --------------- ---------------- Net equipment $1,015,632 $ 486,344 =============== ================
Certain office equipment is pledged as collateral for capital leases payable (See Note 5). The Company depreciates computer equipment, office equipment, and software over five years, office furnishings over seven years, and leasehold improvements over the life of the lease. Depreciation expense was $196,720 and $106,814 for the years ended December 31, 1997 and 1996, respectively. 37 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (4) CAPITALIZED SOFTWARE COSTS Capitalized software costs consists of the following:
DECEMBER 31, 1997 1996 --------------- ---------------- Capitalized i2u software $124,097 $ - Less accumulated amortization (2,068) - --------------- ---------------- Net capitalized software costs $122,029 $ - =============== ================
The Company amortizes the i2u software over its estimated useful life of five years or relative revenues, whichever is greater. (5) NOTE AND CAPITAL LEASES PAYABLE Note and capital leases payable consist of the following:
DECEMBER 31, 1997 1996 --------------- ----------------- Capital lease payable in monthly principal and interest payments of $1,733, for thirty-six months beginning January 15, 1996, effective interest rate of 14.9%, secured by office equipment $ 19,203 $ 35,747 Capital lease payable in monthly principal and interest payments of $471, for thirty-six months beginning July 28, 1995, effective interest rate of 35.8%, secured by a phone system 2,261 6,485 Capital lease payable in monthly principal and interest payments of $198 for thirty-six months beginning April 26, 1996, effective interest rate of 19.7%, secured by a phone system 2,676 4,293 Note payable for purchase of equipment, monthly principal payments of $1,588 beginning March 1996 for twelve months after which payment changes to $625 for the remaining twenty-four months, effective interest rate of 9.0%, unsecured - 16,559 --------------- ----------------- 24,140 63,084 Less-current portion (23,555) (30,437) --------------- ----------------- $ 585 $ 32,647 =============== =================
Future minimum lease payments under capital leases as of December 31, 1997 are as follows: 1998 $25,604 1999 605 ------------- Total minimum lease payments 26,209 Less amount representing interest (2,069) ------------- $24,140 =============
38 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (6) STOCKHOLDERS' EQUITY Preferred Stock On December 31, 1997, the Company completed a private placement for gross proceeds of $2,450,000 with a small group of investors. The Company sold 24.5 units, which consisted of an aggregate of 245,000 shares of 10% cumulative convertible redeemable preferred stock, 61,250 shares of common stock, and warrants to purchase 49,000 shares of common stock. Net proceeds to the Company were $2,137,321 after deducting $312,679 in offering costs. The preferred stock issued in the above private placement entitles the holder to voting rights at one vote per share and specifies a 10% per annum cumulative non-compounding dividend based on the stated value of $10.00 per share. The Company may redeem the preferred stock at any time for $10.00 per share. However, if the Company completes a secondary public offering of its securities, as defined, within nine months from December 31, 1997, the Company shall redeem all of the outstanding preferred stock. If the secondary offering is not completed before September 30, 1998, each share of preferred stock shall become convertible, at the election of the holder, into the number of shares of common stock of the Company equal to $10.00 divided by the lesser of (1) $10.00 or (2) 80% of the average per share closing bid price, as defined, on the date of conversion. The conversion discount of the preferred stock is considered to be an additional preferred stock dividend. The maximum discount available of $434,964 (the "Guaranteed Return") is initially recorded as a reduction of preferred stock and an increase to additional paid-in capital. The Guaranteed Return reduction to preferred stock will be accreted, as additional dividends, by recording a charge to income available to common stockholders during 1998 over the nine month period to the earliest date of conversion of the preferred stock. The Company will also record annual dividends of $1.00 per share as a reduction of income available to common stockholders, whether or not declared by the Board of Directors. Any difference between the highest redemption value ($10 per share) and the recorded value, (excluding the Guaranteed Return discussed above), primarily offering costs, will be accreted as a charge to income available to common stockholders during 1998, over the nine month period when the Company can redeem the preferred stock. The 49,000 common stock purchase warrants issued in the above private placement entitle the holder to purchase one share of the Company's common stock for a purchase price of $15.00 per share at any time during the three-year period commencing on December 31, 1997. On the date of issuance, the Company determined the warrants had a nominal value. In conjunction with services provided during the private placement offering, the Company also issued to the underwriters warrants to purchase 12,250 common shares of the Company for a purchase price of $15.00 per share. The warrants can be exercised at any time during the three-year period commencing December 31, 1997. On the date of issuance, the Company determined the warrants had a nominal value. Common Stock Private Placement Completed March 1996 In March 1996, the Company completed a private placement of common stock. The Company sold 41 units, each consisting of 4,445 shares of common stock and 450 common stock purchase warrants. The units sold at a price of $10,000 per unit. Total proceeds from the private placement, after deducting offering costs of $6,330, were $403,670. 39 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (6) STOCKHOLDERS' EQUITY (CONTINUED) Initial Public Offering In May 1996, the Company completed an initial public offering of its common stock. The Company sold 1,265,000 units, each consisting of one share of common stock and one common stock purchase warrant. The units sold at a price of $6.75 per unit. Total proceeds from the initial public offering were $7,231,981 after deducting offering costs of $1,306,769. Stock Option Plan During 1995, the Company adopted the 1995 Stock Option Plan (the "Plan"). Under the terms of the Plan, the Company may grant options for up to 1,400,000 shares under the Plan. As of December 31, 1997, the Company has options outstanding for 1,002,910 shares. Under the Plan, the option exercise price equals the stock's fair market value on the date of grant and the options vest over various terms with a maximum vesting period of 42 months and expire after a maximum of ten years. The Company accounts for the Plan under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock- Based Compensation." SFAS 123 defines a fair value-based method of accounting for employee stock options and similar equity instruments. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25. Entities electing to remain with the accounting in APB Opinion No. 25 must make pro forma disclosures of net income and earnings per share as if the fair value- based method of accounting defined in SFAS 123 had been applied. The Company has elected to make the pro forma disclosures in accordance with SFAS 123 as set forth below. The fair value of each option grant is estimated on the date of grant using the Black Scholes option pricing model with the following weighted-average assumptions used for grants in 1997 and 1996, respectively: risk-free interest rate of 6.21 and 5.90 percent, no expected dividend yields, expected lives of 3.0 and 2.7 years, and expected volatility of 98 and 75 percent (actual volatility of the Company's common stock since the initial public offering.) Fair value computations are highly sensitive to the volatility factor assumed; the greater the volatility, the higher the computed fair value of options granted. Had compensation cost for options granted under the Plan been determined consistent with SFAS 123, the Company's net loss and net loss per common and common equivalent share would have been increased to the following pro forma amounts:
1997 1996 ------------------- ------------------- Net loss: As Reported $(3,375,279) $(1,420,432) ------------------- ------------------- Pro Forma (3,730,827) (1,541,985) ------------------- ------------------- Net loss per share-basic and diluted As Reported $ (1.05) $ (0.55) ------------------- ------------------- Pro Forma (1.17) (0.59) =================== ===================
40 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (6) STOCKHOLDERS' EQUITY (CONTINUED) Because the fair value method of accounting required by SFAS 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. A summary of the status of the Plan at December 31, 1997 and 1996, and changes during the years then ended is presented in the tables and narrative below:
1997 1996 ----------------------------------- ----------------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ---------------- ------------- ---------------- ------------- Outstanding at beginning of year 719,258 $1.87 510,558 $0.50 Granted 924,200 3.24 466,100 3.28 Exercised (86,249) 0.72 (85,300) 0.50 Forfeited and canceled (554,299) 3.62 (172,100) 2.27 ---------------- ---------------- Outstanding at end of year 1,002,910 $2.26 719,258 $1.87 ================ =============== ================ =============== Exercisable at end of year 246,998 $1.18 209,008 $0.76 ================ =============== ================ =============== Weighted average fair value of options granted during year $1.64 $1.59 ================ ================
The status of total stock options outstanding and exercisable under the Stock Option Plan as of December 31, 1997 follows:
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE ---------------------------------------------------- ---------------------------------------------------- Weighted Weighted Average Weighted Weighted Average Range of Remaining Average Average Remaining Exercise Number of Contractual Exercise Number of Exercise Contractual Prices Shares Life (Years) Price Shares Price Life (Years) - - ---------------------- --------------- --------------- --------------- --------------- -------------- -------------- $ 0.50 - 1.25 225,676 3.5 $0.62 183,365 $0.64 3.5 1.26 - 3.13 550,834 5.9 1.76 35,333 1.69 5.9 3.14 - 7.83 226,400 5.2 5.13 28,300 4.01 5.2 --------------- --------------- $ 0.50 - 7.83 1,002,910 5.2 $2.26 246,998 $1.18 4.0 =============== ===============
Common Stock Options/Warrants In September 1995, in conjunction with a consulting agreement entered into by the Company with Creative Business Strategies ("CBS") (See Note 11), the Company granted stock options under the Plan to purchase 100,000 shares of the Company's common stock at an exercise price of $.50 per share, which were to vest 18 months after the date of the agreement and were exercisable for a period of 5 years. The Company repurchased all the options in 1997 for $75,000, their intrinsic value on the date of purchase. 41 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (6) STOCKHOLDERS' EQUITY (CONTINUED) In December 1995, in conjunction with a business relationship entered into among Charlie Spickert, Medical Education Collaborative ("MEC") and the Company (See Note 11), the Company granted stock options under the Plan to purchase 50,000 shares of the Company's common stock at an exercise price of $.50 per share. The options vest over 48 months, which vesting may be accelerated in certain events. As of December 31, 1997, 50,000 options are vested and none have been exercised. During December 1995, in connection with the acquisition of the equipment described in Note 10, the Company issued warrants to purchase 25,000 shares of the Company's common stock at an exercise price of $.50 per share, which vested immediately and are exercisable for 5 years. On the date of issuance, the Company determined the warrants had a nominal value. During 1997, 5,000 warrants were exercised. As of December 31, 1997, 15,000 warrants were outstanding. In connection with the Company's private placement of common stock in March 1996, the Company issued warrants to purchase 18,450 shares of the Company's common stock at an exercise price of $2.25 per share, which vested immediately and are exercisable for 5 years. On the date of issuance, the Company determined the warrants had a nominal value. During the year ended and as of December 31, 1997, 450 warrants have been exercised. In conjunction with the initial public offering in May 1996, the Company issued 1,265,000 units (including 165,000 units under the over-allotment), each unit consisting of one share of common stock and one common stock purchase warrant. Two of such warrants entitle the unit holders to purchase one share of common stock at a price of $9.00 during the three-year period commencing May 1996. Commencing one year from the date of the initial public offering, the Company has the right, at its discretion, to call all of the warrants for redemption on 45 days' prior written notice at a redemption price of $.05 per warrant if: (i) the closing bid price of the Company's common stock exceeds the exercise price of the warrants ($9.00) by at least 50% during a period of at least 20 of the 30 trading days immediately preceding the notice of redemption; (ii) the Company has in effect a current registration statement covering the common stock issuable upon exercise of the warrants; and (iii) the expiration of the 45-day notice period is within the term of the warrants. If the Company elects to exercise it's redemption right, holders of warrants may either exercise their warrants, or their warrants will be redeemed. As of December 31, 1997, none of the warrants have been exercised or redeemed. In conjunction with the initial public offering, the Company issued to the underwriters an option to purchase 110,000 units (consisting of one share of common stock and one warrant, of which two warrants purchase one share of common stock at a price of $9.00) (the "Representative's Securities"). The Representative's Securities are not exercisable for one year after the date of the initial public offering. Thereafter, for a period of four years, the Representative's Securities are exercisable at a price of $8.10 per unit. The warrants included in the Representative's Securities are exercisable consistent with those issued in the initial public offering. As of December 31, 1997, the option has not been exercised by the underwriter. 42 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (7) STOCK SUBSCRIPTIONS RECEIVABLE The Company entered into two stock subscription agreements. The first agreement stipulates that the purchase price of certain shares will be paid through the fair market value of services rendered to the Company. The $36,683 of required services was completed as of December 31, 1996. The second agreement required the payment of $20,000 cash on or before January 31, 1996. The payment was received prior to the expiration date. In 1997, the remaining services of $586 were completed. (8) MAJOR CUSTOMERS A substantial portion of the Company's sales is derived from a limited number of customers. The Company's sales to customers in excess of 10% of net sales for the years ended December 31, 1997 and 1996, are as follows:
1997 1996 ----------------- ---------------- Customer A $738,460 $ - Customer B 382,441 - Customer C 21,295 149,175
The Company's accounts receivable balances from customers in excess of 10% of the accounts receivable and accrued revenue receivables balance for the years ended December 31, 1997 and 1996, are as follows:
1997 1996 ----------------- ---------------- Customer A $386,233 $ - Customer D - 39,834 Customer E - 33,850
Customer B operates in Buenos Aries, Argentina; however all 1997 revenue transactions with this customer were denominated in U.S. Dollars. (9) INCOME TAXES At December 31, 1997, for income tax return purposes, the Company has approximately $5,149,905 of net operating loss carryforwards that expire at various dates through the year 2012. The net operating loss for tax purposes differs from that for financial reporting purposes due to differences in reporting certain transactions for income tax and financial reporting purposes. The Tax Reform Act of 1986 contains provisions which may limit the net operating loss carryforwards available to be used in any given year if certain events occur, including significant changes in ownership interests. The Company has determined that deferred tax assets resulting from the net operating loss carryforwards, as of December 31, 1997 and 1996, respectively, did not satisfy the realization criteria. Accordingly, a valuation allowance was recorded against the entire deferred tax asset. No other significant deferred tax assets or liabilities existed at December 31, 1997 or 1996. The difference between the expected statutory rate and the effective rate is primarily a result of the increase in the valuation allowance. 43 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (10) RELATED PARTY TRANSACTIONS Capital Lease-Related Party To provide working capital for the Company, shareholders of the Company formed a partnership that purchased the equipment from the Company for cash and then leased the equipment back through a capital lease (See Note 5). Amounts due under capital leases to related parties were $19,203 and $35,747 at December 31, 1997 and 1996, respectively. Office Lease The Company's principal offices are located in a building managed by an affiliate, in that an officer of the Company is related to the vice president of the management company. The Company was in need of expanding its office space and due to several vacant floors in the building, the management company agreed to rent an additional floor to the Company and its current office space at a total monthly rate of $13,657, which increased to $18,208 in January 1998 as new space was occupied. (11) COMMITMENTS AND CONTINGENCIES Minimum future annual lease payments as of December 31, 1997, including amounts committed to related parties, are as follows: 1998 $358,178 1999 257,504 2000 50,074 --------------- $665,756 ===============
In conjunction with an operating lease entered into during 1996, the Company made a security deposit of $222,693, which will be returned to the Company during the lease term as payments are made. During 1997, the Company had deposits totaling $61,016 refunded with $161,677 remaining on deposit as of December 31, 1997. The security deposit is included in short-term deposit and other assets in the accompanying balance sheet. The total lease expense for the years ended December 31, 1997 and 1996, was $339,456 and $122,578, respectively. The Company entered into a business relationship on December 7, 1995 with Charlie Spickert and MEC. Mr. Spickert and MEC will provide the knowledge and reputation to penetrate the medical training and services market. The Company will provide the needed resources and expertise in Internet services. In addition to receiving a percentage of revenues from the results of the joint efforts of the parties, Mr. Spickert was granted 50,000 common stock options (See Note 6). As part of the joint development and marketing arrangement with MEC and Mr. Spickert, the Company has agreed to perform Web site development services as a vendor to MEC. 44 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (11) COMMITMENTS AND CONTINGENCIES (CONTINUED) In September 1995, the Company entered into a consulting agreement with CBS wherein CBS assisted the Company in developing its business plan, advises the Company regarding business opportunities and financings and promotes the Company and its services. For these services, CBS was to be paid a fee of $2,500 a month, was granted a stock option to purchase 100,000 shares of the Company's common stock (See Note 6), and was to be paid a transaction-based fee for business combinations or certain other transactions completed by the Company that were initiated by CBS. Effective February 1, 1996, the agreement with CBS was amended to provide for a monthly fee of $4,000 for a period of 36 months and to eliminate any transaction-based compensation. In June 1997, the Company repurchased the 100,000 stock options from CBS for $75,000 (See Note 6) and prepaid $74,663 for the consulting agreement. The Company is amortizing the prepayment over the remaining 20 months of the consulting agreement. As of December 31, 1997, $48,531 remained unamortized and is included in prepaid expenses in the accompanying balance sheet. (12) SUBSEQUENT EVENT On March 12, 1998, the Company sold an additional 2.25 units related to the private placement for gross proceeds of $225,000. The units sold have the same terms and conditions as discussed in Note 6 and consisted of an aggregate of 22,500 shares of 10% cumulative convertible redeemable preferred stock, 5,625 shares of common stock, and warrants to purchase 4,500 shares of common stock. Net proceeds to the Company were approximately $202,500 after deducting approximately $22,500 in offering expenses. The 4,500 common stock purchase warrants issued entitle the holder to purchase one share of the Company's common stock for a purchase price of $15.00 per share. The warrants can be exercised at any time during the three-year period commencing March 12, 1998. (13) SUBSEQUENT EVENT (UNAUDITED) On March 19, 1998, the Company entered into an agreement and Plan of Merger with Durand Acquisition Corporation (a wholly owned subsidiary of the Company) and Durand Communications, Inc. ("Durand"), pursuant to which Durand would become a wholly owned subsidiary of the Company. Durand is a privately held company which creates and supports on-line communities and electronic commerce applications. The agreement contemplates the issuance of approximately 970,000 shares of restricted common stock for all of the outstanding shares of Durand. The consummation of the merger is subject to approval by the shareholders of the Company and other contingencies. 45 Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. CHANGE IN ACCOUNTANTS (i) On October 7, 1996, the Company dismissed Jones, Jensen & Company as its independent accountants effective October 7, 1996. (ii) The reports of Jones, Jensen and Company, regarding the Company's consolidated financial statements since the Company's inception on March 22, 1994 through December 31, 1995, contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except for an explanatory paragraph in Jones, Jensen and Company's report dated February 9, 1996, concerning the Company's ability to continue as a going concern. (iii)The Company's board of directors approved the decision to change independent accountants. (iv) In connection with the Company's audits since its inception on March 22, 1994 through December 31, 1995 and through October 7, 1996, there have been no disagreements with Jones, Jensen and Company on any matter of accounting principles or practice, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Jones, Jensen and Company would have caused them to make reference thereto in their reports on the financial statements for such years. NEW INDEPENDENT ACCOUNTANTS (i) On October 7, 1996, the Company engaged Arthur Andersen LLP as its new independent accountants for the fiscal year ended December 31, 1996. (ii) Since its inception on March 22, 1994 and through October 7, 1996 the Company did not engage or consult with Arthur Andersen LLP regarding the matters described in Regulation S-B, Item 304(a)(2). 46 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. Reference is made to the pertinent information contained in the Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission, which information is incorporated herein. ITEM 10. EXECUTIVE COMPENSATION. Reference is made to the pertinent information contained in the Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission, which information is incorporated herein. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Reference is made to the pertinent information contained in the Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission, which information is incorporated herein. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Reference is made to the pertinent information contained in the Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission, which information is incorporated herein. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) For Financial Statements filed as a part of this Report, reference is made to "Index to Financial Statements" on page F-1 of this Report. For a list of Exhibits filed as a part of this Report, see Exhibit Index on page 50 of this Report. (b) During the last quarter of the period covered by this Report, the Company did not file any reports on Form 8-K. 47 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ONLINE SYSTEM SERVICES, INC. Date: April 2, 1998 By /s/ R. Steven Adams --------------------- R. Steven Adams, President and Chief Executive Officer In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ R. Steven Adams April 2, 1998 - - --------------------------------------------------- R. Steven Adams, (President, Chief Executive Officer and a Director) /s/ Thomas Plunkett April 2, 1998 - - --------------------------------------------------- Thomas Plunkett (Chief Financial Officer) /s/ Stuart Lucko April 2, 1998 - - --------------------------------------------------- Stuart Lucko (Controller) /s/ Paul H. Spieker April 2, 1998 - - --------------------------------------------------- Paul H. Spieker (Director) /s/ William R. Cullen April 2, 1998 - - --------------------------------------------------- William R. Cullen (Director) /s/ Robert M. Geller April 2, 1998 - - --------------------------------------------------- Robert M. Geller (Director) /s/ Robert J. Lewis April 2, 1998 - - --------------------------------------------------- Robert J. Lewis (Director) 48 /s/ H. Robert Gill April 2, 1998 - - --------------------------------------------------- H. Robert Gill (Director) /s/ Richard C. Jennewine April 2, 1998 - - --------------------------------------------------- Richard C. Jennewine (Director) /s/ Charles P. Spickert April 2, 1998 - - --------------------------------------------------- Charles P. Spickert (Director) 49 ONLINE SYSTEM SERVICES, INC. INDEX TO EXHIBITS FORM 10-KSB (For Fiscal Year Ended December 31, 1997) (a) Listing of Exhibits: 3.1 Articles of Incorporation, as amended, of the Company* 3.2 Bylaws of the Company(1) 4.1 Specimen form of the Company's Common Stock certificate(2) 4.2 Form of Warrant Agreement dated May 23, 1996 between Corporate Stock Transfer and the Company, including form of Warrant(2) 4.3 Stock Option Plan of 1995(1) 4.4 Form of Incentive Stock Option Agreement for Stock Option Plan of 1995(1) 4.5 Form of Nonstatutory Stock Option Agreement for Stock Option Plan of 1995(1) 4.6 Nonstatutory Stock Option Agreement for options issued to Creative Business Strategies, Inc.(2) 4.7 Form of Warrant issued in connection with Sale-Leaseback of Equipment(1) 4.8 Form of Warrant issued in 1996 to private investors(1) 4.11 Specimen of Warrant Certificate--See Exhibit A filed with Exhibit 4.2 4.12 Form of Warrant Agreement issued in 1997 and 1998 to private investors.* 10.1 Equipment Lease Agreement dated December 15, 1995 between the Company and OSS Equipment Leasing General Partnership(1) 10.2 Financial Advisory Agreement dated February 23, 1996 between the Company and Cohig and Associates(1) 10.3 Form of Nondisclosure and Nonsolicitation Agreement between the Company and its employees(2) 10.4 Office Lease for the Company's principal offices(2) 10.5 Long-Term Equipment Sale and Software License Agreement dated October 7, 1997 between the Company and FiberTel TCI2 S.A.* 10.6 Agreement and Plan of Merger dated March 19, 1998 among the Company, Durand Acquisition Corporation and Durand Communications, Inc.* 10.7 Agreement dated October 7, 1997 between the Company and Medical Education Collaborative, Inc.* 13 The registrant intends to deliver to its shareholders a copy of 1997 Annual Report on form 10-KSB (without exhibits), in lieu of a separate Annual Report to Shareholders 16 Letter on change in certifying accountant(3) 23.1 Consent of Arthur Andersen LLP* 27 Financial Data Schedule* - - ----------------------------- * Filed herewith. (1) Filed with the initial Registration Statement on Form SB-2, filed April 5, 1996, Commission File No. 333-3282-D. (2) Filed with Amendment No. 1 to the Registration Statement on Form SB-2, filed May 3,1996, Commission File No. 333-3282-D. (3) Filed with the Form 8-K Report, dated October 7, 1996, Commission File No. 0-28462. 50 EX-3.1 2 AMENDED ARTICLES OF INCORPORATION EXHIBIT 3.1 ARTICLES OF INCORPORATION, AS AMENDED ONLINE SYSTEM SERVICES, INC. ARTICLES OF INCORPORATION ------------------------- OF -- ONLINE SYSTEM SERVICES, INC. ---------------------------- The undersigned incorporator, being a natural person of the age of eighteen years or more hereby establishes a corporation pursuant to the statutes of the State of Colorado and adopts the following Articles of Incorporation: ARTICLE I --------- NAME ---- The name of the corporation shall be Online System Services, Inc. ARTICLE II ---------- PERIOD OF DURATION ------------------ This Corporation shall exist in perpetuity, from and after the date of filing these Articles of Incorporation with the Secretary of State of the State of Colorado unless dissolved according to law. ARTICLE III ----------- PURPOSES -------- The purpose for which this corporation is organized is to engage in any lawful act or activity for which corporations may be organized under the laws of the State of Colorado. In furtherance of the foregoing purposes, the Corporation shall have and may exercise all of the rights, powers and privileges now or hereafter conferred upon corporations organized under the laws of the State of Colorado. In addition, it may do everything necessary, suitable or proper for the accomplishment of any of its corporate purposes. ARTICLE IV ---------- CAPITAL ------- 1. Authorized Shares. The aggregate number of shares which this corporation shall have authority to issue is 10,000 shares, all of one class, Common Stock, having no par value. 2. Restrictions. The Corporation shall have the right to impose restrictions on the transfer of shares of the Corporation. 3. Dividends. The Board of Directors may from time to time distribute to shareholders in partial liquidation, or out of stated capital or capital surplus of the Corporation, a portion of its assets, in cash or property, subject to the limitations contained within the statutes of the State of Colorado. 4. Distribution in Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, and after paying or adequately providing for the payment of all its obligations, the remainder of the assets of the Corporation shall be distributed, either in cash or in kind, pro rata to the holders of the Common Stock. ARTICLE V --------- VOTING BY SHAREHOLDERS ---------------------- 1. Voting Rights; No Cumulative Voting. Each outstanding share of Common Stock is entitled to one vote and each fractional share of Common Stock is entitled to a corresponding fractional vote on each matter submitted to a vote of shareholders. Cumulative voting shall not be allowed in the election of directors of the Corporation and every shareholder entitled to vote at such election shall have the right to vote the number of shares owned by him for as many persons as there are directors to be elected, and for whose election he has a right to vote. 2. Denial of Preemptive Rights. No shareholder of the Corporation, whether now or hereafter authorized, shall have any preemptive or similar right to acquire any additional unissued or treasury shares of stock or securities of any class or rights, warrants or options to purchase stock or scrip or securities in any kind, including shares or securities convertible into shares or carrying stock purchase warrants or privileges. 3. Majority Vote. A quorum for the purpose of stockholder meetings will consist of a majority of the shares issued and outstanding and entitled to vote at the meeting. When a quorum is present, and when the statute requires a vote of two- thirds of the shares entitled to vote to take action, the affirmative vote of a majority of the shares issued and outstanding and entitled to vote on the subject matter shall be the act of the stockholders. ARTICLE VI ---------- BOARD OF DIRECTORS ------------------ The initial Board of Directors shall consist of three (3) directors, and the names and addresses of the persons who shall serve as directors until the first annual meeting of the shareholders or until their successors are elected and shall qualify are: NAME MAILING ADDRESS R. Steven Adams 1800 Glenarm Place, Suite 700 Denver, Colorado 80202 Craig A. Snapp 9063 S. Bermuda Run Circle Highlands Ranch, CO 80126 Thomas D. Smart 1700 Broadway, Suite 1800 Denver, CO 80290 The number of directors shall be prescribed by the Bylaws except that there need be only as many directors as there are shareholders in the event that the outstanding shares are held of record by fewer than two persons. ARTICLE VII ----------- RIGHT OF DIRECTORS TO CONTRACT WITH CORPORATION ----------------------------------------------- The following provisions are inserted for the management of the business and for the conduct of the affairs of the Corporation, and the same are in furtherance of and not in limitation of the powers conferred by law. 1. No contract or other transaction between this Corporation and one or more of its directors or any other corporation, firm, association, or entity in which one or more of its directors are directors or officers or are financially interested shall be either void or voidable solely because of such relationship or interest or solely because such directors are present at the meeting of the Board of Directors or a committee thereof which authorizes, approves, or ratifies such contract or transaction or solely because their votes are counted for such purpose if: (a) The material facts as to such relationship or interest and as to the contract or transaction are disclosed or are otherwise known to the Board of Directors or committee and the board or committee authorizes, approves, or ratifies such contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the directors are less than a quorum; or (b) The material facts of such relationship or interest and as to the contract of transaction are disclosed or otherwise known to the shareholders entitled to vote thereon and they authorize, approve, or ratify such contract or transaction by vote or written consent; or (c) The contract or transaction is fair and reasonable to the Corporation. 2. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or a committee thereof which authorizes, approves or ratifies such contract or transaction. ARTICLE VIII ------------ CORPORATE OPPORTUNITY --------------------- The officers, directors and other members of management of this Corporation shall be subject to the doctrine of "corporate opportunities" only insofar as it applies to business opportunities in which this Corporation has expressed an interest as determined from time to time by this Corporation's Board of Directors as evidenced by resolutions appearing in the Corporation's minutes. Once such areas of interest are delineated, all such business opportunities within such areas of interest which come to the attention of the officers, directors, and other members of management of this Corporation shall be offered first to the Corporation. In the event the Corporation declines to pursue any or all such business opportunities, the officers, directors and other members of management of this Corporation shall be free to engage in such areas of interest on their own and this doctrine shall not limit the right of any officer, director or other member of management of this Corporation (other than an officer, director, or member of management) from any duties which he may have to this Corporation. ARTICLE IX ---------- Indemnification of Officers, ---------------------------- Directors and Others -------------------- 1. To the full extent permitted by the Colorado Corporation Code, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a Director, Officer, employee, fiduciary or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, Officer, employee, fiduciary or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he conducted himself in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 2. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a Director, Officer, employee, fiduciary or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, Officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. 3. To the extent that a Director, Officer, employee, fiduciary or agent of the Corporation has been wholly successful on the merits or otherwise in defense of any action, suit or proceeding referred to in paragraphs 1 and 2 of this Article, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. 4. Any indemnification under paragraphs 1 and 2 of this Article (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the Director, Officer, employee, fiduciary or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs 1 and 2. Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of Directors who were not parties to such action, suit or pending, or (2) if such a quorum is not attainable, or, even if obtainable a quorum of disinterested Directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. 5. Expenses (including attorneys' fees) incurred in defending a civil or criminal action, suit or pending may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized in the manner provided in paragraph 4 of this Article upon receipt of an undertaking by or on behalf of the Director, Officer, employee, fiduciary or agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this section. 6. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a Director, Officer, employee, fiduciary or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this section. 7. In addition to the foregoing, the Corporation shall have the power to indemnify current or former directors, officers, employees and agents to the fullest extent provided by the laws of the State of Colorado. ARTICLE X --------- DIRECTOR LIABILITY ------------------ To the fullest extent permitted by the Colorado Corporation Code, as the same exists or may hereafter be amended, a director of this Corporation shall not be liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director. ARTICLE XI ---------- REGISTERED OFFICE AND REGISTERED AGENT -------------------------------------- The address of the initial registered office of the Corporation is 1800 Glenarm Place, Suite 700, Denver, Colorado 80202 and the name of the initial registered agent at such address is R. Steven Adams. Either the registered office or the registered agent may be changed in the manner permitted by law. ARTICLE XII ----------- INCORPORATOR ------------ The name and address of the incorporator is as follows: NAME ADDRESS Kim P. Castillo 1800 Glenarm Place, Suite 700 Denver, Colorado 80202 IN WITNESS WHEREOF, the above-named incorporator has signed these Articles of Incorporation this 22nd day of March, 1994. ----- ----- /s/ Kim P. Castillo ------------------- Kim P. Castillo STATE OF COLORADO ) )ss. COUNTY OF DENVER ) I, the undersigned, a Notary Public, hereby certify that on the 22nd ---- day of March, 1994, personally appeared before me, Kim P. Castillo, who being by ------ me first duly sworn, severally declared that she is the person who signed the foregoing document as incorporator, and the statements therein contained are true. WITNESS my hand and official seal. /s/ Colleen K. Overocker ------------------------ Notary Public My Commission Expires: 05/17/1995 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 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 EXHIBIT A 5. Designation of 10% Preferred Stock. The Corporation shall establish and reserve for issuance from its 5,000,000 authorized shares of Preferred Stock a class of preferred stock consisting of 500,000 shares to be known as the 10% Preferred Stock (the "10% Preferred Stock"). The 10% Preferred Stock shall have a stated value of $10.00 per share. The preferences, limitations and relative rights of the 10% Preferred Stock shall be as provided in this Section 5. A. Voting Rights. (1) Each outstanding share of the 10% Preferred Stock is entitled to one vote on each matter submitted to a vote of shareholders. The holders of the 10% Preferred Stock shall be entitled to vote on all matters voted upon by the holders of the Corporation's Common Stock. Unless otherwise required by law, the holders of the Common Stock and the holders of the 10% Preferred Stock shall vote as a single class on all matters submitted to a vote of shareholders. (2) The holders of the 10% Preferred Stock shall not be entitled to any rights of cumulative voting with respect to their shares. B. Preemptive Rights. No holder of the 10% Preferred Stock shall have any preemptive or similar right to acquire any additional unissued or treasury shares of stock or securities of any class or rights, warrants or options to purchase stock or scrip or securities in any kind, including shares or securities convertible into shares or carrying stock purchase warrants or privileges. C. Dividends. (1) Dividends shall accrue on the 10% Preferred Stock at the rate of ten percent (10%) per annum on the stated value of the 10% Preferred Stock and shall be paid quarterly on the first of each January, April, July and October, beginning July 1, 1998, to the record holder thereof on the 15th of the previous month, subject to the limitations contained within the statutes of the State of Colorado. Dividends not paid in any quarter shall accumulate until paid, with interest on the unpaid balance, if any, accruing simple interest at the rate stated above. Subject to the foregoing limitations, dividends may be paid out of any funds legally available for such purpose. (2) Dividends on the 10% Preferred Stock shall be declared and paid before dividends of any kind may be declared and paid on the Common Stock or any inferior class or series of stock and before distribution or any liquidation or distribution of any kind may be made upon the issued and outstanding Common Stock or any inferior class of stock. (3) Upon any redemption or conversion of the 10% Preferred Stock pursuant to paragraphs G and H below, the Corporation shall pay all accrued but unpaid dividends on the 10% Preferred Stock called for redemption or converted, as the case may be. The Corporation may pay such accrued but unpaid dividends either (i) in cash or (ii) by issuing shares of Common Stock at a price per share equal to the lesser of (a) $10.00 or (b) if a redemption or a conversion occurring with respect to shares of the 10% Preferred Stock for which the Corporation has given a Notice of Redemption (as that term is defined in subparagraph G(2), below), the Average Per Share Closing Bid Price (as defined below) for the five trading days immediately preceding the date on which the Notice of Redemption was first given to the holders of the 10% Preferred Stock called for redemption, or, if a conversion occurring with respect to shares of the 10% Preferred Stock for which the Corporation has not given a Notice of Redemption, the Average Per Share Closing Bid Price for the five trading days immediately preceding the date on which the Conversion Notice (as that term is defined in subparagraph H(3), below) was first given to the Corporation. (4) Upon payment by the Corporation of dividends on the basis described in subparagraphs C(1)-C(3), the holders of the 10% Preferred Stock shall have no further right to dividends and shall not participate in any manner in dividends declared and paid or other distributions on the Common Stock or any inferior class or series of stock. D. Liquidation Preference. In the event of the liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, the holders of the 10% Preferred Stock shall be entitled to receive, after payment by the Corporation of its debts and liabilities, the stated value of all shares of the 10% Preferred Stock in cash plus any all accrued but unpaid dividends out of the assets of the Corporation before any payment shall be made or any assets distributed to the holders of the Common Stock or any other inferior class or series of stock. If sufficient assets are not available to pay all holders of the 10% Preferred Stock in full, the available assets shall be distributed to the holders of the 10% Preferred Stock on a pro rata basis. Except as provided in this paragraph D, the holders of the 10% Preferred Stock shall not be entitled to receive any other payments from the Corporation in the event of the liquidation, dissolution or winding up of the affairs of the Corporation. E. Other Securities, Obligations. (1) Subject to any limitations contained in these Articles of Incorporation, the Board of Directors of the Corporation reserves the right to establish additional classes and/or series of capital stock of the Corporation and to designate the preferences, limitations and relative rights of any such classes and/or series; provided, however, that no such class and/or series may have preferences, limitations and relative rights which are superior to or senior to the preferences, limitations and relative rights granted to the holders of the 10% Preferred Stock. (2) At any time during which any shares of the 10% Preferred Stock are outstanding, the Corporation shall not incur any obligation or liability other than trade payables and other short-term indebtedness incurred in the ordinary course of business that is superior to or senior to the 10% Preferred Stock in any respects, including liquidation preferences. F. Capital Reorganization. If the Corporation shall at any time hereafter subdivide or combine its outstanding shares of Common Stock, declare a dividend payable in Common Stock, or in case of any capital reorganization or reclassification of the shares of Common Stock of the Corporation, the number of shares and stated value of the 10% Preferred Stock shall be adjusted appropriately to allow the holders of the 10% Preferred Stock, as nearly as reasonably possible, to maintain (i) the aggregate stated value of their 10% Preferred Stock and (ii) their pro rata interest in the Corporation and in the Common Stock upon conversion of the 10% Preferred Stock, that they had prior to any such subdivision, combination, stock dividend, reorganization or reclassification. G. Redemption. (1) The 10% Preferred Stock may be redeemed by the Corporation, in whole or in part, at any time for $10.00 per share (the "Redemption Price"). It is the Corporation's intent to use its best efforts to raise sufficient capital to both fund its operations and to permit it to redeem the 10% Preferred Stock as soon as is reasonably possible. In addition, if the Corporation completes a public offering of its securities that raises net proceeds of at least $5,000,000 (the "Public Offering") within nine months from the date on which the initial closing of the offering of the 10% Preferred Stock occurs (the "Closing Date"), then the Corporation shall redeem all of the outstanding 10% Preferred Stock. (2) The Corporation shall give not more than sixty (60) nor less than thirty (30) days notice (the "Notice of Redemption") of the date fixed for any redemption (as fixed, the "Redemption Date") of the 10% Preferred Stock by mailing the Notice of Redemption to the record holders of the 10% Preferred Stock to such holder's address as it appears on the records of the Corporation; provided, however, that the Corporation shall not be required to give notice of any redemption of the 10% Preferred Stock that occurs within nine months from the Closing Date. In the case of a partial redemption of the 10% Preferred Stock, the shares to be redeemed shall be selected in any manner the Corporation may determine. The Notice of Redemption shall be deemed given when it is deposited in the United States mail with sufficient postage affixed or when it is delivered to the record holder at such holder's address as it appears on the records of the Corporation. (3) On the Redemption Date, all rights of the holders of the 10% Preferred Stock called for redemption shall cease and terminate with respect to such shares except (i) the right to receive the Redemption Price upon surrender of the certificates representing the shares of the 10% Preferred Stock called for redemption and (ii) the right to receive payment of all dividends with respect to the shares of 10% Preferred Stock called for redemption which are accrued but unpaid on the Redemption Date. H. Conversion. (1) If the 10% Preferred Stock is not redeemed within nine months from the Closing Date, each share of the outstanding 10% Preferred Stock shall become convertible, at the election of the holder thereof (the "Conversion Right"), into the number of shares of Common Stock of the Corporation equal to $10.00 divided by the lesser of (i) $10.00 or (ii) 80% of the Average Per Share Closing Bid Price of the Corporation's Common Stock as calculated pursuant to the next sentence The "Average Per Share Closing Bid Price" shall be (a) if the conversion occurs with respect to shares of the 10% Preferred Stock for which the Corporation has given a Notice of Redemption, the average per share closing bid price for the Corporation's Common Stock for the five trading days immediately preceding the date on which the Notice of Redemption was first given to the holders of the 10% Preferred Stock called for redemption or (b) if the conversion occurs with respect to shares of the 10% Preferred Stock for which the Corporation has not given a Notice of Redemption, the average closing bid price for the five trading days immediately preceding the date on which the holder gives the Conversion Notice (as that term is defined in subparagraph H(3), below) to the Corporation. The Closing Bid Price for the Common Stock at any date shall be (i) the Closing Bid Price of the Common Stock as reported in The Wall Street Journal (or, if not so reported, as otherwise reported by The Nasdaq Stock Market or, (ii) in the event that the Common Stock is listed on a stock exchange or on the Nasdaq National Market (or other national market), the Closing Bid Price shall be the closing price on the exchange or the Nasdaq National Market (or other national market), as the case may be, as reported in The Wall Street Journal (or, if not so reported, as otherwise reported by the stock exchange, Nasdaq or other national market). In the event that there is no reported Closing Bid Price or sale price, as the case may be, for a given day, the Closing Bid Price or sale price, as the case may be, for that day shall be deemed to be the Closing Bid Price or sale price, as the case may be, for the first day preceding such day for which there was a reported Closing Bid Price or sale price, as the case may be. (2) The Conversion Right shall expire and terminate five (5) days prior to the Redemption Date. In the case of a partial redemption of the 10% Preferred Stock, the Conversion Right shall so expire and terminate only with respect to the shares of the 10% Preferred Stock called for redemption. (3) In order to exercise the Conversion Right, the holder of the 10% Preferred Stock to be converted shall give written notice (the "Conversion Notice") to the 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. EX-4.12 3 WARRANT AGREEMENT EXHIBIT 4.12 FORM OF WARRANT TO PURCHASE COMMON STOCK OF ONLINE SYSTEM SERVICES, INC. ISSUED TO DECEMBER 1997 AND MARCH 1998 PRIVATE INVESTORS Warrant to Purchase _______ Shares WARRANT TO PURCHASE COMMON STOCK OF ONLINE SYSTEM SERVICES, INC. THIS CERTIFIES THAT for value received ____________________ is entitled, subject to the terms and conditions hereinafter set forth, to purchase from ONLINE SYSTEM SERVICES, INC., a Colorado corporation (the "Company"), __________ fully paid and non-assessable shares of Common Stock of the Company (the "Common Stock"), upon presentation and surrender of this Warrant with the Subscription Form duly executed, at any time during the term hereof, at the principal office of the Company or at such other office as shall have theretofore been designated by the Company by notice pursuant hereto and upon payment therefor of the Purchase Price, in lawful money of the United States of America, determined as set forth below. The term of this Warrant shall commence on the date hereof, and terminate, if not exercised prior thereto, at 5:00 p.m. Mountain Time, on ____________________ (the "Expiration Date"). This Warrant is one of a series of Warrants issued in connection with the offering of Units (the "Units") of the Company each comprised of 10,000 shares of the Company's 10% Preferred Stock, 2,500 shares of the Company's Common Stock, and 2,000 of the Company's Common Stock Purchase Warrants pursuant to a Private Placement Memorandum dated December 4, 1997 (the "Memorandum"). This Warrant is subject to the following terms and conditions: 1. (a) The purchase rights represented by this Warrant are exercisable at any time after the initial closing date of the offering contemplated by the Memorandum and prior to 5:00 p.m. Mountain Time on the Expiration Date, at the option of the registered holder hereof (the "Holder"), in whole or in part (but not as to a fractional share of Common Stock). Exercise of this Warrant shall be made by the surrender hereof by the Holder to the Company at its principal office together with (i) the attached Subscription Form designating the number of shares of Common Stock being purchased, (ii) a certified check or cash in payment for such shares and (iii) a letter of transmittal setting forth the computation of the amount of said payment. The Company shall thereafter promptly (in any event within seven (7) business days after such exercise) issue certificates for the number of shares of the Common Stock of the Company purchased at the Purchase Price in effect at the time of such exercise, together with cash in lieu of any fraction of a share. The Company shall thereupon cancel this Warrant; and in the event that less than the entire number of shares purchasable are purchased, shall issue a new Warrant for the number not so purchased. (b) (1) Provided the Company's Common Stock shall then be traded on an exchange or quoted on the Nasdaq National Market or the Nasdaq Small Cap Market or otherwise traded as described in Section 1(b)(4) hereof, the holder of this Warrant shall have the right to require the Company to convert this Warrant (the "Conversion Right"), at any time after the initial closing date of the offering contemplated by the Memorandum and prior to its expiration into shares of Common Stock as provided for in this Section 1(b). Upon exercise of the Conversion Right, the Company shall deliver to the Holder (without payment by the Holder of any exercise price) that number of shares of Common Stock equal to the quotient obtained by dividing (x) the value of this Warrant at the time the Conversion Right is exercised (determined by subtracting the aggregate Purchase Price (as determined below) for the Warrant shares being exercised and in effect immediately prior to the exercise of the Conversion Right from the aggregate Fair Market Value (as determined below) for the Warrant shares being exercised immediately prior to the exercise of the Conversion Right) by (y) the Fair Market Value of one share of Common Stock immediately prior to the exercise of the Conversion Right. (2) The Conversion Right may be exercised by the Holder by delivering the attached Subscription Form to the Company at its principal office designating (i) the total number of shares of Common Stock the Holder will purchase pursuant to such conversion and (ii) a date not less than five (5) nor more than twenty (20) business days from the date of the Conversion Notice for the closing of such purchase, together with a letter of transmittal setting forth the computation of the number of shares to be so purchased. (3) At any closing under section 1(b)(2) hereof, (i) the Holder will surrender this Warrant, (ii) the Company will deliver to the Holder a certificate or certificates for the number of shares of Common Stock issuable upon such conversion, together with cash, in lieu of any fraction of a share, and (iii) the Company will deliver to the Hholder a new Warrant representing the number of shares, if any, with respect to which the Warrant shall not have been exercised. (4) "Fair Market Value" of a share of Common Stock as of a particular date (the "Determination Date") shall mean: (i) If the Company's Common Stock is traded on an exchange or is quoted on the Nasdaq National Market, or the Nasdaq Small Cap Market, then the average closing or last sale prices, respectively, reported for the ten (10) business days immediately preceding the Determination Date. (ii) If the Company's Common Stock is not traded on an exchange or on the Nasdaq National Market, or the Nasdaq Small Cap Market, but is traded in the over-the counter market, then the average of the closing bid and asked prices reported for the ten (10) business days immediately preceding the Determination Date. 2. The purchase price for each share of Common Stock purchasable pursuant to the exercise of this Warrant shall be Fifteen Dollars ($15.00) per share (the "Initial Purchase Price") or the adjusted price, if applicable, determined as set forth in Section 8 hereof. The Initial Purchase Price, and from time to time the number of shares of Common Stock subject to purchase hereunder are subject to adjustment in certain circumstances provided for below. The purchase price, as defined above, is hereinafter referred to as the "Purchase Price". (a) In case the Company shall (i) pay a dividend in shares of its capital stock (other than an issuance of shares of capital stock to holders of Common Stock who have elected to receive a dividend in shares in lieu of cash), (ii) subdivide its outstanding shares of Common Stock, (iii) reduce, consolidate or combine its outstanding shares of Common Stock into a smaller number of shares, or (iv) issue by reclassification of its shares of Common Stock any shares of the Company, the number of shares of Common Stock issuable upon exercise of this Warrant shall be the number of shares of Common Stock of the Company which the Warrant Holder would have owned or would have been entitled to receive after the happening of any of the events described above had this Warrant been exercised immediately prior to the happening of such event. Such adjustment shall be made successively whenever any such effective date or record date shall occur. An adjustment made pursuant to this subsection (a) shall become effective retroactively, immediately after the record date in the case of a dividend and shall become effective immediately after the effective date in the case of a subdivision, reduction, consolidation, combination or reclassification. (b) In case of any consolidation of the Company with or merger of the Company with or into another corporation or in case of any sale, transfer or lease to another corporation of all or substantially all of the property of the Company, the Company or such successor or purchasing corporation, as the case may be, shall execute an agreement that the Holder of a Warrant shall have the right thereafter upon payment of the Initial Purchase Price in effect immediately prior to such action to purchase upon exercise of the Warrant the kind and amount of shares and other securities and property which the Holder would have owned or would have been entitled to receive after the happening of such consolidation, merger, sale, transfer or lease had the Warrant been exercised immediately prior to such action. The Company shall give prompt written notice of the execution of any such agreement to the Holder of each Warrant at the address of such Holder as shown on the records of the Company. Such agreement shall provide for subsequent adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this section 2, after the happening of such consolidation, merger, sale, transfer or lease. The provisions of this subsection 2(b) shall similarly apply to successive consolidations, mergers, sales, transfers or leases. 3. In case at any time: (a) The Company shall declare any cash dividend on its Common Stock at a rate in excess of the rate of the last cash dividend theretofore paid; (b) The Company shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than regular cash dividends) to the holders of its Common Stock; (c) The Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (d) There shall be any capital reorganization, or reclassification of the capital stock of the Company or consolidation or merger of the Company with, or sales of all or substantially all of its assets to, another corporation; or (e) There shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of said cases, the Company shall give written notice, by first class mail, postage prepaid, addressed to the Holder at the address of such holder as shown on the books of the Company, of the date on which (1) the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights, or (2) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, or winding up, as the case may be. Such written notice shall be given at least 20 days prior to the action in question and not less than 20 days prior to the record date or the date on which the Company's transfer books are closed in respect thereto. 4. If any event occurs as to which, in the sole opinion of the Board of Directors of the Company, the other provisions of this Warrant are not strictly applicable or if strictly applicable would not fairly protect the rights of the Holder in accordance with the essential intent and principles of such provisions, then the Board of Directors shall make such adjustment in the application of such provisions as may be necessary, in the sole judgment of the Board of Directors, in accordance with such essential intent and principles, to protect such rights as aforesaid. 5. The Company covenants and agrees that all shares which may be issued upon the exercise of this Warrant will, upon issuance, be duly and validly authorized and issued, fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issue thereof; and without limiting the generality of the foregoing, the Company covenants and agrees that it will, from time to time, take all such action as may be requisite to assure that the par value or stated value per share of the Common Stock to be acquired upon the exercise of this Warrant is at all times equal to or less than the then effective Purchase Price per share of the Common Stock issuable pursuant to exercise of this Warrant. The Company further covenants and agrees that during the period within which this Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of the issue upon exercise of this Warrant a sufficient number of shares of its Common Stock to provide for such exercise. 6. (a) The Holder represents that he is acquiring this Warrant and, in the absence of an effective registration statement under the Securities Act of 1993 (the "1933 Act") for the shares of Common Stock issuable hereunder, such shares for the purpose of investment and not with a view to or for sale in connection with any distribution thereof. The Holder and the holder of any shares of Common Stock issued upon exercise hereof, by his acceptance hereof, agrees that he will notify the Company in writing before selling or otherwise disposing of this Warrant or any shares of Common Stock issued to him upon exercise hereof, describing briefly the nature of any such sale or other disposition, and no such sale or other disposition shall be made unless and until (i) the Company has received an opinion of counsel reasonably acceptable to it that no registration (or perfection of an exemption) under the 1933 Act is required with respect to such sale or disposition (which opinion may be conditioned upon the transferee's assuming the Holder's obligation under this section 6) or (ii) an appropriate registration statement with respect to such Warrant or such Common Stock, or both, has been filed with the Securities and Exchange Commission (the "Commission") and declared effective by the Commission. The Company may require that this Warrant and certificates representing shares of Common Stock issued upon exercise hereof be stamped or imprinted with an appropriate legend reflecting the foregoing restrictions. For the purposes of this section 6, the term "Securities" shall include this Warrant and the shares of Common Stock issued or issuable upon the exercise hereof. (b) The restrictions imposed by this section 6 on the transfer of the Securities shall terminate as to any portion of the Securities when: (i) Such portion of the Securities shall have been effectively registered under the 1933 Act and sold by the holder thereof in accordance with such registration or exemption; or (ii) Written opinions to the effect that such a registration is no longer required or necessary under any Federal or State law or regulation of governmental authority shall have been received from legal counsel for the Company and counsel for the holder of such portion of the Securities; or, if a favorable opinion is obtained from holder's counsel, and counsel for the Company declines to render such an opinion, upon the holder's undertaking to indemnify the Company, on terms satisfactory to the Company, against all liability or loss the Company may sustain in connection with such transfer. Whenever the restrictions imposed by this section 6 shall terminate, as provided above, any holder of the Securities as to which such restrictions shall have terminated shall be entitled to receive promptly from the Company, without expense to such holder, a new certificate, not bearing the restrictive legend referred to in clause (a) hereof. 7. The Holder acknowledges and agrees that the Company has no future obligation to register this Warrant or the shares of Common Stock issued or issuable upon the exercise of this Warrant under the 1933 Act, or under any state securities laws except as is set forth in the Registration Rights Agreement, a copy of which is Exhibit A to the Memorandum, executed by the Company in connection with the issuance of the Units. 8. This Warrant is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company, for new warrants of like tenor and date representing in the aggregate the right to purchase the number of shares purchasable hereunder, each of such new Warrants to represent the right to purchase such number of shares as shall be designated by said Holder at the time of such surrender. Subject to section 6 hereof, this Warrant and all rights hereunder are transferable in whole or in part by the Holder, in person or by duly authorized attorney, upon surrender of this Warrant duly endorsed, at the principal office of the Company. 9. Upon the receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor, in lieu of this Warrant. 10. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first-class postage prepaid or delivered to a telegraph office for transmission: (a) If to the Holder at such address as may have been furnished by such holder to the Company in writing; and (b) If to the Company at such address as may have been furnished by the Company to the Holder of this Warrant in writing. 11. This Warrant shall be binding upon any successors or assigns of the Company. 12. This Warrant shall be construed in accordance with and governed by the laws of the State of Colorado. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed and delivered as of the date set forth below by one of its officers thereunto duly authorized. Dated: ____________________. ONLINE SYSTEM SERVICES, INC. By______________________________________ R. Steven Adams Its: President ______________________________ SUBSCRIPTION FORM To be signed only upon exercise of Warrant The undersigned the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, __________ of the shares of Common Stock of ONLINE SYSTEM SERVICES, INC. to which such Warrant relates and herewith makes payment therefor in cash or by certified check or through the and requests that the certificates for such shares be issued in the name of, and be delivered to, ______________________________, the address for which is set forth below the signature of the undersigned. If this transaction relates to the exercise of the Conversion Right, the closing of such purchase shall take place at the Company's offices on ____________________ (not less than five (5) nor more than twenty (20) business days from the date of this Subscription Form). Dated: ____________________ ________________________________________ (Signature) ________________________________________ ________________________________________ (Address) ________________________________________ ____________________________________________ TRANSFER FORM To be signed only upon transfer of Warrant FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto _______________ ______________________________ the right to purchase shares of Common Stock of ONLINE SYSTEM SERVICES, INC. to which the within Warrant relates and appoints ______________________________, attorney, to transfer said right on the books of ONLINE SYSTEM SERVICES, INC. with full power of substitution in the premises. Dated: ____________________ ________________________________________ (Signature) ________________________________________ ________________________________________ (Address) EX-10.5 4 LONG TERM EQUIPMENT SALE EXHIBIT 10.5 LONG-TERM EQUIPMENT SALE AND ---------------------------- SOFTWARE LICENSE AGREEMENT -------------------------- LONG-TERM EQUIPMENT SALE AND SOFTWARE LICENSE AGREEMENT ("Agreement") dated this third day of October, 1997 by and between Online System Services, Inc. ("OSS") a Colorado corporation with its principal place of business located at 1800 Glenarm Place, Denver, Colorado and FiberTel TCI/2/ S.A., an Argentinean corporation, with its principal place of business located at Amenabar 23, 1414 Buenos Aires Argentina ("FiberTel"). WHEREAS, OSS is a company generally engaged in the business of providing Internet related equipment software and services such as hardware and software selection, installation, initial training, consulting and general assistance in the implementation and operation of a turn-key Internet Service Provider ("ISP") business as well as documentation and supporting materials for administration, marketing, sales and web site design and development support for ISP systems; WHEREAS, OSS provides and/or has the right to license a package of OSS proprietary programs developed by OSS including but not limited to the "Community Access Partner" ("CAP") Web site software, with future versions to include, without limitation, "Electronic Banking" and "Electronic Commerce" functionality, and user documentation (hereinafter collectively described as the "Application Program"). The basic CAP web site software is a multi-faceted software program allowing the operator to provide customer service information, link to pertinent local, national and international World Wide Web sites as well as develop local user generated content. The CAP software also allows operators to develop advertising revenues. Schedule "G" details the CAP software functionality as of the date of this Agreement as well as the future enhancements features and associated release dates. WHEREAS, OSS sells the non-proprietary software, Equipment, and related materials and services as specifically set forth on Schedules "A" (except CAP and other proprietary software to be released in the future), "B" and "C", respectively attached hereto and made a part hereof and which may be modified by the parties from time to time (collectively referred to as the "Equipment") for use with the Application Program. The Equipment and the Application Program are hereinafter collectively referred to as the "System"; WHEREAS, FiberTel has licensed the Application Program (the "Software License") and purchased certain Equipment from OSS to establish an Internet point of presence, to design web pages for customers to perform such services and, generally, to enable FiberTel to become an Internet Service Provider to its own customers in Argentina (the "Territory"); and to that end have incorporated the essential terms of their agreement into a "Memorandum of Agreement" dated August 8, 1997 [the "MOA"]. NOW THEREFORE, the parties, intending to be legally bound, hereby agree as follows: 1. PURPOSE: OSS shall provide to FiberTel all the software and services and, ------- generally, all the know-how and software technology owned, developed, or licensed to OSS, to develop the Internet content related business in Argentina. OSS further undertakes to channel all its Internet content related business activities in the Territory via FiberTel, subject to the provisions set forth in section 16.6. 1 2. TERM: The term of the Agreement shall commence on the date set forth above, ---- and shall continue for a period of five (5) years unless sooner terminated in accordance with the terms of this Agreement including but not limited to Section 16 hereunder (the "Term"). 3. PROVISIONS APPLICABLE TO EQUIPMENT SALE AND PURCHASE - - ------------------------------------------------------- 3.1 Purchase and Sale: Pursuant to the MOA, FiberTel has previously purchased --------------------- from OSS the Equipment set forth as items 1-46 on Schedule "B" (attached hereto) along with the materials and services set forth on Schedule "C" (attached hereto), which delivery is partially pending at the time of execution of this Agreement, at the price set forth on Schedule "B" ("Equipment Purchase Price"). 3.2 Payment: ----------- (a) Receipt of payment of fifty (50%) percent of the Equipment Purchase Price for items 1 - 46 of Schedule "B" and the items on Schedule "C" is hereby acknowledged by OSS. The remaining fifty (50%) percent shall be paid to OSS upon Acceptance by FiberTel of the Equipment which shall be deemed to be granted within thirty (30) days of delivery by OSS, unless within that thirty (30) days FiberTel provides OSS with documentation that OSS has failed to comply with a material term of the MOA, in which event payment will be made within ten (10) days of OSS' rectification of such material term. For purposes hereof, Acceptance shall mean that either: (i) all of the Equipment has been delivered and complies with and functions in accordance with the acceptance criteria set forth in Item 6 of Schedule "D" hereto; or (ii) in the case of a "partial delivery", the accepted Equipment complies with and functions in accordance with such criteria and has been placed in commercial use by FiberTel for purposes other than testing. (b) OSS shall provide a written invoice to FiberTel for all amounts due. No rights in or title to any separately invoiced Equipment shall pass to FiberTel unless and until FiberTel has fully satisfied all payments required to be made for such Equipment already purchased. Notwithstanding anything to the contrary contained herein, in the case of FiberTel's Acceptance of a Partial Delivery of Equipment, FiberTel agrees to make partial payments to OSS based on the amounts set forth on Schedule "B" for the respective pieces of Equipment. 3.3 Shipping: The cost of all shipping charges, including insurance, shall be ------------ borne by FiberTel. 4. PROVISIONS APPLICABLE TO LICENSE OF THE APPLICATION PROGRAM ----------------------------------------------------------- 4.1 Grant of Software License: During the Term in the Territory and subject ----------------------------- to FiberTel's compliance with the terms and conditions herein, OSS hereby grants to FiberTel a Software License granting FiberTel the right to use and execute the Application Program and its future releases and versions throughout the Term, with no further costs to FiberTel than those set forth in Section 7. Except for the license herein granted to FiberTel, it is hereby acknowledged and agreed to by the parties that as between OSS and FiberTel all rights of any nature whatsoever in and to the Application Program and any other intellectual property relating to Cable Access America are retained exclusively by OSS. The License shall be non-exclusive to FiberTel, subject to the provisions set forth in Section 1 and 16.6. 4.2 Reservation of Rights: The Software License may not, under any ------------------------- circumstances whatsoever be considered a transfer, either direct or indirect of the intellectual and/or industrial property rights of the licensed software and FiberTel shall not have the right to assign, sub-license, rent, lease, sell, encumber, or otherwise transfer ("Assign") any of the rights granted hereunder. Notwithstanding the foregoing, FiberTel shall have the right to Assign any of the rights granted hereunder to any "Affiliate". For 2 purposes hereof, Affiliate shall mean any person or entity controlling, controlled by or under common control with FiberTel. Any person or entity owning at least twenty (20%) percent of the equity interest in an entity shall be deemed to control that entity. FiberTel hereby waives any "moral" or other rights of authorship (droit moral) which may accrue or have accrued to it under any laws of any jurisdiction, including, without limitation, any right to publish or withhold publication, to be or not be associated with the Application Program or to preserve the integrity of the Application Program (the droit de divulgation, droit a la paternite and droit de retrait ou de repentir, respectively). Notwithstanding the above, in case that FiberTel enhances, modifies or jointly develops with OSS any of the Application Program, as between OSS and FiberTel, ownership of such modifications, enhancements or developments rest jointly with the parties. Regarding the non proprietary software provided by OSS to FiberTel hereunder ownership rest exclusively with FiberTel. Except for the rights expressly granted herein, any and all rights in and to the Application Program are hereby reserved to OSS. 4.3 Continued Licensing: Notwithstanding anything contained in Section 16.3 ----------------------- to the contrary, upon the termination of this Agreement for any reason, except FiberTel's material breach of this Agreement, or in the event OSS ceases to do business during the Term hereof, FiberTel shall obtain the source code developed by OSS for the Application Program, and shall have the right to modify it and utilize it subject to the rates set forth below. In that case, OSS agrees to provide FiberTel with a copy of all source code relating to the Application Program. OSS further agrees to provide that the license to FiberTel devolves to OSS' successors in interest.
Date of Termination Annual License Fee ------------------------------------------------------------------- After the beginning of Year 4, or more, of the Term $ 20,000 After the beginning of Year 3 of the Term $ 40,000 After the beginning of Year 2 of the Term $ 80,000 After the beginning of Year 1 of the Term $160,000
Should the Agreement be terminated by OSS or OSS's material breach of this Agreement, FiberTel shall not be obliged to pay any annual License Fee for the continued licensing of the Application Program. In case of expiration of the Term or termination of this Agreement, the parties undertake to agree a fair market value for the continuous upgrading of the Application Program licensed pursuant to this provision. In case of the parties' failure to reach an agreement on the above mentioned fair market value, this value will be determined by one of the consultants set forth in Schedule I. 5. RESPONSIBILITIES OF FIBERTEL: ---------------------------- 5.1 Ancillary Services: FiberTel shall be solely responsible for the ---------------------- provision of telecommunication services provided by the local telephone company, interchange carriers and any other telecommunications company which may be necessary for the FiberTel's use of the System. In addition, FiberTel shall be responsible for insuring for the provision of adequate 110/220 volt power circuits for the System, including backup (uninteruptible power supply, if desired) power. 3 6. OSS INSTALLATION - - ------------------- 6.1 Installation Plan and Acceptance: With respect to Equipment purchased by ------------------------------------ FiberTel from OSS, OSS agrees that it shall promptly provide on-site installation assistance comprised of the installation and other services described in the Installation Plan set forth in Schedule "D" attached hereto and such other services as the parties mutually agree are necessary to permit FiberTel to begin use of the System in accordance with such Installation Plan in compliance with the timetable set forth therein. An OSS technician shall be responsible to demonstrate to FiberTel the successful material operation of all functions of the installed System prior to certifying in writing that the installation has been completed. 6.2 Passage of Title/Risk of Loss/Equipment Delivery: Title to the System ---------------------------------------------------- shall not pass to FiberTel until the issuance of the certification of the Installation Plan and payment of the Equipment Purchase Price and any related installation fees due and owing. Until such time as title passes to FiberTel hereunder, OSS shall bear the risk of loss or damage to the System, or any part thereof. Unless otherwise determined by OSS, OSS shall deliver all Equipment to FiberTel F.O.B. OSS' or manufacturer's principal place of business, whichever is least expensive. OSS reserves the right to make partial deliveries and to ship the Equipment as it becomes available. Delivery dates are approximate. FiberTel shall provide an acceptable installation and operation environment suitable for computer equipment. 6.3 FiberTel Responsibilities: FiberTel shall promptly perform all ----------------------------- responsibilities it is assigned under the Installation Plan. FiberTel shall also furnish to OSS, free of charge, for the period of time required for installation of the System: 1) access during normal business hours to the location in which the Equipment is to be placed; 2) the cooperation of a management-level employee (hereinafter the Project Leader) knowledgeable in aspects of FiberTel's business and technical operations. 7. OSS SUPPORT ----------- 7.1 FiberTel Support: OSS agrees to furnish FiberTel with on-going support. -------------------- The parameters of such on-going support and the establishment of a Buenos Aires office by OSS are defined in Schedule "E" attached hereto. 7.2 Training: Prior to commencing use of the System, FiberTel and OSS shall ------------ determine a mutually acceptable training schedule during normal business hours for OSS training of FiberTel's Personnel ("Training Services"), as specified in the MOA. During the Training Services, FiberTel shall provide employees who are technicians familiar with computers, computer networks, communications and data protocols and who shall be competent to handle routine questions from current and potential customers obtaining Internet access from FiberTel. OSS will provide FiberTel and or its chosen representative with said training set forth in Schedule "F" attached hereto. FiberTel shall be responsible for training on FiberTel's internal systems used in conjunction with the Application Program. Schedule "F" of this Agreement identifies what ongoing training will be provided at OSS' expense. 7.3 Marketing Support: OSS shall provide FiberTel with pre-existing and --------------------- ongoing marketing support materials developed for other markets at no additional cost and OSS shall use best efforts to effect delivery of such materials within two (2) weeks of development. 4 7.4 OSS Professional Management and Intellectual Property Fees: In -------------------------------------------------------------- consideration of the rights and licenses granted hereunder, FiberTel shall pay to OSS: (a) The following percentage of all "Internet Access Gross Receipts" which shall be defined as all fees received by FiberTel or its Assignees attributable to the provision of "Internet Access" to be defined for the purpose of this Agreement as dial-up, telco return and two way cable modem Internet residential access revenues (including residential webhosting revenues) minus uncollectible billings, equipment related revenues (to be calculated based on a three year amortization period for the equipment - i.e. cable modem costs), installation charges, value added, sales and other transactional taxes (other than those taxes which FiberTel is legally obligated to pay on its own behalf):
Contract Year Billed Percentage of Gross Receipts -------------------- ---------------------------- Year One 2% Year Two 2% Year Three 1% Year Four 1% Year Five 1%
(b) Eleven (11%) Percent of all "Content Related Gross Receipts" which shall be defined as all fees received by FiberTel or its Assignees attributable to all content directly related activities, including but not limited to sponsorships, electronic advertising, electronic banking and electronic commerce minus custom software and web-design development cost, uncollectible billings, installation charges, value added, sales and other transactional taxes (other than those taxes which FiberTel is legally obligated to pay on its own behalf). OSS's rights to receive payment of the percentage foreseen in this paragraph is conditioned upon the use by FiberTel of OSS' proprietary software. (c) In addition, FiberTel shall be responsible for payment to OSS of those percentages of Internet Access Gross Receipts and Content Related Gross Receipts set forth above for any expansion of FiberTel's offering of the OSS products and services to the Affiliates. 7.5 Escrowed OSS Professional Management and Intellectual Property Fees: The ----------------------------------------------------------------------- Professional Management and Intellectual Property Fee of US$170,000 paid into an escrow account by FiberTel for the benefit of OSS pursuant to Section 4.3 of the MOA shall be released to FiberTel upon the full execution of this Agreement. 7.6 Additional Professional Management Fees: Pursuant to Section 4.4 of the ------------------------------------------- MOA, FiberTel has agreed to pay to OSS One Hundred Sixty Thousand ($160,000) U.S. Dollars, in consideration for the rendition by OSS of the additional Professional Management Service set forth on Schedule F of the MOA. OSS hereby acknowledges receipt of Fifty (50%) percent of such payment. The remaining fifty (50%) percent shall be paid by FiberTel to OSS in scheduled installments upon the completion of the individual services listed in Schedule "E of the MOA. Such payments shall be made in the Argentine Peso (the legal currency in force as of the date hereof), or such other legal currency that may be in force at the time payment is due to OSS hereunder, equivalent of the amounts set forth in U.S. Dollars and are net of any and all value added, sales or transactional taxes (other than those taxes which FiberTel is legally obligated to pay on its own behalf), duties, customs, deductions or withholdings or any other 5 monies required to be withheld by any other government regulation which FiberTel shall bear on its own account and pay. 7.7 Payment of Professional Management and Intellectual Property Fee: The -------------------------------------------------------------------- Professional Management and Intellectual Property Fees provided for in Section 6.4 shall be paid by FiberTel on or before the forty-fifth day following each month for Gross Receipts collected by FiberTel, with respect to the FiberTel Business during the previous month. 8. MANNER OF PAYMENT: ----------------- All payments required to be made hereunder shall be made in the Argentine Peso and shall be payable by electronic wire transfer to OSS' account at the Argentine Bank of OSS' choice or, at OSS' election, to OSS' account at NORWEST BANK, COLORADO, N.A., Account #101 8048688, ABA #102000076. OSS, or its Argentinean affiliate, shall provide a written invoice to FiberTel for all amounts due. FiberTel will provide OSS with a statement of revenues and expenses as set forth in this Agreement on or before the thirtieth day following each month of FiberTel business. 9. TAXES ----- 9.1 General taxes: Except as provided in Section 7.6, FiberTel shall have the ----------------- right to deduct the amount of any withholding taxes, value added taxes, sales and other transactional taxes (other than those taxes which FiberTel is legally obligated to pay on its own behalf) from the monies due to OSS hereunder; provided, however, that FiberTel shall furnish to OSS, at FiberTel's expense, the following information and documents: (a) an original receipt from taxing authority with respect to the tax paid (and if such receipt is in a language other than English, a certified English translation thereof); (b) a report setting forth the fees with respect to which the tax is paid, including the statutory citations and general description of the provision; and (c) such other information as OSS may from time to time reasonably request to evidence OSS' right to credit such tax against its income tax liability in the United States. 9.2 Stamp Tax: The Stamp tax imposed by the Argentine Government outside the ------------- city of Buenos Aires shall be jointly borne by the parties on a 50/50 basis. 10. AUDITS/INSPECTIONS ------------------ FiberTel and its Assignees shall prepare and maintain complete and accurate records of all matters directly relating to this Agreement, in accordance with generally accepted accounting principles, on a calendar annual basis, throughout the Term and for not less than two years thereafter. During each calendar year of the Term, and within one year after the expiration of this Agreement, OSS, or its designated representative, may inspect and audit such books and records, once per year, upon at least sixty (60) business days prior notice to FiberTel for the purpose of verifying and confirming the accuracy of the payments made to OSS. Under no circumstance shall OSS be entitled to audit the books and records of FiberTel corresponding to the second precedent year which will be considered accepted if not challenged in due time. In the event that any audit reveals any error in the calculation of the amounts due to OSS, FiberTel shall immediately pay or be refunded the difference unless FiberTel contests such audit in good faith. In the event that the amount due to OSS exceeds five (5%) percent of the total amount due to OSS for such audited period, FiberTel shall pay the costs associated with the audit unless FiberTel contests such audit in good faith. In the event FiberTel contests such audit, the dispute shall be subject to Section 18.5 hereunder. 6 11. FORCE MAJEURE ------------- 11.1 If OSS' or FiberTel's performance of any of its obligations hereunder are delayed or impaired by reason of any Act of God, civil disturbance, strike, adverse weather condition, inability to arrange for or delays in transportation, unavoidable casualty, inability to acquire or delays in acquiring any component from a manufacturer or supplier, inability to obtain or delays in obtaining any permits or any law, rule or order of any governmental agency or official or any cause not reasonably within OSS' or FiberTel's control including without limitation the non-renewal or termination of or inability to obtain an OSS license of any of the Application Program, and not due to any fault, neglect, act or omission on the part of OSS or FiberTel, then OSS or FiberTel, as the case may be shall be entitled to an extension of time for completion of same for a period equivalent to the time lost by reason thereof; provided, however, that such party gives the other party notice thereof within five (5) business days (unless circumstances require immediate notification) of the commencement of such claim of delay or impairment. In the event any delay or impairment continues for a period of one month, either party shall have the right to terminate this Agreement in accordance with Section 16 below. 11.2 Withdrawal and Replacement: Subject to Section 11.1 above, and ------------------------------- notification to and approval by FiberTel, at anytime during the Term, OSS shall have the right to withdraw the Application Program or any component and upon FiberTel's consent replace same with another comparable application program. 12. INSURANCE: Prior to commencement of any work associated with the --------- Installation Plan, OSS shall be responsible for the procurement of adequate liability insurance and worker's compensation insurance with limits of no less than $1,000,000 per each casualty along with a certificate of insurance evidencing same, naming FiberTel as additional insured. OSS shall maintain the insurance for as long as the Equipment is utilized. 13. PERMITS: FiberTel and OSS shall jointly, at FiberTel's sole cost, obtain all ------- consents, licenses, permits, approvals, authorizations, and inspections from Argentine federal, state, and local governmental authorities, agencies, or officials required for the execution and completion of the installation and construction work to be performed hereunder. FiberTel and OSS shall also be responsible for and correct any violations of any such laws resulting from or in connection with their performance of the work hereunder. FiberTel and OSS shall furnish each other such proof of its compliance as either party may reasonable request by giving the other party notice thereof. 14. CONFIDENTIALITY/PUBLIC DISCLOSURE/PROPRIETARY RIGHTS: ---------------------------------------------------- The parties hereto agree to execute a Non-Disclosure Agreement substantially in the form of Schedule "H" attached hereto. 14.1 Public Disclosure: OSS and FiberTel shall obtain the others consent ---------------------- prior to making any press release, announcement or other public disclosure concerning this Agreement, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, each party shall be free to discuss with third parties Internet services and the design and development of ISP business, subject to the Non-Disclosure Agreement between the parties, and to Section 16.6 hereunder. 7 14.2 Proprietary Rights: As between FiberTel and OSS, FiberTel acknowledges ----------------------- that OSS is the sole owner of all "System Information", defined as all proprietary information of OSS relating to the System or OSS' services, and FiberTel shall not, by reason of disclosure or access to any System Information during the course of the parties' relationship or otherwise, acquire any right, title, or interest in or to any System Information. No license, or other right in or to the System Information is intended to be granted to FiberTel pursuant to this Agreement or otherwise and no license or other right shall be incorporated herein by reference, implication, or any other means with respect to or under any invention, patent, copyright, trademark, (or any pending application for same) trade secret, or other proprietary right contained in or in any way relating to the System Information disclosed pursuant to this Agreement or to which FiberTel may be given or have access. FiberTel shall not itself, nor shall it permit, by way of carrying out its reasonable commercial efforts, any third parties to remove any copyright except as specifically authorized hereunder. 15. WARRANTIES AND INDEMNITIES/SPECIFICATIONS AND CAPACITY ------------------------------------------------------ 15.1 Services Warranty: OSS warrants that the services to be supplied under ---------------------- this Agreement will be provided by qualified senior technical personnel, agreed to by FiberTel in advance, in a professional and timely manner and will conform to the highest generally accepted industry standard practices. 15.2 Assignment of Warranty: OSS hereby assigns to FiberTel (to the extent --------------------------- OSS has the right to so assign) the benefits of any warranties or guarantees provided to OSS by the manufacturer(s) of the System or any parts, replacements, or additional units and agrees to provide a detailed description of same to FiberTel within thirty (30) days as of the date hereof. Said assignment is not intended to deprive OSS of its rights under said warranties and shall not be construed to do so. 15.3 Compatibility: ------------------ a. OSS warrants and represents that the Equipment being sold to FiberTel by OSS and the Software being Licensed to FiberTel by OSS hereunder are compatible. b. FiberTel acknowledges that certain software and equipment may not be compatible with the System and FiberTel therefore agrees that it shall not use any equipment on which the Application Program is run other than the Equipment, the Application Program and other software provided hereunder without first consulting OSS. In the event that FiberTel fails to inform OSS of such use, any damages to the Equipment or otherwise as a result of such use shall be borne by FiberTel. 8 15.4 System Functions: The System shall accommodate and/or perform in an --------------------- efficient and cost effective manner in accordance with generally accepted industry standards, including but not limited to, the following primary and commonly used Internet functions: Domain Name Service; Internet E-Mail processing; World Wide Web Access, News Groups, File Transfer Protocol (ftp), Telnet, and dialup user access and perform all accounting and control functions of FiberTel. 15.5 Repair of Manufacturer Defects: OSS shall use best efforts to assist ----------------------------------- FiberTel in obtaining the repair of any operational deficiencies from third party manufacturer in accordance with manufacturer's warranty assigned to FiberTel herein. Nothing contained in this section shall be deemed to require OSS to maintain the Equipment or to repair any defect caused by FiberTel's failure to properly maintain the Equipment. Notwithstanding the above, all repair, replacement and restoration of any Equipment manufactured by OSS will be done by OSS without extra costs or charges to FiberTel. 15.6 OSS Indemnification: OSS shall indemnify and hold FiberTel harmless ------------------------ from and against any claims, liabilities, damages and expenses, including, without limitation, reasonable attorney's fees relating to or arising out as OSS' breach of any of its material obligations under this Agreement. OSS shall not be liable for any third party claims based upon or arising from FiberTel's negligent operation of the System or for any indirect, incidental or consequential damages arising from the use of or inability to use the System attributable to FiberTel's negligence, provided that OSS is not also negligent. 15.7 FiberTel Indemnification: FiberTel shall indemnify and hold harmless ----------------------------- OSS from and against any claims, liabilities, damages and expenses, including, without limitation, reasonable attorney's fees relating to or arising out of a breach of any of FiberTel's material obligations hereunder. FiberTel shall not be liable in front of any third party for any indirect, incidental or consequential damages arising from the use of or inability to use the System attributable to OSS's negligence, provided that FiberTel is not also negligent. FiberTel agrees, on a best effort basis, to secure an agreement from each of its commercial and residential customers releasing and holding harmless OSS, FiberTel, their Affiliates, officers and employees form any liability resulting from the business contemplated hereunder. 16. DEFAULT/PERFORMANCE REVIEWS/TERMINATION --------------------------------------- 16.1 Default: Either party may immediately terminate this Agreement upon ------------ thirty (30) days prior written notice to the other party (the "Non-Terminating Party") and upon the occurrence of any of the following events of default by the Non-Terminating Party and the Non-Terminating Party's failure to cure same within fifteen (15) days of notice: the Non-Terminating Party's breach of any material obligation under this Agreement; the Non-Terminating Party's failure to make timely payment to OSS in accordance with the payment obligations set forth in this Agreement; the Non-Terminating Party ceases to do business or sells all or a portion of its assets used in the business of providing Internet service using the System:, or the Non-Terminating Party files for bankruptcy or a trustee or receiver is appointed or the Non-Terminating Party makes an assignment for the benefit of creditors. 9 16.2 Performance Review: As from the first yearly anniversary of this ----------------------- Agreement and on each subsequent yearly anniversary of the same, and for an extra thirty (30) day period, FiberTel shall have the option to request OSS to meet so as to have a performance review carried out by an independent and well- known consultant from the list of those firms attached hereto under Exhibit 1. Failing the parties' agreement to the same, the appointment of the independent consultant will be made by FiberTel. The independent consultant's performance review will be aimed to address the quality of the services provided under this agreement by OSS and to inform if the same are substantially similar to those provided by the three top-rank companies dedicated to providing the same services. Only if the reports of the independent consultant indicates that said level of compliance and services is below the said threshold, can FiberTel place a notice to OSS so that within a thirty (30) day period, it take appropriate steps in order to have the services provided by OSS hereunder, meet the said level of compliance. If at the end of the said thirty-day period, OSS has not duly updated its level of services, FiberTel will be authorized to declare a material breach of contract in which case FiberTel's remedies will be expressly limited to termination of this Agreement without any indemnification or obligation towards OSS, subject with respect to the Application Program, to what is provided under Section 4.4. In the event of such termination, OSS will have to pay the consultant fees. 16.3 Effect of Termination: Upon the termination of this Agreement: 1) the -------------------------- Non-Terminating Party, its receivers, trustees, assigns or other representatives shall immediately surrender all rights, licenses and privileges granted under this Agreement, cease using or displaying the other party's trademarks, service marks or logos, shall cease to identify itself with the other party in any way, shall immediately pay any and all outstanding payments due to the other party; and shall return to the other party any and all property belonging to such other party including without limitation, all manuals, billing, and other proprietary software and informational materials furnished by the other party to the breaching party, subject, with respect to the Application Program, to what is provided under Section 4.3.;. and 2) Any Equipment fully paid for shall remain FiberTel Equipment; provided, however, that as to any Equipment for which FiberTel has made partial payment, FiberTel shall: provide full payment immediately upon termination and the Equipment shall be delivered to FiberTel upon full payment; or such Equipment shall be returned to OSS and OSS shall refund FiberTel the difference between the fair market value of the returned Equipment (after deduction of costs of retrieving and shipping such Equipment) and the total amount due for the purchase of the Equipment. 16.4 Non Release of Obligations: No termination of this Agreement shall ------------------------------- release FiberTel from any obligation to pay OSS any amounts accrued or become payable prior to the date of termination. 16.5 Survival: The provisions of Sections 14, 15, 16.3, 16.5 and 18.1 shall ------------- survive the expiration or termination of this Agreement. 10 16.6 Good Faith Negotiation: During the term of the Agreement, neither party --------------------------- shall participate in any business which is effectively capable of being developed through the Application Program within the Territory without first offering the other party the right to collaborate in such business under the terms set forth in this Agreement. The only exception to the preceding rule will be all those businesses which, although effectively capable of being developed through the Application Program from time to time, may not be accepted by a client of FiberTel, in which case, FiberTel would be able to provide the services to the said client without OSS. FiberTel will under all circumstances have a first right of refusal to accept and/or participate in all other Internet related businesses other than those covered by this agreement which OSS may wish or plan to introduce into the Territory. To this effect, FiberTel will be granted an exclusive ten-day negotiation period, to commence upon written notification served by OSS, during which period neither party shall discuss such business with any third party. In the absence of the parties reaching an agreement within such ten-day period, OSS shall be free to deal with third parties but not on overall economic terms more favorable than those offered to FiberTel without first re-offering such terms to FiberTel and allowing FiberTel an additional three business day period to accept such more favorable terms. The entire commercial management of all business either developed or capable of being developed through the Application Program will be conducted within the Territory by FiberTel. Should FiberTel not reach an understanding with a certain client, then OSS will be able to approach said potential client directly. 16.7. Out clause: After the second yearly anniversary of this Agreement, the ---------------- parties may at their sole discretion, and without needing to invoke any specific grounds for termination, decide to terminate this Agreement. Should this option be exercised by either of the parties, the terminating party will have to render a hundred and twenty (120) day prior written notice to the non-terminating party. In the event that FiberTel is the terminating party an indemnification calculated as $ 3.400.000 less all amounts already paid by FiberTel to OSS under the terms of this Agreement and the MOA, excluding payments set forth in Schedule B of the MOA, multiplied by 0.60, will be payable by FiberTel to OSS as sole, full and complete compensation for the termination of this Agreement as per this paragraph. In the event of OSS is the terminating party the following indemnification will be payable by OSS to FiberTel as sole, full and complete compensation for the termination of this Agreement as per this paragraph:
Termination date Compensation Within month 25 and 30 of the Term $1.000.000 Within month 31 and 36 $1.200.000 Within month 37 and 42 $1.400.000 Within month 43 and 48 $1.800.000 Within month 49 and 60 $2.000.000
11 17. INTELLECTUAL PROPERTY --------------------- 17.1 Infringement Claims: If FiberTel receives a claim that any Equipment or ------------------------ Application Program manufactured or provided by OSS infringes upon any patent, copyright, or other intellectual property interest, FiberTel shall immediately notify OSS in writing. OSS shall have the exclusive authority to handle any such claims and, at its sole option will: 1) settle or defend the claim; 2) procure for FiberTel the right to use the Equipment and Application Program or compatible Equipment and Application Program; 3) replace or restore the Equipment and Application Program. OSS will maintain FiberTel harmless from all and any liability arising from any of the foregoing without limitation.. In the event that any Equipment or Application Program is not manufactured nor provided by OSS, OSS shall not be required to indemnify FiberTel except to the extent such infringement arises from OSS' integration of such Equipment or Application Program or the System. OSS shall also not be required to indemnify FiberTel for any claims of infringement relating to Equipment or Application Program modified or altered in any way or made to FiberTel's designs or specifications without OSS consent. 18. MISCELLANEOUS ------------- 18.1 Non Waiver: A failure by either party to enforce any right hereunder --------------- shall not constitutes a waiver of such right or any other right, and shall not modify the rights or obligations of either party under this Agreement; 18.2 ---- Notice: Any standard notice required to be given under this Agreement shall be - - ------- provided in writing and delivered by letter or fax, to the parties address indicated herein. Any non standard notice required to be given under this Agreement shall be provided in writing and delivered by certified mail (carta documento) to the parties address indicated herein; 18.3 Severability: The ------------------ invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision, the remaining provisions being deemed to continue in full force and effect; 18.4 Governing -------------- law: The Agreement shall be governed by and construed under the laws of - - ---- Argentina; 18.5 Dispute Resolution: The parties hereby agree and consent to the ------------------------ exclusive jurisdiction and venue of the state courts situated in Buenos Aires for resolution of any dispute arising from this Agreement 18.6 Entire Agreement: ---------------------- This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements and communications, whether oral or in writing, between the parties with respect to the subject matter of this Agreement. No amendment or modification of this Agreement shall be effective unless made in writing and signed by OSS and FiberTel. Notwithstanding the above, the MOA will continue applying to the relations between the parties insofar it does not contradict or otherwise conflict with any of the provisions of this Agreement; 18.7 Relationship of Parties: There is no intent within this Agreement to grant - - ----------------------------- a franchise, create a partnership, joint venture, or business relationship between the parties other than that described within this Agreement. FiberTel and OSS are and at all times shall remain independent contractors and shall have no authority to bind the other to any commitments of any kind; 18.8 Assignment: ---------------- This Agreement is nonassignable except to any Affiliate. Any assignment by either party hereto, except as provided above, shall require the written approval of the other party, such approval not to be unreasonably withheld; 18.9 ---- Successors in Interest: This Agreement shall inure to the benefit of - - ----------------------- and be binding upon the successors in interest to either of the parties. 12 IN WITNESS WHEREOF, each of the parties hereto has duly executed and delivered this Agreement as of the date first written above. ONLINE SYSTEM SERVICES [Corporate Seal] By: /s/ R. STEVEN ADAMS ------------------- R. Steven Adams, President and Chief Executive Officer Date: 10/3/97 ------- Date Accepted: 10/3/97 ------- FIBERTEL [Corporate Seal] By: /s/ GEORGE Y. STEWART - C.O.O. ------------------------------ (Print Name and Title of Authorized Signatory) Date: 10/3/97 ------- Date Accepted: 10/3/97 ------- 13 SCHEDULE "A" APPLICATION PROGRAMS - - --------------------------------- 1 Windows 95 Software for Administrative Computer 1 Microsoft Front Page Software 6 NT Server 4.0 Software (w 10 Client Licensees) 1 Community Access Partners (CAP) web site software To include: -Electronic Commerce module for CAP when completed -Electronic Banking module for CAP when completed -Any and all kinds of software related to the Internet content business, developed produced, owned by or licensed to OSS during the Term of this Agreement, duly customized to the Territory. 14 SCHEDULE "B" EQUIPMENT AND EQUIPMENT PRICE - - ------------------------------------------
Item # Qty. Item Code Description Price - - ------ ---- --------- ----------- ----- 1 1 Adaptec SCSI Controller $ 113 2 1 710167 ARCserve Enterprise Backup (NT) $ 781 3 2 667406 Bay Networks 100BaseT Hub (24-Port) $ 3,960 4 2 718481 Bay Networks 100BaseT Module (2 Port) $ 2,827 5 1 718468 Bay Networks 10BaseT Module (8 Port) $ 1,309 6 1 718467 Bay Networks 28200 Ethernet Switch $ 1,760 7 1 Bi-directional Printer Cable (6") $ 4 8 1 CISMEM-NPE-64 Cisco 64MB Memory Upgrade $ 2,640 9 1 CIS7206 Cisco 7206 Chasis $ 4,510 10 1 CISMEM-I/0-8 Cisco 8MB Flash Memory $ 605 11 1 CISPA-8T-V35 Cisco 8-Port V.35 Interface Card $ 7,260 12 1 CISC7200-I/0-FE Cisco IO Controller with 100Base T Port $ 2,750 13 1 CISFR-IR72 Cisco Interdomain Routing Protocals $ 3,025 14 1 CISSW72C- 11.2 Cisco IOS 11.2 (IP Only) $ 2,750 15 1 CISNPE-150 Cisco Network Processing Engine $ 4,510 16 1 CISCAB-OCT Cisco Octal Serial Cable $ 715 17 5 Compaq 250OR Server $ 67,078 18 1 Compaq 250OR Server $ 13,416 19 2 Compaq 4.3GB Pluggable Hard Drive (Spares) $ 2,688 20 1 Compaq 4/8GI3 4mm, DAT Tape Drive $ 1,159 21 6 Compaq Netflex 3 Ethernet Card $ 601 22 1 Compaq Rail Kit (for tape drive) $ 6 23 1 Cybex 19" Rack Mount Kit $ 28 24 1 Cybex Autoboot Commander (8-Port) $ 1,540 25 8 Cybex Video/Keyboard/Mouse Cable $ 660 26 7 742348 DAT Tape (120 length) $ 85 27 1 DAT Tape (5-Pack 90 length) $ 40 28 1 DNEWS Server Software (Electronic Key) $ 550 29 1 703595 HP OpenView Professional $ 990 30 1 796303 ICVerify for Windows $ 292 31 1 633004 Lexmark Laser Printer $ 429 32 1 M25-Pin to F25-Pin Serial Cable (6') $ 3 33 1 Management Consol (Rack-Mount) $ 3,417 34 1 752232 Microsoft FrontPage 97 $ 138 35 1 794803 Microsoft SQL Server 6.5 (10 User) $ 1,870 36 1 499459 Panasonic 17" Monitor $ 593 37 1 Post.Office E-Mail Server Software (Electronic Key) $ 2,200 38 2 TYONS-153E-1-1 Tylink ONS153 (E1 CSU/DSU) $ 2,420 39 1 499459 US Robotics V.Everything Modem $ 263 40 3 USR0668-0 USR Fan Tray $ - 41 6 USR0790-0 USR Quad Modem Card $ 11,220 42 3 USR2059-0 USR Total Control 48-Port Bundle $ 61,545 43 1 USR1091 USR Total Control Management Software $ 1,485 44 5 Windows NT Server (5-User) $ 2,745 45 1 Windows NT Workstation $ 219 46 1 Accounting & Control Software $ 2,500 TOTAL $219,696
15 SCHEDULE "C" MATERIALS AND SERVICES - - ----------------------------------- System Documentation: - - -------------------- 1. General ISP Operations Manual 2. Tier 1 Customer Service Manual 3. Tier 2 Customer Service Manual 4. Start up Manual for Cable Operators 5. Instruction Manual Consulting Assistance on the following: - - -------------------------------------- 6. Internet Backbone Services 7. Initial Telephone Connections 8. General Telecommunications Issues 9. Pricing of Services 10. Financial Models 11. Domain Name Registering 12. Equipment Installation & Testing 13. Initial Technician & Administrative Training 14. Brochures, Flyers Ad Formats 15. FiberTel Contracts & Agreements 16. Administrative Procedures 16 SCHEDULE "D" INSTALLATION PLAN - - ------------------------------ OSS will provide the following services at Installation on or before October 1, 1997 or date that is mutually agreed to by the parties in addition to providing written documentation in the form of an Instruction Manual for FiberTel: 1. OSS will prepare and design an Internet Point of Presence (POP) consisting of computers, network, servers, data termination and routing equipment, modems, software and all wiring. The POP will provide the connection from FiberTel to the Internet backbone network. OSS will prepare an equipment hardware and software list with specific manufacturer, model number, serial number and estimate of the cost, shipping fees and delivery interval. 2. OSS will order, configure and interconnect all of the above elements which comprise the FiberTel Internet POP, including routers, servers and network. 3. OSS will deliver, install and test all of the equipment and software at times agreed to between the parties. 4. OSS will connect the dialup telephone lines to the FiberTel's modem bank. 5. OSS will connect the Internet backbone provider's line to the FiberTel's equipment. 6. OSS will conduct an overall acceptance test, with the assistance of the FiberTel's technician(s) which will demonstrate that all elements of the ISP POP are working satisfactorily. The tests will include DNS, e-mail, Web services, News Groups, ftp, ping, dialup access, dedicated access (if installed), and any other Internet related services provided at the FiberTel's POP. 7. FiberTel will provide access to installation site during regular business hours and, upon OSS' request, for extended hours up to twenty-four hours seven days per week 8. FiberTel will provide network administrators to be present during the installation who are experienced with Microsoft NT servers and who will be responsible for maintaining the equipment post the installation. 9. FiberTel will be responsible for the provision of adequate 110/120 volt power circuits for the system including backup (uninterruptible power supply; if desired) power. 10. FiberTel is responsible for the provision of all telecommunications, Internet and all other external connectivity necessary for the operation of the System. 17 SCHEDULE "E" CUSTOMER SUPPORT - - ----------------------------- OSS agrees to open a Buenos Aires office to support FiberTel in the content related business. This office will be opened within sixty (60) days of the execution of this Long-Term Agreement. OSS, with the approval of FiberTel, may use a pre-existing Buenos Aires corporation in association with OSS senior management oversite to provide said support. OSS agrees to provide support in the following areas: 1. Technical Support (OSS software): OSS will support the Application Program -------------------------------- with one full time technical Resource trained by OSS on CAP software. This full time Resource will be resident in Buenos Aires, Argentina. The Resource will be available during Buenos Aires business hours (generally 9:00 a.m. - 7:00 p.m. Buenos Aires time) Monday through Friday. This Resource will be able to be contacted via telephone at the local OSS office or via cellular phone when away from the office. After hours and on recognized Argentine holidays, support will be via pager and is intend for emergency situations only. OSS and FiberTel will jointly agree on the specific Resource for this position. 2. General Business and Marketing Consulting: OSS will provide a Senior OSS ----------------------------------------- business Resource to provide consulting on general business and marketing issues on five (5) full business days in each month. This Resource will be resident in Buenos Aires, Argentina at the OSS Office. Additional days of consulting will be available to FiberTel at a rate of One Thousand ($70) Dollars per hour. OSS and FiberTel will jointly agree on the specific Resource for this position. 3. SQL Web Server Support: OSS will support the FiberTel SQL Web Server(s) ---------------------- with one full time technical Resource trained by OSS on SQL Servers. This full time Resource will be resident in Buenos Aires, Argentina. The Resource will be available during Buenos Aires business hours (generally 9:00am-7:00pm Buenos Aires time) Monday thru Friday. This Resource will be able to be contacted via telephone at the local OSS office or via cellular phone when away from the office. After hours and on recognized Argentine holidays, support will be via pager and is intend for emergency situations only. OSS and FiberTel will jointly agree on the specific Resource for this position. Response Time: OSS will respond to FiberTel's on-site problems associated with - - ------------- the CAP software and SQL Server within sixty (60) minutes of initial call. 18 SCHEDULE "F" TRAINING - - --------------------- INITIAL TRAINING - - ---------------- CSR TIER ONE TRAINING OSS will instruct FiberTel's customer representatives in the sales and basic customer service techniques to allow FiberTel's representatives to answer Frequently Asked Questions (FAQ's) specific to FiberTel's service and the Buenos Aires marketplace, service options, additions of subscribers, deletions of subscribers. OSS will also train FiberTel's representatives on how to troubleshoot insignificant problems that may arise with FiberTel's customers using the System. OSS and FiberTel will determine parameters of these problems and develop documented methods and procedures to escalate problem resolution to a more technical resource (tier 2) to achieve final resolution. Travel for this training will be handled per the provisions of the Memorandum of Agreement dated August 8, 1997. CSR TIER TWO HELP DESK TRAINING OSS will train FiberTel's representatives in the standard Internet Service Provider (ISP) problem resolution techniques. OSS will assist FiberTel's cable modem vendors in supporting technical problem resolution associated with cable modems. OSS will document common ISP problems and provide this documentation to FiberTel. In addition, role plays of these problems will be conducted during training. Travel for this training will be handled per the provisions of the Memorandum of Agreement dated August 8, 1997. SALES TRAINING OSS will provide basic sales training (for designated CSRs or sales personnel) related to Internet access and the sale of business web pages which businesses can purchase on the FiberTel CAP Web site. CAP SYSTEM ADMINISTRATION TRAINING OSS will provide on-site training of the CAP software system administration tools that enable FiberTel personnel to manage and update the content of Web site and the access rights of users and forum moderators. ONGOING TRAINING - - ---------------- TRAINING AND SUPPORT MATERIALS Documentation and training materials related to the Application Program Management software will be provided. As OSS develops online documentation and training, FiberTel will be given access to these materials. As new releases of the CAP software become available, FiberTel will be provided new release software and documentation. OSS would be available for on-site training of new release software. Ongoing training provided to FiberTel by OSS will be at OSS' expense. 19 SCHEDULE "G" - CAP WEBSITE DEFINITION - - ------------------------------------- Application Program Development Schedule - - ---------------------------------------- CAP PRODUCT (V.1.0) Provided to BA 9/30/97 (final install) - - ---------------------------------------------------------- Features include: * Site tailored to include visual design elements of client * User registration system with security * Personal home page generation system that users create after registration * Business listings (Yellow Pages) system where businesses can add their information to a database * OSS preloads approximately 1,100 business listings to the listings system * Event listing system where local events can be added and searched for by users * Business Web page generation system that businesses can sign up for and then create their pages with a wizard * CableVision movie database search and retrieval system * Movie video preview system where users can watch streaming video clips * Links to numerous Web sites * Cable channel program guide system (searchable) * Online forums with conferences, threads and message capabilities * System administration system where FiberTel can add/modify forums and forum moderators; verify and add/delete users from the system; add content, images and videos to the site; system administration can add additional links for users to visit other sites; system administration can add/update the CableVison channel program guide CAP PRODUCT (V2.0) Ready by 12/30/97 - - ------------------------------------ Features include: - - ----------------- * Ad server system * Additional personalization of content for users * Chat system for user chat sessions * Polling/voting system that can tally and present results of polls created by system administrator * Listserver CAP PRODUCT (v3.0) Ready by 4/31/98 - - ----------------------------------- Features Include: - - ----------------- * Electronic Commerce where the site can personalize advertising and just -in- time purchase opportunities to users based upon their profiles and the content of the site. Online stores and produce sales system with secure online ordering CAP PRODUCT (v4.0) Ready by 8/30/98 - - ----------------------------------- Features Include: - - ----------------- * Electronic Banking capabilities in place (launch date of specific online banking projects determined after project requirements and system integration issues are resolved) OSS's obligations include the provision of any future version enhancement of the above detailed features and all new features created to be included in the Application Program, duly tailored to FiberTel in accordance to the latter's requirements. OSS shall provide FiberTel with a Beta version of any software to be delivered hereunder with at least a thirty (30) day period to the final release. 20 SCHEDULE "H" - NON-DISCLOSURE AGREEMENT - - --------------------------------------- THIS NON-DISCLOSURE AGREEMENT (the "Agreement") is entered into as of the ___ day of 199_, by and between Online System Services, Inc. ("OSS") a Colorado corporation with its principal place of business located at 1800 Glenarm Place, Denver, Colorado and FiberTel, an Argentinean corporation and wholly owned subsidiary of Cablevision/FiberTel, with its principal place of business located at Amenabar 23, 1414 Buenos Aires Argentina ("FiberTel"). NOW, THEREFORE, in consideration of the mutual covenants and conditions set forth in this Agreement, and other good and valuable consideration, FiberTel and OSS agree as follows: 1. Definition of Confidential Information. For purposes of this Agreement, -------------------------------------- "Confidential Information" means any non-public information of either FiberTel or OSS (the "Parties"), disclosed by either Party to the other Party in the following forms: a. information originally disclosed in written, graphic, machine-readable or any other tangible medium to the extent conspicuously marked with a "confidential," "proprietary" or similar legend; and b. information originally disclosed orally or by way of observation, to the extent identified as Confidential Information at the time of such original disclosure; and (ii) summarized in reasonable detail and confirmed as being Confidential Information in a written notice delivered to the receiving Party within 30 days after original disclosure, which notice includes a reference to the date of the original disclosure and a reference to this Agreement. 2. Exceptions. Confidential Information shall not include information which: ---------- a. was acquired by a Party prior to the time of its disclosure by the other Party, as shown by files of the receiving Party in existence at the time of disclosure, and at a time when the receiving Party was under no obligation to the disclosing Party to keep such information confidential; b. is or becomes available in the public domain through no act of the receiving Party that violates this Agreement; c. is received by the receiving Party from a third person or entity that is not known by the receiving Party to be sharing such information in violation of rights of the disclosing Party; d. is developed by or on behalf of the receiving Party without any access to or use of Confidential Information of the disclosing Party; or e. is at any time furnished to a third party by the disclosing Party without restrictions on the third party's rights to disclose. The Party claiming that any of the foregoing exceptions applies shall have the burden of proving such applicability. 21 3. Obligations. Each Party shall: ----------- a. treat Confidential Information of the other Party with the same degree of confidentiality with which it treats its own Confidential Information, in no case less than a reasonable degree of confidentiality; b. use Confidential Information only for the purposes of evaluating the Confidential Information and determining whether the Parties will pursue further negotiations with each other, and in the performance of obligations under subsequent agreements between the Parties, if any; c. refrain from copying Confidential Information, in whole or in part, except as required in furtherance of the uses thereof permitted by this Agreement, and except with accurate reproduction of all proprietary legends and notices located in the originals; d. limit dissemination of Confidential Information to employees and agents of such Party or of such Party's affiliates who have a need to know the Confidential Information in furtherance of the uses thereof permitted by this Agreement; provided, however, that a receiving Party shall in all events be responsible to the disclosing Party for any action or inaction of such employees and agents, and former employees and agents, that would violate this Agreement, had the action or inaction been that of the receiving Party directly; e. comply with all applicable U.S. export and all other applicable laws, rules and regulations with respect to the Confidential Information; and f. destroy or return to the disclosing Party any Confidential Information received in written or other tangible media, including all copies and records thereof, upon any request by the disclosing Party, except for a single set of copies which the receiving Party may retain solely as an archival record of materials submitted. 4. Legally Required Disclosure. If a Party becomes compelled to disclose any --------------------------- Confidential Information of the other Party pursuant to applicable laws, rules or regulations, or pursuant to rules and regulations of any stock exchange or stock association on which securities of the receiving Party may be traded from time to time (collectively, the "Requirements"), the receiving Party shall provide the disclosing Party with prompt notice of any such Requirement and shall cooperate with the disclosing Party, at the disclosing Party's sole expense, in seeking to obtain any protective order or other arrangement pursuant to which the confidentiality of the Confidential Information is preserved. If such an order or arrangement is not obtained, the receiving party shall disclose only that portion of the Confidential Information as is required pursuant to such Requirements. Any such required disclosure shall not, in and of itself, change the status of the disclosed information as Confidential Information under the terms of this Agreement. 5. Term. This Agreement shall commence on the date first above written and shall ---- continue in effect for a period of six months thereafter. 6. Survival. The restrictions and obligations of Paragraphs 3 and 4 of this -------- Agreement shall survive the expiration of this Agreement, and shall continue to bind the Parties, their successors, heirs and assigns, for a period of two years after the date first above written. 22 7. Ownership of Confidential Information. Each of the Parties acknowledges that ------------------------------------- Confidential Information of the other Party is and shall remain the exclusive property and a valuable trade secret of the other Party. Nothing in this Agreement shall be construed as granting any license or other rights under any patents or copyrights of either Party, or any rights in or to Confidential Information of either Party except for the limited rights to use and disclose such Confidential Information expressly granted to the other Party in this Agreement. 8. No Agency. Neither this Agreement nor the disclosure or receipt of --------- Confidential Information shall constitute or imply any promise or intention to enter into a partnership, agency, employment or joint venture relationship between the Parties, to make or purchase any products or services by any Party or to make any commitment by any Party with respect to the present or future marketing of any product or service. Nothing in this Agreement shall be construed to limit either Party's rights to independently develop or acquire products or services without use of the other Party's Confidential Information. 9. No Warranty. No Party shall disclose information to the other that such ----------- Party is not entitled to disclose under applicable laws, rules or regulations, or under applicable agreements binding upon the disclosing Party. Subject to the foregoing, all information disclosed by either Party to the other is provided "AS IS" without any warranty whatsoever, including without limitation any warranty as to the accuracy, reliability or fitness of such information for any particular purpose. 10. No Assignment. Neither Party may assign any of its rights or delegate any of ------------- its obligations under this agreement, except upon the prior written consent of the other party, and except as provided for in the Long Term Equipment Sale Software License Agreement executed by the parties simultaneously herewith. 11. Equitable Relief. Each of the Parties acknowledges that a disclosing Party ---------------- may be irreparably injured by a breach of this Agreement by the receiving Parties, and that a disclosing Party, in addition to any other remedies available at law or in equity, shall be entitled to equitable relief, including injunctive relief and specific performance, in the event of any breach of the provisions of this Agreement by the receiving Party. 12. Invalid Provisions. If any provision of this Agreement is held to be ------------------ illegal, invalid or unenforceable, the remaining provisions shall remain in full force and effect. Should any provision be held to be illegal, invalid or unenforceable as being too broad with respect to the duration, scope or subject matter thereof, such provisions shall be automatically modified to reflect the maximum duration, scope or subject matter allowable by law.. 13. Notices. Any notices or other communications contemplated or required under ------- this agreement, in order to be valid, shall be in writing and shall be given via personal delivery, telefax or overnight courier, or via U.S. Certified Mail, Return Receipt Requested, at the following addresses: 23 If to FiberTel: Amenabar 23 With carbon copy to: (1426) Buenos Aires Marcello Bombau Argentina Suipacha 268 Attn: General Manager (1355) Buenos Aires If to OSS: Online System Services, Inc. With carbon copy to: 1800 Glenarm Place, #800 Stephen Stim & Assoc Denver, CO 80202 200 West 57th St., #1005 Attn: Steve Adams, Pres. & CEO New York, NY 10019 or at such other addresses as either party may designate by notice to the other. Such notices or other communications shall be deemed received when actually delivered (where given via personal delivery, telefax or overnight courier) or three business days after mailing (where given via U.S. Certified Mail). 14. Integration. This Agreement supersedes all previous oral and written ----------- agreements, if any, among the Parties regarding the confidentiality of information disclosed to each other. 15. Governing Law. This Agreement shall be construed and enforced in ------------- accordance with the laws of the State of Colorado. 16. Counterparts. This Agreement may be executed in one or more ------------ counterparts, all of which, taken together, shall constitute the Agreement. IN WITNESS WHEREOF, the Parties have entered into this Agreement effective as of the date first above written. FIBERTEL: By: /s/ GEORGE Y. STEWART --------------------- Name: George Y. Stewart ------------------- Title: C.O.O. ------------------ ONLINE SYSTEM SERVICES, INC.: By: /s/ R. STEVEN ADAMS --------------------- Name: R. Steven Adams ------------------- Title: President/CEO ------------------ 24 SCHEDULE "I" PERFORMANCE BENCHMARKS - - ----------------------------------- 1. KPMG Peat Marwick 2. Forrester 3. Gartner 4. Andersen Consulting 5. Paul Kagan and Associates 25 EX-10.6 5 AGREEMENT AND PLAN OF MERGER EXHIBIT 10.6 AGREEMENT AND PLAN OF MERGER Dated as of March 19, 1998 Among ONLINE SYSTEM SERVICES, INC. DURAND ACQUISITION CORPORATION AND DURAND COMMUNICATIONS, INC. TABLE OF CONTENTS ARTICLE 1 - THE MERGER........................................................1 1.1 The Merger...........................................................1 1.2 Closing..............................................................1 1.3 Effective Time of the Merger.........................................2 1.4 Effects of the Merger................................................2 1.5 Articles of Incorporation; Bylaws....................................2 1.6 Directors............................................................2 1.7 Officers.............................................................2 ARTICLE 2 - EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS.............................................................2 2.1 Exchange of Shares...................................................2 (a) Common Stock of Sub.............................................2 (b) Cancellation of Treasury Stock and Parent-Owned Company Common Stock..........................................................3 (c) Conversion of Company Common Stock..............................3 (d) Dissenting Stockholders.........................................3 (e) Cancellation and Retirement of Company Common Stock.............3 2.2 Options, Warrants, etc...............................................3 2.3 Exchange of Certificates.............................................4 (a) Exchange Agent..................................................4 (b) Exchange Procedures.............................................4 (c) Distributions with Respect to Unexchanged Shares................5 (d) No Further Ownership Rights in Company Common Stock.............5 (e) No Fractional Shares............................................5 (f) No Liability....................................................5 ARTICLE 3 - REPRESENTATIONS AND WARRANTIES....................................6 3.1 Representations and Warranties of the Company........................6 (a) Organization, Standing and Corporate Power......................6 (b) Subsidiaries....................................................6 (c) Capital Structure...............................................6 (d) Authority; Noncontravention.....................................7 (e) Financial Statements; Undisclosed Liabilities...................8 (f) Absence of Certain Changes or Events............................8 (g) Litigation......................................................9 (h) Labor Matters; Employee Matters.................................9 (i) Tax Returns and Tax Payments....................................11 (j) State Antitakeover Laws Not Applicable..........................12 (k) Real Estate.....................................................12 (l) Compliance with Laws; Environmental Matters.....................12 (m) Leased Tangible Personal Property...............................13 (n) Contracts.......................................................13 (o) Assets..........................................................15 (p) Intellectual Property...........................................15 (q) Accounts Receivable.............................................16 (r) Properties......................................................16 i (s) Transactions with Directors, Officers, Employees and Affiliates....................................................16 (t) Insurance.......................................................16 (u) Brokers.........................................................16 (v) Asset Sales; Merger.............................................16 (w) Pooling of Interests............................................17 (x) Full Disclosure.................................................17 (y) Board Recommendation............................................17 (z) Required Company Vote...........................................17 (aa) Information Supplied...........................................17 3.2 Representations and Warranties of Parent.............................17 (a) Organization, Standing and Corporate Power......................17 (b) Subsidiaries....................................................18 (c) Capital Structure...............................................18 (d) Authority; Noncontravention.....................................18 (e) SEC Documents; Undisclosed Liabilities..........................19 (f) Absence of Certain Changes or Events............................20 (g) Litigation......................................................20 (h) Tax Returns and Tax Payments....................................20 (i) Compliance with Laws; Environmental Matters.....................20 (j) Intellectual Property...........................................21 (k) Properties......................................................21 (l) Interim Operations of Sub.......................................21 (m) Brokers.........................................................22 ARTICLE 4 - COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO MERGER.........22 4.1 Conduct of Business of the Company...................................22 ARTICLE 5 - ADDITIONAL AGREEMENTS.............................................24 5.1 Preparation of Proxy Statement; Stockholder Meeting..................24 5.2 Letter of the Company's Accountants..................................24 5.3 Parent Access to Information.........................................24 5.4 Registration of Parent Stock.........................................25 5.5 Board of Directors...................................................25 5.6 Best Efforts.........................................................25 5.7 Expenses.............................................................25 5.8 Public Announcements.................................................26 5.9 Takeover Statutes....................................................26 5.10 Certain Agreements..................................................26 ARTICLE 6 - CONDITIONS PRECEDENT..............................................26 6.1 Conditions to Each Party's Obligation to Effect the Merger...........26 ---------------------------------------------------------- (a) No Injunctions or Restraints....................................26 (b) Nasdaq Governance Requirements..................................26 (c) Compliance with Federal and State Securities Laws...............26 6.2 Conditions to Obligation of Parent and Sub...........................26 (a) Representations and Warranties..................................26 (b) Performance of Obligations of the Company.......................27 (c) Consents, etc...................................................27 (d) Affiliate Letters...............................................27 (e) Opinion of Counsel to the Company...............................27 ii (f) Opinion of Accountants..........................................28 (g) CompuLearning Systems, Inc......................................28 (h) Total Liabilities...............................................28 (i) Dissenter's Rights..............................................28 (j) Undertakings of Company Securities Holders......................28 (k) Noncompete Agreements...........................................28 (l) Releases, Termination of Agreements.............................28 6.3 Conditions to Obligation of the Company..............................28 (a) Representations and Warranties..................................28 (b) Performance of Obligations of Parent and Sub....................29 (c) Opinion of Counsel to Parent....................................29 ARTICLE 7 - TERMINATION, AMENDMENT AND WAIVER.................................29 7.1 Termination..........................................................29 7.2 Effect of Termination................................................30 7.3 Amendment............................................................30 7.4 Extension; Waiver....................................................30 ARTICLE 8 - GENERAL PROVISIONS................................................30 8.1 Survival of Representations and Warranties...........................30 8.2 Further Assurances..................................................30 8.3 Notices..............................................................30 8.4 Definitions..........................................................31 8.5 Interpretation.......................................................32 8.6 Counterparts.........................................................32 8.7 Entire Agreement; No Third-party Beneficiaries.......................32 8.8 Governing Law........................................................32 8.9 Assignment...........................................................32 8.10 Enforcement.........................................................32 8.11 Severability........................................................32 iii AGREEMENT AND PLAN OF MERGER This AGREEMENT AND PLAN OF MERGER (the "Agreement") is entered into as of March 19, 1998, by and among ONLINE SYSTEM SERVICES, INC., a Colorado corporation ("Parent"), DURAND ACQUISITION CORPORATION, a Minnesota corporation and a direct wholly owned subsidiary of Parent ("Sub"), and DURAND COMMUNICATIONS, INC., a California corporation (the "Company"). RECITALS A. The Boards of Directors of Parent and the Company have approved, and deem it advisable and in the best interests of their respective companies and stockholders to consummate, a merger of Sub with and into the Company (the "Merger"), with the Company as the surviving corporation in the Merger, upon the terms and subject to the conditions set forth in this Agreement, pursuant to which each share of common stock, no par value per share, of the Company ("Company Common Stock") issued and outstanding immediately prior to the Effective Time (as defined in Section 1.3), other than shares of Company Common Stock owned, directly or indirectly, by the Company or any subsidiary (as defined in Section 8.4) of the Company or by Parent, Sub or any other subsidiary of Parent, will be converted into the right to receive, subject to the terms hereof, 2.46 shares of common stock, no par value per share, of Parent ("Parent Stock"); provided, however, that the total number of shares of Parent Stock exchanged for Company Common Stock shall not exceed 971,250 shares of Parent Stock. B. The Merger has been approved by a vote of the majority of the outstanding shares of Company Common Stock entitled to vote thereon for the approval thereof (the "Company Stockholder Approval"). C. For United States Federal income tax purposes, it is intended that the Merger shall qualify as a reorganization under the provisions of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code") and this Agreement is intended to be and is adopted as a plan of reorganization within the meaning of Section 368 of the Code. AGREEMENT NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements contained in this Agreement, the parties agree as follows: ARTICLE 1 THE MERGER 1.1 The Merger . Upon the terms and subject to the conditions set ---------- forth in this Agreement, and in accordance with the California General Corporation Law (the "CGCL") and the Minnesota Business Corporation Act (the "MBCA"), the Sub shall be merged with and into the Company at the Effective Time. Upon the Effective Time, the separate existence of Sub shall cease, and the Company shall continue as the surviving corporation (the "Surviving Corporation") having the name Durand Communications, Inc. 1.2 Closing . Unless this Agreement shall have been terminated and ------- the transactions herein contemplated shall have been abandoned pursuant to Section 7.1, and subject to the satisfaction or waiver of the conditions set forth in Article 6, the closing of the Merger (the "Closing") will take place at 10:00 a.m. Mountain Time within three business days of the date that the shareholders of Parent approve the Merger (the "Closing Date"), at the offices of Parent, unless another date, time or place is agreed to in writing by the parties hereto. 1.3 Effective Time of the Merger . On the Closing Date, the parties ---------------------------- shall file articles of merger or other appropriate documents (in any such case, the "Articles of Merger") executed in accordance with the relevant provisions of the CGCL and MBCA and shall make all other filings or recordings required under the CGCL and MBCA. The Merger shall become effective at such time as the Articles of Merger is duly filed with the Secretary of State of the State of California and the Secretary of State of the State of Minnesota, or at such other time as is permissible in accordance with the CGCL and MBCA and as Parent and the Company shall agree should be specified in the Articles of Merger (the time the Merger becomes effective being the "Effective Time"). 1.4 Effects of the Merger. --------------------- The Merger shall have the effects set forth in the CGCL and MBCA. 1.5 Articles of Incorporation; Bylaws. -------------------------------------- (a) The Articles of Incorporation of the Company as in effect immediately prior to the Effective Time shall be the Articles of Incorporation of the Surviving Corporation until thereafter changed or amended as provided therein or by applicable law. (b) The Bylaws of the Company as in effect at the Effective Time shall be the Bylaws of the Surviving Corporation until thereafter changed or amended as provided therein or by applicable law. 1.6 Directors . The directors of Sub at the Effective Time shall be --------- the directors of the Surviving Corporation, until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be. 1.7 Officers . The officers of the Company at the Effective Time -------- shall be the officers of the Surviving Corporation, until the earlier of their resignation or removal or until their respective successors are duly appointed and qualified, as the case may be. ARTICLE 2 EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS 2.1 Exchange of Shares . As of the Effective Time, by virtue of the ------------------ Merger and without any action on the part of the holder of any shares of Company Common Stock or any shares of capital stock of Sub: (a) Common Stock of Sub . Each share of common stock of Sub ------------------- issued and outstanding immediately prior to the Effective Time shall be converted into one share of common stock of the Surviving Corporation and shall be the issued and outstanding capital stock of the Surviving Corporation. 2 (b) Cancellation of Treasury Stock and Parent-Owned Company ------------------------------------------------------- Common Stock. Each share of the Company Common Stock that is owned by ------------ the Company or by any subsidiary of the Company, and each share of Company Common Stock that is owned by Parent, Sub or any other subsidiary of Parent shall automatically be canceled and retired and shall cease to exist, and no cash, Parent Stock or other consideration shall be delivered or deliverable in exchange therefor. (c) Conversion of Company Common Stock. Except as otherwise provided ---------------------------------- herein and subject to Section 2.3, at the Effective Time each issued and outstanding share of Company Common Stock shall be automatically converted into 2.46 fully paid and nonassessable shares of Parent Stock (the "Merger Consideration"); provided, however, that the total number of shares of Parent Stock exchanged for Company Common Stock shall not exceed 981,671 shares of Parent Stock. (d) Dissenting Stockholders. Notwithstanding anything in ----------------------- this Agreement to the contrary, any issued and outstanding shares of Company Common Stock held by a person (a "Dissenting Stockholder") who duly demands appraisal of his shares of Company Common Stock pursuant to the CGCL and complies with all the provisions of the CGCL concerning the right of holders of Company Common Stock to demand appraisal of their shares in connection with the Merger ("Dissenting Shares") shall not be converted as described in Section 2.1(c), but shall become the right to receive such cash consideration as may be determined to be due to such Dissenting Stockholder as provided in the CGCL. If, however, such Dissenting Stockholder withdraws his demand for appraisal or fails to perfect or otherwise loses his right of appraisal, in any case pursuant to the CGCL, his shares shall be deemed to be converted as of the Effective Time into the right to receive Parent Stock, without interest, pursuant to Section 2.1(c). The Company shall give Parent (i) prompt notice of any demands for appraisal of shares received by the Company; and (ii) the opportunity to participate in and direct all negotiations and proceedings with respect to any such demand. The Company shall not, without the prior written consent of Parent, make any payment with respect to, or settle, offer to settle or otherwise negotiate any such demands. (e) Cancellation and Retirement of Company Common Stock. As of the --------------------------------------------------- Effective Time, all shares of Company Common Stock (other than shares referred to in Section 2.1(b)) issued and outstanding immediately prior to the Effective Time, shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such shares of Company Common Stock shall cease to have any rights with respect thereto, except the right to receive pursuant to Section 2.3, (i) a certificate or certificates of Parent Stock representing the number of full shares of Parent Stock into which the shares of Company Common Stock theretofore represented by such canceled and retired certificate shall have been converted pursuant to Section 2.1(c), and (ii) in lieu of fractional shares of Parent Stock, a cash payment for the fair market value of a fractional share to be issued in consideration therefor based on the closing bid price for Parent's common stock on the Nasdaq Small Cap Market on the day prior to the Closing Date. 2.2 Options; Warrants, etc. At the Effective Time, all options, ---------------------- warrants, and convertible promissory notes exercisable for or convertible into Company Common Stock granted or issued prior to the date hereof, which are outstanding and unexercised or unconverted immediately prior to the Effective Time (the "Prior Securities"), shall be automatically converted into options, warrants and convertible promissory notes exercisable for or convertible into shares of Parent Stock (the "Substitute Securities"), 3 in accordance with the terms of such options, warrants and convertible promissory notes, appropriately adjusted (as to both number of shares and exercise price) as follows: (a) The number of shares of Parent Stock covered by each of the Substitute Securities shall equal the number of shares of Company Common Stock covered by the applicable Prior Security immediately prior to the Effective Time, adjusted to reflect the Merger Consideration and rounded to the nearest whole number; (b) The per share exercise price or conversion price for each Substitute Security shall equal the per share exercise price under the applicable Prior Option immediately prior to the Effective Time, adjusted to reflect the Merger Consideration; and (c) In all other respects, the terms of the Substitute Securities shall be in such form and contain such other terms as Parent shall reasonably require, forms of such securities to be made available to the holders of the Prior Securities prior to the Closing Date. 2.3 Exchange of Certificates. ------------------------ (a) Exchange Agent . At the Effective Time, Parent shall designate -------------- Corporate Stock Transfer, Inc., Parent's transfer agent (the "Exchange Agent"), to act as agent for the holders of shares of Company Common Stock in connection with the Merger to issue the certificate or certificates to which holders of shares of Company Common Stock shall become entitled pursuant to Section 2.1(c). Parent shall authorize and instruct the Exchange Agent to issue to the holders of Company Common Stock, in the aggregate, certificates representing the number of shares of Parent Stock required to effectuate the terms of the Merger. The Exchange Agent shall, pursuant to instructions from Parent, issue the certificates provided for in Section 2.1(d). (b) Exchange Procedures . As soon as practicable after the ------------------- Effective Time, the Exchange Agent shall mail to each holder of an outstanding certificate or certificates which prior thereto represented shares of Company Common Stock (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to such certificate shall pass, only upon delivery of such certificates to such Exchange Agent), and (ii) instructions for use in effecting the surrender of the certificates representing shares of Company Common Stock for shares representing Parent Stock. Upon proper surrender to the Exchange Agent of such certificates for cancellation, the holder of such certificates shall after the Effective Time be entitled only to a certificate or certificates representing the number of full shares of Parent Stock, into which the aggregate number of shares of Company Common Stock previously represented by such certificate or certificates surrendered shall have been converted pursuant to this Agreement plus payment for the fair market value of a fractional share as provided in Section 2.3(e). The Exchange Agent shall accept such certificates upon compliance with such reasonable terms and conditions as the Exchange Agent may impose to effect an orderly exchange thereof in accordance with normal exchange practices. After the Effective Time, there shall be no further transfer on the records of the Company or its transfer agent of certificates representing shares of Company Common Stock and if such certificates are presented to the Company for transfer, they shall be canceled against delivery of certificates for Parent Stock as hereinabove provided. If any certificate for such Parent Stock is to be issued in a name other than that in which the certificate for Company Common Stock surrendered for exchange is registered, it shall be a condition of such exchange that the certificate so surrendered shall be properly endorsed, with signature guaranteed, or otherwise in proper form for transfer and that the person requesting such 4 exchange shall pay to Parent or its transfer agent any transfer or other taxes required by reason of the issuance of certificates for such Parent Stock in a name other than that of the registered holder of the certificate surrendered, or establish to the satisfaction of Parent or its transfer agent that such tax has been paid or is not applicable. (c) Distributions with Respect to Unexchanged Shares. No dividends or ------------------------------------------------ other distributions with respect to Parent Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered certificate for shares of Company Common Stock with respect to the shares of Parent Stock represented thereby. Subject to the effect of applicable laws, following surrender of any such certificate, there shall be paid to the holder of the certificate representing whole shares of Parent Stock issued in exchange therefor, without interest, (i) at the time of such surrender the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such shares of Parent Stock, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Time but prior to such surrender and a payment date subsequent to such surrender payable with respect to such shares of Parent Stock. (d) No Further Ownership Rights in Company Common Stock. All shares of --------------------------------------------------- Parent Stock issued upon the surrender for exchange of certificates representing shares of Company Common Stock in accordance with the terms of this Article 2 (including any certificates issued pursuant to Section 2.3(e)) shall be deemed to have been issued in full satisfaction of all rights pertaining to the shares of Company Common Stock theretofore represented by such certificates. (e) No Fractional Shares. -------------------- (i) No certificates or scrip representing fractional shares of Parent Stock shall be issued upon the surrender for exchange of certificates representing shares of Company Common Stock, and such fractional share interests will not entitle the owner thereof to vote or to any rights of a stockholder of Parent; and (ii) Notwithstanding any other provision of this Agreement, each holder of shares of Company Common Stock converted pursuant to the Merger who would have otherwise been entitled to receive a fraction of a share of Parent Stock shall receive, in lieu thereof, payment in cash of the fair market value of the fractional share, such value based on the closing bid price for Parent Common Stock on the Nasdaq Small Cap Market on the last business day prior to the Closing Date. (f) No Liability . None of Parent, Sub, the Company or the ------------ Exchange Agent shall be liable to any person in respect of any shares of Parent Stock (or dividends or distributions with respect thereto) delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. If any certificates representing shares of Company Common Stock shall not have been surrendered prior to five years after the Effective Time (or immediately prior to such earlier date on which any cash, shares of Parent Stock, any cash in lieu of fractional shares of Parent Stock or any dividends or distributions with respect to Parent Stock in respect of such certificate would otherwise escheat to or become the property of any Governmental Entity (as defined in Section 3.1(d)), any such shares, cash dividends or distributions in respect of such certificate shall, to the extent permitted by applicable law, become the property of the Surviving Corporation, free and clear of all claims or interest of any person previously entitled thereto. 5 ARTICLE 3 REPRESENTATIONS AND WARRANTIES 3.1 Representations and Warranties of the Company . The Company represents --------------------------------------------- and warrants to Parent and Sub as follows: (a) Organization, Standing and Corporate Power. Each of the Company and ------------------------------------------ each of its Subsidiaries (as defined in Section 3.1(b)) is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and has the requisite corporate power and authority to carry on its business as now being conducted. The Company and each of its Subsidiaries is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed (individually or in the aggregate) would not have a material adverse effect (as defined in Section 8.4) with respect to the Company. Attached as Section 3.1(a) of the disclosure schedule ("Disclosure Schedule") delivered to Parent by the Company at the time of execution of this Agreement are complete and correct copies of the Articles of Incorporation and Bylaws of the Company. (b) Subsidiaries . The only direct or indirect subsidiaries of ------------ the Company (the "Subsidiaries") and other ownership interests held by the Company in any other person are those listed in Section 3.1(b) of the Disclosure Schedule. Except as set forth in Section 3.1(b) of the Disclosure Schedule, all the outstanding shares of capital stock of each such Subsidiary which is a corporation have been validly issued and are fully paid and nonassessable and are owned (of record and beneficially) by the Company, by another Subsidiary (wholly owned) of the Company or by the Company and another such Subsidiary (wholly owned), free and clear of all pledges, claims, liens, charges, encumbrances and security interests of any kind or nature whatsoever (collectively, "Liens"). Except as set forth in Section 3.1(b) of the Disclosure Schedule, the Company does not own, directly or indirectly, any capital stock or other ownership interest in any corporation, partnership, business association, joint venture or other entity. (c) Capital Structure . The authorized capital stock of the ----------------- Company consists of 1,000,000 shares of Company Common Stock. As of the date of this Agreement, there are (i) 388,474 shares of Company Common Stock issued and outstanding, (ii) 6,086 shares of Company Common Stock reserved for issuance to certain private investors for an aggregate consideration of $140,000; (iii) no shares of Company Common Stock held in the treasury of the Company or held by any Subsidiary of the Company; and (iv) 89,758 shares of Company Common Stock reserved for issuance upon exercise or conversion of outstanding securities of the Company ("Prior Securities"). Section 3.1 (c) of the Disclosure Schedule contains a list of all Prior Securities, including a description of their terms. Except as set forth above, no shares of capital stock or other equity securities of the Company are issued, reserved for issuance or outstanding. All outstanding shares of capital stock of the Company are, and all shares which may be issued pursuant to the Prior Securities will be when issued, duly authorized, validly issued, fully paid and nonassessable and, except as described in Section 3.1(c) of the Disclosure Schedule, are not subject to preemptive rights. There are no outstanding bonds, debentures, notes or other indebtedness or other securities of the Company having the right to vote on any matters on which stockholders of the Company may vote. Except as set forth above, there are no outstanding securities, options, warrants, calls, rights, commitments, agreements, arrangements 6 or undertakings of any kind to which the Company or any of its Subsidiaries is a party, or by which any of them is bound, obligating the Company or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other equity or voting securities of the Company or of any of its Subsidiaries or obligating the Company or any of its Subsidiaries to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, arrangement or undertaking. There are no outstanding contractual obligations, commitments, understandings or arrangements of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire or make any payment in respect of or measured or determined based on the value or market price of any shares of capital stock of the Company or any of its Subsidiaries and, to the knowledge of the Company, there are no irrevocable proxies with respect to shares of capital stock of the Company or any Subsidiary of the Company. Except as provided in Section 3.1(c) of the Disclosure Schedule, there are no agreements or arrangements pursuant to which the Company is or could be required to register shares of Company Common Stock or other securities under the Securities Act of 1933, as amended (the "Securities Act"). (d) Authority; Noncontravention . The Company has the --------------------------- requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company and its shareholders and no other corporate action on the part of the Company or its shareholders is necessary to authorize the execution and delivery of this Agreement and the consummation by the Company of the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. Except as disclosed in Section 3.1(d) of the Disclosure Schedule, the execution and delivery of this Agreement does not, and the consummation of the transactions contemplated hereby and compliance with the provisions hereof will not, (a) conflict with or result in any breach of any provision of the articles of incorporation or bylaws of the Company or the comparable charter documents of its Subsidiaries or (b) conflict with, or result in any breach or violation of, or constitute a default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration under (i) any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise or license applicable to the Company or any of its Subsidiaries or their respective properties or assets or (ii) any judgment, order, decree, statute, law, ordinance, rule, regulation or arbitration award applicable to the Company or any of its Subsidiaries or their respective properties or assets, or (c) result in the creation of any Lien upon any of the parties or assets of the Company or any of its Subsidiaries, other than, in the case of clauses (b) and (c), any such conflicts, breaches, violations, defaults, rights, losses or Liens that individually or in the aggregate could not have a material adverse effect with respect to the Company or could not prevent, hinder or materially delay the ability of the Company to consummate the transactions contemplated by this Agreement. No consent, approval, order or authorization of, or registration, declaration or filing with, or notice to, any Federal, state or local government or any court, administrative agency or commission or other governmental authority or agency, domestic or foreign (a "Governmental Entity"), is required by or with respect to the Company or any of its Subsidiaries in connection with the execution and delivery of this Agreement by the Company or the consummation by the Company of the transactions contemplated hereby, except for (i) the filing of the Articles of Merger with the Secretary of States of the State of California and Minnesota, and appropriate documents with the relevant authorities of other states in which the 7 Company is qualified to do business and (ii) such other consents, approvals, orders, authorizations, registrations, declarations, filings or notices as are set forth in Section 3.1(d) of the Disclosure Schedule. (e) Financial Statements; Undisclosed Liabilities. The consolidated --------------------------------------------- financial statements of the Company for the years ended June 30, 1996 and 1997 audited by KPMG Peat Marwick, LLP and the unaudited balance sheet of the Company as of December 31, 1997 and the unaudited statements of income and retained earnings of the Company for the fiscal period then ended compiled by the Company attached hereto in Section 3.1(e) of the Disclosure Schedule (the "Financial Statements") are true, complete and correct and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved. The Financial Statements fairly present the financial position and assets and liabilities, whether accrued, absolute, contingent or otherwise, of the Company as of the dates thereof and the results of operations and cash flows of the Company for the periods then ended (subject, in the case of unaudited quarterly statements, to normal year-end audit adjustments). Since December 31, 1997, the Company has not incurred any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) except (i) as and to the extent set forth on the balance sheet of the Company as of December 31, 1997 (including the notes thereto), (ii) as incurred in connection with the transactions contemplated by this Agreement, (iii) as incurred after December 31, 1997 in the ordinary course of business and consistent with past practice, (iv) as set forth in Section 3.1(e) of the Disclosure Schedule, or (v) as would not, individually or in the aggregate, have a material adverse effect with respect to the Company. (f) Absence of Certain Changes or Events . Except as described ------------------------------------ in Section 3.1(f) of the Disclosure Schedule, since December 31, 1997 there has not been: (i) any material adverse change in the working capital, financial condition, assets, liabilities (whether absolute, accrued, contingent or otherwise), operating profits, business or prospects of the Company; (ii) any damage, destruction or loss (whether or not covered by insurance) affecting the Company's business or its assets; (iii) any increase or decrease in the rates of compensation payable or to become payable by the Company to any of its officers, directors or employees over or under the rates in effect during the year ended December 31, 1997, other than general increases made in accordance with past practices which are described in Section 3.1(f) of the Disclosure Schedule; or any declaration, payment, commitment, or obligation of any kind for the payment by the Company of any bonus (other than standard year-end bonuses consistent with past practices which are described in Section 3.1(f) of the Disclosure Schedule), additional salary or compensation, or retirement, termination or severance benefits to officers, directors or employees; (iv) any material amendment or termination of any material contract, lease or license to which the Company is a party or by which it may be bound, other than in the ordinary course of business; 8 (v) any disposition, mortgage, pledge, or subjection to any lien, claim, charge, option, or encumbrance of any property or asset of the Company, or any cancellation or compromise of any debt or claim of the Company other than in the ordinary course of business; (vi) any labor dispute or threat of a labor dispute or any attempt or threat of an attempt by a labor union to organize the Company's employees; (vii) any acquisition by the Company of the assets or capital stock of another business entity; (viii)any distribution or disposition of the Company's assets other than in the ordinary course of business; (ix) any termination of any permit or license issued to the Company or to any of its employees or agents; (x) any statute, order, judgment, writ, injunction, decree, permit, rule or regulation of any court or any governmental or regulatory body adopted or entered or proposed to be adopted or entered which may adversely affect the property or business of the Company; (xi) any event or occurrence affecting the Company, its business or its industry which may cause an adverse change affecting the Company's sales, profitability or financial condition or which may otherwise adversely affect the Company; or (xii) any dividend or distribution declared, set aside or paid in respect of the Company Common Stock or any repurchase by the Company of shares of Company Common Stock. (g) Litigation. Except as disclosed in Section 3.1(g) of the ---------- Disclosure Schedule, there is no suit, action or proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any basis for any such suit, action, proceeding or investigation. There is no judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against the Company or any of its Subsidiaries. (h) Labor Matters; Employee Matters. ------------------------------- (i) Neither the Company nor any of its Subsidiaries is a party to, or bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization, nor is it or any of its Subsidiaries the subject of any proceeding asserting that it or any Subsidiary has committed an unfair labor practice or seeking to compel it to bargain with any labor organization as to wages or conditions of employment, nor is there any strike, work stoppage or other labor dispute involving it or any of its Subsidiaries pending or, to its knowledge, threatened. (ii) No employee of the Company has a written or oral agreement (or an assurance pursuant to any employee manual) which would preclude the Company from 9 terminating such employee's employment at any time with no obligation of the Company to make any payment except wages and accrued benefits to the date of termination. The Company has not engaged in any discriminatory hiring or employment practices nor have any employment discrimination complaints been filed against the Company with any state or federal agency. The Company has not been threatened by any former employee with any suit alleging wrongful termination. (iii) The Company has delivered to Parent (i) all employment manuals utilized by the Company within the past three (3) years, (ii) copies of any determination letters received by the Company from the Internal Revenue Service or any other governmental authority with respect to any employee benefit plan, (iii) copies of any summary plan descriptions or summaries of material modifications relating to any employee benefit plan (as defined in Section 3(3) of ERISA) that have been prepared or distributed in the past three (3) years, and (iv) any annual reports (Form 5500 series) filed for any employee benefit plan or fringe benefit plan (within the meaning of Code Section 6039D) for plan years ending in June 30, 1997. All such summary plan descriptions, summaries, and annual reports, were true, complete and correct, and complied with all requirements applicable thereto, at the time such documents were distributed or filed. The current summary plan descriptions comply with all applicable requirements and properly describe the current versions of the plans to which they relate. (iv) There are no present or former Company employees, directors or independent contractors entitled to (i) pension benefits that are "unfunded" as defined under ERISA or (ii) any pension benefit or welfare benefit to be paid after termination of employment. Except with respect to continuation coverage under group health plans pursuant to Section 4980B of the Code or state law, and except with respect to continuation coverage under group life insurance plans pursuant to state law, no other benefits (whether or not pursuant to any plan or benefit arrangement that is subject to the Employee Retirement Income and Security Act ("ERISA")) whatsoever are payable to any present or former Company employees after termination of employment or to any present or former directors or independent contractors after cessation of service to the Company (including, but not limited to, any post-retirement medical or death benefits, any severance benefits or any disability benefits). (v) There are no arrangements or contracts with any director, officer, employee or independent contractor of the Company that require any deferred compensation, retirement or welfare benefits to be paid or provided following termination of services. (vi) Each "employee welfare benefit plan" (as defined in Section 3(1) of ERISA) of the Company is either funded through insurance or is unfunded for purposes of ERISA. There are no reserves, assets, surplus or prepaid premiums under any such plan, and, the Company is not in default under any such plan, and all such plans are in compliance with all applicable laws (including, but not limited to, ERISA, the Code and the Age Discrimination in Employment Act of 1967). (vii) Each of any "employee welfare benefit plan" (as defined above) maintained by the Company, any fiduciary thereof, and the Company is not subject to any liability (other than normal liabilities and expenses associated with maintenance of 10 such plan or arrangement as an ongoing benefit plan or arrangement) under ERISA or the Code or any other applicable law, including without limitation, liability resulting from a partial plan termination. (viii) The Company is not subject to any liability (other than normal liabilities and expenses associated with maintenance of such plan or arrangement as an ongoing benefit plan or arrangement) under ERISA or the Code or any other applicable law, including without limitation, liability resulting from a partial plan termination or from prohibited transactions. (ix) The Company neither maintains, nor has it ever maintained or ever been obligated to contribute to, (i) a multi-employer plan within the meaning of Section 3(37) of ERISA, or (ii) any employee benefit plan within the meaning of Section 3(3) of ERISA. (x) There are and there have been no inquiries, proceedings, claims or suits pending or, to the best knowledge of the Company, threatened by any governmental agency or authority or by any participant or beneficiary against any of the Company's "employee welfare benefit plans" (as defined above) with respect to the operation of such benefit plans. (xi) The consummation of the transactions contemplated by this Agreement will not, alone or together with any other event, (i) entitle any employee of the Company to severance pay or any other payment, or (ii) accelerate the time of payment or vesting, or increase the amount of, compensation due to any such employee. (xii) The Company has no obligation for (i) any long-term disability benefits to or for any of the Company's employees who become disabled prior to the Closing Date (including any individual who is disabled but has not satisfied any applicable waiting period) and (ii) any life insurance benefits promised, due and/or payable to or for any of the Company's employees who die prior to the Closing Date. (i) Tax Returns and Tax Payments. The Company and each of its ---------------------------- Subsidiaries has timely filed, with the appropriate authority, (or, as to Subsidiaries, the Company has filed, with the appropriate authority, on its behalf) all Tax Returns (as defined below) required to be filed by it, has paid (or, as to Subsidiaries, the Company has paid on its behalf) all Taxes (as defined below) shown thereon to be due and has provided (or, as to Subsidiaries, the Company has made provision on its behalf of) adequate reserves in the Financial Statements for any Taxes that have not been paid, whether or not shown as being due on any Tax Returns. All Tax Returns were correct as filed. Except as set forth in Section 3.1(i) of the Disclosure Schedule (i) no claim for unpaid Taxes has been asserted by a Tax authority or has become a lien (except for liens not yet due and payable) against the property of the Company or any of its Subsidiaries or is being asserted against the Company or any of its Subsidiaries, (ii) no audit of any Tax Return of the Company or any of its Subsidiaries is being conducted by any government entity, and (iii) no extension of the statute of limitations on the assessment of any Taxes has been granted by the Company or any of its Subsidiaries and is currently in effect. Neither the Company nor any of its Subsidiaries is or has been a member of any consolidated, combined, unitary or aggregate group for Tax purposes except such a group consisting only of the Company and its Subsidiaries. As used herein, "Taxes" shall mean all taxes of any kind, including, without limitation, those on 11 or measured by or referred to as income, gross receipts, sales, use, ad valorem, franchise, profits, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, value added, property or windfall profits taxes, customs, duties or similar fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any governmental authority, domestic or foreign. As used herein, "Tax Return" shall mean any return, report or statement required to be filed with any governmental authority with respect to Taxes. (j) State Antitakeover Laws Not Applicable. No state takeover -------------------------------------- statute or similar statute or regulation of the State of California applies or purports to apply to this Agreement or the transactions contemplated hereby and no provision of the Articles of Incorporation, Bylaws or other governing instruments of the Company or any of its Subsidiaries or the terms of any rights plan or agreement of the Company would, directly or indirectly, restrict or impair the ability of Parent to vote, or otherwise to exercise the rights of a stockholder with respect to, securities of the Company and its Subsidiaries that may be acquired or controlled by Parent by virtue of this Agreement or the transactions contemplated hereby or permit any shareholder to acquire securities of the Company or of Parent or any of its Subsidiaries on a basis not available to Parent in the event that Parent were to acquire securities of the Company. (k) Real Estate. The Company does not own or have title to any ----------- real estate, and has never owned or had title to any real estate. The Company does not lease any real estate other than pursuant to real estate leases listed in Section 3.1(k) of the Disclosure Schedule, true and correct copies of which has been delivered to Parent (the "Leases"), and, other than pursuant to the Leases, has not leased any other real estate during the past five years. Each of the Company and the other party thereto is not in default under the Lease, and there are no facts which, with notice and/or the passage of time, would constitute such a default. All buildings leased by the Company pursuant to the Leases are in good condition, normal wear and tear excepted, and the heating, air conditioning, plumbing and electrical systems of each such building are in good operating order, ordinary wear and tear excepted. The Company has not received notice that said buildings do not comply with municipal, state and federal statutes, ordinances, rules and regulations applicable to the construction of the buildings and their actual use, and the buildings comply with said statutes, ordinances, rules and regulations. No consent is required under the Leases in connection with the Merger (l) Compliance with Laws; Environmental Matters. ------------------------------------------- (i) The Company and its subsidiaries and their operations and assets, including owned or leased real property, are in compliance in all material respects with all statutes, laws, regulations, ordinances, rules, judgments, orders, decrees or arbitration awards applicable thereto, including Environmental Laws (as defined below). (ii) There are no legal, administrative, arbitral or other proceedings, claims, actions, causes of action, private environmental investigations or remediation activities or governmental investigations of any nature seeking to impose, or that reasonably could be expected to result in the imposition, on the Company or any of its Subsidiaries of any liability or obligations arising under common law standards relating to environmental protection, human health or safety, or under any local, state, federal, national or supernational environmental statute, regulation or ordinance, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as 12 amended (collectively, "Environmental Laws"), pending or, to the knowledge of the Company, threatened, against the Company or any of its Subsidiaries, which liability or obligation would have or would reasonably be expected to have a material adverse effect on the Company or any of its Subsidiaries. To the knowledge of the Company or any of its Subsidiaries, there is no reasonable basis for any such proceeding, claim, action or governmental investigation that would impose any liability or obligation that would have or would reasonably be expected to have a material adverse effect on the Company or any of its Subsidiaries. To the knowledge of the Company, during or prior to the period of (i) its or any of its Subsidiaries' ownership or operation of any of their respective current properties, (ii) its or any of its Subsidiaries' participation in the management of any property, or (iii) its or any of its Subsidiaries' holding of a security interest or other interest in any property, there was no release or threatened release of hazardous, toxic, radioactive or dangerous materials or other materials regulated under Environmental Laws in, on, under or affecting any such property which would reasonably be expected to have a material adverse effect on the Company or any of its Subsidiaries. Neither the Company nor any of its Subsidiaries is subject to any agreement, order, judgment, decree, letter or memorandum by or with any court, governmental authority, regulatory agency or third party imposing any liability or obligations pursuant to or under any Environmental Law. (m) Leased Tangible Personal Property. The Company does --------------------------------- not lease any personal property other than pursuant to (i) leases in the ordinary course of business which can be terminated on not more than 30 days notice by the Company without payment of any penalty or termination payment, and (ii) leases ("Personal Property Leases") which are listed in Section 3.1(m) of the Disclosure Schedule, true and correct copies of which have been delivered to Parent. Each of the Company and the other parties thereto is not in default under any of the Personal Property Leases, and the Company is not aware of any fact which, with notice and/or passage of time, would constitute such a default. No consent is required under the Personal Property Leases in connection with the Merger. (n) Contracts. Section 3.1(n) of the Disclosure Schedule --------- lists, and the Company has previously delivered to Parent, true and complete copies of, all of the following contracts or other obligations to which the Company is a party or by which it is bound: (i) employment agreements and any other contracts or understandings with or loans to any of the Company's shareholders, officers, directors, employees, consultants, salesmen, distributors or sales representatives, including but not limited to any which relate to bonuses or deferred compensation (ii) any employee benefit plan made available by the Company to any of its employees; (iii) any collective bargaining agreement or other agreement with any union; (iv) any outstanding contracts with customers; 13 (v) any deeds of trust, mortgages, conditional sales contracts, security agreements, pledge agreements, trust receipts, or any other agreements or arrangements whereby any assets of the Company are subject to a lien, encumbrance, charge or other restriction; (vi) any loan agreements (whether for borrowing or lending), letters of credit or lines of credit; (vii) any contracts restricting the Company from doing business in any areas or in any way limiting competition and any contracts which limit, restrict or transfer rights to any technology utilized or developed by the Company or which establish rights of a supplier or customer to a particular product marketed or being developed by the Company; for each such contract, Section 3.1(n) of the Disclosure Schedule briefly describes the restrictions or limitations contained in the contract; (viii) any construction contracts, or contracts for the purchase of equipment, and any contracts calling for aggregate payments by the Company in excess of $5,000.00 and which are not terminable without cost or liability on notice of 90 days or less; (ix) any joint venture, partnership or limited partnership agreement involving the Company; (x) any indemnification by the Company and any guarantees by the Company of the obligations of any other party except those resulting from the endorsement of customer checks deposited by the Company for collection; (xi) any license or franchise agreement, either as licensor or licensee or franchisor or franchisee, including any such agreements relating to intangible property, and any distributorship, dealership, or sales agency agreement. (xii) any insurance policies or contracts; (xiii) any other contracts which may have material impact on the Company's results of operations or financial condition; and (xiv) Any commitments to enter into any of the types of contracts and obligations referred to in this Section 3.1(n). Except as set forth in Section 3.1(n) of the Disclosure Schedule, the Company has not received notice of any default under any such contracts, obligations or commitments, the Company is not in default under any such contracts, obligations or commitments, there are no facts which, with notice and/or the passage of time, would constitute such a default, and no other party thereto is in default. All such contracts are enforceable by the Company in accordance with their terms. No consent is required under the contracts, obligations and commitments referred to in this Section 3.1(n) in connection with the Merger. 14 None of the Company's purchase commitments is in excess of the normal, ordinary, and usual requirements of the Company's business or was made at any price substantially in excess of then-current market price, or contains terms and conditions significantly more onerous than those which are usual and customary in the Company's industry. Schedule 3.1(n) of the Disclosure Schedule lists, and the Company has previously delivered to Parent true and complete copies of all outstanding bids, proposals to perform services for customers, or unfilled orders quoting prices. The Company is not a party to or otherwise bound by any contract, agreement, plan, lease, license, commitment, or undertaking which is materially adverse, materially onerous, or materially harmful to any aspect of the Company's business. (o) Assets. The equipment, furniture, computers, and other tangible ------ personal property owned, leased or used by the Company in its business is in good condition, normal wear and tear excepted, and is in good operating order. Section 3.1(o) of the Disclosure Schedule lists all furniture, equipment, and other tangible personal property of the Company (other than inventory and supplies) having an original cost of $5,000.00 or more. Section 3.1(o) of the Disclosure Schedule also lists all equipment, furniture, computers and other tangible personal property which (i) is used by the Company or which is located on the Company's premises and (ii) which is not owned by the Company, except for items leased under the Personal Property Leases and except for normal personal property of employees. Except for sales of inventory in the ordinary course of business, since the date of the most recent balance sheet contained in the Financial Statements no tangible assets (whatever their original cost) have been transferred from the Company, whether by sale, dividend or otherwise. (p) Intellectual Property . Each of the Company and its Subsidiaries --------------------- owns or has a license to use all of the copyrights, patents, trademarks, service marks, service names, trade names, applications therefore, technology rights and licenses, computer software (including any source or object codes therefore or documentation relating thereto), trade secrets, franchises, know-how, inventions, and other intellectual property rights (collectively, the "Intellectual Property") which is used by them in their respective businesses. All software used in the Company's business and sold by the Company is year 2000 compliant. Each of the Company and its Subsidiaries is the owner of or has a license to any Intellectual Property sold or licensed to a third party in connection with their business operations, and have the right to convey by sale or license any Intellectual Property so conveyed. Neither the Company nor any of its Subsidiaries is in default under any of their Intellectual Property licenses. No proceedings have been instituted or are pending, or to the knowledge of the Company has any person claimed or alleged any rights to such Intellectual Property. Except as set forth in Schedule 3.1(p) of the Disclosure Schedule, neither the Company nor any of its Subsidiaries is obligated to any recurring royalties to any person with respect to any such Intellectual Property. No officer, director, or employee of the Company or any of its Subsidiaries is a party to a contract or agreement which requires such officer, director or employee to assign any interest in any Intellectual Property to the Company or any of its Subsidiaries and to keep confidential any trade secrets, proprietary data, customer information, 15 or other business information of the Company or any of its Subsidiaries and to the knowledge of the Company no such officer, director or employee is a party to a contract or agreement which requires such officer, director or employee to assign any interest in any Intellectual Property to any person other than the Company or any of its subsidiaries or to keep confidential any trade secrets, proprietary data, customer information, or other business information of any person other than the Company or any of its Subsidiaries. Except as set forth in Section 3.1(p) of the Disclosure Schedule, no officer or director of the Company or any of its Subsidiaries, or to the knowledge of the Company, other employee of the Company or any of its Subsidiaries, is a party to any contract or agreement which restricts or prohibits such officer, director or employee from engaging in activities competitive with any person. (q) Accounts Receivable. All accounts receivable of the ------------------- Company reflected in the most recent balance sheets contained in the Financial Statements originated in the ordinary course of its business, are valid, and to the knowledge of the Company are fully collectible and not subject to any defense, counterclaim or setoff, except and only to the extent of the reserve against accounts receivable shown on such balance sheet. (r) Properties. Each of the Company and its Subsidiaries (i) has ---------- good, clear and marketable title to all the properties and assets reflected in the latest balance sheet of the Company contained in the Financial Statements as being owned by the Company or one of its Subsidiaries or acquired after the date thereof (except properties sold or otherwise disposed of since the date thereof in the ordinary course of business), free and clear of (a) all Liens except statutory liens securing payments not yet due and (b) all real property mortgages and deeds of trust and (ii) is the lessee of all leasehold estates reflected in the latest financial statements or acquired after the date thereof and is in possession of the properties purported to be leased thereunder, and each such lease is valid without default thereunder by the lessee or, to the Company's knowledge, the lessor. (s) Transactions with Directors, Officers, Employees and Affiliates . --------------------------------------------------------------- There have been no transactions since December 31, 1997 between the Company and any director, officer, employee or affiliate of the Company, except on an arm's length basis in accordance with normal business practices. Since June 30, 1997 none of the officers, directors, employees or affiliates of the Company, or any member of the immediate family of any such persons, has been a director of officer of, or has had a material interest in, any firm, corporation, association or business enterprise which during such period has been a material supplier, customer or sales agent of the Company or has competed to a material extent with the Company. (t) Insurance. The Company has not received any notice of --------- cancellation with respect to any insurance policy of the Company. All premiums due under any such insurance policy have been paid in full. The Company has timely filed all claims or timely notified insurance carriers of events or circumstances giving rise to any claims under such policies. (u) Brokers. Except for the fee payable to National ------- Securities Corporation ("National") pursuant to that certain letter agreement dated December 2, 1997, between the Company and National, no broker, investment banker, financial advisor or other person is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. (v) Asset Sales; Merger. The Company has not, except for ------------------- sales of inventory in the ordinary course of business, sold, transferred or distributed any significant portion of its assets during the two-year period preceding the date hereof nor has the Company taken any other action 16 which would preclude the Merger from qualifying as a reorganization within the meaning of Section 368 of the Code. (w) Pooling of Interests. To the Company's knowledge, -------------------- based on consultation with KPMG Peat Marwick LLP, its independent auditors, neither the Company nor any of its officers, directors or stockholders has taken any action which would preclude Parent's ability to account for the Merger as a pooling of interests. (x) Full Disclosure. No representation or warranty made --------------- by the Company under or in connection with this Agreement, no certification furnished or to be furnished to Parent pursuant to this Agreement, and no agreements, instruments or documents delivered by the Company to Parent or its counsel hereunder, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading. (y) Board Recommendation. The Board of Directors of the -------------------- Company, pursuant to an action in writing, has by unanimous action of all directors then in office (i) determined that this Agreement and the transactions contemplated hereby, including the Merger, are fair to and in the best interests of the stockholders of the Company, and (ii) resolved to recommend that the holders of the shares of Company Stock approve this Agreement and the transactions contemplated herein, including the Merger. (z) Required Company Vote. The Company Stockholder --------------------- Approval which has been obtained prior to the signing of this Agreement, being the affirmative vote of a majority of the outstanding shares of the Company Common Stock, is the only vote of the holders of any class or series of the Company's securities necessary to approve this Agreement, the Merger and the other transactions contemplated hereby. Prior to the signing of this Agreement, registered holders of more than 50% of the Company Common Stock entitled to vote on the Merger have given Parent irrevocable proxies granting Parent the right to vote their shares of Company Common Stock at any meeting called to consider the Merger, for the approval of this Agreement, the Merger and all transactions contemplated herein. (aa) Information Supplied. None of the information -------------------- supplied or to be supplied by the Company for inclusion or incorporation by reference in (i) the proxy statement to be filed with the SEC by Parent in connection with the Parent stockholder approval of the Merger (the "Proxy Statement") will, at the time the Proxy Statement is filed with the SEC, and at any time it is amended or supplemented, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein regarding the Company not misleading, except that no representation is made by the Company with respect to statements made or incorporated by reference therein based on information supplied by Parent for inclusion or incorporation by reference therein. 3.2 Representations and Warranties of Parent. Parent represents ---------------------------------------- and warrants to the Company as follows: (a) Organization, Standing and Corporate Power. Each of Parent and ------------------------------------------ Sub is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and has the requisite corporate power and authority to carry on its business as now being conducted. Each of Parent and Sub is duly qualified or licensed to do business and is in 17 good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed (individually or in the aggregate) would not have a material adverse effect with respect to Parent. (b) Subsidiaries. The only direct or indirect subsidiary of Parent ------------ is Sub. All the outstanding shares of capital stock of Sub have been validly issued and are fully paid and nonassessable and are owned (of record and beneficially) by Parent free and clear of all Liens. (c) Capital Structure. The authorized capital stock of Parent ----------------- consists of 10,000,000 shares of Parent Stock and 5,000,000 shares of preferred stock, with such par value as the board of directors of Parent may designate. As of the date of this Agreement: (i) 3,351,616 shares of Parent Common Stock, and 267,500 shares of Parent 10% Preferred Stock (which at a future date, may be convertible into Parent Common Stock) are issued and outstanding or are reserved for issuance pursuant to signed Subscription Agreements; (ii) 1,800,000 shares of Parent Common Stock are reserved for issuance upon exercise of authorized but unissued options under Parent's 1995 Stock Option Plan; (iv) 1,326,567 shares of Parent Common Stock are issuable upon exercise of outstanding options under Parent's 1995 Stock Option Plan; and (v) 1,004,000 shares of Parent Common Stock are issuable upon exercise of issued and outstanding common stock purchase warrants. Except as set forth above, no shares of capital stock or other equity securities of Parent are issued, reserved for issuance or outstanding. All outstanding shares of capital stock of Parent are, and all shares of Parent Stock which may be issued pursuant to this Agreement will be, when issued, duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. All shares of Parent Stock issued pursuant to this Agreement will, when so issued, be registered or exempt from registration under any applicable federal or state securities laws. Other than the 10% Preferred Stock, there are no outstanding bonds, debentures, notes or other indebtedness or other securities of Parent having the right to vote on any matters on which stockholders of Parent may vote. Except as set forth above, there are no outstanding securities, options, warrants, calls, or rights obligating Parent or any of its subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other equity securities of Parent or any of its subsidiaries or obligating Parent or any of its subsidiaries to issue, grant, extend or enter into any such security, option, warrant, call, or right. The authorized capital stock of Sub consists of 10,000 shares of common stock, par value $.01 per share. (d) Authority; Noncontravention. Parent and Sub have all requisite --------------------------- corporate power and authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement by Parent and Sub and the consummation by Parent and Sub of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of Parent and Sub and no other corporate action on the part of the Company or Sub is necessary to authorize the execution and delivery of this Agreement or the consummation by Parent and Sub of the transactions contemplated hereby. However, the approval of the transactions contemplated in this Agreement of the shareholders of Parent, which has not been obtained as of the date of this Agreement, is required under applicable rules of The Nasdaq Stock Market, Inc. for Parent's Common Stock to continue to be listed on the Nasdaq Small Cap Market. This Agreement has been duly executed and delivered by and constitutes a valid and binding obligation of each of Parent and Sub, enforceable against such party in accordance with its terms. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated by this Agreement 18 and compliance with the provisions hereof will not (a) conflict with or result in any breach of any provision of the articles of incorporation or bylaws of either Parent or Sub, or (b) conflict with, or result in any breach or violation of, or constitute a default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration under (i) any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise or license applicable to Parent or Sub or their respective properties or assets or (ii) any judgment, order, decree, statute, law, ordinance, rule, regulation or arbitration award applicable to Parent or Sub or their respective properties or assets, or (c) result in the creation of any Lien upon any of the properties or assets of Parent or Sub, other than, in the case of clauses (b) and (c), any such conflicts, breaches, violations, defaults, rights, losses or Liens that individually or in the aggregate could not have a material adverse effect with respect to Parent or could not prevent, hinder or materially delay the ability of Parent to consummate the transactions contemplated by this Agreement. No consent, approval, order or authorization of, or registration, declaration or filing with, or notice to, any Governmental Entity is required by or with respect to Parent or Sub or in connection with the execution and delivery of this Agreement by Parent or Sub or the consummation by Parent or Sub, as the case may be, of any of the transactions contemplated by this Agreement, except for (i) the filing with the SEC of such reports under the Securities Act of 1933, as amended (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act") as may be required in connection with this Agreement and the transactions contemplated hereby, (ii) the filing of the Articles of Merger with the Secretaries of State of the State of California and the State of Minnesota and appropriate documents with the relevant authorities of other states in which the Company is qualified to do business, and (iii) such other consents, approvals, orders, authorizations, registrations, declarations, filings or notices as may be required under the "takeover" or "blue sky" laws of various states. (e) SEC Documents; Undisclosed Liabilities. Parent has filed all -------------------------------------- required reports, schedules, forms, statements and other documents with the SEC since May 23, 1996 (collectively, and in each case, including all exhibits and schedules thereto and documents incorporated by reference therein, the "Parent SEC Documents"). As of their respective dates, the Parent SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such Parent SEC Documents, and none of the Parent SEC Documents (including any and all financial statements included therein) as of such date contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of Parent included in the Parent SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles (except, in the case of unaudited consolidated quarterly statements, as permitted by Form 10-QSB of the SEC) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly present the consolidated financial position of Parent as of the dates thereof and the results of operations and changes in cash flows for the periods then ended (subject, in the case of unaudited quarterly statements, to normal year-end audit adjustments). Since December 31, 1997, neither Parent nor any of its subsidiaries has incurred any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) except (i) as and to the extent set forth on the balance sheet of Parent as of December 31, 1997 (including the notes thereto), (ii) the placement of up to $2,675,000 stated amount of Parent's 10% Preferred Stock, (iii) as 19 incurred in connection with the transactions contemplated by this Agreement, (iv) as incurred after December 31, 1997 in the ordinary course of business and consistent with past practice, (v) as described in the SEC Documents filed since September 30, 1997 (the "Recent Parent SEC Documents"), or (vi) as would not, individually or in the aggregate, have a material adverse effect with respect to Parent. (f) Absence of Certain Changes or Events. Except as disclosed in ------------------------------------ this Agreement, the Recent Parent SEC Documents and the unaudited balance sheet of Parent as of December 31, 1997 (including the notes thereto), since December 31, 1997, Parent has conducted its business only in the ordinary course consistent with past practice, and there is not and has not been (i) any material adverse change with respect to Parent; (ii) any condition, event or occurrence which, individually or in the aggregate, could reasonably be expected to have a material adverse effect or give rise to a material adverse change with respect to Parent; or (iii) any condition, event or occurrence which could reasonably be expected to prevent, hinder or materially delay the ability of Parent to consummate the transactions contemplated by this Agreement. (g) Litigation. There is no suit, action or proceeding or ---------- investigation pending or, to the knowledge of Parent, threatened against or affecting Parent or Sub or any basis for any such suit, action, proceeding or investigation. There is no judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against Parent or Sub. (h) Tax Returns and Tax Payments. Parent has timely filed, with ---------------------------- the appropriate authority, all tax returns required to be filed by it, has paid all Taxes shown thereon to be due and has provided adequate reserves in the Financial Statements for any Taxes that have not been paid, whether or not shown as being due on any Tax Returns. All Tax Returns were correct as filed. Further, (i) no claim for unpaid Taxes has been asserted by a Tax authority or has become a lien (except for liens not yet due and payable) against the property of Parent or is being asserted against Parent, (ii) no audit of any Tax Return of Parent is being conducted by any Government Entity, and (iii) no extension of the statute of limitations on the assessment of any Taxes has been granted by Parent and is currently in effect. Parent has not been a member of any consolidated, combined, unitary or aggregate group for Tax purposes. (i) Compliance with Laws; Environmental Matters. ------------------------------------------- (i) Parent and its operations and assets, including owned or leased real property, are in compliance in all material respects with all statutes, laws, regulations, ordinances, rules, judgments, orders, decrees or arbitration awards applicable thereto, including Environmental Laws. (ii) There are no legal, administrative, arbitral or other proceedings, claims, actions, causes of action, private environmental investigations or remediation activities or governmental investigations of any nature seeking to impose, or that reasonably could be expected to result in the imposition, on Parent of any liability or obligations arising under common law standards relating to environmental protection, human health or safety, or under any local, state, federal, national or supernational environmental statute, regulation or ordinance, including the Environmental Laws, pending or, to the knowledge of Parent, threatened, against Parent, which liability or obligation would have or would reasonably be expected to have a material adverse effect on Parent. To the knowledge of the Parent, there is no reasonable basis for any such proceeding, claim, 20 action or governmental investigation that would impose any liability or obligation that would have or would reasonably be expected to have a material adverse effect on Parent. To the knowledge of Parent, during or prior to the period of (i) its ownership or operation of any of its current properties, (ii) its participation in the management of any property, or (iii) its holding of a security interest or other interest in any property, there was no release or threatened release of hazardous, toxic, radioactive or dangerous materials or other materials regulated under Environmental Laws in, on, under or affecting any such property which would reasonably be expected to have a material adverse effect on Parent. Parent is not subject to any agreement, order, judgment, decree, letter or memorandum by or with any court, governmental authority, regulatory agency or third party imposing any liability or obligations pursuant to or under any Environmental Law. (j) Intellectual Property. Parent owns or has a license to use all of --------------------- the copyrights, patents, trademarks, service marks, service names, trade names, applications therefore, technology rights and licenses, computer software (including any source or object codes therefore or documentation relating thereto), trade secrets, franchises, know-how, inventions, and other intellectual property rights (collectively, the "Intellectual Property") which is used in its business. All software used in Parent's business and sold by Parent is year 2000 compliant. Parent is the owner of or has a license to any Intellectual Property sold or licensed to a third party in connection with its business operations, and has the right to convey by sale or license any Intellectual Property so conveyed. Parent is not in default under any of its Intellectual Property licenses. No proceedings have been instituted or are pending, or to the knowledge of Parent has any person claimed or alleged any rights to such Intellectual Property. Parent is not obligated to any recurring royalties to any person with respect to any such Intellectual Property. No officer, director, or employee of Parent is a party to a contract or agreement which requires such officer, director or employee to assign any interest in any Intellectual Property to Parent and to keep confidential any trade secrets, proprietary data, customer information, or other business information of Parent and to the knowledge of Parent no such officer, director or employee is a party to a contract or agreement which requires such officer, director or employee to assign any interest in any Intellectual Property to any person other than Parent or to keep confidential any trade secrets, proprietary data, customer information, or other business information of any person other than Parent. No officer or director of Parent, or to the knowledge of Parent, other employee of Parent, is a party to any contract or agreement which restricts or prohibits such officer, director or employee from engaging in activities competitive with any person. (k) Properties. Parent (i) has good, clear and marketable title to ---------- all the properties and assets reflected in the latest balance sheet of Parent contained in the Financial Statements as being owned by Parent or acquired after the date thereof (except properties sold or otherwise disposed of since the date thereof in the ordinary course of business), free and clear of (a) all Liens except statutory liens securing payments not yet due and (b) all real property mortgages and deeds of trust and (ii) is the lessee of all leasehold estates reflected in the latest financial statements or acquired after the date thereof and is in possession of the properties purported to be leased thereunder, and each such lease is valid without default thereunder by the lessee or, to Parent's knowledge, the lessor. (l) Interim Operations of Sub. Sub was formed on March 4, 1998, ------------------------- solely for the purposes of engaging in the transactions contemplated hereby, has engaged in no other business activities and has conducted its operations only as contemplated hereby. 21 (m) Brokers. No broker, investment banker, financial advisor or ------- other person is entitled to or may be paid any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Parent. ARTICLE 4 COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO MERGER 4.1 Conduct of Business of the Company. From the date of this ---------------------------------- Agreement to the Effective Time (except as otherwise specifically required by the terms of this Agreement), the Company shall, and shall cause its Subsidiaries to, act and carry on their respective businesses in the usual, regular and ordinary course of business consistent with past practice and, to the extent consistent therewith, use its best efforts to preserve intact their current business organizations, keep available the services of their current officers and employees and preserve their relationships with customers, suppliers, franchisees, licensors, licensees, advertisers, distributors and others having business dealings with them to the end that their goodwill and ongoing businesses shall not be impaired in any material respect at the Effective Time. Without limiting the generality of the foregoing, from the date of this Agreement to the Effective Time, the Company shall not, and shall not permit any of its Subsidiaries to, without the prior written consent of Parent: (a) (i) declare, set aside or pay any dividends on, or make any other distributions in respect of, any of its capital stock, other than dividends and distributions by a direct or indirect wholly owned Subsidiary of the Company to its parent, (ii) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or (iii) purchase, redeem or otherwise acquire any shares of capital stock of the Company or any of its Subsidiaries or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities; (b) authorize for issuance, issue, deliver, sell, pledge or otherwise encumber any shares of its capital stock or the capital stock of any of its Subsidiaries, any other voting securities or any securities convertible into, or any rights, warrants or options to acquire, any such shares, voting securities or convertible securities or any other securities or equity equivalents (including without limitation stock appreciation rights), or contractual obligation valued or measured by the value or market price of Company Common Stock (other than the issuance of Company Common Stock upon the exercise or conversion of stock options, warrants or convertible securities or pursuant to antidilution provisions of securities outstanding on the date of this Agreement and in accordance with their present terms, such issuance, together with the acquisitions of shares of Company Common Stock permitted under clause (a) above, being referred to herein as "Permitted Changes"); (c) amend its articles of incorporation, by-laws or other comparable charter or organizational documents; (d) acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the stock or assets of, or by any other manner, any business or any corporation, partnership, joint venture, association, or other business organization or division thereof; 22 (e) sell, lease, license, mortgage or otherwise encumber or subject to any Lien or otherwise dispose of any of its properties or assets except in the ordinary course of business consistent with past practice; (f) (i) incur any indebtedness for borrowed money or guarantee any such indebtedness of another person, issue or sell any debt Securities or warrants or other rights to acquire any debt securities of the Company or any of its Subsidiaries, guarantee any debt securities of another person, enter into any "keep well" or other agreement to maintain any financial statement condition of another person or enter into any arrangement having the economic effect of any of the foregoing, except for short-term borrowings incurred in the ordinary course of business consistent with past practice, or (ii) make any loans, advances or capital contributions to, or investments in, any other person, other than to the Company or any direct or indirect wholly owned Subsidiary of the Company; (g) acquire or agree to acquire any assets or make or agree to make any capital expenditures except in the ordinary course of business consistent with past practice; (h) pay, discharge or satisfy any claims (including claims of shareholders), liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), except for the payment, discharge or satisfaction, of (i) liabilities or obligations in the ordinary course of business consistent with past practice or in accordance with their terms as in effect on the date hereof, (ii) liabilities reflected or reserved against in, or contemplated by, the most recent financial statements (or the notes thereto) of the Company set forth in Section 3.1(e) of the Disclosure Schedule, or waive, release, grant, or transfer any rights of value or modify or change in any respect any existing license, lease, contract or other document, other than in the ordinary course of business consistent with past practice; (i) adopt or amend in any respect (except as may be required by law or by this Agreement) any bonus, profit sharing, compensation, stock option, pension, retirement, deferred compensation, employment or other employee benefit plan, agreement, trust, fund or other arrangement for the benefit or welfare of any employee, director or former director or employee or, other than increases for individuals (other than officers and directors) in the ordinary course of business consistent with past practice, increase the compensation or fringe benefits of any director, employee or former director or employee; pay any benefit not required by any existing plan, arrangement or agreement, grant any new or modified severance or termination arrangement or increase or accelerate any benefits payable under its severance or termination pay policies in effect on the date hereof, other than any such increase or acceleration provided for under such policies as in effect on the date of this Agreement; (j) change any material accounting principle used by it, except for such changes as may be required to be implemented following the date of this Agreement pursuant to generally accepted accounting principles or rules and regulations of the SEC; (k) take any action that would, or is reasonably likely to, result in any of its representations and warranties in this Agreement becoming untrue, or result in any of the conditions to the Merger set forth in Article 6 not being satisfied; (l) except in the ordinary course of business and consistent with past practice, make any tax election or settle or compromise any federal, state, local or foreign income tax liability; 23 (m) do anything which would preclude the Company from being a party to a pooling of interests transaction; and (n) authorize any of, or commit or agree to take any of, the foregoing actions. ARTICLE 5 ADDITIONAL AGREEMENTS 5.1 Preparation of Proxy Statement; Stockholder Meeting. --------------------------------------------------- (a) Promptly following the date of this Agreement, Parent shall prepare and file with the SEC a Proxy Statement which will be used by Parent to solicit approval of its stockholders of this Agreement, the Merger and the other transactions contemplated herein. Each of the Company and Parent shall use its reasonable best efforts to cause the Proxy Statement to be filed with the SEC as promptly as practicable and to have the Proxy Statement finalized as promptly as practicable after such filing. Parent shall also take any action (other than qualifying to do business in any jurisdiction in which it is not now so qualified) required to be taken under any applicable state securities laws in connection with the issuance of Parent Stock in the Merger, and the Company shall furnish all information concerning the Company and the holders of the Company Common Stock and rights to acquire Company Common Stock as may be reasonably requested in connection with any such action. (b) Parent will, as promptly as practicable following the date of this Agreement, duly call, give notice of, convene and hold a meeting of its stockholders (the "Stockholder Meeting") for the purpose of approving this Agreement, the Merger and the transactions contemplated herein. Parent will, through its Board of Directors, recommend to its stockholders approval of the foregoing matters. Parent will use its reasonable efforts to hold such meeting as soon as practicable after the date hereof. 5.2 Letter of the Company's Accountants. ' The Company shall use ----------------------------------- its best efforts to cause to be delivered to Parent a letter of KPMG Peat Marwick LLP, the Company's independent public accountants, dated a date within two business days before the date on which the Proxy Statement shall become effective and addressed to Parent, in form and substance reasonably satisfactory to Parent and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements. 5.3 Parent Access to Information . ---------------------------- (a) The Company shall, and shall cause its Subsidiaries, officers, employees, counsel, financial advisors and other representatives to, afford to Parent and its representatives reasonable access during normal business hours during the period prior to the Effective Time to its properties, books, contracts, commitments, personnel and records and, during such period, shall, and shall cause its Subsidiaries, officers, employees and representatives to, furnish promptly to Parent information concerning its business, properties, financial condition, operations and personnel as Parent may from time to time reasonably request. No investigation pursuant to this Section 5.3 shall affect any representations or warranties of the Company herein or the conditions to the obligations of the parties hereto. 24 (b) The Company shall report on operational matters and promptly advise Parent orally and in writing of any change or event having, or which, insofar as can reasonably be foreseen, could have, a material adverse effect on the Company and its Subsidiaries taken as a whole. 5.4 Registration of Parent Stock. Within one hundred twenty (120) days ---------------------------- after the Closing Date, Parent shall prepare and file a registration statement (including a prospectus, pre- and post-effective amendments, and all exhibits thereto) (the "Registration Statement"), covering the Parent Stock issued to the shareholders of the Company in accordance with Section 2.3 of this Agreement and any Parent Common Stock issuable upon exercise or conversion of the Prior Securities converted into similar securities of Parent in accordance with Section 2.2 of this Agreement with the Securities and Exchange Commission (the "SEC") and use its best efforts to cause the Registration Statement to be declared effective under the Securities Act of 1933, as amended (the "Securities Act"), as promptly as practicable after its filing. The Registration Statement shall be on form SB-2, Form S-1, Form S-3 or such other form as is appropriate in order to register such Parent Stock with the SEC pursuant to section 5 of the Securities Act. Parent shall use its best efforts to cause the Registration Statement to be declared effective by the SEC as soon as possible following the filing thereof and shall use its best efforts to maintain the Registration Statement continually effective under the Securities Act for a period of two (2) years after the date on which the Registration Statement is declared effective by the SEC. No person may participate in any such registration unless such person (i) agrees to execute, if so requested by Cohig & Associates, Inc., National Securities Corporation or other underwriter of Parent's securities, a lockup agreement pursuant to which such person agrees not to offer, sell, contract to sell, pledge, hypothecate, or otherwise dispose of any shares of Parent Stock (or securities convertible into or exchangeable for Parent Stock ) beneficially owned or otherwise held by such person on the date of such agreement or acquired on or prior to the effectiveness of the Registration Statement for a period not to exceed eight months from the date of such agreement and (ii) completes and executes all questionnaires, powers of attorney, indemnities and other documents required under the terms of any such registration. 5.5 Board of Directors. Parent shall use its best efforts to cause two ------------------ persons selected by the Company and reasonably acceptable to Parent to be nominated to and elected to serve on Parent's Board of Directors at Parent's 1998 Annual Meeting of Shareholders. 5.6 Best Efforts. Each of the parties agrees to use its best efforts to ------------ take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Merger and the other transactions contemplated by this Agreement. Parent, Sub and the Company will use their best efforts and cooperate with one another (i) in promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained under any applicable law or regulation or from any governmental authorities or third parties in connection with the transactions contemplated by this Agreement and (ii) in promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits or authorizations. 5.7 Expenses. Whether or not the Merger is consummated, all costs and -------- expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses. 25 5.8 Public Announcements. Parent and Sub, on the one hand, and the -------------------- Company, on the other hand, will consult with each other before issuing, and provide each other the opportunity to review and comment upon, any press release or other public statements with respect to the transactions contemplated by this Agreement, including the Merger, and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by applicable law, court process or by obligations pursuant to any listing agreement with any national securities exchange or The Nasdaq Stock Market, Inc. The parties agree that the initial press release or releases to be issued with respect to the transactions contemplated by this Agreement shall be mutually agreed upon prior to the issuance thereof. 5.9 Takeover Statutes. If any "fair price," "moratorium," "control share ----------------- acquisition" or other form of antitakeover statute or regulation shall become applicable to the transactions contemplated hereby, the Company and the members of the Board of Directors of the Company shall grant such approvals and take such actions as are reasonably necessary so that the transactions contemplated hereby may be consummated as promptly as practicable on the terms contemplated hereby and otherwise act to eliminate or minimize the effects of such statute or regulation on the transactions contemplated hereby. 5.10 Certain Agreements. Neither the Company nor any Subsidiary of the ------------------ Company will waive or fail to enforce any provision of any confidentiality or standstill or similar agreement to which it is a party without the prior written consent of Parent. ARTICLE 6 CONDITIONS PRECEDENT 6.1 Conditions to Each Party's Obligation to Effect the Merger. The ---------------------------------------------------------- respective obligation of each party to effect the Merger is subject to the satisfaction or waiver on or prior to the Closing Date of the following conditions: (a) No Injunctions or Restraints. No temporary restraining order, ---------------------------- preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger shall be in effect; provided, however, that -------- ------- the parties hereto shall use their best efforts to have any such injunction, order, restraint or prohibition vacated. (b) Nasdaq Governance Requirements. The issuance of Parent Stock ------------------------------ pursuant to the Merger shall satisfy all applicable requirements of The Nasdaq Stock Market, Inc. for Parent's Common Stock to be listed on the Nasdaq Small Cap Market. (c) Compliance with Federal and State Securities Laws. The issuance ------------------------------------------------- of Parent's securities to the holders of the Company Common Stock and Prior Securities shall be exempt from the registration requirements of the Securities Act, and applicable state blue sky laws. 6.2 Conditions to Obligation of Parent and Sub. The obligations of Parent ------------------------------------------ and Sub to effect the Merger are further subject to the following conditions: (a) Representations and Warranties. The representations and ------------------------------ warranties of the Company set forth in this Agreement shall be true and correct in all respects, in each case as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing 26 Date. Parent shall have received a certificate signed on behalf of the Company by the chief executive officer of the Company to such effect. (b) Performance of Obligations of the Company. The Company shall ----------------------------------------- have performed the obligations required to be performed by it under this Agreement at or prior to the Closing Date (except for such failures to perform as have not had or could not reasonably be expected, either individually or in the aggregate, to have a material adverse effect with respect to the Company or adversely affect the ability of the Company to consummate the transactions herein contemplated or perform its obligations hereunder), and Parent shall have received a certificate signed on behalf of the Company by the chief executive officer of the Company to such effect. (c) Consents, etc. Parent shall have received evidence, in form and ------------- substance reasonably satisfactory to it, that such licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental authorities and other third parties as are necessary in connection with the transactions contemplated hereby have been obtained, except such licenses, permits, consents, approvals, authorizations, qualifications and orders which are not, individually or in the aggregate, material to Parent or the Company or the failure of which to have been received would not (as compared to the situation in which such license, permit, consent, approval, authorization, qualification or order had been obtained) materially dilute the aggregate benefits to Parent of the Merger. (d) Affiliate Letters. Parent shall have received the agreements ----------------- from each of the officers and directors of the Company and Parent and from each of the beneficial owners of 5% or more of the outstanding shares of Company Common Stock and Parent Common Stock, pursuant to which they shall have agreed to not take any action which adversely affect the appropriateness of pooling of interests accounting for the Merger. The agreements shall be in substantially the form of Exhibit 6.2(d) hereto. (e) Opinion of Counsel to the Company. Parent shall have received, --------------------------------- on and as of the Closing Date, an opinion of Pollet & Woodbury, counsel to the Company, in usual and customary form reasonably acceptable to Parent, to the effect that (i) the Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California, (ii) the execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly authorized by all necessary corporate and shareholder action, (iii) this Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms (subject to customary exceptions), and (iv) the execution and delivery of this Agreement does not, and the consummation by the Company of the transactions contemplated hereby will not, (a) violate the Articles of Incorporation or Bylaws of the Company, or (b) to the best knowledge of such counsel based upon due inquiry of the Company, conflict with, or result in any breach or violation of, or constitute a default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration under (i) any loan or credit agreement, note, bond, mortgage indenture, lease or other agreement, instrument, permit, concession, franchise, or license applicable to the Company of any of its Subsidiaries or their respective properties and assets, or (ii) any judgment, order, decree, statute, law, rule, ordinance, regulation or arbitration award applicable to the Company or any of its Subsidiaries or their respective properties or assets, or 27 (iii) result in the creation of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries. (f) Opinion of Accountants. Parent shall have received a letter from ---------------------- Arthur Andersen LLP regarding such firm's concurrence with Parent management's conclusions as to the appropriateness of pooling of interests accounting for the Merger under Accounting Principles Board Opinion No. 16, if consummated in accordance with this Agreement. In addition, the Company's accountants shall have provided a letter, satisfactory in form and substance to Parent, regarding the appropriateness of pooling of interests accounting for a transaction involving the Company. (g) CompuLearning Systems, Inc. The Company shall have completed the -------------------------- acquisition of CompuLearning Systems, Inc., the owner and operator of the Electronic University Network, and shall have completed payment in full for the purchase price thereof. (h) Total Liabilities. The total liabilities of the Company and its ----------------- consolidated Subsidiaries shall not exceed $915,000 as of the Closing Date plus the amount of any indebtedness incurred by the Company following the execution of this Agreement which Parent has previously approved, it being understood that the Company expects to require up to $300,000 of additional funding to sustain its operations prior to the Closing Date. (i) Dissenter's Rights. At least 95% of the shareholders of the ------------------ Company shall have waived any dissenter's rights they may have with respect to the Merger pursuant to the CGCL. (j) Undertakings of Company Securities Holders. All of the ------------------------------------------ shareholders of the Company and the holders of the Company's other securities shall have completed, executed and delivered to Parent the Securities Holder Agreement and Undertakings in substantially the form of Exhibit 6.2(j) hereto. (k) Noncompete Agreements. Andre Durand, Steven Eskow and Sarah --------------------- Blackmum, executive officers of the Company shall have entered into noncompete agreements with Parent in substantially the form of Exhibit 6.2(k) hereto. (l) Releases, Termination of Agreements. Parent shall have received ----------------------------------- such releases, undertakings or agreements as it shall reasonably require to evidence that neither the Company nor any of its affiliates have any ongoing obligations or commitments with respect to Durand Brazil or any of its officers, directors, shareholders, affiliates or related companies, other than the Company's commitments pursuant to the exclusive CommunityWare(R) license for Brazil, a copy of which is included as Exhibit 6.2(l) hereto. In addition, Parent shall have received such evidence as it may reasonably require to demonstrate that the Company's agreements with Spencer Trask Securities and AJ Capital have been terminated and are of no further force and effect. 6.3 Conditions to Obligation of the Company. The obligation of the --------------------------------------- Company to effect the Merger is further subject to the following conditions: (a) Representations and Warranties. The representations and ------------------------------ warranties of Parent and Sub set forth in this Agreement shall be true and correct in all respects, in each case as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date; 28 provided, however, that between the date of this Agreement and the Closing Date, Parent may have issued or agreed to issue additional securities of Parent in connection with one or more private or public offerings of its securities or incurred or agreed to incur additional indebtedness in order to raise additional working capital. The Company shall have received a certificate signed on behalf of Parent by the chief executive officer of Parent to such effect. (b) Performance of Obligations of Parent and Sub . Parent and Sub -------------------------------------------- shall have performed the obligations required to be performed by them under this Agreement at or prior to the Closing Date (except for such failures to perform as have not had or could not reasonably be expected, either individually or in the aggregate, to have a material adverse effect with respect to Parent or adversely affect the ability of Parent to consummate the transactions herein contemplated or perform its obligations hereunder), and the Company shall have received a certificate signed on behalf of Parent by the chief executive officer of Parent to such effect. (c) Opinion of Counsel to Parent . The Company shall have received, ---------------------------- on and as of the Closing Date, an opinion of Gray, Plant, Mooty, Mooty & Bennett, P.A., counsel to Parent, in usual and customary form reasonably acceptable to the Company, to the effect that (i) Parent and Sub are corporations duly incorporated, validly existing and in good standing under the laws of the state of their incorporation, (ii) the execution and delivery of this Agreement by Parent and Sub and the consummation by Parent and Sub of the transactions contemplated hereby have been duly authorized by all necessary corporate action, (iii) this Agreement has been duly executed and delivered by Parent and Sub and constitutes a valid and binding obligation of each of Parent and Sub, enforceable in accordance with its terms (subject to customary exceptions), and (iv) the execution and delivery of this Agreement does not, and the consummation by Parent and Sub of the transactions contemplated hereby will not violate the Articles of Incorporation or Bylaws of Parent or Sub. ARTICLE 7 TERMINATION, AMENDMENT AND WAIVER 7.1 Termination. This Agreement may be terminated and abandoned at any ----------- time prior to the Effective Time of the Merger: (a) by mutual written consent of Parent and the Company; or (b) by either Parent or the Company if any Governmental Entity shall have issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the Merger and such order, decree, ruling or other action shall have become final and nonappealable; or (c) by Parent if the Merger shall not have been consummated on or before July 31, 1998; or (d) by Parent if the Company shall have withdrawn, modified or amended in any respect adverse to Parent or Sub its approval or recommendation of this Agreement or the Merger; or (e) by Parent, if the Company fails to perform any of its material obligations under this Agreement; or 29 (f) by the Company, if Parent or Sub fails to perform any of their respective material obligations under this Agreement; or (g) by Parent if the Merger cannot be accounted for as a pooling of interests. 7.2 Effect of Termination. In the event of termination of this Agreement --------------------- by either the Company or Parent as provided in Section 7.1, this Agreement shall forthwith become void and have no effect, without any liability or obligation on the part of Parent, Sub or the Company, other than pursuant to the provisions of Section 5.7 and this Section 7.2. Nothing contained in this Section 7.2 shall, however, relieve any party for any breach of the representations, warranties, covenants or agreements set forth in this Agreement prior to any such termination. 7.3 Amendment. This Agreement may be amended by the parties at any time --------- before or after required approval of the Merger by the stockholders of the Company; provided, however, that after such approval, there shall be made no -------- ------- amendment that by law requires further approval by such stockholders without the further approval of such stockholders. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties. 7.4 Extension; Waiver. At any time prior to the Effective Time, the ----------------- parties may (a) extend the time for the performance of any of the obligations or other acts of the other parties, (b) waive any inaccuracies in the representations and warranties contained in this Agreement or in any document delivered pursuant to this Agreement or (c) subject to the proviso of Section 7.3, waive compliance with any of the agreements or conditions contained in this Agreement. Any agreement on the part of a party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of such rights. ARTICLE 8 GENERAL PROVISIONS 8.1 Survival of Representations and Warranties. The respective ------------------------------------------ representations and warranties of each of the parties to this Agreement shall not be deemed to be waived or otherwise affected by any investigation made by the other parties to this Agreement. The representations of Parent, Sub, and the Company contained in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Merger. 8.2 Further Assurances. From time to time, on and after the Effective ------------------ Time, as and when requested by Parent or its successors or assigns, the proper officers and directors of the Company immediately before the Effective Time, or other proper officers or directors, shall, at Parent's expense, and for and on behalf and in the name of the Company, or otherwise, execute and deliver all such deeds, bills of sale, assignments and other instruments and shall take or cause to be taken such further or other reasonable actions as Parent or its successors or assigns may deem necessary or desirable in order to confirm or record or otherwise transfer to the Surviving Corporation title to and possession of all the properties, rights, privileges, powers, franchises and immunities of the Company and otherwise to reasonably carry out fully the provisions and purposes of this Agreement. 8.3 Notices. All notices, requests, claims, demands and other ------- communications under this Agreement shall be in writing and shall be deemed given if delivered personally or sent by overnight 30 courier (providing proof of delivery) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Parent or Sub, to: Online System Services, Inc. 1800 Glenarm Place, Suite 800 Denver, Colorado 80202 Attention: Chairman of the Board with a copy to: Gray, Plant, Mooty, Mooty & Bennett, P.A. 33 South Sixth Street, Suite 3400 Minneapolis, Minnesota 55402 Attention: Lindley S. Branson (b) if to the Company, to: Durand Communications, Inc. 147 Castilian Drive Santa Barbara, California 93117 Attention: President with a copy to: Pollet & Woodbury, a law corporation 10900 Wilshire Boulevard, Suite 500 Los Angeles, California 90024 Attention: John M. Woodbury, Jr. 8.4 Definitions. For purposes of this Agreement: ----------- (a) an "affiliate" of any person means another person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first person; (b) "material adverse change" or "material adverse effect" means, when used in connection with the Company or Parent, any change or effect that either individually or in the aggregate with all other such changes or effects is materially adverse to the business, assets, properties, condition (financial or otherwise) or results of operations of such party and its subsidiaries taken as a whole; provided, however, that, (i) a -------- ------- decline in general economic conditions affecting the Company or Parent shall not be deemed to be a "material adverse change" or to have a "material adverse effect" with respect to either such party or its subsidiaries; (c) "person" means an individual, corporation, partnership, joint venture, association, trust, unincorporated organization or other entity; and 31 (d) a "subsidiary" of any person means another person, an amount of the voting securities, other voting ownership or voting partnership interests of which is sufficient to elect at least a majority of its board of directors or other governing body (or, if there are no such voting interests, 50% or more of the equity interest of which) is owned directly or indirectly by such first person. 8.5 Interpretation. A reference made in this Agreement to a Section, -------------- Exhibit or Schedule, shall be to a Section of, or an Exhibit or Schedule to, this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." 8.6 Counterparts. This Agreement may be executed in one or more ------------ counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. 8.7 Entire Agreement; No Third-party Beneficiaries. This Agreement ---------------------------------------------- constitutes the entire agreement, and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter of this Agreement. This Agreement is not intended to confer upon any person other than the parties any rights or remedies. 8.8 Governing Law. This Agreement shall be governed by, and construed in ------------- accordance with, the laws of the State of Colorado regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. 8.9 Assignment. Neither this Agreement nor any of the rights, interests ---------- or obligations under this Agreement shall be assigned, in whole or in part, by operation of law or otherwise, by any of the parties without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns. 8.10 Enforcement. The parties agree that irreparable damage would occur in ----------- the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any court of the State of Colorado or of the United States located in the State of Colorado in the event any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement, and each party agrees (a) it will not attempt to deny or defeat personal jurisdiction or venue in any such court by motion or other request for leave from any such court and (b) it will not bring any action relating to this Agreement or any of the transactions contemplated by this Agreement in any court other than any such court. 8.11 Severability. Whenever possible, each provision or portion of any ------------ provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law but if any provision or portion of any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or portion of any provision in such jurisdiction, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or 32 unenforceable provision or portion of any provision had never been contained herein, so long as the economic and legal substance of the transactions contemplated hereby are not affected in a manner materially adverse to any party hereto. IN WITNESS WHEREOF, Parent, Sub, and the Company have caused this Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first written above. ONLINE SYSTEM SERVICES, INC. By: /s/ R. Steven Adams ----------------------------------------------- R. Steven Adams Its Chairman of the Board and Chief Executive Officer DURAND ACQUISITION CORPORATION By: /s/ R. Steven Adams ----------------------------------------------- R. Steven Adams Its President DURAND COMMUNICATIONS, INC. By: /s/ Andre Durand ----------------------------------------------- Andre Durand Its President 33 Exhibit 3.1(z) SHAREHOLDERS' AGREEMENT This SHAREHOLDERS' AGREEMENT (the "Agreement") is entered into as of ________________, 1998, by and between ONLINE SYSTEM SERVICES, INC., a Colorado corporation ("Parent"), and each of the persons whose signature appears on the signature page hereto (each a "Shareholder" and collectively, the "Shareholders"). RECITALS A. Concurrently with the execution and delivery of this Agreement, Parent, Durand Communications, Inc., a California corporation (the "Company"), and Durand Acquisition Corporation, a Minnesota corporation ("Sub"), are executing and delivering to each other that certain Agreement and Plan of Merger of even date herewith (the "Merger Agreement"), pursuant to which Sub will merge with and into the Company (the "Merger") and each share of common stock of the Company will be automatically converted into shares of common stock of Parent, all pursuant to the terms and conditions of the Merger Agreement. B. After considering the best interests of the Company and its shareholders, reviewing the Merger Agreement, and weighing the possibilities of acquisition proposals from parties other than Parent, each of the Shareholders has determined that an acquisition of the Company by Parent is in the best interests of the Company. C. Parent is willing to execute and deliver the Merger Agreement only if each of the Shareholders executes and delivers this Agreement and only in reliance upon the agreements, representations, and warranties of each of the Shareholders contained in this Agreement, and each of the Shareholders is willing to execute and deliver this Agreement in order to induce Parent to execute and deliver the Merger Agreement. AGREEMENT NOW THEREFORE, in consideration of the above recitals and the promises set forth in this Agreement, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Representations and Warranties of the Shareholders. Each Shareholder -------------------------------------------------- hereby severally represents and warrants to Parent as follows: 1.1 Authority; No Violation. Such Shareholder has all necessary ----------------------- power and authority to enter into and perform all of such Shareholder's obligations hereunder. The execution and delivery of this Agreement by such Shareholder and consummation by such Shareholder of the transactions contemplated hereby will not violate, conflict with, or constitute a default under any contract, commitment, restriction, arrangement, or other agreement to which such Shareholder is a party or by which such Shareholder is bound, including any proxy, proxy agreement, voting agreement, voting trust, shareholders' agreement, or trust agreement. There is no other person, including any beneficiary of or other holder of an interest under any trust of which such Shareholder is a trustee, whose consent is required for the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. This Agreement has been duly 34 and validly executed and delivered by such Shareholder (and such Shareholder's spouse if such spouse's signature is required under applicable law in order to convey to Parent the full benefit of this Agreement), and constitutes a valid and binding agreement of such Shareholder (and such spouse if applicable), enforceable against such Shareholder (and such spouse) in accordance with its terms. 1.2 Ownership of Shares. Such Shareholder is the beneficial owner or ------------------- record holder of the number of shares of Company Common Stock indicated under such Shareholder's name on the signature page hereto (the "Existing Shares", and together with any shares of the Company Common Stock acquired by Shareholder after the date hereof, the "Shares") and, as of the date hereof, the Existing Shares constitute all of the shares of Company Common Stock owned beneficially or of record by such Shareholder. With respect to the Existing Shares, such Shareholder has sole voting power, sole power to issue instructions with respect to the matters set forth in Section 2 hereof, sole power to dispose, sole power to demand a dissenting shareholder's appraisal rights and sole power to engage in the actions set forth in Section 2 hereof, with no restriction on the voting rights, rights of disposition or otherwise, subject to applicable federal or state securities laws restricting "affiliates" of the Company. 2. Voting Agreement, Proxy, and Other Agreements. --------------------------------------------- 2.1 Agreement to Vote for Merger. Each Shareholder hereby severally ---------------------------- and irrevocably agrees to vote all of the Shares as follows: (i) in favor of the Merger Agreement, the Merger, and the other transactions contemplated by the Merger Agreement; (ii) in favor of any other matter necessary to the consummation of the Merger and the other transactions contemplated by the Merger Agreement, and (iii) against any other action or agreement that would result in a breach in any material respect of any covenant, representation or warranty or any other obligation or agreement of the Company under the Merger Agreement or that is intended, or could reasonably be expected, to impede, interfere with, delay, postpone, discourage or adversely affect the consummation of the Merger or the other transactions contemplated by the Merger Agreement. Such Shareholder will not enter into any agreement or understanding prior to the Termination Date (as defined below) to vote after the Termination Date in any manner inconsistent with clauses (i), (ii), or (iii) of the preceding sentence. 2.2 Irrevocable Proxy. Each Shareholder hereby severally grants to, ----------------- and appoints, Parent and R. Steven Adams, President of Parent, Robert M. Geller, Secretary of Parent, and Thomas S. Plunkett, Chief Financial Officer of Parent, in their respective capacities as officers of Parent, and any individual who shall succeed to such office of Parent, and any other designee of Parent, and each of them, such Shareholder's proxy and attorney-in-fact (with full power of substitution and resubstitution), to vote the Shares as stated in clauses (i), (ii), and (iii) of Section 2.1. This proxy is, and such Shareholder intends this proxy to be, irrevocable and coupled with an interest. This proxy will expire at the close of business on the Termination Date. Such Shareholder will take any and all further actions and will execute and deliver any and all further instruments (including a proxy separate from this Agreement) as may be necessary or desirable, in Parent's sole determination, to effectuate the intent of this proxy. Such Shareholder hereby revokes any and all proxies, voting agreements, voting trusts, or 35 other arrangements of any kind previously granted by such Shareholder with respect to the voting of the Shares. 2.3 No Transfer of Shares. Each Shareholder hereby severally agrees --------------------- not to (i) sell, transfer, assign, or otherwise dispose, by gift or otherwise, of any of the Shares or any interest therein, (ii) pledge, mortgage, hypothecate, or otherwise encumber any of the Shares or any interest therein, (iii) deposit the Shares or any interest therein into any voting trust, voting agreement, proxy, or other arrangement of any kind with respect to the voting of the Shares, or (iv) enter into any contract, option, or other arrangement with respect, directly or indirectly, to the foregoing, provided that nothing herein shall be deemed to prohibit (a) the pledge of any of the Shares pursuant to the terms of any bank credit agreement, or (b) any Shareholder from making bona fide gifts of any of the Shares, if the donee of such Shares agrees in writing with Parent to be bound by the terms of this Agreement. Except as expressly set forth above, without the prior written consent of Parent, any purported sale, transfer, assignment, disposition, pledge, mortgage, hypothecation, encumbrance, or deposit of the Shares or any interest therein, or contract, option, or other arrangement with respect, directly or indirectly, thereto will be null, void, and unenforceable and will have no effect on the agreements, including the proxy, contained in this Agreement. 2.4 Waiver of Appraisal Rights. Such Shareholder waives any rights -------------------------- of appraisal or rights to dissent from the Merger that such Shareholder may have. 2.5 Stop Transfer. Each Shareholder hereby severally agrees that ------------- such Shareholder (i) will not request that the Company register the transfer (by book-entry or otherwise) of any certificate or uncertificated interest representing any of such Shareholder's Shares, unless such transfer is made with Parent's prior written consent, (ii) will tender to the Company, within fifteen business days of the date of this Agreement, all certificates representing such Shareholder's Shares for the Company to inscribe thereupon the following legend: "The shares of Common Stock represented by this certificate are subject to a Shareholders' Agreement dated as of [date], and may not be sold or otherwise transferred, except in accordance therewith. A copy of such Agreement is available for inspection at the principal executive office of the Company", and (iii) will, within fifteen business days of the date of this Agreement, no longer hold any Shares, whether certificated or uncertificated, in "street name" or in the name of any nominee. 3. Affiliate Status. Each Shareholder hereby severally acknowledges that ---------------- such Shareholder may be deemed an "affiliate" of the Company within the meaning of Rule 145 ("Rule 145") promulgated under the Securities Act of 1933, as amended (the "Act"), although nothing contained herein should be construed as an admission of such fact. Shareholder represents to and covenants with Parent that such Shareholder will not sell, assign, transfer or otherwise dispose of, or offer to sell, transfer or otherwise dispose of, the Parent Shares that such Shareholder receives in the Merger except (i) in conformity with Rule 145, (ii) pursuant to an effective registration statement under the Act, or (iii) in a transaction that, in the opinion of independent counsel reasonably satisfactory to Parent, is exempt from registration under the Act. 36 4. Stockholder Capacity. Each Shareholder is entering this Agreement in -------------------- his capacity as the record and beneficial owner of such Shareholder's Shares, and not in his capacity as a director of the Company. 5. Termination. The obligations of the Shareholders, other than those ----------- set forth in the last sentence of Section 2.1 and those set forth in Section 3, shall terminate upon the earlier to occur of (i) termination of the Merger Agreement in accordance with Article 7 thereof, or (ii) consummation of the Merger. The date of such termination is referred to herein as the "Termination Date". 6. Specific Performance. The Shareholders each acknowledge and agree -------------------- with Parent that irreparable damages would occur in the event that any provision of this Agreement is not performed in accordance with the terms hereof, that monetary damages would be an inadequate remedy to Parent, and that Parent shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or in equity. 7. Miscellaneous. ------------- 7.1 Definitional Matters. Any capitalized terms used but not defined -------------------- in this Agreement shall have the respective meanings that the Merger Agreement ascribes to such terms. The phrase "including" shall be deemed to mean "including without limitation". 7.2 Integration. This Agreement embodies the entire agreement and ----------- understanding among the parties relative to subject matter hereof and supersedes all prior agreements and understandings relating to such subject matter. 7.3 Applicable Law. This Agreement and the rights of the parties shall be -------------- governed by and construed and enforced in accordance with the laws of the state of Colorado (without regard to its conflicts of laws rules). The venue for any action hereunder shall be in the state of Colorado, whether or not such venue is or subsequently becomes inconvenient, and the parties consent to the jurisdiction of the courts of the state of Colorado and the U.S. District Court, District of Colorado. 7.4 Counterparts. This Agreement may be executed in several counterparts ------------ and as so executed shall constitute one agreement binding on the parties hereto. 7.5 Binding Effect. Except as herein or otherwise provided to the -------------- contrary, this Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, successors, assigns and personal representatives; provided, however, that neither party may assign its rights or obligations hereunder without the prior written consent of the other party. 7.6 Notices. All notices, requests and other communications hereunder ------- shall be given in writing and deemed to have been duly given or served if personally delivered, or sent by first class, certified mail, return receipt requested, postage prepaid, to the party at the address as provided below, or to such other address as such party may hereafter designate by written notice to the other party: (a) If to Parent, to the address of its then principal office. (b) If to Employee, to the address last shown in the records of Parent. 37 7.7 Modification. This Agreement shall not be modified or amended except ------------ by a written instrument signed by the parties. 7.8 Severability. The invalidity or partial invalidity of any portion of ------------ this Agreement shall not invalidate the remainder thereof, and said remainder shall remain in full force and effect. Moreover, if one or more of the provisions contained in this Agreement shall, for any reason, be held to be excessively broad as to scope, activity, subject or otherwise, so as to be unenforceable at law, such provision or provisions shall be construed by the appropriate judicial body by limiting or reducing it or them, so as to be enforceable to the maximum extent compatible with then applicable law. 7.9 Assignment. Neither party may assign its rights or obligations ---------- hereunder without prior written consent of the other party. 7.10 Headings. The section headings contained in this Agreement are -------- for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. ONLINE SYSTEM SERVICES, INC. By______________________________________ R. Steven Adams Its: President [SHAREHOLDERS] _________________________________________ [Shareholder] Number of Shares of Company Stock:__________________ 38 AFFILIATE LETTER Gentlemen: The undersigned, a holder of shares of common stock of Durand Communications, Inc., a California corporation ("DCI") or Online System Services, Inc., a Colorado corporation ("OSS"), hereby submits this letter pursuant to Section 6.2(d) of that certain Agreement and Plan of Merger between DCI, OSS, and Durand Acquisition Corporation, a Minnesota corporation and a direct wholly owned subsidiary of OSS ("DAC"), pursuant to which DAC will merge with and into DCI (the "Merger"). The undersigned is either (i) a director of DCI or OSS, (ii) an officer of DCI or OSS, or (iii) the beneficial owner of five percent (5%) or more of the outstanding common stock of either DCI or OSS. The undersigned hereby represents and warrants to and covenants with DCI, OSS, and DAC that the undersigned will not, for a period commencing on the date that is thirty (30) days prior to the consummation of the Merger and ending on the date that is thirty (30) days after financial statements for the combined companies which include thirty (30) or more days of the operations of the combined companies have been released to the general public, sell, assign, transfer, or otherwise dispose any of the securities of DCI or OSS beneficially owned or otherwise held by the undersigned as of the date of this letter or acquired on or prior to the date on which such period ends, including securities received by the undersigned in connection with the Merger. The undersigned acknowledges that OSS and DCI may instruct their respective transfer agents to place stop transfer orders on any of such securities for purposes of carrying the representations, warranties and covenants contained in this letter into effect. The undersigned acknowledges that (i) the undersigned has carefully read this letter and understands the requirements hereof and the limitations imposed upon the sale, assignment, transfer, or other disposition of securities of DCI or OSS and (ii) the receipt by OSS of this letter is an inducement and a condition precedent to OSS's obligations to consummate the Merger. Dated: _________________, 1998 Very truly yours, ________________________________________ 39 IMPORTANT: PLEASE READ CAREFULLY BEFORE SIGNING. SIGNIFICANT REPRESENTATIONS ARE CALLED FOR HEREIN. SECURITIES HOLDER AGREEMENT AND UNDERTAKINGS Online System Services, Inc. 1800 Glenarm Place Suite 800 Denver, Colorado 80202 Gentlemen: The undersigned (the "Subscriber") hereby tenders this subscription for the acquisition of shares of the Common Stock ("Common Stock"), of Online System Services, Inc., a Colorado corporation (the "Company") and/or options, warrants or convertible notes of the Company ("Derivative Securities") issued in replacement of similar securities of Durand Communications, Inc., a California corporation ("Durand"), which are described in the Memorandum dated ____________, 1998 (the "Memorandum"). The Common Stock and Derivative Securities are to be issued in connection with the proposed merger ("Merger") of Durand with and into Durand Acquisition Corporation, a Minnesota corporation and a direct wholly owned subsidiary of the Company ("DAC"). The Common Stock and Derivative Securities are hereinafter referred to collectively as the "Securities." By execution below, the Subscriber acknowledges that the Company is relying upon the accuracy and completeness of the representations contained herein in complying with its obligations under applicable securities laws. 1. Subscription Commitment. The Subscriber hereby agrees to the issuance ----------------------- of the Securities in exchange for Subscriber's shares of the Common Stock of Durand in connection with the proposed merger of Durand with and into DAC. The Subscriber understands that this subscription is subject to the completion of the Merger. Subscriber is the beneficial owner or recordholder of the number of shares of the Common Stock of Durand indicated under Subscriber's name on the signature page hereto, and that such number of shares constitutes all of the shares of Durand Common Stock owned beneficially or of record by the Subscriber. With respect to such shares, Subscriber has sole voting power, sole power to dispose and sole power to demand a dissenting shareholder's appraisal rights, with no restriction on the voting rights, rights of disposition or otherwise, subject to applicable federal or state securities laws. 2. Representations and Warranties. In order to induce the Company to ------------------------------ accept this subscription, the Subscriber hereby represents and warrants to, and covenants with, the Company as follows: (a) The Subscriber has received and had the opportunity to review the Memorandum and has been given access to full and complete information regarding the Company and has utilized such access to the Subscriber's satisfaction for the purpose of obtaining such information regarding the Company as the Subscriber has reasonably requested; and, particularly, the Subscriber has been given reasonable opportunity to ask questions of, and receive answers from, representatives of the Company concerning 40 the terms and conditions of the offering of the Securities and to obtain any additional information, to the extent reasonably available. (b) Except for the Memorandum, the Subscriber has not been furnished with any other materials or literature relating to the offer and sale of the Securities; except as set forth in the Memorandum, no representations or warranties have been made to the Subscriber by the Company, any selling agent of the Company, or any agent, employee, or affiliate of the Company or such selling agent. (c) The Subscriber believes that an investment in the Securities is suitable for the Subscriber based upon the Subscriber's investment objectives and financial needs. The Subscriber (i) has adequate means for providing for the Subscriber's current financial needs and personal contingencies; (ii) has no need for liquidity in this investment; (iii) at the present time, can afford a complete loss of such investment; and (iv) does not have an overall commitment to investments which are not readily marketable that is disproportionate to the Subscriber's net worth, and the Subscriber's investment in the Securities will not cause such overall commitment to become excessive. (d) The Subscriber, in reaching a decision to subscribe, has such knowledge and experience in financial and business matters that the Subscriber is capable of reading and interpreting financial statements and evaluating the merits and risk of an investment in the Securities and has the net worth to undertake such risks. (e) The Subscriber was not offered or sold the Securities, directly or indirectly, by means of any form of general advertising or general solicitation, including, but not limited to, the following: (i) any advertisement, article, notice or other communication published in any newspaper, magazine, or similar medium of or broadcast over television or radio; or (ii) to the knowledge of the undersigned, any seminar or meeting whose attendees had been invited by any general solicitation or general advertising. (f) The Subscriber has obtained, to the extent the Subscriber deems necessary, the Subscriber's own personal professional advice with respect to the risks inherent in the investment in the Securities, and the suitability of an investment in the Securities in light of the Subscriber's financial condition and investment needs. (g) The Subscriber recognizes that the Securities as an investment involve a high degree of risk, including those set forth under the caption "Risk Factors" in the Memorandum. (h) The Subscriber Questionnaire previously delivered by the Subscriber to the Company is true, complete and correct in all material respects as of the date hereof; the Subscriber understands that the Company's determination that the exemption from the registration provisions of the Securities Act of 1933, as amended (the "Act"), which is based upon non-public offerings and applicable to the offer and sale of the Securities, is based, in part, upon the representations, warranties, and agreements made by the Subscriber herein and in the Subscriber Questionnaire referred to above, and the Subscriber consents to the disclosure of any such information, and any other information furnished to the Company, to any governmental authority, self-regulatory organization, or, to the extent required by law, to any other person. (i) The Subscriber realizes that (i) the purchase of the Securities is a long-term investment; (ii) the purchaser of the Securities must bear the economic risk of investment for an indefinite period of time because the Securities have not been registered under the Act or under the securities laws of any state and, therefore, the Securities cannot be resold unless they are subsequently registered under said 41 laws or exemptions from such registrations are available; and (iii) the transferability of the Securities is restricted and (A) requires conformity with the restrictions contained in paragraph 3 below and (B) legends will be placed on the certificate(s) representing the Securities referring to the applicable restrictions on transferability. (j) The Subscriber certifies, under penalties of perjury, that the Subscriber is NOT subject to the backup withholding provisions of Section 3406(a)(i)(C) of the Internal Revenue Code; and (k) Stop transfer instructions will be placed with the transfer agent for the Securities, and a legend may be placed on any certificate representing the Securities substantially to the following effect: THIS SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE ACT"), IN RELIANCE UPON THE EXEMPTIONS FROM REGISTRATION PROVIDED IN THE ACT AND REGULATION D UNDER THE ACT. AS SUCH, THE PURCHASE OF THIS SECURITY WAS NECESSARILY WITH THE INTENT OF INVESTMENT AND NOT WITH A VIEW FOR DISTRIBUTION. THEREFORE, ANY SUBSEQUENT TRANSFER OF THIS SECURITY OR ANY INTEREST THEREIN WILL BE UNLAWFUL UNLESS IT IS REGISTERED UNDER THE ACT OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. FURTHERMORE, IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY OR ANY INTEREST THEREIN, WITHOUT THE OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT THE PROPOSED TRANSFER OR SALE DOES NOT AFFECT THE EXEMPTIONS RELIED UPON BY THE COMPANY IN ORIGINALLY DISTRIBUTING THE SECURITY AND THAT REGISTRATION IS NOT REQUIRED. 3. Restricted Nature of the Securities. The Subscriber has been advised ----------------------------------- and understands that (i) the Securities have not been registered under the Act or applicable state securities laws and that the Securities are being offered and sold pursuant to exemptions from such laws; and (ii) the Memorandum has not been filed with or reviewed by certain state securities administrators because of the limited nature of the offering. The Subscriber represents and warrants that the Securities will be acquired for the Subscriber's own account and for investment purposes only, and without the intention of reselling or redistributing the same; the Subscriber has made no agreement with others regarding any of the Securities; and the Subscriber's financial condition is such that it is not likely that it will be necessary to dispose of any of such Securities in the foreseeable future. The Subscriber is aware that, in the view of the Securities and Exchange Commission, a purchase of such securities with an intent to resell by reason of any foreseeable specific contingency or anticipated change in market value, or any change in the condition of the Company, or in connection with a contemplated liquidation settlement of any loan obtained for the acquisition of such securities and for which such securities were pledged, would represent an intent inconsistent with the representations set forth above. The Subscriber further represents and agrees that if, contrary to the foregoing intentions, the Subscriber should later desire to dispose of or transfer any of such securities in any manner, the Subscriber shall not do so unless and until (i) said Securities shall have first been registered under the Act and all applicable securities laws; or (ii) the Subscriber shall have first delivered to the Company a written notice declaring such holder's 42 intention to effect such transfer and describe in sufficient detail the manner and circumstances of the proposed transfer, which notice shall be accompanied either by a written opinion of legal counsel who shall be reasonably satisfactory to the Company, which opinion shall be to the Company and reasonably satisfactory in form and substance to the Company's counsel, to the effect that the proposed sale or transfer is exempt from the registration provisions of the Act and all applicable state securities laws, or by a "no action" letter from the Securities and Exchange Commission to the effect that the transfer of the Securities without registration will not result in recommendation by the staff of the Commission that action be taken with respect thereto. 4 Residence. The Subscriber represents and warrants that the Subscriber --------- is a bona fide resident of, is domiciled in and received the offer and made the decision to invest in the Securities in the state set forth on the signature page hereof, and the Securities are being purchased by the Subscriber in the Subscriber's name solely for the Subscriber's own beneficial interest and not as nominee for, or on behalf of or for the beneficial interest of, or with the intention to transfer to, any other person, trust or organization, except as specifically set forth in paragraph 13 of this Securities Holder Agreement and Undertakings. 5 Sophistication. The Subscriber further represents and warrants that -------------- Subscriber has such knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of an investment in the Securities and protecting the Subscriber's own interests in this transaction, and does not desire to utilize the services of any other person in connection with evaluating such merits and risks. 6. Other Representations, Warranties and Agreements of Subscriber. -------------------------------------------------------------- (a) The Subscriber hereby waives any rights of appraisal or rights to dissent from the Merger that the Subscriber may have. (b) In order to induce the Company to accept this subscription, Subscriber, for himself/herself/itself and its successors and assigns, hereby represents and warrants that, as between Subscriber and (i) Durand, (ii) Andre Durand, and (iii) the directors, officers, shareholders and affiliates of Durand Communications, Inc. (collectively the "Parties"), Subscriber has no past, present and future claims, demands, obligations, duties, liabilities, actions, causes of action, at law or in equity, whether arising by contract, common law, statute or otherwise, of any kind and nature against or relating to any of the Parties arising from or in any way relating to any written or oral representations, agreements or business relationships among any of them entered into or in existence prior to the date of this Securities Holder Agreement and Undertakings. The Subscriber specifically and expressly acknowledges and agrees that this representation and warranty covers known and unknown claims for known and unknown damages, claims for anticipated or unanticipated damages, and claims for expected and unexpected consequences of all damages which have heretofore arisen and which may hereafter arise out of any written or oral representations, agreements or business relationships among any of the Parties and Subscriber entered into or in existence prior to the date of this Securities Holder Agreement and Undertakings. (c) The Subscriber hereby waives any and all preemptive rights, whether arising by operation of law, contract or otherwise, which the Subscriber has, may have or be entitled to with respect to Subscriber's interests in Durand. 43 (d) The Subscriber hereby waives any and all registration rights (except for the registration rights granted pursuant to the terms of the Merger Agreement) which the Subscriber has, may have or be entitled to as a result of any agreement between Subscriber and any of the Parties regardless of whether such registration rights exist pursuant to contract or otherwise and regardless of whether such registration rights relate to the common stock of Durand or any securities convertible into or exchangeable for such common stock. 7. Reliance on Representations. The Subscriber understands the meaning --------------------------- and legal consequences of the representations, warranties, agreements, covenants, and confirmations set out above and agrees that the subscription hereby may be accepted in reliance thereon. The Subscriber agrees to indemnify and hold harmless the Company and any selling agent (including for this purpose their employees, officers, directors, agents and each person who controls either of them within the meaning of Section 20 of the Securities Exchange Act of 1934, as amended) from and against any and all loss, damage, liability or expense, including reasonable costs and attorney's fees and disbursements, which the Company, or such other persons may incur by reason of, or in connection with, any representation or warranty made herein (or in the Subscriber Questionnaire referred to above) not having been true when made, any misrepresentation made by the Subscriber or any failure by the Subscriber to fulfill any of the covenants or agreements set forth herein, in the Subscriber Questionnaire or in any other document provided by the Subscriber to the Company. 8. Transferability and Assignability. Neither this Securities Holder --------------------------------- Agreement and Undertakings nor any of the rights of the Subscriber hereunder may be transferred or assigned by the Subscriber. The Subscriber agrees that the Subscriber may not cancel, terminate, or revoke this Securities Holder Agreement and Undertakings or any agreement of the Subscriber made hereunder (except as otherwise specifically provided herein) and that this Securities Holder Agreement and Undertakings shall survive the death or disability of the Subscriber and shall be binding upon the Subscriber's heirs, executors, administrators, successors, and assigns. 9. Survival. The representations and warranties of the Subscriber set -------- forth herein shall survive the sale of the Securities pursuant to this Securities Holder Agreement and Undertakings. 10. Notices. All notices or other communications hereunder shall be in ------- writing and shall be deemed to have been duly given if delivered personally or mailed by certified or registered mail, return receipt requested, postage prepaid, as follows: if to the Subscriber, to the address set forth below; and if to the Company to the address at the beginning of this letter, or to such other address as the Company or the Subscriber shall have designated to the other by like notice. 11. (Applicable to FLORIDA residents only.) The Subscriber has been --------------------------------------- informed and recognizes that (a) the Securities have not been registered under the Florida Securities Act, and (b) under Section 517.061(11) of the Florida Securities Act, the Subscriber may void the sale of any Securities within three (3) days after the tender of this Securities Holder Agreement and Undertakings and payment hereunder to the Company. 12. Counterparts This Securities Holder Agreement and Undertakings may be ------------ executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. 44 13. Title. Manner in which title is to be held. -------- Place an "X" in one space below: (a) _______ Individual Ownership (b) _______ Community Property (c) _______ Joint Tenant with Right of Survivorship (both parties must sign) (d) _______ Partnership (e) _______ Tenants in Common (f) _______ Corporation (g) _______ Trust (h) _______ Other (Describe): ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ Please print above the exact name(s) in which the Securities are to be held. SIGNATURES The Subscriber hereby represents he has read this entire Securities Holder Agreement and Undertakings and the Memorandum. Dated____________________ INDIVIDUAL Address to which correspondence should be directed __________________________________________ __________________________________ Signature (Individual) __________________________________ __________________________________________ __________________________________ Signature (All record holders should sign) City, State and Zip Code ____________________________________________ __________________________________ Tax Identification or Social Security Number Name(s) Typed or Printed ( ) ____________________________________________ Telephone Number __________________________________________ __________________________________________ Number of Shares of Common Stock of Durand Communications, Inc. Owned 45 46 CORPORATION, PARTNERSHIP, TRUST, OR OTHER ENTITY Address to which correspondence should be directed _____________________________ ____________________________________________ Name of Entity By:__________________________ ____________________________________________ *Signature City, State and Zip Code ____________________________________________ Its:_________________________ Tax Identification or Social Security Number Title ( ) ____________________________________________ _____________________________ Telephone Number Name Typed or Printed ____________________________________________ Number of Shares of Common Stock of Durand Communications, Inc. Owned *If Securities are being subscribed for by an entity, the Certificate of Signatory must also be completed. CERTIFICATE OF SIGNATORY To be completed if Securities are being subscribed for by an entity. I,_______________________________, am the _________________________________ of _____________________________________________________________ (the "Entity"). I certify that I am empowered and duly authorized by the Entity to execute and carry out the terms of this Securities Holder Agreement and Undertakings and to purchase and hold the Securities, and certify that this Securities Holder Agreement and Undertakings has been duly and validly executed on behalf of the Entity and constitutes a legal and binding obligation of the Entity. IN WITNESS WHEREOF, I have hereto set my hand this ____ day of ___________. ________________________________ Signature 47 NONCOMPETITION AGREEMENT This NONCOMPETITION AGREEMENT (the "Agreement") is entered into as of ________________, 1998, by and between ONLINE SYSTEM SERVICES, INC., a Colorado corporation (the "Corporation"), and _________________ ("Recipient"). RECITALS A. The Corporation, Durand Communications, Inc., a California corporation ("DCI"), and Durand Acquisition Corporation, a Minnesota corporation ("DAC"), are parties to an Agreement and Plan of Merger of even date herewith (the "Merger Agreement"), pursuant to which DAC will merge with and into DCI (the "Merger"). B. Recipient is a shareholder of DCI and will receive shares of the Corporation's common stock as consideration for the Merger. C. Following the Merger, it is the Corporation's intent that Recipient will become an employee of the Corporation and in connection therewith, will be paid a salary of $________ per year and will be granted options pursuant to the Corporation's Stock Option Plan of 1995 to purchase ________ shares of the Corporation's common stock at an exercise price equal to the fair market value for the Corporation's common stock on the first day of such employment. D. As a condition precedent to the closing of the transactions contemplated herein and in the Merger Agreement, Recipient has agreed to enter into this Agreement for the benefit of the Corporation and its affiliates. AGREEMENT NOW THEREFORE, in consideration of the above recitals and the promises set forth in this Agreement, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Definitions. The following terms, when capitalized and used herein, ----------- have the meanings set forth below. 1.1 "Affiliates" means any and all entities owned or controlled by Online ---------- System Services, Inc. 1.2 "Competing Business" means any individual or entity, other than the ------------------ Corporation or its Affiliates, engaged in, or about to become engaged in, (i) any business that consists of developing, marketing, and supporting products and services that enable broadband operators to provide high-speed Internet access to their customers, (ii) any business that consists of developing, marketing and supporting Internet or Intranet community building tools and services, training in the use of such tools and services or hosting an online service for such communities, or (iii) any business that consists of developing, marketing and supporting Internet or Intranet courses for colleges, universities and other educational endeavors. 2. Noncompetition. From the date hereof through the date that is the later of -------------- the (i) third anniversary of the Closing Date (as that term is defined in the Merger Agreement) or (ii) the first anniversary of Recipient's termination of employment with the Corporation or any of its Affiliates 48 (whichever the case may be, the "Restricted Period"), without the prior written consent of the Corporation, Recipient will not, directly or indirectly, own, manage, operate, join, control, render services to or assist in any way any Competing Business which is located anywhere within the United States or any foreign country in which the Corporation (i) conducts business activities, whether directly or with or through one or more other companies, or (ii) licenses its products or services. The foregoing notwithstanding, nothing herein shall prevent Recipient from purchasing and owning securities of any entity whose securities are regularly traded on a national exchange or in an established over-the-counter market, provided that such purchases do not result in Recipient owning beneficially at any time more than five percent of any class of securities of any Competing Business. 3. Nonsolicitation. During the Restricted Period, Recipient agrees that --------------- Recipient shall not, either directly or indirectly, on Recipient's own behalf or in the service or on behalf of others, (i) solicit, divert, or appropriate, or attempt to solicit, divert, or appropriate, to any Competing Business, (a) any person or entity that was a customer of the Corporation during the Restricted Period or (b) any person or entity from whom the Corporation solicited business during the last year of the Restricted Period or (ii) solicit, divert, or hire away, or attempt to solicit, divert, or hire away, to any Competing Business, any person employed by or providing services to the Company or one of its Affiliates, whether or not such person is a full-time employee, temporary employee, or consultant of the Company or such Affiliate and whether or not such employment or service is pursuant to written agreement and whether or not such employment or service is at will. 4. Remedies. Recipient and the Corporation acknowledge and agree that -------- irreparable injury will result to the Corporation and its business if Recipient breaches this Agreement, and, therefore, in the event of any actual or threatened breach hereof by Recipient, the Corporation shall be entitled to seek all rights and remedies available at law and in equity, including without limitation the right to seek damages for such actual or threatened breach and the right to seek to enjoin Recipient and all other persons acting in actual or threatened breach hereof, from commencing or continuing, and to remedy, the activities which constitute such actual or threatened breach. The Corporation shall also be entitled to recover from Recipient the Corporation's reasonable attorneys' fees and costs in any action for the breach hereof in which the Corporation substantially prevails. 5. Miscellaneous. ------------- 5.1 Integration. This Agreement embodies the entire agreement and ----------- understanding among the parties relative to subject matter hereof and supersedes all prior agreements and understandings relating to such subject matter. 5.2 Employment Agreement. Nothing in this Agreement shall be -------------------- construed to modify the terms of an employment agreement, if any, between the Corporation and the Recipient or shall be construed to constitute, or evidence, an agreement or understanding, whether express or implied, by the Corporation to (i) employ or retain the Recipient for any specific period of time or (ii) terminate the Recipient only for cause. 5.3 Applicable Law. This Agreement and the rights of the parties -------------- shall be governed by and construed and enforced in accordance with the laws of the state of Colorado (without regard to its conflicts of laws rules). The venue for any action hereunder shall be in the state of Colorado, whether or not such venue is or subsequently becomes inconvenient, and the parties consent to the jurisdiction of the courts of the state of Colorado and the U.S. District Court, District of Colorado. 49 5.4 Counterparts. This Agreement may be executed in several counterparts ------------ and as so executed shall constitute one agreement binding on the parties hereto. 5.5 Binding Effect. Except as herein or otherwise provided to the -------------- contrary, this Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, successors, assigns and personal representatives; provided, however, that neither party may assign its rights or obligations hereunder without the prior written consent of the other party. 5.6 Notices. All notices, requests and other communications hereunder ------- shall be given in writing and deemed to have been duly given or served if personally delivered, or sent by first class, certified mail, return receipt requested, postage prepaid, to the party at the address as provided below, or to such other address as such party may hereafter designate by written notice to the other party: (a) If to the Corporation, to the address of its then principal office. (b) If to Recipient, to the address last shown in the records of the Corporation. 5.7 Modification. This Agreement shall not be modified or amended except ------------ by a written instrument signed by the parties. 5.8 Severability. The invalidity or partial invalidity of any portion of ------------ this Agreement shall not invalidate the remainder thereof, and said remainder shall remain in full force and effect. Moreover, if one or more of the provisions contained in this Agreement shall, for any reason, be held to be excessively broad as to scope, activity, subject or otherwise, so as to be unenforceable at law, such provision or provisions shall be construed by the appropriate judicial body by limiting or reducing it or them, so as to be enforceable to the maximum extent compatible with then applicable law. 5.9 Assignment. Neither party may assign its rights or obligations ---------- hereunder without prior written consent of the other party. 5.10 Headings. The section headings contained in this Agreement are for -------- reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 50 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. ONLINE SYSTEM SERVICES, INC. By______________________________________ R. Steven Adams Its: President [RECIPIENT] ________________________________________ [Recipient] 51 EXHIBIT 10.7 LICENSE AGREEMENT This LICENSE AGREEMENT (the "Agreement") is entered into as of October 22, 1997, between Online System Services, Inc., a Colorado corporation ("OSS") with offices at 1800 Glenarm Place, Suite 1800, Denver, Colorado 80202, and Medical Education Collaborative, a Colorado nonprofit corporation ("MEC") with offices at 1800 Jackson Street, Suite 200, Golden CO 80401. RECITALS WHEREAS, OSS develops sophisticated, high-end WorldWide Web ("Web") products for use in connection with the Internet, including standard and custom Web sites targeted at the health-care industry; and WHEREAS, MEC is a nationally recognized provider of CME in the health-care industry; and WHEREAS, OSS has developed an integrated network or "market space," called MD Gateway ("MD Gateway"), which provides a Web site through which interested persons may access medical information and continuing medical education ("CME") information; and WHEREAS, OSS owns the URL Web address "www.mdgateway.com" as well as certain trademarks, copyrights, and other intellectual property rights associated with MD Gateway; and WHEREAS, MEC desires to improve its existing online medical information resources and the ability to provide CME information through the Internet for physicians, nurses, pharmacists and other health-care professionals, and desires to do so through a license to certain rights in MD Gateway; and WHEREAS, OSS desires to license to MEC certain rights in MD Gateway on the terms and conditions set forth herein, NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereby agree as follows. ARTICLE I. GRANT ----- 1.1 MD Gateway. OSS grants to MEC and MEC accepts an exclusive license to ---------- use, market, advertise and promote the following items: 52 (a) MD Gateway, including all hardware and software comprising the integrated network and the Web site, as well as a T1 telecommunications facility, as identified in Schedule A; (b) Copies of all documentation related to the hardware and software of MD Gateway including, but not limited to, user's manuals and customer support manuals; (c) All trademarks used in connection with MD Gateway, which trademarks are portrayed in Schedule B; (d) All other intellectual property rights in and to MD Gateway including, but not limited to, copyright to the layout of the Web site and all materials displayed on the Web site on or before the date of this Agreement; and (e) The URL Web address "www.mdgateway.com". (f) The right to use any capacity on the Tl telecommunications faculty not required in connection with MD Gateway for other Internet communication purposes of MEC. 1.2 Scope of Exclusivity. OSS acknowledges and agrees that the exclusive -------------------- rights granted to MEC in Section 1.1 above exclude both OSS and any third party (defined as any party other than OSS and MEC) from using, advertising, marketing, or promoting the rights identified in Section 1.1 above while this Agreement is in effect. ARTICLE II. TERM ---- 2.1 Term. This Agreement shall commence on the date set forth above and ---- shall continue in effect for a term of five (5) years from such date, unless sooner terminated in accordance with the provisions of Article VIII below, or unless renewed in accordance with Section 2.2 below. 2.2 Automatic Renewal. This Agreement shall automatically renew for ----------------- additional five-year terms unless MEC gives notice to OSS at least 90 days before the end of a five-year term of this Agreement expressing its desire that this Agreement not be extended. ARTICLE III. DELIVERY INSTALLATION, ACCEPTANCE, AND TRAINING ---------------------------------- --- -------- 3.1 Installation of MD Gateway. Within 30 days of the execution and -------------------------- delivery of this Agreement, OSS shall deliver to the premises of MEC and install within such premises all of the hardware and software components of MD Gateway (as identified in Schedule A). OSS shall also arrange for the installation of a T1 telecommunications facility to connect the MD Gateway 53 installation on MEC's premises to an Internet gateway computer network operated and maintained by OSS. 3.2 Acceptance. Unless MEC, within 30 days after the date of delivery of ---------- MD Gateway, notifies OSS in writing to the contrary, MD Gateway shall be deemed to be acceptable by MEC as of the date of completion of installation. OSS's warranty set forth in Section 6.1 shall commence on the date OSS has completed installation. 3.4 Standard Training. OSS shall provide training to two (2) individuals ----------------- chosen by MEC. The training shall be sufficient to enable those two individuals to program and operate MD Gateway at a level adequate to act as a replacement of OSS as the source of all technical support required by MEC. 3.5 Additional Training. In addition to the training provided pursuant to ------------------- Section 3.4 above, MEC may request additional training from OSS which OSS may provide upon terms and conditions acceptable to MEC and OSS. 3.6 Maintenance. MEC acknowledges and agrees that this Agreement does not ----------- contemplate any on-going maintenance services by OSS of the equipment and software installed by OSS on MEC's premises pursuant to Section 3.1 above. OSS acknowledges and agrees that OSS shall be responsible for maintaining the Tl telecommunications facility connecting the MD Gateway system on MEC's premises with an Internet gateway computer network operated and maintained by OSS. OSS further acknowledges and agrees that OSS shall be responsible for the on-going maintenance of the Internet gateway computer network through which MD Gateway connects to the Internet and for any on-going maintenance of the redundant version of MD Gateway and the computer on which it is loaded, all as described in Section 6.5(c) below. ARTICLE IV. PAYMENT ------- 4.1 Royalty. MEC agrees to pay OSS, as a royalty for the rights granted ------- to MEC under this Agreement and in consideration of all other obligations and commitments of OSS under this Agreement, a royalty fee based on the MD Gateway Revenue as defined in Section 4.2 below and the Webmaster cost as defined in Section 4.3 below. The royalty fee shall be calculated at the end of each calendar quarter in which this Agreement is in effect. The amount of the quarterly royalty fee shall be 35 % of the amount by which the quarterly MD Gateway Revenue exceeds the quarterly Webmaster Cost. If for any given calendar quarter, the quarterly MD Gateway Revenue is less than the quarterly Webmaster Cost then the quarterly royalty fee for such quarter shall be $0.00 and the amount of the deficiency shall be added to and included in the quarterly Webmaster Cost of the succeeding calendar quarter. 4.2 MD Gateway Revenue. For purposes of this Article IV, MD Gateway ------------------ Revenue shall be the sum of all revenue received by MEC, less any refunds attributable to such revenue, in connection with its operation of MD Gateway including, but not limited to: 54 (1) access and usage fees levied on information users of MD Gateway; (2) service ("hosting") fees charged to information providers on MD Gateway; and (3) advertising fees charged to advertisers on MD Gateway. 4.3 Webmaster Cost. For purposes of this Article IV, Webmaster Cost shall -------------- be the total cost (salary, benefits and withholdings) incurred by MEC in connection with the employment of one individual as a Webmaster for MD Gateway. 4.4 Quarterly Statements. On or before the 30th day of the month -------------------- following each calendar quarter (for purposes of this Agreement, a calendar quarter shall end on the last day of March, June, September and December), MEC shall furnish to OSS complete and accurate statements certified to be accurate by MEC showing the MD Gateway Revenue received and the Webmaster cost incurred during the preceding calendar quarter. OSS agrees that no statement shall be due for the calendar quarter ending September 30, 1997; rather, all information relevant for the month of September 1997 shall be included in the statement due in January 1998. 4.5 Quarterly Payments. Royalty payments due hereunder shall be due on ------------------ the 30th day of the month following the calendar quarter in which earned, and payment shall accompany the statements furnished as required above. The receipt or acceptance by OSS of any of the statements furnished pursuant to this Agreement or of any royalties paid hereunder (or the cashing of any royalty checks paid hereunder) shall not preclude OSS from questioning the correctness thereof at any time, within two years from date thereof, and in the event that any inconsistencies or mistakes are discovered in such statements or payments, they shall immediately be rectified and the appropriate payment shall be made by MEC. ARTICLE V. ACCOUNTING ---------- 5.1 Books and Records. MEC agrees to keep accurate books of account and ----------------- records at its principal place of business covering all transactions relating to the license hereby granted, the MD Gateway Revenue and the Webmaster Cost. 5.2 Reasonable Inspections. OSS shall have the right to examine, in ---------------------- person or through its legal representatives, all MEC books of account and records described in Section 5.1 above at any time during reasonable business hours of MEC upon three days prior written notice, subject only to such protection as may be necessary to prevent further dissemination of the inventions, trade secrets and other confidential information of MEC. 55 ARTICLE VI. REPRESENTATIONS. WARRANTIES. AND ADDITIONAL COVENANTS ------------------------------------------------------- 6.1 Representations of OSS. OSS represents and warrants to MEC as set ---------------------- forth in this Section 6.1. Any inaccuracy of such representations and warranties as of the date of this License Agreement shall constitute a breach of this Agreement. (a) OSS is a corporation duly organized, validly existing and in good standing under the laws of the State of Colorado, U.S.A. OSS has all corporate authority to enter into this License Agreement and all other agreements between OSS and MEC, and to perform its obligations hereunder and thereunder. All action required of OSS's members and managers and any other similar action by OSS required to authorize the execution and delivery of each of the agreements between OSS and MEC has been completed. (b) This Agreement is a valid and binding obligation of OSS enforceable against OSS in accordance with its terms. 6.2 Representations of MEC. MEC represents and warrants to OSS as set ---------------------- forth in this Section 6.2. Any inaccuracy of such representations and warranties as of the date of this Agreement shall constitute a breach of this Agreement. (a) MEC is a nonprofit corporation duly organized, validly existing and in good standing under the laws of Colorado. MEC has all corporate authority to enter into this Agreement. All actions required of MEC's management, shareholders and any other similar action by MEC required to authorize the execution and delivery of this Agreement and all other agreements between OSS and MEC have been completed. (b) This Agreement constitutes a valid and binding obligation of MEC enforceable against MEC in accordance with its terms. 6.3 Warranties of OSS. ----------------- (a) OSS hereby warrants that OSS is the legal and beneficial owner of the rights granted to MEC pursuant to the exclusive license set forth in Article I above, and is the owner of all items to be used in connection with such grant of rights. OSS hereby agrees to indemnify and hold MEC and its officers, directors, employees and agents harmless from and against any and all loss, cost, damage, liability or expense (including without limitation reasonable attorney's fees, court costs and other reasonable litigation expenses) suffered, sustained or incurred by MEC or its officers, directors, employees or agents as a result of, arising out of or in connection with any breach by OSS of the foregoing warranty and representation. 56 (b) OSS agrees to defend or settle, at OSS's expense, any action brought against MEC based upon or arising out of any infringement by OSS or MEC's use, marketing, advertising, or promoting of MD Gateway of any patent, trademark, copyright, trade secret, or other proprietary right. OSS further agrees to pay any costs, damages, and attorneys' fees finally awarded against MEC in such action by a court of law, after all appeals, which are attributable to such claim. 6.4 Warranties of MEC. MEC shall indemnify and hold harmless OSS and its ----------------- officers, directors, employees, agents and affiliates ("Indemnified Parties") from and against any and all claims, causes of action, suits, damages, liabilities, and/or judgments and settlements including all costs, expenses, and attorneys' and accountants' fees that an Indemnified Party may incur due to any breach by MEC of any of its representations, and/or warranties, obligations under this Agreement. MEC shall undertake to conduct the defense of such suit at its own expense, it being understood, however, that OSS has at all times the option to participate in, or undertake any litigation involving said matters through counsel of OSS's own selection and at OSS's own expense, subject to the indemnity and hold harmless obligations of MEC hereunder with respect to such expense. MEC shall not make any settlement of any claim, suit, or demand for which OSS may become responsible hereunder without OSS's written consent, which shall not be unreasonably withheld. 6.5 Covenants of OSS. ---------------- (a) OSS shall not voluntarily take any action or allow any event within its control to occur that, in either case, would cause any of the representations and warranties in section 6.1 to become inaccurate. (b) During the term of this Agreement, OSS shall not provide Web development services to anyone other than MEC in connection with any project which is intended to aggregate medical or CME information provided by two or more providers. The parties intend for the terms of this Section to be specifically enforceable. (c) During the term of this Agreement OSS shall continuously provide Internet access for MD Gateway and other MEC uses via the T1 telecommunications facility and an Internet Gateway computer network as described in Section 3.1 above. OSS shall also maintain a redundant version of MD Gateway on an Internet gateway computer, or a computer connected to an Internet gateway computer, operated and maintained by OSS, which version shall serve as the active version of MD Gateway in the event that the T1, telecommunications facility is down or MD Gateway is otherwise unavailable from MEC's premises. (d) During the term of this Agreement OSS shall take all steps necessary to preserve its ownership interest in the items made subject to an exclusive license to MEC in Article I. 57 6.6 Covenants of MEC. ---------------- (a) MEC shall not voluntarily take any action or allow any event within its control to occur that, in either case, would cause any of the representations and warranties in section 6.2 to become inaccurate. (b) During the term of this Agreement, MEC shall not engage or work with any Internet or Web provider other than OSS to obtain Internet or Web development services. The parties intend for the terms of this paragraph (b) to be specifically enforceable. ARTICLE VII. OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS ----------------------------------------- 7.1 Rights Owned by OSS. ------------------- (a) MEC acknowledges and agrees that MD Gateway is and shall remain a proprietary business asset of OSS, and that OSS retains sole ownership of all right, title and interest in the items enumerated in Section 1.1 above. 7.2 Rights Owned by MEC. ------------------- (a) OSS acknowledges and agrees that MEC shall own all rights, title and interest in any copyrights, trademarks, tradenames, patents, trade secrets, or other intellectual property which MEC creates as part of its operation of MD Gateway; provided, however, that MEC shall not acquire under this Agreement any ownership interest in the trademark "MD Gateway." ARTICLE VIII. TERMINATION ----------- 8.1 Defaults On This Agreement. As used herein, the term "default" shall -------------------------- mean a material breach of this Agreement that is not cured by the breaching party within 30 days following receipt of written notice of default from the other party. In the event of a default by either party, the party not in default shall be entitled to any and all remedies available at law or in equity, including but not limited to damages, specific performance and/or termination of this Agreement. This Agreement may be terminated by the party not in default, at any time following a default, by delivery of a written notice of termination to the defaulting party, and termination shall take effect immediately upon the giving of notice hereunder. 8.2 External Conditions. In the event that (i) MEC discontinues operation ------------------- of MD Gateway, (ii) MEC shall make an assignment for the benefit of creditors, (iii) MEC shall go into liquidation, or (iv) a trustee is appointed for the benefit of creditors and the trustee is not discharged within 30 days of his appointment, whether any of the aforesaid events be the outcome of a voluntary act of MEC or otherwise, OSS shall be entitled to terminate this 58 Agreement forthwith by giving notice to such effect to MEC, and termination shall take effect immediately upon the giving of notice hereunder. 8.3 Preservation of Intellectual Property Rights Under This Agreement. ----------------------------------------------------------------- The termination of this Agreement for any reason shall be without prejudice to any of OSS's or MEC's intellectual property rights as described in Article VII of this Agreement. 8.4 Mutual Obligations. Notwithstanding termination of this Agreement, ------------------ the parties shall be required to carry out any provisions hereof which contemplate performance by them subsequent to such termination, and such termination shall not affect any liability or other obligation which shall have accrued prior to such termination. 8.5 OSS Rights in MD Gateway. In the event of any termination of this ------------------------ Agreement according to the terms hereof, MEC shall immediately discontinue all use of MD Gateway. All rights to MD Gateway as described in Section 7.1 above shall automatically revert to OSS and MEC shall promptly execute any and all documents reasonably required by OSS in connection with such discontinuance and reversion. 8.6 Return of Equipment. After termination and within twenty-one (21) ------------------- days from the date of OSS's written notice of termination to MEC, MEC shall at its cost return to OSS all hems associated with MD Gateway as identified in Article I. 8.7 MEC Intellectual Property. In the event of termination of this ------------------------- Agreement, OSS acknowledges that MEC shall own all right, title and interest in and to all intellectual property described in Section 7.2 above. ARTICLE IX. MISCELLANEOUS PROVISIONS ------------------------ 9.1 Assignment. This Agreement and the fights granted hereunder cannot be ---------- assigned or otherwise transferred by a party hereto without the prior written consent of the other party hereto. Any attempted assignment or transfer without such consent shall be null and void. 9.2 Relationship of the Parties. Nothing herein contained shall be deemed --------------------------- or construed to constitute either party hereto the agent of the other party hereto or to create a partnership or joint venture between the parties hereto, and neither party shall have any power hereunder to obligate or bind the other party in any manner whatsoever. 9.3 Governing Law and Dispute Resolution. This Agreement shall be ------------------------------------ governed by and interpreted in accordance with the laws of the State of Colorado. Except as provided in Section 9.4 below, any action, claim or suit initiated in connection with this Agreement shall be prosecuted exclusively within the courts of the State of Colorado located in Colorado Springs, except where exclusive federal jurisdiction applies, in which case an action, claim or suit initiated in connection with this Agreement shall be prosecuted in US District Court in Denver. 59 9.4 Arbitration. In addition to its other rights and remedies under ----------- Section 9.3 above, either party may require that any dispute concerning this Agreement, its interpretation or application, including any dispute relating to either party's right to terminate this Agreement, shall be resolved by mandatory arbitration as set forth below: (a) In the event of any disagreement or dispute that a party wishes to submit to arbitration, such party (the "Initiating Party") may request arbitration by providing a written "notice of dispute" to the other party (the "Responding Party") and such notice shall require both parties to submit to mandatory and binding arbitration. The Initiating Party shall have the responsibility of notifying the American Arbitration Association's Denver Regional Office, which shall conduct the arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. (b) The arbitrators shall have frill power to decide the dispute presented, including the power to order affirmative or negative injunctive relief and may award compensatory damages to the prevailing party, if any. The arbitrators shall also award reasonable attorneys' fees and costs to the prevailing party. The award rendered by the arbitrators shall be final and judgment may be entered upon it in accordance with applicable law in any court of competent jurisdiction. (c) Arbitration shall be conducted by a three-person panel of arbitrators (or such lesser number of arbitrators as may be mutually agreed) in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitrators shall be chosen by mutual agreement of the parties, or, if no agreement can be reached, by use of the procedures of the American Arbitration Association. (d) The arbitration hearing shall be held in Denver, Colorado. 9.5 Notices. All notices, requests and other communications from one of ------- the parties hereto to any or all of the others shall be given in writing and deemed to have been duly given or served if personally delivered, or sent by first class, certified mail, return receipt requested, postage prepaid, to the party at the address provided below, or to such other address as such party may hereafter designate by written notice to the other parties. If to OSS: Online System Services, Inc. --------- Attn: Steve Adams, President 1800 Glenarm Place Suite 1800 Denver, Colorado 80202 60 If to MEC: Medical Education Collaborative, Inc. --------- Attn: Charles P. Spickert, President 1800 Jackson Street Suite 200 Golden, Colorado 80401 9.6 Entire Agreement. This Agreement constitutes the complete and ---------------- exclusive statement of the agreement between the parties, and supersedes all prior and concurrent proposals and understandings, whether oral or written, and all other communications between the parties relating to the subject matter of this Agreement. The parties may, from time to Lime during the continuance of this Agreement, modify, vary or alter any of the provisions of this Agreement, but only by an instrument in writing duly executed by all parties hereto. 9.7 Force Majeure. If either party is unable to perform any of its ------------- obligations under this Agreement. Other than payments due hereunder, or to enjoy any of its benefits, other than payments clue hereunder, because of (or if loss of the Equipment is caused by) natural disaster, actions or decrees of governmental bodies or communications line failure not the fault of the affected party (a "Force Majeure Event"), the party who has been so affected shall immediately give notice to the other party and shall do everything possible to resume performance. Upon receipt of such notice, all obligations under this Agreement shall be immediately suspended. If the period of nonperformance exceeds 15 days from the receipt of notice of the Force Majeure Event, the party whose ability has not been so affected may by giving notice terminate this Agreement. However, delays in delivery due to Force Majeure Events shall automatically extend the delivery date for a period equal to the duration of such Events; any warranty period affected by a Force Majeure Event shall likewise be extended for a period equal to the duration of such event. 9.8 Consent of a Party. Wherever the consent or approval of a party ------------------ hereto is required pursuant to any provisions of this Agreement, the same shall not be deemed to have been given unless in writing, signed by the party whose consent or approval is required. 9.9 Execution of Documents. Each party agrees to and shall execute any ---------------------- and all documents and do any and all acts or things reasonably necessary to fulfill each party's obligations hereunder, including, if necessary to effect the intent of the parties or to comply with applicable laws, rulings or regulations, the execution of two or more separate documents to evidence the terms and conditions of this Agreement. 9.10 Binding Agreement This Agreement shall be binding upon and inure to ----------------- the benefit of the legal representatives, parent companies, subsidiaries, affiliates, related companies, successors, and assigns (subject to approval in accordance with Section 9.1 above) of the parties hereto. 9.11 Interpretation. In the interpretation of this Agreement, words -------------- importing the singular number shall include the plural and visa versa words importing the neuter gender shall include the masculine and feminine gender and words importing a corporation shall include a 61 person, except to the extent that such interpretation shall be excluded by or be repugnant to the context. 9.12 Signatures. The individuals signing this Agreement on behalf of the ---------- parties hereto represent and warrant that they have the requisite authority to do so and to bind the party for whom they sign to the terms of this Agreement. 9.13 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which when so executed shall be an original, but all of which together shall constitute one agreement. Executed as of the date first set forth above. Online System Services, Inc. Medical Education Collaborative, Inc. By /s/ R. Steven Adams By /s/ Charles P. Spickert ------------------------------- ---------------------------------- Steve Adams Charles P. Spickert, MPH President President/CEO 62 SCHEDULE A COMPONENTS OF MD GATEWAY ------------------------ Router Cisco 2501 (IOS IP software set, 2-Serial, 1 Ethernet) Tylink T-1 CSU/DSU Accton 10BaseT hub (16 Ports) WebMaster Workstation (Pentium P5-133, 32MB RAM, I.7 GB HD, 4X CD-ROM w speakers, 3.5" FD, Intel Ethernet Express 10X card) Microsoft Windows NT Workstation 4.0 Maxtech 14" monitor Web Server -- Physically located in the web server suite at OSS Software necessary to support existing and planned web site features (as currently exist in CME Gateway, MD Gateway and CAA), including but not limited to database, statistics, e-commerce, broadcast e-mail (e.g., Visual InterDev, SQL Enterprise Manager) SCHEDULE B TRADEMARK RIGHTS ASSOCIATED WITH MD GATEWAY ------------------------------------------- MD GATEWAY(TM) EX-10.7 6 MEDICAL EDUCATION COLLABORATIVE AGREEMENT EXHIBIT 10.7 LICENSE AGREEMENT This LICENSE AGREEMENT (the "Agreement") is entered into as of October 22, 1997, between Online System Services, Inc., a Colorado corporation ("OSS") with offices at 1800 Glenarm Place, Suite 1800, Denver, Colorado 80202, and Medical Education Collaborative, a Colorado nonprofit corporation ("MEC") with offices at 1800 Jackson Street, Suite 200, Golden CO 80401. RECITALS WHEREAS, OSS develops sophisticated, high-end WorldWide Web ("Web") products for use in connection with the Internet, including standard and custom Web sites targeted at the health-care industry; and WHEREAS, MEC is a nationally recognized provider of CME in the health-care industry; and WHEREAS, OSS has developed an integrated network or "market space," called MD Gateway ("MD Gateway"), which provides a Web site through which interested persons may access medical information and continuing medical EDUCATION ("CME") information; and WHEREAS, OSS owns the URL Web address "www.mdgateway.com" as well as certain trademarks, copyrights, and other intellectual property rights associated with MD Gateway; and WHEREAS, MEC desires to improve its existing online medical information resources and the ability to provide CME information through the Internet for physicians, nurses, pharmacists and other health-care professionals, and desires to do so through a license to certain rights in MD Gateway; and WHEREAS, OSS desires to license to MEC certain rights in MD Gateway on the terms and conditions set forth herein, NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereby agree as follows. ARTICLE 1. GRANT ----- 1.1 MD Gateway. OSS grants to MEC and MEC accepts an exclusive license to ---------- use, market, advertise and promote the following items: (a) MD Gateway, including all hardware and software comprising the integrated network and the Web site, as well as a T I telecommunications facility, as identified in Schedule A; (b) Copies of all documentation related to the hardware and software of MD Gateway including, but not limited to, user's manuals and customer support manuals; (c) All trademarks used in connection with MD Gateway, which trademarks are portrayed in Schedule B; (d) All other intellectual property rights in and to MD Gateway including, but not limited to, copyright to the layout of the Web site and all materials displayed on the Web site on or before the date of this Agreement; and (e) The URL Web address "www.mdgateway.com". (f) The right to use any capacity on the T1 telecommunications facility not required in connection with MD Gateway for other Internet communication purposes of MEC. 1.2 Scope of Exclusivity. OSS acknowledges and agrees that the exclusive -------------------- rights granted to MEC in Section 1. 1 above exclude both OSS and any third party (defined as any party other than OSS and MEC) from using, advertising, marketing, or promoting the rights identified in Section 1. 1 above while this Agreement is in effect. ARTICLE 11. TERM ---- 2.1 Term. This Agreement shall commence on the date set forth above and ---- shall continue in effect for a term of five (5) years- from such date, unless sooner terminated in accordance with the provisions of Article VIII below, or unless renewed in accordance with Section 2.2 below. 2.2 Automatic Renewal. This Agreement shall automatically renew for ----------------- additional five-year terms unless MEC gives notice to OSS at least 90 days before the end of a five-year term of this Agreement expressing its desire that this Agreement not be extended. ARTICLE Ill. DELIVERY, INSTALLATION, ACCEPTANCE, AND TRAINING ------------------------------------------------ 3.1 Installation of MD Gateway. Within 30 days of the execution and -------------------------- delivery of this Agreement, OSS shall deliver to the premises of MEC and install within such premises all of the hardware and software COMPONENTS OF MD GATEWAY (AS IDENTIFIED IN SCHEDULE A). OSS shall also arrange for the installation of a T I telecommunications facility to connect the MD Gateway installation on MEC's premises to an Internet gateway computer network operated and maintained by OSS. 3.2 Acceptance. Unless MEC, within 30 days after the date of delivery of MD ---------- Gateway, notifies OSS in writing to the contrary, MD Gateway shall be deemed to be acceptable by MEC as of the date of completion of installation. OSS's warranty set forth in Section 6.1 shall commence on the date OSS has completed installation. 3.4 Standard Training. OSS shall provide training to two (2) individuals ----------------- chosen by MEC. The training shall be sufficient to enable those two individuals to program and operate MD Gateway at a level adequate to act as a replacement of OSS as the source of all technical support required by MEC. 3.5 Additional Training. In addition to the training provided pursuant to ------------------- Section 3.4 above, MEC may request additional training from OSS which OSS may provide upon terms and conditions acceptable to MEC and OSS. 3.6 Maintenance. MEC acknowledges and agrees that this Agreement does not ----------- contemplate any on-going maintenance services by OSS of the equipment and software installed by OSS on MEC's premises pursuant to Section 3.1 above. OSS acknowledges and agrees that OSS shall be responsible for maintaining the T1 telecommunications facility connecting the MD Gateway system on MEC's premises with an Internet gateway computer network operated and maintained by OSS. OSS further acknowledges and agrees that OSS shall be responsible for the on-going maintenance of the Internet gateway computer network through which NM Gateway connects to the Internet and for any on-going maintenance of the redundant version of MD Gateway and the computer on which it is loaded, all as described in Section 6.5(c) below. ARTICLE IV. PAYMENT ------- 4.1 Royalty. MEC agrees to pay OSS, as a royalty for the rights granted to ------- MEC under this Agreement and in consideration of all other obligations and commitments of OSS under this Agreement, a royalty fee based on the MD Gateway Revenue as defined in Section 4.2 below and the Webmaster cost as defined in Section 4.3 below. The royalty fee shall be calculated at the end of each calendar quarter in which this Agreement is in effect. The amount of the quarterly royalty fee shall be 35 % of the amount by which the quarterly MD Gateway Revenue exceeds the quarterly Webmaster Cost. If, for any given calendar quarter, the quarterly MD Gateway Revenue is less than the quarterly Webmaster Cost, then the quarterly royalty fee for such quarter shall be $0.00 and the amount of the deficiency shall be added to and included in the quarterly Webmaster Cost of the succeeding calendar quarter. 4.2 MD Gateway Revenue. For purposes of this Article IV, MD Gateway Revenue ------------------ shall be the sum of all revenue received by MEC, less any refunds attributable to such revenue, in connection with its operation of MD Gateway including, but not limited to: (1) access and usage fees levied on information users of MD Gateway; (2) service ("hosting") fees charged to information providers on MD Gateway; and (3) advertising fees charged to advertisers on MD Gateway. 4.3 Webmaster Cost. For purposes of this Article IV, Webmaster Cost shall -------------- be the total cost (salary, benefits and withholdings) incurred by MEC in connection with the employment of one individual as a Webmaster for MD Gateway. 4.4 Quarterly Statements. On or before the 30th day of the month following -------------------- each calendar quarter (for purposes of this Agreement, a calendar quarter shall end on the last day of March, June, September and December), MEC shall furnish to OSS complete and accurate statements certified to be accurate by MEC showing the MD Gateway Revenue received and the Webmaster cost incurred during the preceding calendar quarter. OSS agrees that no statement shall be due for the calendar quarter ending September 30, 1997; rather, all information relevant for the month of September 1997 shall be included in the statement due in January 1998. 4.5 Quarterly Payments. Royalty payments due hereunder shall be due on the ------------------ 30th day of the month following the calendar quarter in which earned, and payment shall accompany the statements furnished as required above. The receipt or acceptance by OSS of any of the statements furnished pursuant to this Agreement or of any royalties paid hereunder (or the cashing of any royalty checks paid hereunder) shall not preclude OSS from questioning the correctness thereof at any time, within two years from date thereof, and in the event that any inconsistencies or mistakes are discovered in such statements or payments, they shall immediately be rectified and the appropriate payment shall be made by MEC. ARTICLE V. ACCOUNTING ---------- 5.1 Books and Records. MEC agrees to keep accurate books of account and ----------------- records at its principal place of business covering all transactions relating to the license hereby granted, the MD Gateway Revenue and the Webmaster Cost. 5.2 Reasonable Inspections. OSS SHALL HAVE the right to examine, in person ---------------------- or through its legal representatives, all MEC books of account and records described in Section 5.1 above at any time during reasonable business hours of MEC upon three days prior written notice, subject only to such protection as may be necessary to prevent further dissemination of the inventions, trade secrets and other confidential information of MEC. ARTICLE VI. REPRESENTATIONS, WARRANTIES, AND ADDITIONAL COVENANTS ----------------------------------------------------- 6.1 Representations of OSS. OSS represents and warrants to MEC as set forth ---------------------- in this Section 6. 1. Any inaccuracy of such representations and warranties as of the date of this License Agreement shall constitute a breach of this Agreement. (a) OSS is a corporation duly organized, validly existing and in good standing under the laws of the State of Colorado, U.S.A. OSS has all corporate authority to enter into this License Agreement and all other agreements between OSS and MEC, and to perform its obligations hereunder and thereunder. All action required of OSS's members and managers and any other similar action by OSS required to authorize the execution and delivery of each of the agreements between OSS and MEC has been completed. (b) This Agreement is a valid and binding obligation of OSS enforceable against OSS in accordance with its terms. 6.2 Representations of MEC. MEC represents and warrants to OSS as set forth ---------------------- in this Section 6.2. Any inaccuracy of such representations and warranties as of the date of this Agreement shall constitute a breach of this Agreement. (a) MEC is a nonprofit corporation duly organized, validly existing and in good standing under the laws of Colorado.. MEC has all corporate authority to enter into this Agreement. All actions required of MEC's management, shareholders and any other similar action by MEC required to authorize the execution and delivery of this Agreement and all other agreements between OSS and MEC have been completed. (b) This Agreement constitutes a valid and binding obligation of MEC enforceable against MEC in accordance with its terms. 6.3 Warranties of OSS. ------------------ (a) OSS hereby warrants that OSS is the legal and beneficial owner of the rights granted to MEC pursuant to the exclusive license set forth in Article I above, and is the owner of all items to be used in connection with such grant of rights. OSS hereby agrees to indemnify and hold MEC and its officers, directors, employees and agents harmless from and against any and all loss, cost, damage, liability or expense (including without limitation reasonable attorney's fees, court costs and other reasonable litigation expenses) suffered, sustained or incurred by MEC or its officers, directors, employees or agents as a result of, arising out of or in connection with any breach by OSS of the foregoing warranty and representation. (b) OSS agrees to defend or settle, at OSS's expense, any action brought against MEC based upon or arising out of any infringement by OSS or MEC's use, marketing, advertising, or promoting of MD Gateway of any patent, trademark, copyright, trade secret, or other proprietary right. OSS FURTHER agrees to pay any costs, damages, and attorneys' fees finally awarded against MEC in such action by a court of law, after all appeals, which are attributable to such claim. 6.4 Warranties of MEC. MEC shall indemnify and hold harmless OSS and its ----------------- officers, directors, employees, agents and affiliates ("Indemnified Parties") from and against any and all claims, causes of action, suits, damages, liabilities, and/or judgments and settlements including all costs, expenses, and attorneys' and accountants' fees that an Indemnified Party may incur due to any breach by MEC of any of its representations, and/or warranties, obligations under this Agreement. MEC shall undertake to conduct the defense of such suit at its own expense, it being understood, however, that OSS has at all times the option to participate in, or undertake any litigation involving said matters through counsel of OSS's own selection and at OSS's own expense, subject to the indemnity and hold harmless obligations of MEC hereunder with respect to such expense. MEC shall not make any settlement of any claim, suit, or demand for which OSS may become responsible hereunder without OSS's written consent, which shall not be unreasonably withheld. 6.5 Covenants of OSS. ----------------- (a) OSS shall not voluntarily take any action or allow any event within its control to occur that, in either case, would cause any of the representations and warranties in section 6.1 to become inaccurate. (b) During the term of this Agreement, OSS shall not provide Web development services to anyone other than MEC in connection with any project which is intended to aggregate medical or CME information provided by two or more providers. The parties intend for the terms of this Section to be specifically enforceable. (c) During the term of this Agreement OSS shall continuously provide Internet access for MD Gateway and other MEC uses via the T1 telecommunications facility and an Internet Gateway computer network as described in Section 3.1 above. OSS shall also maintain a redundant version of MD Gateway on an Internet gateway computer, or a computer connected to an Internet gateway computer, operated and maintained by OSS, which version shall serve as the active version of MD Gateway in the event that the T1 telecommunications facility is down or MD Gateway is otherwise unavailable from MEC's premises. (d) During the term of this Agreement OSS shall take all steps necessary to preserve its ownership interest in the items made subject to an exclusive license to MEC in Article 1. 6.6 Covenants of MEC. ----------------- (a) MEC shall not voluntarily take any action or allow any event within its control to occur that, in either case, would cause any of the representations and warranties in section 6.2 to become inaccurate. (b) During the term of this Agreement, MEC shall not engage or work with any Internet or Web provider other than OSS to obtain Internet or Web development services. The parties intend for the terms of this paragraph (b) to be specifically enforceable. ARTICLE VII. OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS ----------------------------------------- 7.1 Rights Owned by OSS. -------------------- (a) MEC acknowledges and agrees that MD Gateway is and shall remain a proprietary business asset of OSS, and that OSS retains sole ownership of all right, title and interest in the items enumerated in Section 1.1 above. 7.2 Rights Owned by MEC. -------------------- (a) OSS acknowledges and agrees that MEC shall own all rights, title and interest in any copyrights, trademarks, tradenames, patents, trade secrets, or other intellectual property which MEC creates as part of its operation of MD Gateway; provided, however, that MEC shall not acquire under this Agreement any ownership interest in the trademark WD Gateway." ARTICLE VIII. TERMINATION ----------- 8.1 Defaults On This Agreement. As used herein, the term "default" shall -------------------------- mean a material breach of this Agreement that is not cured by the breaching party within 30 days following receipt of written notice of default from the other party. In the event of a default by either party, the party not in default shall be entitled to any and all remedies available at law or in equity, including but not limited to damages, specific performance and/or termination of this Agreement. This Agreement may be terminated by the party not in default, at any time following a default, by delivery of a written notice of termination to the defaulting party, and termination shall take effect immediately upon the giving of notice hereunder. 8.2 External Conditions. In the event that (i) MEC discontinues operation ------------------- of MD Gateway, (ii) MEC shall make an assignment for the benefit of creditors, (iii) MEC shall go into liquidation, or (iv) a trustee is appointed for the benefit of creditors and the trustee is not discharged within 30 days of his appointment, whether any of the aforesaid events be the outcome of a voluntary act of MEC or otherwise, OSS shall be entitled to terminate this Agreement forthwith by giving notice to such effect to MEC, and termination shall take effect immediately upon the giving of notice hereunder. 8.3 Preservation of Intellectual Property Rights Under This Agreement. The ----------------------------------------------------------------- termination of this Agreement for any reason shall be without prejudice to any of OSS's or MEC's intellectual property rights as described in Article VII of this Agreement. 8.4 Mutual Obligations. Notwithstanding termination of this Agreement, the ------------------ parties shall be required to carry out any provisions hereof which contemplate performance by them subsequent to such termination, and such termination shall not affect any liability or other obligation which shall have accrued prior to such termination. 8.5 OSS Rights in MD Gateway. In the event of any termination of this ------------------------ Agreement according to the terms hereof, MEC shall immediately discontinue all use of MD Gateway. All rights to MD Gateway as described in Section 7.1 above shall automatically revert to OSS and MEC shall promptly execute any and all documents reasonably required by OSS in connection with such discontinuance and reversion. 8.6 Return of Equipment. After termination and within twenty-one (2 1) days ------------------- from the date of OSS's written notice of termination to MEC, MEC shall at its cost return to OSS all items associated with MD Gateway as identified in Article 1. 8.7 MEC Intellectual Property. In the event of termination of this ------------------------- Agreement, OSS acknowledges that MEC shall own all right, title and interest in and to all intellectual property described in Section 7.2 above. ARTICLE IX MISCELLANEOUS PROVISIONS ------------------------ 9.1 Assignment. This Agreement and the rights granted hereunder cannot be ---------- assigned or otherwise transferred by a party hereto without the prior written consent of the other party hereto. Any attempted assignment or transfer without such consent shall be null and void. 9.2 Relationship of the Parties. Nothing herein contained shall be deemed --------------------------- or construed to constitute either party hereto the agent of the other party hereto or to create a partnership or joint venture between the parties hereto, and neither party shall have any power hereunder to obligate or bind the other party in any manner whatsoever. 9.3 Governing Law and Dispute Resolution. This Agreement shall be governed ------------------------------------ by and interpreted in accordance with the laws of the State of Colorado. Except as provided in Section 9.4 below, any action, claim or suit initiated in connection with this Agreement shall be prosecuted exclusively within the courts of the State of Colorado located in Colorado Springs, except where exclusive federal jurisdiction applies, in which case an action, claim or suit initiated in connection with this Agreement shall be prosecuted in U.S. District Court in Denver. 9.4 Arbitration. In addition to its other rights and remedies under Section ----------- 9.3 above, either party may require that any dispute concerning this Agreement, its interpretation or application, including any dispute relating to either party's right to terminate this Agreement, shall be resolved by mandatory arbitration as set forth below: (a) In the event of any disagreement or dispute that a party wishes to submit to arbitration, such party (the "Initiating Party") may request arbitration by providing a written "notice of dispute" to the other party (the "Responding Party") and such notice shall require both parties to submit to mandatory and binding arbitration. The Initiating Party shall have the responsibility of notifying the American Arbitration Association's Denver Regional Office, which shall conduct the arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. (b) The arbitrators shall have full power to decide the dispute presented, including the power to order affirmative or negative injunctive relief and may award compensatory damages to the prevailing party, if any. The arbitrators shall also award reasonable attorneys' fees and costs to the prevailing party. The award rendered by the arbitrators shall be final and judgment may be entered upon it in accordance with applicable law in any court of competent jurisdiction. (c) Arbitration shall be conducted by a three-person panel of arbitrators (or such lesser number of arbitrators as may be mutually agreed) in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitrators shall be chosen by mutual agreement of the parties, or, if no agreement can be reached, by use of the procedures of the American Arbitration Association. (d) The arbitration hearing shall be held in Denver, Colorado. 9.5 Notices. All notices, requests and other communications from one of the ------- parties hereto to any or all of the others shall be given in writing and deemed to have been duly given or served if personally delivered, or sent by first class, certified mail, return receipt requested, postage prepaid, to the party at the address provided below, or to such other address as such party may hereafter designate by written notice to the other parties. If to OSS: Online System Services, Inc. - - ----------- Attn: Steve Adams, President 1800 Glenarm. Place Suite 1800 Denver, Colorado 80202 If to MEC: Medical Education Collaborative, Inc. - - ----------- Attn: Charles P. Spickert, President 1800 Jackson Street Suite 200 Golden CO 80401 9.6 Entire Agreement. This Agreement constitutes the complete and exclusive ---------------- statement of the agreement between the parties, and supersedes all prior and concurrent proposals and understandings, whether oral or written, and all other communications between the parties relating to the subject matter of this Agreement. The parties may, from time to time during the continuance of this Agreement, modify, vary or alter any of the provisions of this Agreement, but only by an instrument in writing duly executed by all parties hereto. 9.7 Force Majeure. If either party is unable to perform any of its ------------- obligations under this Agreement, other than payments due hereunder, or to enjoy any of its benefits, other than payments due hereunder, because of (or if loss of the Equipment is caused by) natural disaster, actions or decrees of governmental bodies or communications line failure not the fault of the affected party (a "Force Majeure Event"), the party who has been so affected shall immediately give notice to the OTHER PARTY AND shall do everything possible to resume performance. Upon receipt of such notice, all obligations under this Agreement shall be immediately suspended. If the period of nonperformance exceeds 15 days from the receipt of notice of the Force Majeure Event, the party whose ability has not been so affected may by giving notice terminate this Agreement. However, delays in delivery due to Force Majeure Events shall automatically extend the delivery date for a period equal to the duration of such Events; any warranty period affected by a Force Majeure Event shall likewise be extended for a period equal to the duration of such event. 9.8 Consent of a Party. Wherever the consent or approval of a party hereto ------------------ is required pursuant to any provisions of this Agreement, the same shall not be deemed to have been given unless in writing, signed by the party whose consent or approval is required. 9.9 Execution of Documents. Each party agrees to and shall execute any and ---------------------- all documents and do any and all acts or things reasonably necessary to fulfill each party's obligations hereunder, including, if necessary to effect the intent of the parties or to comply with applicable laws, rulings or regulations, the execution of two or more separate documents to evidence the terms and conditions of this Agreement. 9.10 Binding Agreement. This Agreement shall be binding upon and inure to ----------------- the benefit of the legal representatives, parent companies, subsidiaries, affiliates, related companies, successors, and assigns (subject to approval in accordance with Section 9.1 above) of the parties hereto. 9.11 Interpretation. In the interpretation of this Agreement, words -------------- importing the singular number shall include the plural and visa versa words importing the neuter gender shall include the masculine and feminine gender and words importing a corporation shall include a person, except to the extent that such interpretation shall be excluded by or be repugnant to the context. 9.12 Signatures. The individuals signing this Agreement on behalf of the ---------- parties hereto represent and warrant that they have the requisite authority to do so and to bind the party for whom they sign to the terms of this Agreement. 9.13 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which when so executed shall be an original, but all of which together shall constitute one agreement. Executed as of the date first set forth above. Online System Services, Inc. Medical Education Collaborative, Inc. By: /s/ Steve Adams By: /s/ Charles P. Spickert, MPH ------------------------ -------------------------------- Steve Adams, Charles P. Spickert, MPH, President President/CEO SCHEDULE A COMPONENTS OF MD GATEWAY ------------------------ Router Cisco 2501 (IOS IP software set, 2-Serial, I Ethernet) Tylink T-1 CSU/DSU Accton 10BaseT hub (16 Ports) WebMaster Workstation (Pentium P5-133, 32MB RAM, 1.7 GB HD, 4X CD-ROM w speakers, 3.5 " FD, Intel Ethernet Express I OX card) Microsoft Windows NT Workstation 4.0 Maxtech 14" monitor Web Server - Physically located in the web server suite at OSS Software necessary to support existing and planned web site features (as currently exist in CME Gateway, MD Gateway and CAA), including but not limited to database, statistics, e-commerce, broadcast e-mail (eg, Visual InterDev, SQL Enterprise Manager) SCHEDULE B TRADEMARK RIGHTS ASSOCIATED WITH MD GATEWAY ------------------------------------------- MD GATEWAY/TM/ SCHEDULE B TRADEMARK RIGHTS ASSOCIATED WITH MD GATEWAY ------------------------------------------- MD GATEWAY/TM/ EX-23.1 7 CONSENT OF ARTHUR ANDERSON LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 27, 1998 (except with respect to the matter discussed in Note 12 as to which the date is March 12, 1998), included in this Form 10-KSB, into Online System Services, Inc.'s previously filed Registration Statement No. 333-13983 on Form S-8. Arthur Andersen LLP Denver, Colorado March 31, 1998 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM ONLINE SYSTEM SERVICES, INC. FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 3,680,282 0 759,389 58,059 235,441 5,087,478 1,370,003 354,371 6,326,491 1,219,306 585 0 1,483,282 8,635,075 (5,011,757) 6,326,491 1,117,358 2,791,556 972,260 1,993,521 4,341,612 0 0 (3,375,279) 0 (3,375,279) 0 0 0 (3,375,279) (1.05) (1.05)
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