-----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, AoCw4SBDcOopwZe+DjfoeEkPjOzenwPDYZB6Ma9lmNxtphxRgEIl49YyKR4nkE2s nlL1xu5s0gkjc5afMYAOcA== 0001021408-99-000662.txt : 19990416 0001021408-99-000662.hdr.sgml : 19990416 ACCESSION NUMBER: 0001021408-99-000662 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ONLINE SYSTEM SERVICES INC CENTRAL INDEX KEY: 0001011901 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 841293864 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 333-71503 FILM NUMBER: 99594680 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, 1998 0-28462 ONLINE SYSTEM SERVICES, INC. (Exact name of registrant as specified in its charter) Colorado 84-1293864 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1800 Glenarm Place, Suite 700, Denver, CO 80202 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 296-9200 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value Warrants for the purchase of Common Stock, no par value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained herein, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB [__]. Registrant's revenues for fiscal year ended December 31, 1998: $1,584,380 Aggregate market value of voting stock held by non-affiliates of registrant as of April 1, 1999: Approximately $80,349,587. Number of shares outstanding as of April 1, 1999: 5,600,465 shares of common stock, no par value, and 1,268,300 common stock purchase warrants. The Warrants expire on May 23, 1999 and represent the right to acquire 634,150 shares of registrant's common stock at a purchase price of $9.00 per share. Documents incorporated by reference: None PART I Item 1. DESCRIPTION OF BUSINESS. General OSS develops, markets and supports products and services that enable individuals and organizations to create and manage their own Internet Web presence and online communities. We have developed a proprietary suite of Web site development tools, known as WEBBbuilder and Portal Objects (formerly marketed under the i2u brand), which enables individuals and organizations to create their own personal/organizational portals. We have targeted the following market opportunities: . Community - Customized community and communication portals or start pages for broadband operators who provide Internet access. . Consumer - Personal portals for individual Internet users. . Enterprise - Internet and Extranet services for businesses, associations and government institutions. . Education - Classroom applications for elementary and secondary schools, including parent/teacher communications, virtual campuses for colleges and universities and online classrooms for corporate training. . Financial Services - Online banking services for banks, credit unions and other financial institutions. Prior to the third quarter of 1997, our focus generally was on three markets: general Web site development, maintenance and hosting; rural or small market Internet service providers ("ISPs"); and healthcare information services and continuing medical education. Each of these activities involved, to varying degrees, the building of online communities and the development of tools and services to allow for the building of strategic and customized Web sites. As an outgrowth of these activities, since mid 1997, our business has evolved to the development of online communities and more recently, the development of personal and organizational portals. Underpinning the evolution of our products and services is our belief that the Internet is evolving from its origins as an information access and delivery tool to one that supports communications and community interactivity. The WEBBbuilder software includes sophisticated personal communications tools which allow users to establish, maintain and enhance online communications with others. These communications tools include: . E-Mail services . Virtual communities . Chat . Calendars . Instant messaging . Conferencing . Newsletters . Friends online There are many portals available to Internet users today. These portals categorize and organize the Internet to varying degrees, with the goal of helping individuals and organizations find valuable information on the Internet. We believe our personal/organizational portals can be differentiated from other portals in three key respects: . "Stay" not "start". Many traditional portals offer some level of personalization in order to attract and retain membership. These portals, or start pages, generally enable users to establish links to other Web sites, thereby serving as a springboard, taking users out and away from the portal site. Our products are designed to maximize personalization in order to retain attention and keep users on our network of hosted sites. . Easy personalization/customization. Our software allows users to select from a list of Portal Objects as well as general Internet content to create a personal Internet experience. 2 . Interactive communications. Our software includes a full range of Internet communications capabilities that supports communications and interactivity. As part of our product enhancement efforts, we have agreed to acquire Durand Communications, Inc., a developer and marketer of Internet "community" building tools and services which allow users to set up their own password-protected virtual communities. DCI's CommunityWare product has been integrated into our suite of products and services. In March 1999, we completed the acquisition of a majority interest in NetIgnite 2, LLC. NetIgnite is applying emerging technologies to develop private-label Web-based services that allow directory publishers, search engines and ISPs to enhance end-user and advertiser value by facilitating data-driven comparison shopping and the development of business Web pages via telephone response systems. We expect NetIgnite's first products to be available around mid 1999. Investment Considerations Investors should consider all of the information contained in this report including the factors discussed under "Item 1 Description of Business General, Competition and Factors That May Affect Future Results," and "Item 6 - Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Item 7 Financial Statements" before making an investment decision with regard to our stock. Certain statements made in this report in the sections referenced above and elsewhere in this report constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). These statements are subject to the safe harbor provisions of the Reform Act. Forward-looking statements may be identified by the use of the terminology such as "may," "will," "expect," "anticipate," "intend," "believe," "estimate," "should," or "continue" or the negatives thereof or other variations thereon or comparable terminology. To the extent that this report contains forward-looking statements regarding our financial condition, operating results, business prospects or any other aspect of our business, you should be aware that our actual financial condition, operating results and business performance may differ materially from that projected or estimated in the forward-looking statements. We have attempted to identify, in context, certain of the factors that we currently believe may cause actual future experience and results to differ from their current expectations. These differences may be caused by a variety of factors, including but not limited to adverse economic conditions, intense competition, including entry of new competitors, ability to obtain sufficient financing to support our operations, progress in research and development activities, variations in costs that are beyond our control, adverse federal, state and local government regulation, unexpected costs, lower sales and net income (or higher net losses) than forecasted, price increases for equipment, inability to raise prices, failure to obtain new customers, the possible fluctuation and volatility of our operating results and financial condition, inability to carry out marketing and sales plans, loss of key employees, and other specific risks that may be alluded to in this report. The Internet The Internet is a global web of computer networks. Developed over 25 years ago, this "network of networks" allows any computer attached to the Internet to talk to any other using Internet protocols. Increased Internet use and the availability of powerful new tools for the development and distribution of Internet content have led to a proliferation of Internet based services, such as advertising, online magazines, specialized news feeds, interactive games, electronic commerce, electronic banking and educational and entertainment applications, that are increasingly incorporating multimedia information such as video and near-CD-quality audio clips. The Internet has the potential of becoming a platform through which consumers and businesses can easily access rich multimedia information for entertainment, communication, and the conduct of business, creating new sources of revenue for ISPs, advertisers, content providers and other businesses. However, multimedia content and other data- intensive applications require high bandwidth. Today, the average Internet user accesses the Internet via telephone connection. Telephone modems are edging toward 56 kilobits per second ("Kbps") transfer rates, but most current users are still using transfer rates of 28.8 Kbps. At these rates, to send an image filling a computer screen with a color photograph requires about 16 3 seconds. To download a 10 megabyte ("Mb") software file requires upwards of an hour or more. Despite the frustration of lengthy downloading, Internet and PC usage is growing rapidly. It is estimated that by the year 2002, 65% of U.S. households will have PCs and 34% of U.S. households will be online. (See eMarketer, March 1999 and Dataquest, February 1999.) Demand for high-speed Internet access is increasing due to the growing number of telecommuters, home businesses, home PCs, Internet-literate students entering the work place and an increase in the availability and complexity of multimedia. [GRAPH APPEARS HERE] Several new technologies attempt to address the performance problems of the Internet. These include Integrated Services Digital Network ("ISDN") technology with data transmission speeds of 128 Kbps and Asymmetric Digital Subscriber Line ("ADSL") technology with peak data transmission speeds of 8.4 megabits per second ("Mbps"), both telecommunications based offerings. Wireless offerings include satellite-delivered approaches such as direct broadcast satellite ("DBS") which currently provide peak data transmission speeds of approximately 400 Kbps downstream (delivering information from Web sites) and rely on dial-up modems and the telephone network for upstream transmission ("telephone return") and multichannel multipoint distribution service ("MMDS") and local multipoint distribution service ("LMDS"). In recent years, cable system operators have been upgrading to hybrid fiber-coaxial cable infrastructure both to compete more effectively with DBS television providers, which offer a large number of television channels with digital audio and video, and to increase revenue by offering digital television, telephone and data transmission using cable modems through the upgraded infrastructure. In addition, new cable modems have been introduced which can be used with the cable infrastructure currently in place in most systems to provide data transmission speeds of 10 Mbps and more downstream and rely on dial-up telephone modems for upstream transmission ("hybrid access"). The following table demonstrates comparative data transmission speeds. 4 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 Strategy Our products and services are designed to enhance the online experience by providing users with personalized web spaces and by enabling users to set up their own virtual online communities. By providing the products and services required for individuals, ISPs, businesses, educational institutions, associations and governmental bodies to establish and maintain online communities, we believe we can establish our products and services as unique channels for the distribution of Internet products, advertising and services. Our strategies to achieve our growth objectives include: Gain Early Market Share. We believe technological convergence is occurring rapidly in the areas of television, telecommunications, PC's and the Internet and that with improving data transmission speeds, the Internet will become the global communications medium enabling millions of people to share information and conduct business electronically. As multiple solutions to the data transmissions problem are developed, we believe that Internet users will increasingly use ISPs that can deliver high data transmission speeds. Of the various broadband operators, we believe that cable operators (wired and wireless) are in the best position to solve the data transmission speed problem the soonest, as they already have the infrastructure in place needed to drive high-speed Internet access at competitive rates. For this reason, we have developed product and service offerings specifically for cable television operators which permits the generation of Internet Web site content by individuals, local merchants and others. This product and service offering is intended to capitalize on the enhanced capabilities available through broadband access to the Internet and provides the operators with a local content start page and our software, including our personal and organizational portal services. Expand Product Offering. We believe that it is important to continually expand the functionality and performance of our product and service offerings. Underpinning the evolution of the WEBBbuilder platform is our belief that the Web is evolving from its origins as an information access and delivery tool to one that supports communication and community interactivity. By developing premium products and services, we believe we can enhance the user's online experience and foster loyalty among the user base. Product enhancements currently planned include: . Improved Communications Capabilities -- including Web-based e-mail, calendar, file management and task list functionality. . Settop Delivery -- modifications to enable users with settop devices (e.g., digital settops and WebTV) with Internet capability to display and interact with our portal services. . Video-based Advertising -- short and long form interactive advertising that can leverage consumer profile and Internet usage data to present targeted product information to users. . Premium Content -- developing product offerings such as archived television programming, low latency (fast paced, interactive) games and video conferencing which will be tailored to the high-speed connection afforded by broadband operators. 5 . Training and Education -- products designed to use multimedia content to enhance computer-mediated learning. As part of our product enhancement efforts, we have agreed to acquire DCI, a developer and marketer of Internet "community" building tools and services which allow users to set up their own password-protected virtual communities. DCI's CommunityWare product has been integrated into our suite of products and services. During March we also acquired a majority interest in NetIgnite 2, LLC, a company developing private-label Web-based services that allow directory publishers, search engines and ISPs to enhance end-user and advertising value by facilitating data-driven comparison shopping and the development of business Web pages via telephone response systems. Leverage platform software. Our product development strategy also includes leveraging our core community building software technology to develop products for particular industries, companies, educational institutions, governmental institutions, markets or consumer needs. We have utilized our WEBBbuilder and Portal Object foundation software to develop products for our targeted markets and expect to continue to develop additional online products tailored to these markets. Aggregate Subscribers. We believe that the interactive and computer- based nature of the Internet makes it possible to offer highly sophisticated target marketing to individuals or groups of Internet users. The geographic areas served by ISP's, the community's online members, and the aggregation of members with similar interests across multiple communities all represent potential channels of distribution for Internet products, advertising and services. We have planned upgrades to our software which will permit the aggregation of community member profiles (collected as part of the registration process) as well as track and analyze site usage. We intend to offer community members the opportunity to receive product information (e-mail, electronic brochures, videos, etc.) of specific interest to them. It is our belief that these "addressable advertisements" will be an effective alternative to the current environment which inundates the average American consumer with several thousand media impressions per day, most of which are believed to be of little or no interest. Acquisitions. We intend to seek acquisition candidates that add immediate revenue, provide product or technology enhancements in one or more of our targeted markets or provide an existing customer base to increase advertising or e-commerce opportunities. Strategic Alliances. To enhance our products and services, accelerate our speed to market and to provide additional revenue-generating opportunities, we expect to enter into strategic agreements and partnerships with companies that can provide additional technologies, such as IP telephony and IPMulticast. Products and Services Our WEBBbuilder product enables individuals and organizations to create their own personal or organizational portals. Individual and business users can begin with a defined template as a starting point. Then, by simply clicking, dragging and dropping specific capabilities onto their portal page, they can create their own personal or organizational portal. We are scheduled to deliver two product upgrades during 1999. Features to be included or enhanced in the June release include personal portals, commerce, Web-based e-mail, new message forums and new portal objects. Incorporated into WEBBbuilder with the product release scheduled for the fourth quarter of 1999 will be proprietary technology that will enable users to share a specific object that has pre- populated content. Essentially, the Shared WEBBspace technology will allow an individual or organization to grant permission to someone else to drop an already customized or populated object from one portal onto another, not as a link but as embedded content. Additional improvements scheduled for the fourth quarter release include enhanced personalization, customization and private-label capabilities. We also expect to begin integrating the NetIgnite technology with our WEBBbuilder technology during the fourth quarter of 1999 (see "Acquisition of NetIgnite"). We provide various services designed to facilitate development of online communities and local/user-generated content. These services include: . Providing onsite launch specialists before and at the time the service is commenced; . Providing in-market regional or city managers to support local content development on an on-going basis for our Community products and services; . Developing and distributing marketing materials; and . Developing incentive programs for online moderators and promotional partners. 6 We intend to expand existing services and to develop additional community- building and support services. Our products and services, all of which utilize our WEBBbuilder software platform, are marketed under five product groupings: Community; Consumer; Enterprise; Education; and Financial Services. Revenue sources for each of these product groupings include license fees which may be based on a percentage of revenues derived by our customers through the use of our licensed- products and services; custom development and premium services fees; advertising; and transaction fees and fees based on e-commerce activities. To date, we have recognized application license fees for our Community products and services and custom development and application license fees for our Enterprise, Education and Financial products and services. In addition, for our Community products and services grouping, we have recognized revenues for the sale of equipment and for providing Internet access services for certain of our broadband operator customers. With our increasing focus on software-based products and services, we have elected to phase-out our Internet access products and services and do not expect revenues from these sources to be significant in the future. To date, we have not recognized any revenues in connection with our Consumer product grouping, nor have we received any fees from advertising or e- commerce activities. Generally, we do not expect to recognize any significant revenues from these activities until our user base and the user base of our business partners are large enough to attract advertisers and distribution partners. Community Content Software. Our Community software enables broadband operators and other communications companies to create complex Web sites where content itself is generated and updated by the people who use the Community Web site. Using very simple, on-screen templates, individuals and businesses can post information about their interests and services. Furthermore, by allowing users to participate in the development of the community, we believe users will develop "ownership" in the site and be more interested in using the site on an ongoing basis. The trend towards local content delivered via the Internet is significant. A study by New York City-based FIND/SVP predicts that in 1998 more than 24 million adults would use the Internet to obtain local news, sports, weather and yellow pages, and to locate community resources. The report concludes that, if successful, local online advertising revenues could rise to more than $500 million by the year 2000. Similarly, The Yankee Group forecasts $1.1 billion in online classifieds and local banner ads by the year 2000. Our content products and services include: Revenue Opportunities. We believe that high-value, useful local content offers the opportunity for additional revenue streams for us and our distribution partners. We and our ISP partners can obtain a valuable database on users including their interests, purchasing history and community Web site usage which can be used for highly- targeted marketing campaigns. This information, with the consent of the user, may be used by us and our ISP partners or sold to outside organizations and advertisers for their use. Our software ties the content of all of the user interactions within the community sites into electronic commerce opportunities and automatically serves banner advertising and direct purchasing opportunities to users based upon the local content they are viewing. In addition, areas within the site are available for sponsorship and offer merchants the ability to obtain a unique commercial presence. For example, a forum on commercial law and an accompanying weekly live chat group could be sponsored by a local law office or a forum on car repairs could be sponsored by an auto parts dealer. Sponsorship opportunities of this nature provide businesses with the ability to control both the media (content) and medium (advertising vehicle). Our software enables ISPs to offer premium services for a fee. Examples of such services include personalized URLs (Internet addresses), enhanced business and consumer Web pages, integrated personal communication tools and software and video content on a subscription or pay-per-use basis. 7 Local Content Development Areas. Our current software provides five specific areas that generate local content: . Personal home pages and communication tools; . Business Web pages; . Business directory listings; . Community and events listings; and . Online discussion forums. To use the community site, users must first complete an online registration. At this time the system collects detailed profile information about their interests and hobbies. In exchange for providing this information, users may create a free personal Web page. Using a template, the user can input text and chose from a variety of visuals to create their signature Web site. We believe this is a powerful incentive for registration, as having a personal Web site is attractive to many people. The data obtained from the online registration can then be used to develop a data-base marketing system for advertising and other revenue- generating activities. The system provides businesses with a low-cost means for preparing a business Web page while also providing new revenue streams. Business owners need only fill out on-screen forms to self-create their Web page and can change information as needed. Any business in the community can add a "Yellow Pages" type listing to the system. This free listing is added to a comprehensive database that users of the site can search, both by category and keyword, to quickly locate a business that may fit their needs. Communities have many events that can be shared easily with the system. Users can search for information on current and upcoming events while out- of-date events are automatically deleted from the system. Our software lets users communicate online about any subject. They can share ideas and concerns with other members of the local community. The system automatically serves both banner advertising (animated, rolling advertising) and direct purchasing opportunities to users based upon the local content they are viewing. For example, a user might be viewing a discussion forum on gardening. The system would automatically present an ad for a local gardening store where users could "click through" to visit the store, or present an ad for a bouquet of flowers where the user can click and instantly order the bouquet for delivery from a local florist. Core Business Support. Our software enables broadband operators or other community members to promote their core business. In the case of cable operators, we include a channel guide. The operator can promote pay-per- view events and enhanced services such as pay channels. The software also integrates content from national providers of interest to the local communities. National Content. Localized, national content includes weather, yellow page listings and news and information. For example, we have established an arrangement with InfoSpace, a Washington state aggregator of community listings and information, whereby InfoSpace provides its content to us at low cost in return for advertising. We believe that integrating content of this nature extends the utility of the our offering, particularly in the first months following installation, as user-generated information is being developed. Online Commerce. Online e-commerce is expected to increase dramatically over the next few years. Input, a California-based research firm, predicts that e-commerce will grow from approximately $57 million in 1995 to more than $2 billion at the 8 turn of the century. Planned upgrades to the system are expected to help businesses that do not have online stores create them. The inventory and product descriptions are automatically added to the database which creates personalized just-in-time purchasing messages for the site users. We install and maintain our community-building and communications software for each system within our operations center. We are exploring strategic relationships with satellite companies and other vendors to multicast IP data to ISPs and broadband operators. Satellites are expected to be used to deliver popular Web sites to caching servers located at the cable system headend, and are expected to serve as the primary delivery vehicle for high-bandwidth content. Consumer As individuals continue to integrate the Internet into their daily lives, we believe they will seek products that provide them with greater control and flexibility. This is, by nature, a more localized, more personal and more integrated culmination of their interest into their online space. With our WEBBbuilder software, individuals can build their personal Internet, including links to their favorite Web sites, community listings for their affiliated groups and their favorite stores, all on one page. Individuals can build communities, join communities and initiate chat or join chat. Their personal portal can be changed over time and may grow in sophistication as they become more knowledgeable. Our goal is to make this an individual's best of the Web, their true personal portal. Our personal product offering, which currently is included with our Community products and services, will also be offered direct to consumers. Our goal is to aggregate all users of our personal portal products and services, including those who access these products and services through the Community product offering, to provide advertising and e-commerce opportunities. In addition, we may license our community tools to high-traffic sites and may charge consumers for premium services which will be available on a fee-for-use basis. Enterprise Our Enterprise products and services enable businesses, associations, and government institutions to create commerce-enabled Internet, Intranet, and Extranet services. These Enterprise portals provide a place where people from the business, association or government institution can meet and communicate in real-time, use online discussions for information exchange and share files. Standard features include: . Communication tools, including instant messaging, conferencing, message forums, newsletters and event calendars. . Resource material management, including employee handbooks, policy manuals, document templates, telephone listings and organization charts. . Service bureau convenience of hosting, online billing and member management. . E-commerce and transactional services. We are focusing the distribution of these products and services on vertical market opportunities, distribution ventures, resellers, and direct customer sales. RE/MAX International, Inc., a large international real estate brokerage company, is utilizing a customized version of the Enterprise software called "RE/MAX Mainstreet" to link its real estate agents, management and approved suppliers worldwide. Users can quickly gain access to RE/MAX's private community with simple, online enrollment. The system makes it easy to transfer company resource materials and forms, and for members to share ideas, information and referrals in real-time. We intend to expand features for this product to include online convention registration, electronic commerce with approved suppliers, integrated product management software and online education and training. We were paid a fee for the development of the system and receive ongoing revenues based on the use of the system. The American Society of Association Executives has 24,000 members representing over 10,000 associations. The Union of International Association estimates that there are over 44,000 associations worldwide. We believe that the Enterprise software is well suited to bring together association members online, in order to 9 replace costly mailings or time consuming and expensive meetings. Utilizing this software, member discussions could happen anytime, information could be disseminated instantaneously and inexpensively and membership surveys could happen in real-time. Education Our education market segments include K-12, higher education and corporate training and career development. For the K-12 market, our software provides schools the ability to create online communities that facilitate communication and information exchange among teachers, administrators, parents and students. Through our education products and services, we provide colleges and universities with the following services: . Virtual campuses-Our product provides a virtual campus, including an academic center, classrooms, administration, counseling, library services, student union, campus store and continuing education. . Hosting services-We host the virtual campus and classroom and provide all infrastructure and related technical services required for an annual service fee. . Marketing services-We provide colleges and universities with online and print and other media marketing materials and services. . Professional development and training services-We provide onsite counseling and resources for faculty, administrators and staff to help them take maximum advantage of our education products and services. During March 1999, we commenced a pilot project with Tele- Communications, Inc.'s ("TCI") education project whereby we are deploying online school community Web sites utilizing our software and hosted by us. This product is designed to enable teachers, students and parents to more effectively use Web technology by fostering parent-teacher interaction and educational resources and information sharing. We believe that our Education products and services are also well- suited to facilitate distant learning for corporate training and career development. Financial Services We have developed an online banking solution specifically targeted at smaller financial institutions having less than $500 million in assets. As of the end of 1997, there were over 10,000 FDIC-insured financial institutions in the U.S., 90% of which are believed to have assets of $500 million or less. In addition, there were over 11,000 federally and state chartered credit unions, almost all of which are believed to have assets of $500 million or less. Our financial services solution is based on transactional foundation software from Edify Corporation. The Edify software has been chosen by many corporations and financial institutions and is the foundation of the Web-banking systems of some of the nation's largest banks. We have taken a service bureau approach to e-banking, which enables us to provide smaller community banks and credit unions with many of the capabilities and services available to the larger banks without the cost associated with the development of bank-specific systems. Our e-banking system includes access to account activity, history and current account balance information 24 hours a day, seven days a week, the ability to obtain electronic statements and transfer funds between accounts, pay bills, make loan applications and download transactions into personal financial software such as Quicken or Microsoft Money. We are currently providing online banking services for Rockwell Federal Credit Union's ("RFCU") 54,000 members. RFCU is a non- profit organization that provides a wide range of financial services for employees of Rockwell International, Boeing North America and approximately 100 other companies. RFCU has entered into a three-year agreement with us whereby we have developed the Internet solution with applications customized specifically for the needs of RFCU membership, and have integrated Edify's Electronic Banking System and CheckFree's bill payment system with RFCU's host system. Under the terms of the agreement, we have received revenue for system development and are receiving a monthly fee per member for providing the online banking services. 10 During February 1999, we entered into an agreement with CU Cooperative Systems, Inc., a national co-operative association representing over 500 credit unions, pursuant to which we are developing an Internet e-banking solution for the co-op's members with applications customized for the needs of the co-op and its members. Under terms of the agreement, we are receiving income for system development and will receive fees from individual credit unions who belong to the co-op and who elect to use our e-banking services and ongoing fees based on these credit unions' members' use of the system. We do not expect any significant fees from the use of the system until 2000. Proposed Acquisition of DCI On March 19, 1998 we executed an Agreement and Plan of Merger (the "DCI Merger Agreement") pursuant to which we agreed to acquire Durand Communications, Inc., a California corporation ("DCI"), via a merger of our wholly owned subsidiary, Durand Acquisition Corporation, with DCI (the "DCI Merger"). We anticipate that the DCI Merger will occur in the second quarter of 1999. A significant element of our strategy to achieve our growth objective is to seek acquisitions that add immediate revenue, provide product or technology enhancements in one or more of our targeted markets or provide an existing customer base to increase advertising or e-commerce opportunities. Our acquisition of DCI will provide us with DCI's technology, including both completed technology and technology in development, and product development expertise. Our product development strategy is based upon our belief that the Web is evolving from an information access and delivery tool to a system that supports communication and community interactivity. We believe that DCI's CommunityWare technology, which enables users to organize themselves on the Internet in a matter of minutes, and to thereafter manage and expand their own public and private online community to facilitate and promote communications, information sharing and commerce among the users that comprise the various constituent communities, is particularly well suited for providing the communications component for our software. Since the execution of the DCI Merger Agreement, representatives of DCI and OSS have worked together to incorporate the CommunityWare technology into our software. Following the DCI Merger, we intend to fully integrate DCI's product development efforts with our own and we expect to fully integrate DCI's products with our products and to market them as part of our product offerings and not on a stand-alone basis. In the event that the DCI Merger is not completed, DCI has agreed to grant us a license for CommunityWare on as favorable terms as it licenses such technology to others. We believe that the primary value of DCI to OSS is (i) DCI's proprietary technology, particularly DCI's CommunityWare technology, (ii) DCI's software development capabilities which we believe are important to our ability to continue to develop state-of-the-art proprietary software products required to maintain long-term relationships with our customers, and (iii) the ability the DCI acquisition will give us to greatly reduce the time it will take us to introduce new proprietary software products. Andre Durand, Chief Executive Officer of DCI, has been elected Senior Vice President-Product Development of OSS and will be responsible for our product development efforts. A condition to the DCI Merger is that Mr. Durand enter into a three-year noncompete agreement with OSS. We intend to continue to employ most of DCI's product development personnel following the DCI Merger. We also believe that DCI's Electronic University Network ("EUN") business, which offers accredited online courses for colleges, universities and corporations, represents a valuable business opportunity. We expect to continue to develop this business both as a separate product offering and as an adjunct to our product offerings. The DCI Merger Agreement contemplates that we will acquire 100% of the outstanding common stock of DCI. Based on the average closing price of our common stock for the two days before and the two days after March 19, 1998, the day that the transaction was announced, the total purchase price is estimated to be approximately $13,100,000, consisting of (i) 955,649 shares of our common stock to be issued to the stockholders of DCI, (ii) approximately 240,000 shares of our common stock to be reserved for issuance upon the exercise of options and warrants of DCI to be exchanged for similar securities of OSS at exercise prices ranging from $4.31 to $20.33 per 11 share; and (iii) approximately $400,000 of expenses to be incurred. In addition, DCI will have approximately $1,200,000 of liabilities (including approximately $381,000 of convertible securities which will be converted into similar convertible securities of OSS) at the time of the DCI Merger, which will become the liabilities of the consolidated entities upon consummation of the DCI Merger. We will reserve approximately 40,000 shares of our common stock to be issued upon the conversion of these convertible securities. The DCI Merger will be accounted for under the purchase method of accounting, with the purchase price allocated to the fair value of assets acquired. A portion of such amount and liabilities assumed on a consolidated basis has been identified as intangible assets. The portion of the purchase price and liabilities assumed on a consolidated basis which is allocated to in- process research and development will be recognized as expense in the period the DCI Merger is consummated (currently expected to be the second quarter of 1999). DCI completed the acquisition of CompuLearning Systems, d/b/a Electronic University Network ("EUN") during January 1998. Based on preliminary financial information provided by DCI and EUN, the combined revenues for DCI and EUN for the year ended December 31, 1998 totaled $813,522, including $540,372 of services provided to OSS and DCI's combined loss for the same period equaled ($1,564,160). In addition, DCI's accumulated deficit at December 31, 1998 was ($8,397,347) and DCI's shareholders' deficit at December 31, 1998 was ($1,492,548). We estimate that, on a pro forma basis, the acquisition of DCI would have resulted in an increase to the net book value of our shares of common stock as of December 31, 1998 from $0.43 (actual) to $2.20 (pro forma) and $2.48 (pro forma adjusted to reflect the subsequent conversions of 10% Preferred Stock and Series A Preferred Stock, the subsequent issuance and conversions of the Series A Preferred Stock, the subsequent exercise of the warrants to purchase 140,000 shares of common stock issued in connection with the issuance of the Series A Preferred Stock, and the subsequent issuance and conversions of Series C Preferred Stock). The final determination of the value of consideration issued by OSS and the liabilities assumed will be made at the effective time of the DCI Merger. Accordingly, the determination of the total purchase price, liabilities assumed and the allocations may change significantly from the amounts stated in this report. We expect that the DCI Merger will be completed in the second quarter of 1999. If, for some unanticipated reason, the DCI Merger was not completed, we would be required to license the CommunityWare technology from DCI for a license fee which would need to be negotiated. In addition, we would need to hire additional software development engineers to replace those that would have joined us had the DCI Merger been completed. Acquisition of NetIgnite On March 10, 1999, we acquired a controlling interest in a newly formed company, NetIgnite 2, LLC ("NetIgnite"). NetIgnite is a development stage company which we formed with a predecessor company by the name of NetIgnite, Inc. ("NI"), the sole shareholder and founder of which was Perry Evans, the founder and past President of MapQuest.com. In connection with the formation of NetIgnite, NI contributed all of its rights to certain technology to NetIgnite and we agreed to provide $1,500,000 of funding which it is believed will be required to implement NetIgnite's business plan during the next 12 to 18 months. We are entitled to 99.5% of NetIgnite's operating income and approximately 60% of any proceeds upon the sale of NetIgnite. NI is entitled to .5% of NetIgnite's operating income and approximately 40% of any proceeds upon the sale of NetIgnite. We have entered into a Buy-Sell Agreement with NI pursuant to which either we or NI could, subject to certain conditions, acquire all of the other's interest in NetIgnite. In the event that we sold our interest to NetIgnite in accordance with the Buy-Sell Agreement, we would be entitled to retain a limited non-exclusive license to utilize the technology developed by NetIgnite. Mr. Evans has entered into an Employment Agreement with OSS and NetIgnite which has an initial term of two years, provides for a minimum annual salary of $190,000 and the granting of stock options to purchase 80,000 shares of our common stock at an exercise price of $12.25, one-third of such option shares to vest annually during the next three years subject to Mr. Evans' continuous employment by OSS. 12 NetIgnite is applying emerging technologies to develop private-label Web- based services designed to allow directory publishers, online search engines and ISPs to enhance end-user and advertiser value by facilitating data-driven comparison shopping. NetIgnite plans to employ XML, a next generation web language that makes it possible to add database capability to information found on a web page, to solve the following problems: . Make it far easier for potential customers to find local business web sites by searching the information presented within the web site, not just the domain name or limited description fields of today's technology. . Allow consumers to compare price, product offering, and other information of their choosing among competing providers. . Allow directory services, ISPs, and community start page providers to generate advertising and e-commerce revenue from local web site owners who heretofore have seen limited traffic from internal site promotions or general advertising placements. . Enhance the value of small and geographically-focused web sites by making them easier to create and maintain, as well as by increasing targeted page views. NetIgnite intends to provide its services on a hosted, private label basis, earning an annual fee from its customers for each business web site its products and services enable. We believe that NetIgnite's products and services may be marketed directly to online directory publishers, online search engines and ISPs as well as part of our Community product and service offering for broadband operators and other ISPs. We expect NetIgnite's first products to be available during the third quarter of 1999. However, there can be no assurance that NetIgnite will be successful in developing its proposed products or that, if developed, that they can be successfully introduced and marketed or that NetIgnite's business will be profitable. Marketing We have a multi-faceted distribution strategy, including establishing private-label distribution ventures and direct distribution through consumer marketing designed to inform individual Internet users of our products' capabilities and direct marketing to targeted businesses, educational institutions, governmental bodies and associations. Our private-label distribution arrangements to date have been primarily with broadband cable Internet access providers. These distribution agreements generally provide for the development of operator-branded local content pages which, using our proprietary software, permit the generation of Internet Web site content by ISPs, individuals, local merchants and others. Personal user home pages, enhanced business Web pages, business directories, community events, online discussion groups and forums and programming guides can all be developed and updated by users, without the distribution partner's involvement. Also included are our personal portal services which facilitate user interaction and community "groupware" which enables any group to create a public or private community for personal interaction and information exchange. We are also seeking to partner with high traffic Internet web sites who are seeking to add personalization and communication capabilities to their products. For our Enterprise products and services, we offer customized products incorporating our proprietary software to address particular customer or market needs and are pursuing licensed resellers who desire to integrate our software with their Web applications designed to meet specific market needs. In addition to licensing our software to these resellers, we would also provide Web hosting services. In the Education market, we have joined with TCI's Education Project to develop and deploy online school community Web sites based on our WEBBbuilder platform and hosted by us. The first of five pilot launches will occur in March, 1999. If the pilot launches are successful, we expect to work with TCI to market the product to the 20,000 schools in the TCI franchise areas. The goal is to commence marketing of this product in time for the beginning of the 1999 fall school year. For our financial services, we have entered into a development agreement with CU Cooperative Systems, Inc., a national co-operative association including over 500 credit unions, pursuant to which we are developing an e-banking product specifically designed for the co-op's member credit unions. 13 Our marketing activities include advertising in trade publications, developing advertising campaigns and materials for use by our customers to promote the use of the Internet to their customers, developing public relations programs featuring us and our products and services and attendance at trade shows. A substantial portion of our sales have been derived from a limited number of customers. During 1998, Starstream, Inc., American Telecasting, Inc., Rockwell Federal Credit Union, and Intermedia Partners accounted for 28%, 17%, 14% and 12%, respectively, of our sales for the period. During 1997, American Telecasting, Inc. accounted for 26% of sales and FiberTel TCI2 S.A. accounted for 14% of sales for the year. During 1996, EBI Securities, Inc. accounted for 10% of sales for the year. While major customers in one fiscal period are not necessarily likely to be major customers in future fiscal periods, the loss of a major customer could have an adverse effect on our business. Trademarks and Proprietary Protection We do not believe that our or DCI's current products or services are patentable. We and DCI plan to rely on a combination of copyright, trade secret, trademark laws, and nondisclosure and other contractual provisions to protect our respective proprietary rights. As a part of our confidentiality procedures, we generally enter into written nondisclosure and nonsolicitation agreements with our officers and employees which restrict the use and disclosure of proprietary information and the solicitation of customers for the purpose of selling competing products or services. We generally have not entered into noncompetition agreements with our officers, directors or employees. Because the policing of proprietary rights may be difficult and the ideas and other aspects underlying our and DCI's products and services may not in all cases be protectable under intellectual property laws, there can be no assurance that either we or DCI could prevent competitors from marketing the same or similar products and services. In addition, competitors may independently develop products and services that compete with our and DCI's products and services. Competition Our and DCI's current and prospective competitors include many companies that have substantially greater financial, technical, marketing, and other resources. We attempt to distinguish our products primarily on the bases of: . Customizability and personalization; . Breadth and depth of communications capabilities; . Ease of use; and . Our willingness to permit other companies to incorporate/private label our products with their products to support their applications or market requirements. We believe that competition will intensify in the future. Increased competition could result in price reductions and increased spending on marketing and product development. Any of these events could have a material adverse effect on our and DCI's financial condition and operating results. There is no assurance that we will be able to compete successfully against current and future competitors or that competitive pressures faced by us and DCI will not materially adversely affect our respective business financial condition, and results of operations. We and DCI believe that the primary factors that will impact competition are technical expertise and development, price, sales and marketing abilities, customer support, reliability and security. We are aware of a number of companies specializing in the creation of local content and national companies such as GeoCities, Excite and Globe.com which market products which enable users to set up their own Internet communities, but do not believe that any of these companies also focus on creating communities for broadband operators centered on geographic areas. National ISPs, including companies such as MCI Telecommunications Corporation, AT&T, Sprint Corp., Netcom Online Communications Services, Inc. and Performance Systems International, Inc. and Internet access providers such as America Online, Inc., @Home Corporation, RoadRunner, High Speed Access Corporation, and Softnet Systems, Inc. could also develop products which compete with our community-building and local content products and services. Further, the market for our 14 products and services is characterized by rapidly changing technology, evolving industry standards, emerging competition and frequent new product and service introductions. There can be no assurance that we can successfully identify new product and service opportunities or develop and bring new products and services to market in a timely manner, or that products and services or technologies developed by others will not render our products and services noncompetitive or obsolete. DCI believes that its direct competitors include, HotOffice, Netscape's NetCenter and Netopia's Virtual Office in the business market and University Online and Real Education in the education and training markets. Management of DCI believes that its products and services can be differentiated in the following ways: (i) CommunityWare generally offers more sophisticated and customizable public and private conferencing and group discussion capabilities; (ii) CommunityWare offers more private, integrated and customizable live services; (iii) CommunityWare allows users to engage their primary community in addition to their other communities simultaneously; (iv) CommunityWare offers full integration of group collaboration functionality (i.e. communications) and content hosting services and management tools; and (v) DCI believes it is the only company using its service as a platform to launch other companies (channel partners) for specific markets such as business, education and virtual tradeshows. DCI believes that it indirectly competes with content-centric companies (such as The Mining Company, the Globe, Tripod, iVillage and GeoCities), community software tools companies (such as Throw, Netopia, PowWow, iChat, eShare, and Well Engaged), and providers of client/server groupware software (such as IBM, Netscape, Novell and Microsoft). DCI believes that content- centric companies typically focus on hosting specific communities specially created by them, and do not provide services or tools for others to build and host their own communities. DCI believes that Internet tool companies typically focus on providing one or two communications tools which can be integrated into a Web page and do not provide an integrated solution which is obtainable at a consumer level. DCI further believes that the major providers of groupware such as Microsoft, Netscape, IBM, Lotus and Novell are focusing on dedicated, high- end and high-dollar solutions to the corporate market, and do not provide solutions for those groups who are either technically or financially unable to implement these complex and expensive solutions. Government Regulation Our and DCI's products and services pertaining to Web site content and development are not currently subject to direct regulation by the Federal Communications Commission or any other federal or state agency, other than regulations applicable to businesses generally. Our broadband customers, however, face significant uncertainty and possible changes as the markets in which they operate are being deregulated or subject to changing regulation. Changes in the regulatory environment relating to the Internet content or connectivity industries, including regulatory changes that directly or indirectly affect telecommunication costs or increase the likelihood or scope of competition from regional telephone companies or others, could have a material adverse effect on our business. We cannot predict the impact, if any, that future regulation or regulatory changes may have on our business. Employees At March 22, 1998, we employed 53 full time employees, which included 9 in management, 2 in sales and marketing, and 14 in development. In addition to these Company personnel, we contract with other creative and production resources, as required for peak load situations, to create Web pages. Our employees are not represented by a labor union, and we consider our employee relations to be good. Factors That May Affect Future Results Factors that may affect our future results include, but are not limited to, the following items as well as the information in "Item 1 Description of Business General and Competition," "Item 6 Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Item 7 Financial Statements Note 1 to the Financial Statements." 15 Our limited operating history could affect our business. We were founded in March 1994, commenced sales in February 1995, and were in the development stage through December 31, 1995. DCI was founded in 1993. Accordingly, we have a limited operating history upon which you may evaluate us. Our business is subject to the risks, expenses and difficulties frequently encountered by companies with a limited operating history including: . Limited ability to respond to competitive developments, . Exaggerated effect of unfavorable changes in general economic and market conditions, . Ability to attract qualified personnel, and . Ability to develop and introduce new product and service offerings. There is no assurance we will be successful in addressing these risks. If we are unable to successfully address these risks our business could be significantly affected. We have accumulated losses since inception and we anticipate that we will continue to accumulate losses for the foreseeable future. We have incurred net losses since inception totaling $20,774,129 through December 31, 1998. DCI has incurred net losses since its formation totaling $8,397,347 through December 31, 1998. In addition, we expect to incur additional substantial operating and net losses in 1999 and for one or more years thereafter. We expect to incur these additional losses because: . We currently intend to increase our capital expenditures and operating expenses to expand the functionality and performance of our WEBBbuilder products and services, support additional subscribers of our ISP customers in future markets, and market and provide our products and services. . We will be required to recognize as a loss in the fiscal period in which the DCI acquisition is consummated that portion of the purchase price for DCI which we allocate to in-process research and development. . We will be required to record goodwill and other intangible assets in connection with the DCI acquisition which we will amortize over their estimated useful lives of approximately three years. We currently expect to allocate approximately $12.5 million to goodwill and other intangible assets, however, this amount could change significantly once the actual amount is determined after the consummation of the DCI acquisition. We expect to complete the DCI acquisition in the second quarter of 1999. If we do not complete the DCI acquisition, it is likely that we would have to record as a loss all or a portion of the note receivable from DCI of approximately $1,005,500, including accrued interest, at March 29, 1999. DCI would not have the ability to repay our advances without obtaining significant additional working capital through the sale of its securities. There is no assurance that DCI would be able to raise working capital in the amounts required. If we are unable to raise additional working capital funds, we may not be able to sustain our operations. We believe that our present cash and cash equivalents and working capital will be adequate to sustain our current level of operations only through May 1999. If we cannot raise additional funds when needed, we may be required to curtail or scale back our operations. These actions could have a material adverse effect on our business, financial condition, or results of operations. We estimate that we will need to raise through equity, debt or other external financing at least $9 million to sustain operations for the next 12 months and $1 million to pay DCI indebtedness which would be assumed as part of the DCI acquisition. There is no assurance that we will be able to raise additional funds in amounts required or upon acceptable terms. In addition, we may discover that we have underestimated our working capital needs, and we may need to obtain additional funds to sustain our operations. In its report accompanying the audited financial statements for the years ended December 31, 1998 and 1997, our auditor, Arthur Andersen LLP, expressed substantial doubt about our ability to continue as a going concern. See "Item 6 - Management's Discussion of Financial Condition and Results of Operations - Liquidity and Capital Resources." 16 We may never become or remain profitable. We may never become or remain profitable. Our ability to become profitable depends on the ability of our WEBBbuilder products and services to generate revenues. The revenue model for certain of our i2u/WEBBbuilder products and services assumes that our broadband customers and other distribution partners will share with us a percentage of their revenues generated by advertising and e-commerce conducted through our WEBBbuilder products. The success of our revenue model will depend upon many factors including: . The success of broadband operators and other distribution partners in marketing Internet services to subscribers in their local areas, and . The extent to which consumers and businesses use our WEBBbuilder products and conduct e-commerce transactions and advertising utilizing our products. Because of the new and evolving nature of the Internet, we cannot predict whether our revenue model will prove to be viable, whether demand for our products and services will materialize at the prices we expect to be charged, or whether current or future pricing levels will be sustainable. Our revenue model may not generate significant revenues, if any, until some time in the future. We expect a significant portion of our revenues to come from advertising revenues and in connection with e-commerce transactions conducted using our products. However, we do not expect to realize these revenues, if at all, until a significant time after we have licensed our WEBBbuilder products and services. This expectation is based on the fact that we believe that it may take broadband operators and other distribution partners several months or more to: . Market and sell Internet access to their subscribers, and . Establish a significant enough user base to attract advertisers and for users to conduct significant e-commerce transactions. Our business depends on the growth of the Internet. Our business plan assumes that the Internet will develop into a significant source of communication and communication interactivity. However, the Internet market is new and rapidly evolving and there is no assurance that the Internet will develop in this manner. If the Internet does not develop in this manner, our business, operating results, and financial condition would be materially adversely effected. Numerous factors could prevent or inhibit the development of the Internet in this manner, including: . The failure of the Internet's infrastructure to support Internet usage or electronic commerce, . The failure of businesses developing and promoting Internet commerce to adequately secure the confidential information, such as credit card numbers, needed to carry out Internet commerce, and . Regulation of Internet activity Use of certain of our products and services may be dependent on broadband operators. Because we have elected to partner with broadband operators for the distribution of many of our products and services, many users of our WEBBbuilder products and services are expected to subscribe through a broadband operator. As a result, the broadband operator, and not us, will substantially control the customer relationship with these users. If the business of broadband operators with whom we partner is adversely affected in any manner, business, operating results, and financial condition could be materially adversely effected. Many factors may affect the business of broadband operators, including: . General economic and market conditions, . Competition among broadband operators, . Costs associated with the renewal of operator licenses, and . Costs associated with the operation and maintenance of an Internet service provider business segment. We may be unable to develop desirable products. Our products are subject to rapid obsolescence and our future success will depend upon our ability to develop new products and services that meet changing customer and marketplace requirements. There is no assurance that we will be able to successfully: 17 . Identify new product and service opportunities, or . Develop and introduce new products and services to market in a timely manner. If we are unable to accomplish these items, our business, including the business of DCI if the DCI acquisition is completed, operating results, and financial condition could be materially adversely affected. Our products and services may not be successful. Even if we are able to successfully identify, develop, and introduce new products and services there is no assurance that a market for these products and services will materialize to the size and extent that we anticipate. If a market does not materialize as we anticipate, our business, including the business of DCI if the DCI acquisition is completed, operating results, and financial condition could be materially adversely affected. The following factors could affect the success of our products and services: . The failure of our business plan to accurately predict the rate at which the market for Internet products and services will grow, . The failure of our business plan to accurately predict the types of products and services the future Internet marketplace will demand, . Our limited experience in marketing our products and services, . The failure of our business plan to accurately predict our future participation in the Internet marketplace, . The failure of our business plan to accurately predict the estimated sales cycle, price, and acceptance of our products and services, . The development by others of products and services that renders our and DCI's, products and services noncompetitive or obsolete, or . Our failure to keep pace with the rapidly changing technology, evolving industry standards, and frequent new product and service introductions that characterize the Internet marketplace. The intense competition that is prevalent in the Internet market could have a material adverse effect on our business. DCI's and our current and prospective competitors include many companies whose financial, technical, marketing and other resources are substantially greater than ours. There is no assurance that we will have the financial resources, technical expertise, or marketing, sales and support capabilities to compete successfully. The presence of these competitors in the Internet marketplace could have a material adverse effect on our business, operating results, or financial condition by causing us to: . Reduce the average selling price of our products and services, or . Increase our spending on marketing, sales, and product development. There is no assurance that we would be able to offset the effects of any such price reductions or increases in spending through an increase in the number of our customers, higher sales from premium services, cost reductions or otherwise. Further, our financial condition may put us at a competitive disadvantage relative to our competitors. If we fail to, or cannot, meet competitive challenges, our business, operating results and financial condition could be materially adversely affected. A limited number of our customers generates a significant portion of our revenues. For the year ended December 31, 1998, four of our customers produced approximately 71% of our revenues, including one customer, Starstream, Inc., who produced approximately 28% of our revenues. There is no assurance that we will be able to attract or retain major customers. The loss of, or reduction in demand for products or related services from, any of these major customers could have a material adverse effect on our business, operating results, cashflows, and financial condition. The sales cycle for our products and services is lengthy and unpredictable. While our sales cycle varies from customer to customer, it typically has ranged from one to six months for WEBBbuilder projects. Our pursuit of sales leads typically involves an analysis of our prospective customer's needs, preparation of a written proposal, one or more presentations and contract negotiations. We often provide significant education to prospective customers regarding the use and benefits of Internet technologies and products. Our sales cycle may also be 18 affected by a prospective customer's budgetary constraints and internal acceptance reviews, over which we have little or no control. We may be unable to adjust our spending to account for potential fluctuations in our quarterly results. As a result of our limited operating history and the recent increased focus on our WEBBbuilder products and services, we do not have historical financial data for a sufficient number of periods on which to base planned operating expenses. Therefore, our expense levels are based in part on our expectations as to future sales and to a large extent are fixed. We typically operate with little backlog and the sales cycles for our products and services may vary significantly. As a result, our quarterly sales and operating results generally depend on the volume and timing of and the ability to close customer contracts within the quarter, which are difficult to forecast. We may be unable to adjust spending in a timely manner to compensate for any unexpected sales shortfalls. If we were unable to so adjust, any significant shortfall of demand for our products and services in relation to our expectations would have an immediate adverse effect on our business, operating results and financial condition. Further, we currently intend to increase our capital expenditures and operating expenses to fund product development and increase sales and marketing efforts. To the extent that such expenses precede or are not subsequently followed by increased sales, our business, operating results and financial condition will be materially adversely affected. We may be unable to retain our key executives and research and development personnel. We are highly dependent on the technical and management skills of our key employees, including in particular R. Steven Adams, our founder, President and Chief Executive Officer. The loss of Mr. Adams' services could have a material adverse effect on our business and operating results. We have not entered into employment agreements with Mr. Adams, or any of our other officers or employees. We do not maintain key person insurance for Mr. Adams or any other member of management. In addition, the success of the DCI acquisition is highly dependent on the technical and management skills of Andre Durand, the founder, President and Chief Executive Officer of DCI. The loss of Mr. Durand's services could have a material adverse affect on the value of the DCI acquisition. Our future success also depends in part on our ability to identify, hire and retain additional personnel, including key product development, sales, marketing, financial and executive personnel. Competition for such personnel is intense and there is no assurance that we can identify or hire additional qualified personnel. Executives and research and development personnel who leave us may compete against us in the future. We generally enter into written nondisclosure and nonsolicitation agreements with our officers and employees which restrict the use and disclosure of proprietary information and the solicitation of customers for the purpose of selling competing products or services. Other than Andre Durand, who, as a condition to the acquisition of DCI, will be required to execute a three-year non-compete agreement with us, we generally do not require our employees to enter into non-competition agreements. Thus, if any of these officers or key employees left, they could compete with us, so long as they did not solicit our customers. Any such competition could have a material adverse effect on our business. We may be unable to manage our expected growth. If we are able to implement our growth strategy, we will experience significant growth in the number of our employees, the scope of our operating and financial systems, and the geographic area of our operations. There is no assurance that we will be able to implement in whole or in part our growth strategy or that our management or other resources will be able to successfully manage any future growth in our business. Any failure to do so could have a material adverse effect on our operating results and financial condition. We may be unable to protect our intellectual property rights. Intellectual property rights are important to our success and our competitive position. There is no assurance that the steps we take to protect our intellectual property rights will be adequate to prevent the imitation or unauthorized use of our intellectual property rights. Policing unauthorized use of proprietary systems and products is difficult and, while we are unable to determine the extent to which piracy of our software exists, we expect software piracy to be a persistent problem. In addition, the laws of some foreign countries do not protect software to the same extent as do the laws of the United States. Even if the steps we take to protect our proprietary rights prove to be adequate, our competitors may develop products or technologies that are both non-infringing and substantially equivalent or superior to our products or technologies. 19 Computer viruses and similar disruptive problems could have a material adverse effect on our business. Our software and equipment may be vulnerable to computer viruses or similar disruptive problems caused by our customers or other Internet users. Our business, financial condition, or operating results could be materially adversely effected by: . Losses caused by the presence of a computer virus that causes us or third parties with whom we do business to interrupt, delay or cease service to our customers, . Losses caused by the misappropriation of secured or confidential information by a third party who, in spite of our security measures, obtains illegal access to this information, . Costs associated with efforts to protect against and remedy security breaches, or . Lost potential revenue caused by the refusal of consumers to use our products and services due to concerns about the security of transactions and commerce that they conduct on the Internet. Future government regulation could materially adversely effect our business. There are currently few laws or regulations directly applicable to access to, communications on, or commerce on the Internet. Therefore, we are not currently subject to direct regulation of our business operations by any government agency, other than regulations applicable to businesses generally. Due to the increasing popularity and use of the Internet, however, federal, state, local, and foreign governmental organizations are currently considering a number of legislative and regulatory proposals related to the Internet. The adoption of any of these laws or regulations may decrease the growth in the use of the Internet, which could, in turn: . Decrease the demand for our products and services, . Increase our cost of doing business, or . Otherwise have a material adverse effect on our business, results of operations and financial condition. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, copyright, trademark, trade secret, obscenity, libel and personal privacy is uncertain and developing. Our business, results of operations and financial condition could be materially adversely effected by the application or interpretation of these existing laws to the Internet. Our systems may not be year 2000 compliant. We have reviewed our internal software and hardware systems. Based on this review, we believe that our internal software and hardware systems will function properly with respect to dates in the year 2000 and thereafter. We expect to incur no significant costs in the future for Year 2000 problems. Nonetheless, there is no assurance in this regard until our internal software and hardware systems are operational in the year 2000. We are in the process of contacting all of our significant suppliers to determine the extent to which our systems are vulnerable to those third parties' failure to make their own systems Year 2000 compliant. The failure to correct material Year 2000 problems by our suppliers and vendors could result in an interruption in, or a failure of, certain of our normal business activities or operations. Due to the general uncertainty inherent in the Year 2000 problem, resulting from the uncertainty of the Year 2000 readiness of third-party suppliers and vendors and of our customers, we are unable to determine at this time that consequences of Year 2000 failures will not have a material impact on our results of operations, liquidity or financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Compliance Disclosures." Our articles of incorporation and bylaws may discourage lawsuits and other claims against our directors. Our articles of incorporation provide, as permitted by Colorado law, that our directors shall have no personal liability for certain breaches of their fiduciary duties to us. In addition, our bylaws provide for mandatory 20 indemnification of directors and officers to the fullest extent permitted by Colorado law. These provisions may reduce the likelihood of derivative litigation against directors and may discourage shareholders from bringing a lawsuit against directors for a breach of their duty. The completion of the DCI acquisition will have an immediate dilutive effect on our current shareholders. If the DCI acquisition is consummated, we will issue 955,649 shares of our common stock as consideration for DCI. The issuance of these shares will have an immediate dilutive effect on our current shareholders and will increase our outstanding common stock by approximately 17%. There is no assurance that our results of operations will improve enough, if at all, as a result of the DCI acquisition, to offset this dilution. On a pro forma basis, we estimate that the issuance of these shares would have resulted in an increase to our net book value per share as of December 31, 1998 from $0.43 (actual) to $2.20 (pro forma) and $2.48 (pro forma adjusted to reflect the subsequent conversions of 10% Preferred Stock and Series A Preferred Stock, the subsequent exercise of the warrants to purchase 140,000 shares of common stock issued in connection with the issuance of the Series A Preferred Stock, and the subsequent issuance and conversions of Series C Preferred Stock). In addition to issuing these shares of common stock, in connection with the DCI acquisition we will reserve for issuance shares that, when issued, may have a dilutive effect on our shareholders. There is no assurance that our results of operations will improve enough, if at all, as a result of the DCI acquisition, to offset this possible future dilution. These shares consist of approximately: . 240,000 shares of our common stock for issuance upon exercise of outstanding options and warrants that will be issued in connection with the DCI acquisition, and . 40,000 shares of our common stock for issuance upon conversion of convertible securities of DCI that we will assume in connection with the DCI acquisition. The price of our common stock has been highly volatile due to factors that will continue to effect the price of our stock. Our common stock traded as high as $15.25 per share and as low as $3.75 per share during the year ended December 31, 1998. Historically, the over-the-counter markets for securities such as our common stock have experienced extreme price and volume fluctuations. Some of the factors leading to this volatility include: . Price and volume fluctuations in the stock market at large that do not relate to our operating performance, . Fluctuations in our quarterly operating results, . Announcements of product releases by us or our competitors, and . Announcements of acquisitions and/or partnerships by us or our competitors, . Increases in outstanding shares of common stock upon exercise or conversion of derivative securities. (See "We have issued numerous options, warrants and convertible securities to acquire our common stock that could have a dilutive effect on our shareholders.") The trading volume of our common stock may diminish significantly if our common stock is prohibited from being traded on the Nasdaq SmallCap Market. Although our shares are currently traded on The Nasdaq SmallCap Market, there is no assurance that we will remain eligible to be included on Nasdaq. If our common stock was no longer eligible for quotation on Nasdaq, it could become subject to rules adopted by the Securities and Exchange Commission regulating broker-dealer practices in connection with transactions in "penny stocks." If our common stock became subject to the penny stock rules, many brokers may be unwilling to engage in transactions in our common stock because of the added regulation, thereby making it more difficult for purchasers of our common stock to dispose of their shares. We have issued numerous options, warrants, and convertible securities to acquire our common stock that could have a dilutive effect on our shareholders. We have issued numerous options, warrants, and convertible securities to acquire our common stock. During the terms of these outstanding options, warrants, and convertible securities, the holders these securities will have the opportunity to profit from an increase in the market price of our 21 common stock with resulting dilution to the holders of shares who purchased shares for a price higher than the respective exercise or conversion price. The existence of such stock options, warrants and convertible securities may adversely affect the terms on which we can obtain additional financing, and you should expect the holders of such options or warrants to exercise or convert those securities at a time when we, in all likelihood, would be able to obtain additional capital by offering securities on terms more favorable to us than those provided by the exercise or conversion of such options or warrants. As of March 22, 1999, we have issued the following warrants and options to acquire shares of our common stock: . Options and warrants to purchase 1,772,382 shares of common stock upon exercise of such options and warrants, exercisable at prices ranging from $0.50 to $18.25 per share, with a weighted average exercise price of approximately $7.11 per share. . Warrants issued in connection with our initial public offering on May 23, 1996 (the "IPO Warrants") to purchase 634,150 shares upon exercise of the IPO Warrants at an exercise price of $9.00 per share. . Options issued to EBI Securities Corporation, the representative of the underwriters involved in such initial public offering (the "Representative's Option"), to purchase 106,700 shares upon exercise of the Representative's Option at a purchase price of $8.10 per share. . The Representative's Option to purchase 106,700 IPO Warrants issuable upon exercise of the Representative's Option at a purchase price of $.001 per IPO Warrant. These IPO Warrants entitle the holder to purchase up to 53,350 shares upon exercise of such IPO Warrants at an exercise price of $9.00 per share. . Warrants issued in connection with the issuance of the 10% Preferred Stock to purchase 53,500 shares of common stock upon exercise of such warrants, exercisable at $15.00 per share. . Warrants issued in connection with the issuance of the 5% Preferred Stock to purchase 100,000 shares of common stock upon exercise of such warrants, exercisable at $16.33 per share. . Warrants issued in connection with the issuance of the Series A Preferred Stock to purchase 20,000 shares of common stock upon exercise of such warrants, exercisable at $5.71 per share. In addition to these warrants and options, we: . Will issue 955,649 shares of our common stock upon the completion of the DCI acquisition, . Will reserve approximately 240,000 shares of common stock for issuance upon exercise of options and warrants to be issued in connection with the DCI acquisition, . Will reserve approximately 40,000 shares of our common stock for issuance upon conversion of convertible securities of DCI that will be assumed by OSS in connection with the DCI acquisition, and . Have reserved an indeterminate number of shares of common stock for issuance upon conversion of outstanding shares of our 10% and Series C Preferred Stock. Based on the market value for the common stock as of March 22, 1999, the then outstanding 10% Preferred Stock and Series C Preferred Stock were convertible into approximately 95,813 shares and 129,757 shares, respectfully, of common stock. The number of shares of common stock issuable upon conversion of the 10% Preferred Stock and the Series C Preferred Stock could increase significantly if the market value for our common stock decreases in the future. Further, there could be issuances of additional similar securities in connection with our need to raise additional working capital. Future sales of our common stock in the public market could adversely affect the price of our common stock. Sales of substantial amounts of common stock in the public market that is not currently freely tradable, or even the potential for such sales, could have an adverse effect on the market price for shares of our common stock and could impair the ability of purchasers of our common stock recoup their investment or make a profit. As of March 22, 1999, these shares consist of: . Approximately 1,300,000 shares issued without registration under the securities laws ("Restricted Shares"), 22 . Approximately 60,000 shares owned by our officers, directors and holders of 10% of our outstanding common stock ("Affiliate Shares"), and . 955,469 shares to be issued upon consummation of the DCI acquisition. Unless the Restricted Shares and the Affiliate Shares are further registered under the securities laws, they may not be resold except in compliance with Rule 144 promulgated by the SEC, or some other exemption from registration. Rule 144 does not prohibit the sale of these shares but does place conditions on their resale which must be complied with before they can be resold. Before September 30, 1999, the shares of the common stock to be issued to the shareholders of DCI in connection with the DCI acquisition will be subject to contractual limitations on their transfer, however, such shares or a portion of them could be sold before September 30, 1999. Future sales of our common stock in the public market could limit our ability to raise capital. Sales of substantial amounts of common stock in the public market pursuant to Rule 144, upon exercise or conversion of derivative securities or otherwise, or even the potential for such sales, could affect our ability to raise capital through the sale of equity securities. (See "We have issued numerous options, warrants, and convertible securities to acquire our common stock that could have a dilutive effect on our shareholders" and "Future sales of our common stock in the public market could adversely affect the price of our common stock.") Provisions in our articles of incorporation allow us to issue shares of stock that could make a third party acquisition of us difficult. Our Articles of Incorporation authorize our Board of Directors to issue up to 20,000,000 shares of common stock and 5,000,000 shares of preferred stock in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by our shareholders. Preferred stock authorized by the Board of Directors may include voting rights, preferences as to dividends and liquidation, conversion and redemptive rights and sinking fund provisions. If the Board of Directors authorizes the issuance of preferred stock in the future, this authorization could affect the rights of the holders of common stock, thereby reducing the value of the common stock, and could make it more difficult for a third party to acquire us, even if a majority of the holders of our common stock approved of an acquisition. Other than the 2,000 shares of Series C Preferred Stock that will be issued if the warrant to purchase such shares is exercised, our Board of Directors has no present plans to issue any shares of preferred stock. Our issuance of our Series C Preferred Stock will require us to record a non-operating expense which will, in turn, increase our net loss available to shareholders. Based on current accounting standards, we will be required to record a non-operating expense of approximately $4,200,000 for the quarter ending March 31, 1999 as a result of the issuance of the Series C Preferred Stock. While these charges will not affect our operating loss or working capital during such period, they are expected to result in an increase of approximately $4,200,000 in the net loss available to our holders of common stock for the quarter ending March 31, 1999. In addition, to the extent that we exercise our right to issue or the investor exercises its right to acquire up to $2,000,000 additional principal amount of the Series C Preferred Stock, we may incur similar non-operating expenses in excess of $2,000,000 at the time that any such additional shares of Series C Preferred Stock are issued. We do not anticipate paying dividends on our common stock for the foreseeable future. We have never paid dividends on our common stock and do not intend to pay any dividends on our common stock in the foreseeable future. Any decision by us to pay dividends on our common stock will depend upon our profitability at the time, cash available therefor, and other factors. We anticipate that we will devote profits, if any, to our future operations. Item 2. DESCRIPTION OF PROPERTY. Our principal offices are located in approximately 16,800 square feet of space in Denver, Colorado, leased for a period of three years ending on September 30, 1999. The current base monthly rental is $18,208. 23 Item 3. LEGAL PROCEEDINGS. Not Applicable. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 24 PART II Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The number of record holders of our common stock and publicly traded common stock warrants on March 22, 1999 was 72 and 7, respectfully. Based on information provided by nominee holders of our common stock, we believe that the number of beneficial holders of our common stock is in excess of 3,706. The table below sets forth the high and low bid prices for the common stock and the warrants as reported on the Nasdaq Small Cap Market during the last two years. The information shown is based on information provided by the Nasdaq Stock Market. These quotations represent prices between dealers, and do not include retail markups, markdowns or commissions, and may not represent actual transactions.
COMMON STOCK WARRANTS ------------------------------------ -------------------------------------- Quarter Ended High Bid Low Bid High Low - ------------- --------- -------- ---- --- 1997 - ---- March 31 $ 5.00 $3.25 $0.78 $0.50 June 30 $ 4.00 $1.25 $0.56 $0.19 September 30 $10.88 $2.06 $2.13 $0.50 December 31 $12.50 $6.13 $2.63 $1.00 1998 - ---- March 31 $10.38 $6.50 $1.81 $1.00 June 30 $15.63 $8.50 $3.94 $1.50 September 30 $15.69 $4.88 $4.00 $1.00 December 31 $14.75 $3.25 $3.75 $0.44
We have never paid a cash dividend on our common stock. The payment of dividends, if any, in the future rests within the discretion of our Board of Directors and will depend, among other things, upon our earnings, capital requirements and financial condition. Dividends on our 10% Preferred Stock and our Series C Preferred Stock must be declared and paid before dividends can be paid on our common stock. On November 9, 1998, we entered into a Securities Purchase Agreement with Archer Investors LLC ("Archer") pursuant to which Archer acquired 1,400 shares of our Series A Convertible Preferred Stock for an aggregate purchase price of $1,400,000. In connection with their acquisition of the Series A Convertible Preferred Stock, Archer also acquired a warrant pursuant to purchase 140,000 shares of our common stock at any time prior to November 9, 2003 at a per share exercise price of $5.71 (the "Archer Warrant"). EBI Securities Corporation served as placement agent for the offering and received a commission equal to 7% of the gross proceeds of the offering and a warrant to purchase 20,000 shares of our common stock at any time prior to November 9, 2001 at a per share exercise price of $5.71. Archer exercised the Archer Warrant in full in January 1999. Each share of Series A Preferred Stock was convertible, at the option of the holder thereof, at any time and from time to time, into such number of fully paid and nonassessable shares of common stock determined by dividing $1,000, plus the amount of any accrued and unpaid dividends we elect to pay in common stock, by the lower of (i) $5.71 or (ii) 80% of the average closing bid price of our shares of common stock for the lowest five consecutive trading days within the 20 days immediately preceding the Series A Preferred Stock conversion date. The Series A Preferred Stock, including dividends, has been converted into 247, 366 shares of common stock. We agreed to file, and did file on December 22, 1998, a registration statement pursuant to the Securities Act of 1933 for the common stock issuable upon conversion of the Series A Convertible Preferred Stock and the common stock issuable upon the exercise of the Archer Warrant. The Series A Convertible Preferred Stock was issued to Archer without registration under the Securities Act of 1933 in reliance upon the exemptions from registration provided in Section 4(2) and Regulation D of the Act. 25 On January 11, 1999, we entered into a Securities Purchase Agreement with Arrow Investors II LLC ("Arrow") pursuant to which Arrow acquired 3,000 shares of our Series C Convertible Preferred Stock for an aggregate purchase price of $3,000,000. Arrow also acquired for $1,000 a "Mandatory Warrant" pursuant to which Arrow has the right and commitment, subject to certain conditions set forth in the Mandatory Warrant, to purchase an additional 2,000 shares of our Series C Convertible Preferred Stock prior to June 30, 1999. None of the additional 2,000 shares had been used as of March 22, 1999. The Series C Convertible Preferred Stock is convertible into our common stock at a variable conversion price equal to the lesser of the Maximum Conversion Price (as defined in the terms of the Series C Preferred Stock), initially $20.65, or the market price for our common stock at the time of conversion. The terms of the Series C Preferred Stock define market price as the average of the five lowest closing bid prices for our common stock during the 44 consecutive trading days immediately preceding the conversion of the Series C Convertible Preferred Stock. As of March 22, 1999, 2,500 shares of the Series C Preferred Stock, including dividends, had been converted into 232,564 shares of common stock and 500 shares of Series C Preferred Stock remained outstanding. We agreed to file, and did file on January 29, 1999, a registration statement pursuant to the Securities Act of 1933 for the common stock issuable upon conversion of the Series C Convertible Preferred Stock. The Series C Preferred Stock was issued to Arrow without registration under the Securities Act of 1933 in reliance upon the exemptions from registration provided in Section 4(2) and Regulation D of the Act. Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. General To date, we have generated revenues through the sale of design and consulting services for Web site development and network engineering services, resale of software licenses, mark-ups on computer hardware and software sold to customers, maintenance fees charged to customers to maintain computer hardware and Web sites, license fees based on a percentage of revenues from our products and services, training course fees, and monthly fees paid by customers for Internet access which we have provided. We commenced sales in February 1995, and were in the development stage through December 31, 1995. We have incurred losses from operations since inception. At December 31, 1998, we had an accumulated deficit of $20,774,129. The reports of our independent public accountants for the years ended December 31, 1998 and 1997 contained a paragraph noting substantial doubt regarding our ability to continue as a going concern. Prior to the quarter ended September 30, 1997, our focus was generally on three markets: general Web site development, maintenance and hosting; rural or small market Internet service providers ("ISPs"); and healthcare information services and continuing medical education ("CME"). These activities were divided into three separate units early in 1997; the Business Resource Group ("BRG") for Web site-related activities; Community Access America ("CAA") for the ISP activities; and Healthcare for the CME and healthcare information activities. As an outgrowth of our BRG and CAA activities, and in recognition of the need to increase the availability of high-speed Internet access, our focus since mid-1997, our business has evolved to the development of online communities, particularly for broadband (high bandwidth or high data transmission capabilities) operators such as cable TV operators (wired and wireless), and on personal and organizational portals. This focus has resulted in the introduction of community-building products and services which include a wide range of online services that enable broadband operators' customers and others to generate online local content, create Web pages and conduct online commerce. Our revenues for these products and services include payments for hardware, software licenses, training and other implementation services and a percentage of advertising revenues as well as a percentage of fees paid by subscribers of our broadband operator customers in connection with e-commerce transactions which these subscribers conduct on the broadband operator's systems. We intend to focus our future efforts primarily on our community- building products and services for broadband operators and other ISPs; our consumer/personal portal products and services; our enterprise products and services for companies and organizations with dispersed operations, vendors or constituents; our online educational products and services; and our financial services for financial institutions having less than $500 million in assets. 26 During November 1997, we announced to certain of our customers that we were terminating specific types of Web site development, maintenance and hosting activities and began to transition this business to other companies. We have ceased Web site development activities which are not related to the development of products for our community, consumer, enterprise, education and financial products and services. In addition, during October 1997, we licensed our MD Gateway Web site to Medical Education Collaborative ("MEC") and are no longer developing products for the healthcare market. In the future, revenues from the healthcare market are expected to be limited to license fees received from MEC in connection with the use of MD Gateway. Revenues for the products and services that we are no longer offering represented $905,649 of our revenues during the year ended December 31, 1997, representing 32% of the total revenues for such period. For the year ended December 31, 1998, revenues from these activities were insignificant. During 1998, we implemented a new pricing structure for our broadband community-building products and services whereby we supply our content and community-building products and services and the operator provides the infrastructure and channel for distribution of high-speed Internet access services. This new structure results in a lower front-end cost for the operator, in consideration for which we expect to receive a higher percentage of advertising and transaction fees received from the broadband operator's subscribers. We will require additional working capital and will realize substantially lower initial revenues in connection with the sale of our broadband community-building products and services, as we will, under this structure, be providing our products and services primarily for a percentage of future revenues rather than license and service fees. We expect that this pricing strategy will result in higher revenues in the future as broadband operators' Internet subscriber bases grow. In addition, we intend to continue to incur significant capital expenditures and operating expenses in order to continue development and expansion of our products and services and to market our products and services to an expanding base of potential customers. As a result, we expect to incur additional substantial operating and net losses during 1999 and for one or more years thereafter. There can be no assurance that such expenditures will result in increased revenue and/or customers. In addition, we expect that our net revenues will decrease during the first six to nine months of 1999 compared to the similar periods in 1998 as we continue to transition our business and to develop the customer base required to attract paid advertising and e-commerce opportunities. Based on applicable current accounting standards, we estimate that we will be required to record a non-operating expense of approximately $4,200,000 during the first quarter of 1999 in connection with the private placement of $3,000,000 principal amount of our Series C preferred stock. In addition, if we exercise our option to sell an additional $2,000,000 principal amount of our Series C preferred stock, we may incur similar non-operating expense in excess of $2,000,000 at the time of the sale. Non-operating expenses of approximately $4,800,000 were charged to earnings in connection with the private placement of preferred stock during 1998. While these charges do not affect our operating losses or working capital, they do result in a decrease in our net income available to common stockholders. Additionally, we recorded a non-cash charge for preferred stock dividends during 1998 of approximately $329,000. 27 Results of Operations We have revised certain factors used in determining the amounts to be accreted related to issuances of our 10% and 5% Preferred Stock as well as the period for the accretion of the 5% Preferred Stock. These revisions and their impact on unaudited quarterly amounts are presented below.
Three Months Ended March 31, ------------------------------ As Reported As Revised (Unaudited) (Unaudited) ------------ ------------ Net loss (1,488,709) (1,488,709) Preferred stock dividends 62,399 62,399 Accretion of preferred stock to redemption value 145,334 418,696 (a) ------------ ------------ Net loss available to common stockholders $ (1,696,442) $ (1,969,804) ============ ============ Loss per share, basic and diluted $ (0.51) $ (O.59) ============ ============ Weighted average shares outstanding 3,335,687 3,335,687 ============ ============
(a) Increase in accretion of preferred stock to redemption value is due to the revision of discounts applied to common stock and common stock warrants issued in connection with the preferred stock private placements.
Three Months Ended Six Months Ended June 30, June 30, -------------------------------- --------------------------------- As Reported As Revised As Reported As Revised (Unaudited) (Unaudited) (Unaudited) (Unaudited) ------------- ------------ ------------ ------------ Net loss (1,638,472) (1,638,472) (3,127,181) (3,127,181) Preferred stock dividends 80,585 80,585 142,984 142,984 Accretion of preferred stock to redemption value 848,646 1,818,564 (b) 993,980 2,237,260(b) ------------- ------------ ------------ ------------ Net loss, available to common stockholders $ (2,567,703) $ (3,537,621) $ (4,264,145) $ (5,507,425) ============= ============ ============ ============ Loss per share, basic and diluted $ (0.75) $ (1.03) $ (1.26) $ (1.62) ============= ============ ============ ============ Weighted average shares outstanding 3,446,131 3,446,131 3,390,909 3,390,909 ============= ============ ============ ============
(b) Increase in accretion of preferred stock to redemption value due to the revision of discounts applied to common stock and common stock warrants issued in connection with preferred stock private placements and the revision of the accretion period for the preferred stock.
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- --------------------------- As Reported As Revised As Reported As Revised (Unaudited) (Unaudited) (Unaudited) (Unaudited) ------------ ----------- ------------- ----------- Net loss (2,091,211) (2,091,211) (5,218,392) (5,218,392) Preferred stock dividends 100,635 100,635 243,619 243,619 Accretion of preferred stock to redemption value 1,691,209 472,800 (c) 2,685,189 2,710,060 (c) ------------ ----------- ------------- ----------- Net loss available to common stockholders $ (3,883,055) $(2,664,646) $ (8,147,200) $(8,172,071) ============ =========== ============= =========== Loss per share, basic and diluted $ (1.09) $ (0.75) $ (2.37) $ (2.38) ============ =========== ============= =========== Weighted average shares outstanding 3,566,951 3,566,951 3,436,922 3,436,922 ============ =========== ============= ===========
(c) Increase in accretion of preferred stock to redemption value due to the revision of discounts applied to common stock and common stock warrants issued in connection with preferred stock private placements and the revision of the accretion period for the preferred stock. The following table sets forth for the periods indicated the percentage of net sales by items contained in the statements of operations. All percentages are calculated as a percentage of total net sales, with the exception of cost of services and cost of hardware and software which are calculated as a percentage of service sales and hardware and software sales, respectively.
For the Year Ended December 31, -------------------------------------------------------------------- 1998 1997 1996 -------------- ------------- ------------- Net sales: Service sales 30.6% 60.0% 77.9% Hardware and software sales 69.4% 40.0% 22.1% -------------- ------------- ------------- Total net sales 100.0% 100.0% 100.0% Cost of sales: Cost of services (as percentage of service sales) 79.5% 61.0% 63.7% Cost of hardware and software (as percentage of hardware and software sales) 82.0% 87.0% 72.8% -------------- ------------- ------------- Total cost of sales 81.3% 71.4% 65.7% Gross margin 18.7% 28.6% 34.3% -------------- ------------- ------------- Operating expenses: Sales and marketing expenses 156.0% 42.9% 43.8% Product development expenses 79.5% 39.7% 32.0% General and administrative expenses 410.2% 65.8% 61.8% Depreciation and amortization expenses 49.8% 7.1% 7.4% -------------- ------------- ------------- Total operating expenses 695.5% 155.5% 145.0% Loss from operations (676.8)% (126.9)% (110.7)% -------------- ------------- ------------- Net loss (668.0)% (120.9)% (98.3)% Preferred stock dividends (20.7)% - - Accretion of preferred stock to redemption value (258.6)% - - Accretion of preferred stock for guaranteed return in excess of redemption value (44.5)% - - -------------- ------------- ------------- Net loss available to common stockholders (991.8)% (120.9)% (98.3)% ============= ============= =============
Twelve Months Ended December 31, 1998 and 1997. Net sales for the twelve months ended December 31, 1998 totaled $1,589,380, including $485,663 for service sales and $1,103,717 for hardware and software sales. This represents a decrease of 43% below 1997 net sales of $2,791,556, which consisted of $1,674,198 for service sales and $1,117,358 for hardware and software sales. We had four customers representing 71% of sales and four customers representing 47% of sales for the years ended December 31, 1998 and 1997, respectively. The decrease in sales for the 1998 period compared to the 1997 period was due to the reduction of certain of our Web site development, maintenance and hosting activities during the fourth quarter of 1997 and due to a new revenue-based pricing structure for our products and services for broadband operators. During the second quarter of 1998, we implemented a new pricing structure for these products and services whereby we supply any required equipment and the products and services and the customer is not required to pay any significant fees upon the delivery of such items. This structure results in a lower front-end cost for the operator and lower initial revenues for us, in consideration for which we expect to receive a higher percentage of advertising and transaction fees received from the broadband operators' subscribers. We anticipate 28 that our near-term revenues will be less as a result of the implementation of this new pricing strategy, but that our future revenues will be higher as the subscriber base for Internet access for our broadband operator customers grows. Cost of sales as a percentage of net sales was 81.3% for the twelve month 1998 period and 71.4% for the comparable 1997 period. Service Sales - Cost of service sales increased in the 1998 period as a percentage of service sales as the mix of sales changed from custom Web page development, hosting and maintenance activities, which were at higher margins, to transactional services, such as e-banking, our Re/MAX Main Street product, and our i2u/WEBBbuilder products, which were at lower margins. We incurred development expenses to assist our i2u/WEBBbuilder customers in enabling and launching their sites, which included charges such as help desk set-up fees, credit card processing set-up fees, and costs associated with integrating the billing system through the Internet, totaling $49,100 related to the Re/Max Main Street product, and also provided programming services to our e-banking customer at discounts, which contributed to lower gross margins on service sales. In addition, the increase in cost of service sales in the 1998 period reflect an increase in direct costs, such as telephone line costs (on a per customer basis) related to the our Internet connectivity business coupled with decreasing revenues from that activity as we are selling these services to fewer customers as a result of our decision to emphasize our Internet content services. Hardware and Software Sales - Cost of hardware and software sales increased in the 1998 period as a percentage of hardware sales because we sold equipment to existing customers at lower margins. Sales and marketing expenses were $2,479,029 for the twelve months ended December 31, 1998, compared to $1,197,038 for the 1997 period. Sales and marketing expenses as a percentage of net sales increased from 42.9% in 1997 to 156.0% in 1998. During the 1998 period, we incurred new market development costs associated with developing our i2u/WEBBbuilder business. These costs consist of expenses incurred by us, principally labor, travel and other third- party costs such as software licenses, in connection with getting our customer's ISP presence established, including design and branding of the customer's Internet start page, developing local area content, and assisting our customers in developing our Internet business presence. We also incurred costs in the 1998 period associated with opening international markets, principally in Mexico and Argentina, costs associated with developing sales collateral materials, including brochures and PC based presentation software as well as additional compensation expense as a result of employing more experienced sales people. Product development expenses were $1,264,287 for the twelve months ended December 31, 1998, compared to $1,108,456 for the 1997 period. Product development expense as a percentage of net sales increased from 39.7% in 1997 to 79.5% in 1998. We capitalized $281,776 of development costs during 1998 and $124,097 during 1997 related to the development of our i2u/WEBBbuilder product offerings. (See discussion below regarding depreciation and amortization.) During 1998, we continued developing our i2u/WEBBbuilder products and services, reflected by our release of i2u/WEBBbuilder software versions through 2.0, including the development of e-commerce and the integration of DCI's CommunityWare(R) with our i2u/WEBBbuilder software. During 1997, we developed our initial i2u product, wireless cable capabilities, and initial product offerings targeted at the CME segment of the healthcare market. We expect product development expenses to continue to increase during 1999 as we continue to develop our products and services. General and administrative expenses were $6,519,441 for the twelve months ended December 31, 1998, compared to $1,837,330 for the 1997 period. General and administrative expenses as a percentage of net sales increased from 65.8% in 1997 to 410.2% in 1998. During the 1998 period, we recorded non-cash charges of $2,870,628 for grants of common stock and options and warrants to purchase common stock to non-employees in exchange for services, including $1,925,000, which we incurred during the fourth quarter of the year to enhance our 29 activities in corporate finance, mergers and acquisitions, and public and investor relations. We also added (in the aggregate) nine individuals in 1998 in the finance, strategic development, and network operations areas to support our business segments, and we incurred costs in connection with the administration of our operating segments, including additional personnel costs, particularly for our Chief Operating Officer, as well as administration of our financial services business segment. Additionally, in the 1998 period we incurred costs of $179,562 in connection with unsuccessful business acquisition efforts and accounting, legal and other expenses associated with capital raising activities. Depreciation and amortization was $791,155 for the twelve months ended December 31, 1998, compared to $198,788 for the 1997 period. During the 1998 period, we fully amortized our i2u/WEBBbuilder software costs and recorded $401,737 of amortization expense. (See Note 5 of the Notes to Financial Statements.) We also recorded more depreciation expense as a result of an increase in fixed assets, including our e-banking service bureau based solution, and equipment and software to support our i2u/WEBBbuilder development and testing. Interest income was $139,806 during the twelve-month period ended December 31, 1998, compared to $168,298 for the 1997 period. During the 1998 period, we utilized more of our cash reserves to fund our operations, which resulted in less cash available for investment in interest bearing securities. We also recorded interest income on the note receivable to DCI, which partially offset the decrease in interest income from our cash investments. Our investments consist of corporate bonds and cash equivalents. Net losses allocable to common stockholders were $15,762,372 for the twelve-month period ended December 31, 1998 compared to $3,375,279 for the 1997 period. During the 1998 period, we recorded non-operating expenses for preferred stock dividends and accretion of preferred stock to redemption value of $329,120 and $4,110,060, respectively. In addition, during 1998 we recorded $706,929 of accretion of preferred stock for the guaranteed return in excess of the redemption value. Additionally, the increase in losses reflect expenses in sales and marketing, product development, and general and administrative areas that have increased at a faster rate than net sales. This is due to the time lag associated with product development and market introduction as well as the long sales cycle for most of our products and services. We expect to continue to experience increased operating expenses and capital investments during 1999, as we continue to develop new product offerings and the infrastructure required to support our anticipated growth. We believe that, initially, these expenses will be greater than increases in net sales. We expect to report operating and net losses for 1999 and for one or more years thereafter. Twelve Months Ended December 31, 1997 and 1996. Net sales for the twelve months ended December 31, 1997 totaled $2,791,556, including $1,674,198 for service sales and $1,117,358 for hardware and software sales. This represents an increase of 93% above 1996 net sales of $1,445,042, which consisted of $1,125,617 for service sales and $319,425 for hardware and software sales. We had one customer representing 26% of sales and one customer representing 14% of sales for the year ended December 31, 1997. In 1996, one customer accounted for sales in excess of 10% of net sales. The increase in sales for the 1997 period compared to 1996, was due to the expanded development of our i2u product and service offerings, and to a substantial increase in marketing and sales efforts in the broadband market. The sales increase includes Web site development revenue from three customers associated with electronic commerce, initial revenue from an online banking service bureau application and sales of the i2u product, including hardware, software and consulting services to a South American cable provider and a large domestic wireless operator. Cost of sales as a percentage of net sales was 71.4% for the twelve month 1997 period and 65.7% for the comparable 1996 period. Cost of sales on hardware and software sales are generally higher than on service sales. Therefore, our overall gross profit margin is higher during periods when service sales are a greater percentage of total net sales. Sales of hardware and software as a percent of total sales increased significantly over the 1996 period, which contributed to the higher overall cost of sales. The higher cost of sales on hardware and software for the 1997 period was due to equipment sales to larger customers, which were at lower margins. Sales and marketing expenses were $1,197,038 for the twelve months ended December 31, 1997 and $633,025 for the twelve months ended December 31, 1996. Sales and marketing expenses as a percentage of net sales decreased slightly from 43.8% in 1996 to 42.9% in 1997. The increase in dollars spent during the 1997 30 twelve-month period was due to the hiring of new sales and marketing personnel and associated expenditures. We also developed initial marketing materials, began lead generation activity, and began to sell our i2u and CME products and services. In addition, we entered into an agreement with Telemedical Systems Integration, Inc. (TMED) during the fourth quarter of 1996 to serve as our primary sales group for our healthcare products. We incurred significant expenses during the early part of the twelve-month period ended December 31, 1997 related to initial training of and lead generation for this sales force. During the last quarter of the 1997 period, we incurred expenses associated with marketing and trade shows directed towards the wireless cable market and began to market our i2u products and services to markets outside of the United States. Product development expenses were $1,108,456 for the twelve months ended December 31, 1997, compared to $462,108 for the 1996 period. Product development expense as a percentage of net sales increased from 32.0% in 1996 to 39.7% in 1997. The increase in these expenses, as well as the increase as a percentage of net sales during the 1997 period, reflect the continued development of our products and services. Product development expenses during the 1997 period included the completion of the initial development of our i2u product, addition of wireless cable capabilities, and initial product offerings targeted at the CME segment of the healthcare market. Product development expenses during the 1996 period included enhancements to the initial CAA product and early development of our WebQuest process. General and administrative expenses were $1,837,330 for the twelve months ended December 31, 1997, compared to $892,799 for the 1996 period. General and administrative expenses as a percentage of net sales increased from 61.8% in 1996 to 65.8% in 1997. The dollar and percentage increases reflect the development of our general and administrative infrastructure, including finance, accounting, business development and investor relations capabilities, as well as additional expenses related to being a public company. In addition, during the latter part of the twelve-month period ended December 31, 1997, we incurred expenses and developed capabilities to enter into the international market for our i2u products and services. Depreciation and amortization was $198,788 for the twelve months ended December 31, 1997, compared to $106,814 for the 1996 period. This increase reflects the increase in fixed assets and equipment to support higher levels of Web site and Internet access services, i2u development and testing as well as to support the growth in the number of employees. Interest income was $168,298 during the twelve-month period ended December 31, 1997, compared to $179,192 for the 1996 period. Upon completion of our initial public offering, we paid a portion of our outstanding debt resulting in a reduction of future interest expense and began earning interest income on the invested net proceeds. Net losses available to common stockholders were $3,375,279 for the twelve-month period ended December 31, 1997 compared to $1,420,432 for the 1996 period. The increase in losses in the 1997 period reflect expenses in the marketing and sales, product development, and general and administrative areas that have increased at a faster rate than net sales. This is due to the time lag associated with product development and market introduction as well as the long sales cycle for most of our products and services. Liquidity and Capital Resources As of December 31, 1998, we had cash and cash equivalents of $698,339 and working capital of $877,091, and a working capital deficit of $(249,100) excluding the note receivable from DCI and deferred acquisition costs. We financed our operations and capital equipment expenditures in 1998 primarily through private sales of preferred stock resulting in net proceeds of $4,164,286. See Note 7 of Notes to Financial Statements for information regarding these sales of securities. During January 1999, we sold 3,000 shares of Series C Preferred Stock with a stated value of $1,000 per share, which resulted in net proceeds of $2,755,000. In connection with that transaction, we also have the right (subject to a related registration statement being declared effective by the Securities and Exchange Commission) to exercise a warrant to require the investor to purchase 2,000 additional shares of the Series C Preferred Stock, which would result in additional net proceeds of approximately $2,000,000. To date, we have not exercised this warrant. 31 In addition, during January 1999, an investor exercised the warrant to purchase common stock we issued in connection with the Series A Preferred Stock, which resulted in proceeds of $799,400. During the twelve months ended December 31, 1998, we purchased $481,427 of property and equipment. These purchases were primarily computer equipment, communications equipment, and software necessary to develop and demonstrate the recently introduced i2u/WEBBbuilder products as well as office furniture, the installation of a new accounting software system, and software for a second online banking service. In anticipation of future growth, including the implementation of our new pricing structure, we expect to invest a minimum of $1,000,000 during 1999 to purchase additional computer equipment, software and office equipment. Accounts receivable balances decreased from $701,330 at December 31, 1997 to $147,837 at December 31, 1998, due to in part to the implementation of our new pricing structure for our i2u/WEBBbuilder products and services for broadband operators and the collection of receivables from sales recorded in the fourth quarter of 1997. We use the percentage of completion method of revenue recognition for certain of our Web development services in which we record an asset for revenue earned but not billed. During the year ended December 31, 1998, we billed the remaining accrued revenue receivable resulting in a reduction of $143,543 from the December 31, 1997 balance. In connection with using the percentage of completion method, we record deferred revenue for amounts we receive from our customers for work we have yet to complete. As of December 31, 1998, our customers have paid us $100,600 for work we have yet to complete and which was recorded as a deferred revenue liability. Our hardware and software inventory consists of software licenses and computer hardware purchased by us for resale, which decreased from $235,441 at December 31, 1997 to $55,126 at December 31, 1998. Prepaid expenses decreased to $74,179 at December 31, 1998, from $249,510 at December 31, 1997, primarily due to receipt of items that we prepaid during December 1997 and the realization of a prepayment for a software license. The major portion of the remaining balance consists of prepaid insurance and January 1999 expenses that we paid in 1998. Deferred acquisition costs represent costs we incurred in connection with our proposed merger with DCI. Trade accounts payable and accrued liabilities at December 31, 1998, decreased to $873,901 from $969,937 at December 31, 1997, primarily due to a reduction in payables for equipment purchases to support inventory requirements for sales at the end of 1997 and sales that we anticipated for the early part of 1998. We believe that our cash and cash equivalents and working capital at December 31, 1998, plus the net proceeds of the offering of preferred stock that we completed during January 1999 will be adequate to sustain our operations through at least May 1999. In order to continue to finance our operations, we are pursing several funding possibilities. These funding activities are intended to raise the approximately $10 million of net proceeds we estimate will be required to sustain operations for the next twelve months and the additional approximately $15 million we estimate will be required to implement our business plan. First, we are pursuing various potential strategic relationships which, if consummated, could result in one or more significant investments by strategic partners. Second, in connection with our initial public offering during May 1996, warrants representing the right to acquire 632,500 shares of our common stock at $9.00 per share were issued to investors. These warrants expire on May 23, 1999, if not exercised prior thereto. In the event that all of the warrants were exercised for cash, we would receive in excess of $5.6 million in net proceeds. In lieu of exercising the warrants for cash, holders may utilize a "cashless exercise" option whereby they may apply the value of a portion of their warrants (i.e., the difference between the market value for our common stock and $9.00, the exercise price of the warrants) to pay the exercise price for the balance of the warrants to be exercised. Therefore, we are unable to predict the amount of net proceeds, if any, which we may receive upon exercise of the warrants. We have also initiated discussions with various potential private investors which could result in additional debt or equity investments and have begun discussions regarding a possible secondary offering of our securities during the fall of 1999. There can be no assurance that we will be successful in obtaining any additional equity or debt capital or that if such capital is available, that it will be available on acceptable terms. If we are unable to obtain the capital required to sustain our operations, we will be required to reduce or terminate certain of our operations which could have a material adverse affect on our operating results and financial condition. In its reports accompanying the audited financial statements for the years ended December 31, 1998 and 1997, our auditors, Arthur Andersen LLP, expressed substantial doubt about our ability to continue as a going concern. 32 Year 2000 Compliance Disclosure The Year 2000 issue involves the potential for system and processing failures of date-related data resulting from computer-controlled systems using two digits rather than four to define the applicable year. For example, computer programs that contain time-sensitive software may recognize a date using two digits of "00" as the year 1900 rather than the year 2000. This could result in system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar ordinary business activities. We have reviewed our internal software and hardware systems and believe they will function properly with respect to dates in the year 2000 and thereafter. We expect to incur no significant costs in the future for Year 2000 problems. Nonetheless, there can be no assurance in this regard until such systems are operational in the Year 2000. We are in the process of contacting all of our significant suppliers to determine the extent to which our systems are vulnerable to those third parties' failure to make their own systems Year 2000 compliant. As of the date of this report, we have completed a significant portion of this review and expect to complete it by the end of the second quarter of 1999. Based on the review to date, we believe our significant suppliers and vendors are Year 2000 compliant and that should any of them prove not to be Year 2000 compliant, we believe that it could find a replacement vendor or supplier which is Year 2000 compliant without significant delay or expense. However, the failure to correct material Year 2000 problems by our suppliers and vendors could result in an interruption in, or a failure of, certain of our normal business activities or operations. While our review has not identified any Year 2000 problems that will have a material impact on our business, due to the general uncertainty inherent in the Year 2000 problem, resulting from the uncertainty of the Year 2000 readiness of third-party suppliers and vendors and of our customers, we are unable to determine at this time that the consequences of Year 2000 failures will not have a material impact on our results of operations, liquidity or financial condition. Of our product offerings, the one that may be most impacted by Year 2000 problems or peoples' concern about potential Year 2000 problems, is our Financial Services product offering. We have recently entered into an agreement with CU Cooperative Systems, Inc., a national cooperative association representing over 500 credit unions. The services to be provided to the Cooperative's members are scheduled for introduction during the second half of 1999. Our Financial Services products are Year 2000 compliant, however, concerns about Year 2000 problems may cause individual cooperatives or their members to be reluctant to offer or to engage in e-banking transactions prior to the end of 1999. While we have not anticipated any significant income from the use of this prior to 2000, a delay in the implementation of the system by the Cooperative's members could result in a decrease in anticipated revenues for the product offering in 2000, particularly during the first six months of the year. Item 7. FINANCIAL STATEMENTS. See Financial Statements beginning on page F-1. Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 33 PART III Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. Directors and Officers The directors and officers of OSS as of March 22, 1999 are as follows:
Name Age Director Position - ----- --- -------- -------- Since ----- R. Steven Adams............... 46 1994 Chairman of the Board, President and Chief Executive Officer and a Director William R. Cullen............. 57 1998 Chief Operating Officer and a Director Thomas S. Plunkett............ 45 --- Chief Financial Officer Paul E. Beckelheimer.......... 52 --- Senior Vice President-Business Development Gwenael S. Hagan.............. 38 --- Senior Vice President-Strategic Development Paul H. Spieker............... 55 1995 Vice President-Technical Operations and a Director Andre Durand.................. 31 --- Senior Vice President-Product Development Robert J. Lewis............... 68 1995 Director Richard C. Jennewine.......... 60 1996 Director
R. Steven Adams, founder of OSS, has served as President, Chief Executive Officer and a director since our incorporation in March 1994. From 1985 to 1994, Mr. Adams was President-Sheridan Hotel Management, a full service hotel management company. Mr. Adams was the creator and founder of HotelNet, which was an online information system for the hospitality industry. Mr. Adams' experience includes software development, personal computer manufacturing and management of online information systems. William R. Cullen, has served as Chief Operating Officer and a director since March 1998. From May 1997 to March 1998, Mr. Cullen worked as a consultant to businesses in the cable industry. From April 1994 to May 1997, Mr. Cullen was Chairman and CEO of Access Television Network, Inc., a privately held company specializing in providing paid programming to local cable systems. From January 1992 to March 1994, Mr. Cullen was President and CEO of California News Channel, a programming project of Cox Cable Communications. From July 1984 to December 1991, Mr. Cullen was employed by United Artist Cable Corporation (and its predecessor United Cable Television Corporation) as Vice President of Operations and President of its subsidiary United Cable of Los Angeles, Inc., and as its Senior Vice President of the Southwest Division. Prior to joining United Artist Cable Corporation, Mr. Cullen was President of Tribune Company Cable of California, Inc. and CEO of its United-Tribune Cable of Sacramento joint venture, served as a top financial officer of three companies, and worked in banking. Thomas S. Plunkett, has served as Vice President-Chief Financial Officer of OSS since October 1996. From 1995 to 1996, Mr. Plunkett was the Vice President of Business Management at Maxtor Corporation, a manufacturer of disk drives. From 1994 to 1995, Mr. Plunkett was the Vice President of Operations for Hi-Tech Manufacturing, an electronic manufacturing services company. From 1992 to 1994, he was a Controller at Conner Peripherals, a manufacturer of disk drives. From 1989 to 1992, Mr. Plunkett served as Vice President and C.F.O. of Discovery Technologies, a manufacturer of high resolution medical image transmission equipment. Prior to joining Discovery Technologies, Mr. Plunkett held various senior operations and financial management positions with Miniscribe Corporation from 1982 to 1989. Paul E. Beckelheimer, joined OSS in June 1998 as Senior Vice President-Business Development. From September 1994 to June 1998, Mr. Beckelheimer served in various positions, most recently as Vice President- Operations, at American Telecasting, Inc., a wireless cable television systems operator. From October 1993 to September 1994, Mr. Beckelheimer served as General Manager-Houston Central for DCI Cablevision of Houston, Inc., a cable television systems operator. From November 1990 to August 1993, Mr. Beckelheimer served as Vice 34 President-Western Region of The Monitor Channel, a cable television channel company. Prior to joining The Monitor Channel, Mr. Beckelheimer was President and co-founder of Sterling Communications Incorporated, a cable television system operator, and worked in various operations positions for Rifkin and Associates, Communicom Cable Television, and United Cable Television Corporation. Gwenael S. Hagan, joined OSS in January 1998 as Senior Vice President of Strategic Development. From June 1996 to January 1998, Mr. Hagan served as Vice President of New Business Development with International Channel, a cable television network, where he was responsible for new revenue opportunities, both domestically and internationally, and developing and implementing strategies to increase revenue and position International Channel for growth via evolving digital cable and satellite platforms. From December 1994 to June 1996, Mr. Hagan served as the Internet Marketing Manager for Microsoft's western region. His work with Microsoft encompassed competitive strategy development, sales resource allocation, presentations and public relations. From March 1994 to December 1994, Mr. Hagan worked with Missing Link Communications, Inc., a developer of television programs to assist computers in buying personal computers. At Missing Link, Mr. Hagan was responsible for programming concepts and establishing alliances. Prior to that time, Mr. Hagan spent 11 years with Jones International, Ltd., a cable television operator and television network development company. Paul H. Spieker, has been Vice President-Technical Operations and a director of OSS since February 1995. From 1992 to 1994 Mr. Spieker was President of Business Regulatory Coalition-Colorado, a public affairs company responsible for policy formulation and activities primarily dealing with regulatory matters representing companies before the Colorado Public Utilities Commission. From 1991 to 1994, he was a private consultant primarily for businesses in voice and data communications. From 1990 to 1991, Mr. Spieker was President of Developers Cable Construction, a startup company providing contract construction services for residential developers and local telephone and cable companies. From 1987 to 1990, Mr. Spieker was employed by Volt Information Sciences, Inc., a New York based telecommunications company. Mr. Spieker was employed by US WEST Communications, Inc. and its predecessor from 1966 to 1987 and served in several senior management capacities, including the head of the strategic business unit which served large telephone customers in a seven state territory. Andre Durand, pending completion of the DCI Merger, Mr. Durand has been elected Senior Vice President-Product Development of OSS. Mr. Durand is the founder, President, Chief Executive Officer, Secretary and a Director of DCI. Mr. Durand is a regular guest speaker at computer fairs, conferences and expositions, and regularly contributes articles to trade publications discussing Internet technologies, trends and predictions. From January 1991 to January 1993, Mr. Durand was an auditor with KPMG Peat Marwick in Los Angeles, California. Mr. Durand holds two degrees from the University of California at Santa Barbara, one in Biology and one in Economics/Accounting. Robert J. Lewis, has been a director of OSS since February 1995. Mr. Lewis retired in October 1995 after having spent 37 years in the cable television industry as an owner and developer of cable systems and senior executive with several cable television companies. Beginning in March 1997, however, and continuing through the present, Mr. Lewis has been the General Partner and Chief Executive Officer of InterMedia Partners, an operator of cable systems in Kentucky, Tennessee, North Carolina, South Carolina, and Georgia. From 1987 until his retirement in 1995, Mr. Lewis was employed by Western Tele- Communications, Inc. ("TCI"), one of the largest cable television companies in the United States. Mr. Lewis served as a Senior Vice President of TCI from 1991 to 1993 and as a Senior Advisor to TCI from 1993 until his retirement in 1995. Richard C. Jennewine, has been a director of OSS since November 1996. From September 1995 to the present, Mr. Jennewine has been President- International Operations and Regional Manager-Western Operations for Computer Aid, Inc. a leader in strategic outsourcing and information services consulting. From December 1991 to February 1995, Mr. Jennewine served as the Senior Vice President of the CONCORD Group, a privately held entrepreneurial group of 40 international enterprises. From January 1994 to February 1995, he served as the President of the Concord Trading Corporation, a company focusing on trading and business ventures in Asia, Russia, the Middle East and South America. Prior to these positions, Mr. Jennewine spent 26 years with IBM 35 Corporation, including startup operations in mainland China. Mr. Jennewine is a director of Easter Seals of Colorado and is a member of the Corporate Management Committee of Computer Aid, Inc. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires OSS' directors and executive officers, and persons who own more than ten percent of a registered class of OSS' equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Officers, directors and greater than ten-percent shareholders are also required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on review of the copies of such reports furnished to us and written representations that no other reports were required, during the year ended December 31, 1997, all Section 16(a) filing requirements applicable to our officers, directors and greater than ten-percent beneficial owners were timely complied with except for the following:
Name of Individual Form Number of Late Reports Transactions Not Timely Reported - ------------------ ---- ---------------------- -------------------------------- R. Steven Adams 5 1 6 William R. Cullen 3 1 2 5 1 1 Thomas S. Plunkett 5 1 5 Paul E. Beckelheimer 3 1 1 5 1 1 Gwenael S. Hagan 3 1 2 5 1 4 Paul H. Spieker 5 1 5 Andre Durand 3 1 1 Robert J. Lewis 5 1 2 Richard C. Jennewine 5 1 1
36 Item 10. EXECUTIVE COMPENSATION. The following table summarizes the annual compensation paid by OSS during years ended December 31, 1996, 1997, and 1998 to R. Steven Adams, the Chief Executive Officer of OSS as of December 31, 1998 and the officers of OSS, other than Mr. Adams, whose total annual salary and bonus exceeded $100,000 for the year ended December 31, 1998.
SUMMARY COMPENSATION TABLE Annual Compensation Long-Term Compensation ------------------------------------------------------------------------------- Salary Bonus Other Securities Name and Principal Position Year $ $ $ Underlying Options - --------------------------- ---- ------ ----- ------ ------------------- R. Steven Adams 1998 $155,203 -- -- 175,250 shs. (1) President, Chief Executive Officer 1997 $120,217 -- -- -- and Director 1996 $110,217 -- -- -- William R. Cullen (2) 1998 $165,000 -- $271,494 (3) 160,000 shs. Chief Operating Officer 1997 -- -- -- -- 1996 -- -- -- -- Thomas S. Plunkett 1998 $128,798 $25,000 -- 65,250 shs. (4) Chief Financial Officer 1997 $103,642 -- -- 90,000 shs. (5) 1996 $ 17,641 -- -- 60,000 shs. Gwenael Hagan (6) 1998 $ 91,549 $13,800 -- 70,000 shs. (7) Senior Vice President-Product and 1997 -- -- -- -- Business Development 1996 -- -- -- -- Michael Murphy 1998 $100,203 $15,000 -- 250 shs. (8) Vice President and General Manager 1997 $ 63,758 -- -- 75,000 shs. Financial Services 1996 -- -- -- -- Edward Robinson 1998 $ 99,842 $ 3,450 -- 4,250 shs. (9) Vice President Market Development 1997 $ 81,667 -- -- 50,000 shs. 1996 -- -- -- --
_______________ (1) Includes options for the purchase of 25,000 and 250 shares of common stock initially granted to Mr. Adams on June 3, 1998 and June 7, 1998, respectively, but repriced on November 20, 1998. (2) Mr. Cullen was hired as Chief Operating Officer in March, 1998. (3) Includes 24,000 shares of common stock issued instead of cash compensation. These shares have an aggregate dollar value of $228,556 (determined by multiplying the last sale price of our common stock by the amount of common stock on the dates such shares were earned). Also includes amounts paid to Mr. Cullen for reimbursement of airfare expenses ($17,730) and other commuting expenses ($15,510). (4) Includes options for the purchase of 250 shares of common stock initially granted to Mr. Plunkett on June 7, 1998 but repriced on November 20, 1998. (5) Includes options for the purchase of 60,000 and 15,000 shares of common stock initially granted to Mr. Plunkett on October 4, 1996 and January 9, 1997, respectively, but repriced on May 20, 1997. (6) Mr. Hagan was hired as Senior Vice President-Product and Business Development in January 1998. (7) Includes options for the purchase of 250 shares of common stock initially granted to Mr. Hagan on June 7, 1998 but repriced on November 20, 1998. (8) Represents options for the purchase of 250 shares of common stock initially granted to Mr. Murphy on June 7, 1998 but repriced on November 20, 1998. (9) Includes options for the purchase of 250 shares of common stock initially granted to Mr. Robinson on June 7, 1998 but repriced on November 20, 1998. 37 OSS Stock Options The following tables summarize the stock option grants and exercises during 1998 to or by the named officers and the value of all options held by the named officers as of December 31, 1998. Unless otherwise noted, each of these stock options is exercisable in one-third increments on the 12th, 24th, and 36th month after the date of grant.
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1998 Percent of Total Options Number of Securities Granted to Employees Exercise Underlying Options During Year Ended Price Expiration Name Granted December 31, 1998 ($/Share) Date - ----- ------- ----------------- --------- ---- R. Steven Adams 100,000 $8.50 2/18/05 25,000 (1)(3) $8.50 6/3/05 250 (2) $8.50 6/7/03 50,000 $7.63 11/24/05 --------- Total 175,250 12.4% William R. Cullen 30,000 $6.81 2/9/05 100,000 $8.25 3/10/05 30,000 $7.63 11/24/05 --------- Total 160,000 11.3% Thomas S. Plunkett 30,000 $8.50 2/18/05 35,000 $4.00 10/8/05 250 (2) $8.50 6/7/03 --------- Total 65,250 4.6% Gwenael Hagan 30,000 $8.50 2/18/05 39,750 $4.00 10/8/05 250 (2) $8.50 6/7/03 --------- 70,000 Michael Murphy 250 (2) * $8.50 6/7/03 Edward Robinson 250 (2) $8.50 6/7/03 4,000 $7.63 11/24/05 --------- Total 4,250 *
- -------------------------------------------------------------------------------- * Less than 1%. (1) This option was originally granted on June 3, 1998 at an exercise price of $13.375 per share. This option was repriced to an exercise price of $8.50 per share on November 20, 1998. (2) These options were originally granted on June 7, 1998 at an exercise price of $14.00 per share. These options were repriced to an exercise price of $8.50 per share on November 20, 1998. (3) This option was exercisable in full immediately upon grant. 38
AGGREGATED OPTION EXERCISES DURING YEAR ENDED DECEMBER 31, 1998 AND OPTION VALUES AT DECEMBER 31, 1998 Number of Securities Value of Unexercised Shares Underlying Options at In-The-Money Options at Acquired Value December 31, 1998 December 31, 1998 (2) Name on Exercise Realized (1) Exercisable / Unexercisable Exercisable / Unexercisable - ---- ----------- ------------- ----------------------------- ----------------------------- R. Steven Adams 0 $0 25,000 / 150,250 $112,250 / $719,875 William R. Cullen 0 $0 0 / 160,000 $0 / $821,950 Thomas S. Plunkett 5,000 $35,600 35,000 / 115,250 $682,200 / $735,375 Gwenael Hagan 0 $0 10,000 / 90,000 $65,000 / $623,875 Michael Murphy 25,000 $278,000 0 / 50,250 $0 / $569,625 Edward Robinson 16,667 $162,170 0 / 37,583 $0 / $401,621
_______________ (1) The value realized was determined by multiplying the number of shares exercised by the favorable difference between the exercise price per share and the closing bid price per share on the date of exercise. (2) The value of unexercised in-the-money options was determined by multiplying the number of shares subject to such options by the favorable difference between the exercise price per share and $13.00, the closing bid price per share on December 31, 1998. Board of Director Compensation The Board of Directors of OSS do not receive cash compensation for their services as directors of OSS, but they are reimbursed for their reasonable expenses in attending meetings of the Board of Directors. During 1998, we compensated Robert J. Lewis and Richard C. Jennewine for their services as consultants and issued to them options to purchase 42,500 and 32,5000 shares, respectively, of our common stock. Change of Control Agreements We have entered into employment agreements with R. Steven Adams, William R. Cullen, Thomas S. Plunkett, and Gwenael Hagan which take effect only if a change of control of 30% or more of our outstanding voting stock occurs. If a change of control occurs, these agreements provide for the continued employment (at similar responsibility and salary levels) of the employee for a period of three years after the change of control. During this three year period, if OSS (or a successor entity) terminates the employee's employment without cause or if the employee terminates his employment for good reason, then OSS (or the successor entity) must pay a lump sum severance to the employee equal to three years salary (including bonus), accelerate the vesting of all outstanding options held by the employee and allow the employee to continue to participate in the benefit and welfare plans of OSS (or the successor entity) for a period of three years after the employment terminates. 39 Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information as to the name, address and stock holdings of each person known by OSS to be a beneficial owner of more than 5% of our common stock, its 10% Preferred Stock, or its Series C Preferred Stock as of and as to the name, address and stock holdings of certain officers, each director and nominee for election to the Board of Directors and by all executive officers, directors, and nominees, as a group, as of March 22, 1999 is set forth below. On March 29, 1999, we had 5,595,273 shares of our common stock outstanding. Except as indicated below, we believe that each such person has the sole (or joint with spouse) voting and investment powers with respect to such shares.
Common Stock 10% Preferred Stock Series C Preferred Stock ------------------------------------------------------------------------------------------ Name/Address Amount Percent Amount Percent Amount Percent of Beneficially of Beneficially of Beneficially of Shareholder/Director Owned Class (1) Owned Class (1) Owned Class (1) - ---------------------------------------------------------------------------------------------------------------------------------- R. Steven Adams 555,334 (2) 9.8% None -- None -- 1800 Glenarm Place, Suite 700 Denver, Colorado 80202 Lee E. Schlessman 91,633 (3) 1.6% 60,000 (4) 70.6% None -- 1301 Pennsylvania Street, Suite 800 Denver, Colorado 80203 Susan M. Duncan 22,908 (5) * 15,000 (6) 17.6% None -- 2651 South Wadsworth Circle Lakewood, Colorado 80227 Cal J. and Amanda Mae Rickel 7,636 (7) * 5,000 5.9% None -- P.O. Box 1076 Cortez, Colorado 81321 Southwest Contracting, Inc. 7,636 (8) * 5,000 5.9% None -- P.O. Box 719 Cortez, Colorado 81321 Arrow Investors II LLC 462,321 (9) 8.3% None -- 500 100% One World Trade Center Suite 4563 New York, New York 10048 John M. Liviakis 362,850 (10) 6.5% None -- None -- 2420 K Street Suite 220 Sacramento, California 95816 Paul H. Spieker 193,000 (11) 3.4% None -- None -- 1800 Glenarm Place, Suite 700 Denver, Colorado 80202 Thomas S. Plunkett 65,250 (12) 1.2% None -- None -- 1800 Glenarm Place, Suite 700 Denver, Colorado 80202
40
William R. Cullen 67,333 (13) 1.2% None -- None -- 1800 Glenarm Place, Suite 700 Denver, Colorado 80202 Gwenael Hagan 20,250 (14) * None -- None -- 1800 Glenarm Place, Suite 700 Denver, Colorado 80202 Michael Murphy 25,250 (15) * None -- None -- 1800 Glenarm Place, Suite 700 Denver, Colorado 80202 Edward Robinson 16,916 (16) * None -- None -- 1800 Glenarm Place, Suite 700 Denver, Colorado 80202 Robert J. Lewis 85,703 (17) 1.5% None -- None -- 1800 Glenarm Place, Suite 700 Denver, Colorado 80202 Richard C. Jennewine 50,000 (18) * None -- None -- 1800 Glenarm Place, Suite 700 Denver, Colorado 80202 Directors and Executive Officers as a 1,039,370 (19) 17.5% None -- None -- Group (8 persons)
----------------------- * Less than one percent of shares outstanding. (1) In calculating percentage ownership, all shares of Common stock which a named shareholder has the right to acquire within 60 days from the date of this report upon exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage of common stock owned by that shareholder, but are not deemed to be outstanding for the purpose of computing the percentage of common stock owned by any other shareholders. No options or warrants to acquire either the 10% Preferred Stock or Series A Preferred Stock are outstanding. (2) Includes options for the purchase of 58,334 shares of common stock, but excludes options for the purchase of 116,916 shares of common stock that are not exercisable during the next 60 days. (3) Includes 67,633 shares of common stock issuable upon the conversion of shares of 10% Preferred Stock, including accrued but unpaid dividends thereon, if such conversion occurred as of the close of business on March 22, 1999 plus 24,000 shares issuable upon the exercise of warrants to purchase shares of common stock at a per share exercise price of $15.00. Upon the actual conversion of the 10% Preferred Stock, the number of shares into which the 10% Preferred Stock is convertible may be more or less than 67,633 shares, but in no event will be less than 60,000 shares. Pursuant to the terms of the 10% Preferred Stock, on March 22, 1999 the conversion price was approximately $9.95. Also includes shares of common stock beneficially owned by (i) The Schlessman Family Foundation and (ii) persons who have granted Mr. Schlessman a power of attorney with respect to such shares. (4) Includes 5,000 shares of 10% Preferred Stock owned by The Schlessman Family Foundation. Also includes 15,000 shares of 10% Preferred Stock owned by persons who have granted Mr. Schlessman a power of attorney with respect to such shares. (5) Includes 16,908 shares of common stock issuable upon the conversion of shares of 10% Preferred Stock, including accrued but unpaid dividends thereon, if such conversion occurred as of the close of business on March 22, 1999 plus 6,000 shares issuable upon the exercise of warrants to purchase shares of common stock at a per share exercise price of $15.00. Upon the actual conversion of the 10% Preferred Stock, the number of shares into which the 10% Preferred Stock is convertible may be more or less than 16,908 shares, but in no event will be less than 15,000 shares. Pursuant to the terms of the 10% Preferred Stock, on March 22, 1999 41 the conversion price was approximately $9.95. Also includes shares of common stock beneficially owned by the Susan M. Duncan Irrevocable Gift Trust. (6) Includes 10,000 shares of 10% Preferred Stock owned by the Susan M. Duncan Irrevocable Gift Trust. (7) Includes 5,636 shares of common stock issuable upon the conversion of shares of 10% Preferred Stock, including accrued but unpaid dividends thereon, if such conversion occurred as of the close of business on March 22, 1999 plus 2,000 shares issuable upon the exercise of a warrant to purchase shares of common stock at a per share exercise price of $15.00. Upon the actual conversion of the 10% Preferred Stock, the number of shares into which the 10% Preferred Stock is convertible may be more or less than 5,636 shares, but in no event will be less than 5,000 shares. Pursuant to the terms of the 10% Preferred Stock, on March 22, 1999 the conversion price was approximately $9.95. (8) Includes 5,636 shares of common stock issuable upon the conversion of shares of 10% Preferred Stock, including accrued but unpaid dividends thereon, if such conversion occurred as of the close of business on March 22, 1999 plus 2,000 shares issuable upon the exercise of a warrant to purchase shares of common stock at a per share exercise price of $15.00. Upon the actual conversion of the 10% Preferred Stock, the number of shares into which the 10% Preferred Stock is convertible may be more or less than 5,636 shares, but in no event will be less than 5,000 shares. Pursuant to the terms of the 10% Preferred Stock, on March 22, 1999 the conversion price was approximately $9.95. (9) Includes 129,757 shares issuable upon the conversion of the Series C Preferred Stock if such conversion occurred as of the close of business on March 22, 1999. Upon the actual conversion of the Series C Preferred Stock, the number of shares into which the Series C Preferred Stock is convertible may be more or less than 129,757 shares, but in no event will be less than 24,213 shares. Pursuant to the terms of the Series C Preferred Stock, on March 22, 1999 the conversion price was approximately $11.65. Also includes 100,000 shares issuable to affiliates of Arrow Investors II LLC upon the exercise of warrants to purchase shares at a per share exercise price of $16.33. (10) Includes 352,850 shares owned by Liviakis Financial Communications, Inc. Mr. Liviakis, together with his spouse, owns all of the outstanding securities of Liviakis Financial Communications, Inc. (11) Includes options for the purchase of 50,000 shares of common stock, but excludes options for the purchase of 40,250 shares of common stock that are not exercisable during the next 60 days. (12) Includes options for the purchase of 65,250 shares of common stock, but excludes options for the purchase of 105,250 shares of common stock that are not exercisable during the next 60 days. (13) Includes options for the purchase of 43,333 shares of common stock, but excludes options for the purchase of 116,667 shares of common stock that are not exercisable during the next 60 days. (14) Includes options for the purchase of 20,250 shares of common stock, but excludes options for the purchase of 80,000 shares of common stock that are not exercisable during the next 60 days. (15) Includes options for the purchase of 25,250 shares of common stock, but excludes options for the purchase of 25,000 shares of common stock that are not exercisable during the next 60 days. (16) Includes options for the purchase of 16,916 shares of common stock, but excludes options for the purchase of 20,667 shares of common stock that are not exercisable during the next 60 days. (17) Includes options and warrants for the purchase of 58,333 shares of common stock, but excludes options for the purchase of 19,167 shares of common stock that are not exercisable during the next 60 days. (18) Includes options for the purchase of 50,000 shares of common stock, but excludes options for the purchase of 32,500 shares of common stock that (19) Includes options and warrants for the purchase of 345,750 shares of common stock, but excludes options for the purchase of 570,750 shares of common stock that are not exercisable during the next 60 days. 42 Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. During November 1997, we licensed our MD Gateway Web site and related equipment and software to Medical Education Collaborative, a nonprofit company formed by Charles P. Spickert, a former director of OSS. We licensed MD Gateway to MEC in connection with our strategic decision to focus our activities on non- healthcare related activities. The license agreement provides that MEC will pay us a license fee of 35% of revenues in excess of certain MEC expenses related to MD Gateway services. Our principal offices are located in a building managed by Sheridan Management Company prior to July 7, 1998 and owned by one of its affiliates. R. Steven Adams' spouse is a vice president of Sheridan Management Company. The current base monthly rental is $18,209. Robert J. Lewis, one of our directors, is the general partner and chief executive officer of, InterMedia Partners, one of our broadband customers. InterMedia is an operator of cable systems in Kentucky, Tennessee, North Carolina, South Carolina, and Georgia. We entered into a contract during August 1997, as amended, pursuant to which we provide our products and services to several of InterMedia's markets. The expiration dates of the contracts and related amendments range from August 1999 to July 2000. We earn revenue from the sale of computer hardware and third party software, engineering fees, equipment installation fees, and royalties from subscriber Internet access and content fees. We recognized revenue in connection with these contracts totaling $185,768 and $47,092 for the years ended December 31, 1998 and 1997, respectively. Included in accounts receivable at December 31, 1998 and 1997 are amounts due from InterMedia totaling $22,925 and $2,052, respectively. We believe that the transactions summarized above are on terms no less favorable than could be obtained from unaffiliated third parties. The Board of Directors has determined that any transactions with officers, directors or principal shareholders will be approved by the disinterested directors and will be on terms no less favorable than could be obtained from an unaffiliated third party. The Board of Directors will obtain independent counsel or other independent advice to assist in that determination. 43 Item 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) For Financial Statements filed as a part of this Report, reference is made to "Index to Financial Statements" on page F-1 of this Report. For a list of Exhibits filed as a part of this Report, see Exhibit Index page following Audited Financial Statements and Notes thereto. (b) During the last quarter of the period covered by this Report, we did not file any reports on Form 8-K. 44 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ONLINE SYSTEM SERVICES, INC. Date: April 9, 1999 By /s/ R. Steven Adams -------------------------------------- R. Steven Adams, President and Chief Executive Officer In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ R. Steven Adams April 9, 1999 - ------------------------------------------------ R. Steven Adams, (President, Chief Executive Officer and a Director) /s/ Thomas Plunkett April 9, 1999 - ------------------------------------------------ Thomas Plunkett (Chief Financial Officer) /s/ Stuart Lucko April 9, 1999 - ------------------------------------------------ Stuart Lucko (Controller) /s/ William R. Cullen April 9, 1999 - ------------------------------------------------ William R. Cullen (Director) /s/ Robert J. Lewis April 9, 1999 - ------------------------------------------------ Robert J. Lewis (Director) /s/ Richard C. Jennewine April 9, 1999 - ------------------------------------------------ Richard C. Jennewine (Director) 45 ITEM 7. FINANCIAL STATEMENTS. ONLINE SYSTEM SERVICES, INC. ---------------------------- INDEX TO FINANCIAL STATEMENTS -----------------------------
Page ---- Report of Independent Public Accountants F-2 Balance Sheets as of December 31, 1998 and 1997 F-3 Statements of Operations for the Years Ended December 31, 1998 and 1997 F-4 Statements of Stockholders' Equity for the Years Ended December 31, 1998 and 1997 F-5 Statements of Cash Flows for the Years Ended December 31, 1998 and 1997 F-6 Notes to Financial Statements F-8
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Online System Services, Inc.: We have audited the accompanying balance sheets of ONLINE SYSTEM SERVICES, INC. (a Colorado corporation) as of December 31, 1998 and 1997, and the related statements of operations, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Online System Services, Inc. as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As further discussed in Note 1 to the financial statements, among other factors, the Company has incurred significant and recurring losses from operations, and such losses are expected to continue in the near future, which raises substantial doubt about the ability of the Company to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. ARTHUR ANDERSEN LLP Denver, Colorado, March 10, 1999. F-2 ONLINE SYSTEM SERVICES, INC. BALANCE SHEETS
DECEMBER 31, ----------------------------------------------- 1998 1997 -------------------- ------------------- ASSETS Current assets: Cash and cash equivalents $ 698,339 $ 3,680,282 Accounts receivable, net (Note 2) 147,837 701,330 Accrued revenue receivables - 143,543 Note and accrued interest receivable (Note 3) 896,787 - Inventory, net 55,126 235,441 Prepaid expenses 74,179 249,510 Deferred acquisition costs 229,404 - Short-term deposits 101,441 77,372 -------------------- ------------------- Total current assets 2,203,113 5,087,478 Property and equipment, net (Note 4) 1,178,628 1,015,632 Capitalized software costs, net (Note 5) - 122,029 Other assets 3,535 101,352 -------------------- ------------------- Total assets $ 3,385,276 $ 6,326,491 ==================== =================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 873,901 $ 969,937 Accrued salaries and payroll taxes payable 329,755 216,493 Current portion of capital leases payable (Note 6) 21,766 23,555 Customer deposits and deferred revenue 100,600 9,321 -------------------- ------------------- Total current liabilities 1,326,022 1,219,306 Capital leases payable (Notes 6 and 12 ) 39,915 585 Commitments and contingencies (Notes 1 and 12) Stockholders' equity (Note 7): Preferred stock, no par value, 5,000,000 shares authorized: 10% redeemable, convertible preferred stock, 10% cumulative return; 245,000 shares issued and outstanding, including dividends payable of $241,172 and none, respectively 2,691,172 1,226,376 Series A redeemable, convertible preferred stock, 5% cumulative return; 1,400 and none issued and outstanding, respectively, including dividends payable of $10,164 and none, respectively 1,410,164 - Common stock, no par value, 20,000,000 shares authorized, 4,642,888 and 3,315,494 shares issued and outstanding, 16,410,300 8,726,554 respectively Warrants and options 2,281,832 165,427 Accumulated deficit (20,774,129) (5,011,757) -------------------- ------------------- Total stockholders' equity 2,019,339 5,106,600 -------------------- ------------------- Total liabilities and stockholders' equity $ 3,385,276 $ 6,326,491 ==================== ===================
The accompanying notes to financial statements are an integral part of these balance sheets. F-3 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1998 1997 -------------------- ----------------- Net sales: Service sales $ 485,663 $ 1,674,198 Hardware and software sales 1,103,717 1,117,358 ------------------- ----------------- 1,589,380 2,791,556 ------------------- ----------------- Cost of sales: Cost of services 386,303 1,021,261 Cost of hardware and software 905,234 972,260 ------------------- ----------------- 1,291,537 1,993,521 ------------------- ----------------- Gross margin 297,843 798,035 ------------------- ----------------- Operating expenses: Sales and marketing expenses 2,479,029 1,197,038 Product development expenses 1,264,287 1,108,456 General and administrative expenses 6,519,441 1,837,330 Depreciation and amortization 791,155 198,788 ------------------- ----------------- 11,053,912 4,341,612 ------------------- ----------------- Loss from operations (10,756,069) (3,543,577) Interest income, net 139,806 168,298 ------------------- ----------------- Net loss (10,616,263) (3,375,279) Preferred stock dividends (Note 7) 329,120 - Accretion of preferred stock to redemption value (Note 7) 4,110,060 - Accretion of preferred stock for guaranteed return in excess of redemption value (Note 7) 706,929 - ------------------- ----------------- Net loss available to common stockholders $ (15,762,372) $ (3,375,279) =================== ================= Loss per share, basic and diluted $ (4.35) $ (1.05) =================== ================= Weighted average shares outstanding 3,621,585 3,200,474 =================== =================
The accompanying notes to financial statements are an integral part of these statements. F-4 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
10% Preferred Stock 5% Preferred Stock Series A Preferred Stock ---------------------------- ----------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------------- ------------- ----------- ------------ ------------ -------------- Balances, December 31, 1996 - $ - - $ - - $ - Stock issued in conjunction with private placement- 10% Preferred Stock 245,000 1,904,385 - - - - Common stock - - - - - - Common stock warrants - - - - - - Offering costs - (243,045) - - - - Guaranteed return on 10% Preferred Stock - (434,964) - - - - Exercises of stock options and warrants - - - - - - Repurchase of options to buy common stock - - - - - - Stock options issued for services - - - - - - Stock subscriptions receivable - - - - - - Net loss available to common stockholders - - - - - - ------------- ------------- ----------- ------------ ------------ -------------- Balances, December 31, 1997 245,000 1,226,376 - - - - Stock issued in conjunction with private placement- 10% Preferred Stock 22,500 159,559 - - - - Common stock - - - - - - Common stock warrants - - - - - - Offering costs - (18,980) - - - - Guaranteed return on 10% Preferred Stock - (56,250) - - - - Stock issued in conjunction with private placement- 5% Preferred Stock - - 3,000 2,597,500 - - Common stock warrants - - - - - - Offering costs - - - (626,855) - - Warrants issued for placement fee - - - - - - Guaranteed return on 5% Preferred Stock - - - (316,410) - - Stock issued in conjunction with private placement- Series A Preferred Stock - - - - 1,400 764,400 Common stock warrants - - - - - - Offering costs - - - - - (103,001) Warrants issued for placement fee - - - - - - Guaranteed return on 5% Preferred Stock - - - - - (1,368,328) Preferred stock dividends payable - 241,172 - - - 10,164 Preferred stock and dividends converted to common stock (22,500) (225,000) (3,000) (3,000,000) - - Exercises of stock options and warrants - - - - - - Accretion of preferred stock to redemption value - 1,364,295 - 1,345,765 - 1,400,000 Accretion of preferred stock for guaranteed return in excess of redemption value - - - - - 706,929 Stock and stock options issued for services and to customer - - - - - - Net loss available to common stockholders - - - - - - ------------- ------------- ----------- ------------ ------------ -------------- Balances, December 31, 1998 245,000 $2,691,172 - $ - 1,400 $1,410,164 ============= ============= =========== ============ ============ ============= Common Stock Warrants Stock ---------------------------- and Subscriptions Accumulated Stockholders Shares Amount Options Recievable Deficit Equity ------------- ------------ --------- ------------- -------------- ----------- Balances, December 31, 1996 3,162,545 $ 7,953,665 $ - $ (586) $ (1,636,478) $ 6,316,601 Stock issued in conjunction with private placement- 10% Preferred Stock - - - - - 1,904,385 Common stock 61,250 398,125 - - - 398,125 Common stock warrants - - 147,490 - - 147,490 Offering costs - (50,811) (18,823) - - (312,679) Guaranteed return on 10% Preferred Stock - 434,964 - - - - Exercises of stock options and warrants 91,699 65,611 - - - 65,611 Repurchase of options to buy common stock - (75,000) - - - (75,000) Stock options issued for services - - 36,760 - - 36,760 Stock subscriptions receivable - - - 586 - 586 Net loss available to common stockholders - - - - (3,375,279) (3,375,279) ------------- ----------- ----------- ------ ----------- ---------- Balances, December 31, 1997 3,315,494 8,726,554 165,427 - (5,011,757) 5,106,600 Stock issued in conjunction with private placement- 10% Preferred Stock - - - - - 159,559 Common stock 5,625 46,406 - - - 46,406 Common stock warrants - - 19,035 19,035 Offering costs - (5,520) (2,264) - - (26,764) Guaranteed return on 10% Preferred Stock - 56,250 - - - - Stock issued in conjunction with private placement- 5% Preferred Stock - - - - - 2,597,500 Common stock warrants - - 402,500 - - 402,500 Offering costs - - (96,895) - - (723,750) Warrants issued for placement fee - - 402,500 - - 402,500 Guaranteed return on 5% Preferred Stock - 316,410 - - - - Stock issued in conjunction with private placement- Series A Preferred Stock - - - - - 764,400 Common stock warrants - - 635,600 - - 635,600 Offering costs - - (85,647) - - (188,648) Warrants issued for placement fee - - 75,948 - - 75,948 Guaranteed return on 5% Preferred Stock - 1,368,328 - - - - Preferred stock dividends payable - - - - - 251,336 Preferred stock and dividends converted to common stock 685,538 3,302,784 - - - 77,784 Exercises of stock options and warrants 262,231 494,088 - - - 494,088 Accretion of preferred stock to redemption value - - - - - 4,110,060 Accretion of preferred stock for guaranteed return in excess of redemption value - - - - - 706,929 Stock and stock options issued for services and to customer 374,000 2,105,000 765,628 - - 2,870,628 Net loss available to common stockholders - - - - (15,762,372) (15,762,372) --------------- ------------ ------------- ---------- ------------- ------------ Balances, December 31, 1998 4,642,888 $16,410,300 $ 2,281,832 - $(20,774,129) $ 2,019,339 =============== ============ ============= ========== ============= ============
The accompanying notes to financial statements are an integral part of these statements. F-5 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1998 1997 ------------------- ------------------ Cash flows from operating activities: Net loss $(10,616,263) $(3,375,279) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 791,155 198,788 Gain on sale of equipment - (1,535) Accrued interest income on advances to DCI (49,304) - Reduction in note receivable for services received from DCI 540,372 - Stock and stock options issued for services and to customer 2,870,628 37,346 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable 553,493 (471,980) (Increase) decrease in accrued revenue receivables 143,543 (53,206) (Increase) decrease in inventory 180,315 (39,500) (Increase) decrease in prepaid expenses 175,331 (116,966) Decrease in short-term deposits and other assets 73,579 46,907 Increase (decrease) in accounts payable and accrued liabilities (96,036) 620,444 Increase in accrued salaries and payroll taxes payable 113,262 133,687 Increase (decrease) in customer deposits and deferred revenue 91,279 (39,348) ------------------- ------------------- Net cash used in operating activities (5,228,646) (3,060,642) ------------------- ------------------- Cash flows from investing activities: Redemption of short-term investments - 3,855,343 Purchase of property and equipment (481,427) (727,094) Capitalized software development costs (281,776) (124,097) Cash advances to DCI (1,387,855) - Payment of acquisition costs (229,404) - Proceeds from sale of property and equipment - 2,621 ------------------- ------------------- Net cash (used in) provided by investing activities (2,380,462) 3,006,773 ------------------- ------------------- Cash flows from financing activities: Payments on capital leases and notes payable (31,209) (38,944) Proceeds from issuance of common stock and warrants 65,441 545,615 Proceeds from exercise of stock options and warrants 494,088 65,611 Re-purchase of option to buy common stock - (75,000) Proceeds from issuance of 10% Preferred Stock 159,559 1,904,385 Proceeds from issuance of 5% Preferred Stock and warrants 3,000,000 - Proceeds from issuance of Series A Preferred Stock and warrants 1,400,000 - Stock offering costs (460,714) (312,679) ------------------- ------------------- Net cash provided by financing activities 4,627,165 2,088,988 ------------------- ------------------- Net increase (decrease) in cash and cash equivalents (2,981,943) 2,035,119 Cash and cash equivalents, beginning of period 3,680,282 1,645,163 ------------------- ------------------- Cash and cash equivalents, end of period $ 698,339 $ 3,680,282 =================== ===================
The accompanying notes to financial statements are an integral part of these statements. F-6 ONLINE SYSTEM SERVICES, INC. STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, --------------------------------------------- 1998 1997 ------------------- ------------------- Supplemental disclosure of cash flow information: Cash paid for interest $ 7,024 $ 5,987 Supplemental schedule of non-cash investing and financing activities: Accretion of preferred stock to redemption value $4,110,060 $ - Accretion of preferred stock for guaranteed return in excess of redemption value 706,929 - Preferred stock dividends paid or to be paid in common stock 329,120 - Preferred stock and dividends converted to common stock 3,302,784 - Stock and stock options issued for services and value to customer 2,870,628 37,346 Common stock warrants issued for offering costs 478,448 - Capital leases for equipment 68,750 - Reduction of note receivable in exchange for services received 540,372 -
The accompanying notes to financial statements are an integral part of these statements. F-7 ONLINE SYSTEM SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (1) ORGANIZATION AND BUSINESS Online System Services, Inc. (the "Company") was incorporated on March 22, 1994, under the laws of Colorado, and principal operations began in 1995. To date, the Company has generated revenues through the sale of design and consulting services for Web site development, resale of software licenses, mark- ups on computer hardware and software sold to customers, maintenance fees charged to customers to maintain computer hardware and Web sites, license fees based on a percentage of revenues from the Company's i2u/WEBBbuilder (formally marketed under the i2u brand) family of products and services, training course fees, and monthly fees paid by customers for Internet access provided by the Company. The Company commenced sales in February 1995, and was in the development stage through December 31, 1995. Prior to the quarter ended September 30, 1997, the Company's focus generally was on three markets: general Web site development, maintenance and hosting; rural or small market Internet service providers ("ISPs"); and healthcare information services and continuing medical education ("CME"). These activities were divided into three separate units early in 1997: the Business Resource Group ("BRG") for Web site-related activities; Community Access America ("CAA") for the ISP activities; and Healthcare for the CME and healthcare information activities. As an outgrowth of the Company's BRG and CAA activities, and in recognition of the need to increase the availability of high-speed Internet access, the Company's focus since mid-1997 has evolved to the development of online communities, particularly for broadband (high bandwidth or high data transmission capabilities) operators such as cable TV operators (wired and wireless), and on personal and organizational portals. This focus has resulted in the introduction of community-building products and services which include a wide range of online services that enable broadband operators' customers and others to generate online local content, create Web pages and conduct online commerce. The Company intends to focus its future efforts primarily on its community-building products and services for broadband operators and other ISPs, consumer/personal portal products and services, enterprise products and services for companies and organizations with dispersed operations, vendors or constituents, online educational products and services, and financial services for financial institutions having less than $500 million in assets. The Company earns revenue through the sale of computer hardware and third party software, software license fees, network engineering services, consulting services, other implementation services and license fees based on a percentage (royalties) of advertising revenues as well as a percentage of fees paid by subscribers of our broadband operator customers in connection with e-commerce transactions which these subscribers conduct on the broadband operator's systems from our products and services, training course fees, and monthly fees paid by customers for Internet access which we have provided. To date, royalties earned by the Company from this revenue model have not been significant. The Company has also generated revenue from design and consulting services for Web site development, computer hardware and software sold to customers of its Web site development services, maintenance fees charged to customers to maintain computer hardware and Web sites, license fees based on a percentage of revenues from its CAA program, training course fees and monthly fees paid by customers for Internet access provided by the Company in the Denver, Colorado market. During 1998, the Company implemented a new pricing structure for its broadband community-building products and services whereby the Company supplies its content and community-building products and services and the operator provides the infrastructure and channel for distribution of high-speed Internet access services. This new structure results in a lower front-end cost for the operator, in consideration for which the Company expects to receive a higher percentage of advertising and transaction fees received from the broadband operator's subscribers. During November 1997, the Company announced to certain customers that it was terminating specific types of Web site development, maintenance and hosting activities and began to transition this business to other companies. The Company transitioned Web site development activities which were not related to the development of products for its i2u/WEBBbuilder products and services or did not involve the creation of online communities for particular businesses or information purposes. In addition, during October 1997, the Company licensed its MD Gateway Web site to Medical Education Collaborative ("MEC") and is no longer developing products for the healthcare market. In the future, revenues from the healthcare market are expected to be limited to license fees received from MEC in connection with the use of MD Gateway. The Company has not been profitable since inception. The Company had at December 31, 1998, $698,339 in cash and cash equivalents and $877,091 in working capital, and a working capital deficit of $249,100 excluding the note receivable and accrued interest receivable and the deferred acquisition costs. The Company competes in an intensively competitive industry, which has been characterized by price erosion, rapid technological change, short product life cycles, and rapidly changing business models. Significant technological changes in the Internet access and broadband data delivery require that the Company expend significant funds in order to compete in an ever-changing marketplace. The Company has expended significant funds to develop its current product offerings. During 1999, the Company anticipates increased operating expenses and research and development expenditures, F-8 (1) ORGANIZATION AND BUSINESS (CONTINUED) which are necessary for the Company to further develop and market its products, and to achieve market acceptance of its products in sufficient quantities to achieve positive cash flow from operations. The Company's future revenues are highly dependent upon the use of its products by the customers of the broadband operators who have entered into business relationships with the Company, as the Company receives a portion of the proceeds generated by the broadband operator for such services as Internet access and electronic commerce. The Company's cash expenditures have been, and are expected to continue to be, increased due to the expected acquisition of Durand Communications, Inc. ("DCI") (See Note 14). There can be no guarantee that the Company will be successful in marketing its products or that it will be able to achieve positive cash flow from operations. The continued viability of the Company depends upon, in part, its ability to obtain additional profitable customer contracts and to obtain additional capital through debt or equity financing. The Company believes that its cash and cash equivalents and working capital plus the net proceeds of the offering of Preferred Stock that was completed during January 1999 (See Note 15) will be adequate to sustain operations through May 1999. The Company estimates that it will need to raise approximately $25,000,000 through equity, debt or other external financings, to implement its business development plan (approximately $8,000,000 of which is required to sustain operations for 1999). The Company's plan to fund its operations for the next twelve months is to obtain equity financing through a combination of strategic partner investments, proceeds from the exercise of initial public offering ("IPO") common stock warrants (if any, see below), additional private placements of its securities, and may include a secondary public offering of its common stock. The Company is engaged in ongoing discussions with certain potential strategic partners, which if successful, could result in significant additional equity funding for the Company. In connection with the Company's IPO during May 1996, warrants representing the right to acquire 632,500 shares of common stock at $9.00 per share were issued to investors. These warrants expire on May 23, 1999, if not exercised prior thereto. In the event that all of the warrants were exercised for cash, the Company would receive in excess of $5.6 million in net proceeds. In lieu of exercising the warrants for cash, holders may utilize a "cashless exercise" option whereby they may apply the value of a portion of their warrants (i.e., the difference between the market value for our common stock and $9.00, the exercise price of the warrants) to pay the exercise price for the balance of the warrants to be exercised. Therefore, the Company is unable to predict the amount of net proceeds, if any, which it may receive upon exercise of the warrants. Further, the Company believes that it would be possible to continue to raise additional working capital through the sale of securities similar to the transactions described in Note 7 and has initiated discussions with various potential private investors which could result in additional debt or equity investments. The Company has begun discussions regarding a possible secondary offering of its securities during the fall of 1999. However, the Company has no commitments for any such funding and there can be no assurances that these discussions will be successful, or if successful, that the terms of any such fundings will be acceptable to the Company. If the Company is not successful in obtaining funding in appropriate amounts or at appropriate terms, management would consider significant reductions in activity and operations. As a result of the foregoing, substantial doubt exists about the ability of the Company to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. The Company has revised certain factors used in determining the amounts to be accreted related to issuances of its 10% and 5% Preferred Stock as well as the period for the accretion of the 5% Preferred Stock. See Note 16 for these revisions and their impact on unaudited quarterly amounts. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions may affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of reporting cash flows, the Company considers cash and cash equivalents to include highly liquid investments with original maturities of 90 days or less that are readily convertible into cash and are not subject to significant risk from fluctuations in interest rates. Concentration of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments, note receivable, and accounts receivable. The Company has no significant off balance-sheet concentrations of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company maintains the majority of its cash with financial institutions in the form of demand deposits, and denominates the majority of its transactions in U.S. dollars. The Company believes such financial institutions are of high credit quality. The Company performs ongoing evaluations of its customers' financial condition and generally does not require collateral, except for billings in advance of work performed, and maintains reserves for potential credit F-9 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) losses. Its accounts receivable balances are primarily domestic. Accounts receivable are shown net of allowance for doubtful accounts of $18,000 and $58,059 at December 31, 1998 and 1997, respectively. As discussed in Note 9, the Company has five and four customers that accounted for more than 10% of 1998 and 1997 revenues, respectively, and three customers that accounted for more than 10% of accounts receivable as of December 31, 1998 and 1997. The Company's pricing structure is highly dependent on the broadband operator's success in generating revenue from the use of the Company's products. Deferred Acquisition Costs Costs incurred related to the Company's anticipated acquisition, discussed in Note 14, are being deferred and will be included in the acquisition price if successful, or to expense if unsuccessful. Inventory Inventory is stated at the lower of cost (first-in, first-out) or market. Inventory consists of software licenses which the Company has purchased for the purpose of sub-licensing the software to its customers, and hardware purchased for resale. Property and Equipment Property and equipment is stated at cost and depreciation is provided using the straight-line method over the estimated useful lives of the respective assets. Maintenance and repairs are expensed as incurred and improvements are capitalized. Long-Lived Assets Long-lived assets and certain identifiable intangibles to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Any long-lived assets and certain identifiable intangibles to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. Capitalized Software Development Costs and Research and Development Costs The Company capitalizes software development costs in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed" (SFAS 86). Capitalization of development costs of software products begins once the technological feasibility of the product is established. The establishment of technological feasibility is highly subjective and requires the exercise of judgment by management. Based on the Company's product development process, technological feasibility is established upon completion of a detailed program design. Capitalization ceases when such software is ready for general release, at which time amortization of the capitalized costs begins. At each balance sheet date, the Company evaluates the unamortized capitalized costs of its i2u/WEBBbuilder software product and compares it to the net realizable value of the product. Amortization of capitalized software development costs is computed using the greater of the straight-line method or the product's estimated useful life, generally one year, or based on relative current revenue. Net realizable value is measured by estimating the royalties to be derived under the Company's current arrangements. The amount by which the unamortized i2u/WEBBbuilder software costs exceeds the net realizable value are recorded as period expenses. During the fourth quarter of 1998, the Company performed this evaluation and determined that based on the increasingly short product life of Internet software, its i2u/WEBBbuilder software product life was much shorter than originally anticipated and, accordingly, the carrying amount was no longer realizable. The Company also determined that the time between technological feasibility and general release has become increasingly short, consequently, as of December 31, 1998, all capitalized software costs have been fully amortized. Product development costs relating principally to the design and F-10 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) development of non-software products are generally expensed as incurred. The cost of developing routine software enhancements are expensed as product development costs as incurred. Fair Value of Financial Instruments The Company's financial instruments consist of cash and cash equivalents, short-term trade receivables and payables, note receivable, and notes payable. As of December 31, 1998 and 1997, the carrying values of such instruments approximated their fair value. Revenue Recognition Revenue from hardware and licenses for software is generally recognized upon shipment, or when title passes to the customer, provided that the Company has no significant remaining obligations, evidence of an agreement exists, the fee is fixed or determinable, and collectibility is probable. Revenue from maintenance fees, training courses and Internet access fees is recognized as the services are performed. For consulting arrangements of short durations, the Company recognizes revenue as the services are performed based on hourly or daily rates, or upon completion of the services. Amounts invoiced but not earned are shown as deferred revenue in the accompanying balance sheets. During 1998, the Company changed its business model to become more reliant on royalty revenue from the use of its products and services. In general, the Company will be paid a royalty when the subscriber of a customer (generally a broadband operator) of the Company's i2u/WEBBbuilder software and hardware product accesses such products. Revenue sharing and other transactional royalty revenue is recorded as earned by the Company, and to date has not been significant. Revenue from Web site design and consulting fees is recognized on the percentage of completion method on an individual contract basis. Percentage complete is determined primarily based upon the ratio that labor costs incurred bear to total estimated labor costs. The Company's use of the percentage of completion method of revenue recognition requires estimates of the degree of project completion. To the extent these estimates prove to be inaccurate, the revenues and gross margin, if any, reported for periods during which work on the project is ongoing, may not accurately reflect the final results of the project, which can only be determined upon project completion. Provisions for any estimated losses on uncompleted contracts are made in the period in which such losses are determinable. Amounts earned but not billed under development contracts are shown as accrued revenue receivables in the accompanying balance sheets. Estimates of returns and allowances are recorded in the period of the sale based on the Company's historical experience and the terms of individual transactions. Income Taxes The current provision for income taxes represents actual or estimated amounts payable on tax return filings each year. Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying balance sheets, and for operating loss and tax credit carryforwards. The change in deferred tax assets and liabilities for the period measures the deferred tax provision or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to the tax provision or benefit in the period of enactment. The Company's deferred tax assets have been reduced by a valuation allowance to the extent it is more likely than not, that some or all of the deferred tax assets will not be realized (See Note 10). Stock-Based Compensation The Company accounts for its employee stock option plans and other stock- based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25") and related interpretations. As such, compensation expense related to employee stock options is recorded if, on the date of grant, the fair value of the underlying stock exceeds the stock option exercise price. The Company adopted the disclosure-only provisions of SFAS No. 123 "Accounting F-11 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) for Stock-Based Compensation" ("SFAS 123"), which allows entities to continue to apply the provisions of APB Opinion No. 25 for transactions with employees and provide pro forma disclosures for employee stock grants made in 1996 and future years as if the fair-value-based method of accounting in SFAS 123 had been applied to these transactions. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS 123. Net Loss Per Share Net loss per share is calculated in accordance with SFAS No. 128, "Earnings Per Share" ("SFAS 128"), and Securities and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS 128 and SAB 98, basic net loss per share is computed by dividing net loss available to common shareholders for the period by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of the potential common shares is dilutive. As a result of the Company's net losses, all potentially dilutive securities, as indicated in the table below, would be anti-dilutive and are excluded from the computation of diluted loss per share.
DECEMBER 31, ------------------------------------ 1998 1997 ---------------- --------------- Stock options 1,758,665 1,002,910 Warrants and underwriter options 1,190,612 879,500 10% Preferred Stock 300,401 471,154 Series A Preferred Stock 246,964 - ---------------- --------------- Total 3,496,642 2,353,564 ================ ===============
Comprehensive Income Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. From its inception through December 31, 1998, the Company has not had any material transactions that are required to be reported in comprehensive income as compared to its net loss. Recent Accounting Pronouncements In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS 131"). This statement changes the manner in which companies report information about their operating segments. SFAS 131, which is based on the management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report entity-wide disclosures about products and services, major customers, and the geographic locations in which the entity holds assets and reports revenue. The Company adopted the provisions of SFAS 131 during 1998, resulting in additional disclosures which are reflected in Note 13. In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Development or Obtained for Internal Use" ("SOP 98-1"). This statement establishes standards for the capitalization of costs related to internal use software. In general, costs incurred during the development stage are capitalized, while the costs incurred during the preliminary project and post-implementation stages are expensed. The provisions of SOP 98-1 are effective for all fiscal years beginning after December 15, 1998. Management believes the adoption of SOP 98-1 will not have a material impact on its financial statements. F-12 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start- Up Activities" ("SOP 98-5"). In general, SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred and specifies that initial application of SOP 98-5 should be reported as the cumulative effect of a change in accounting principle. The provisions of SOP 98-5 are effective for fiscal years beginning after December 15, 1998 and will be adopted by the Company during the year ended December 31, 1999. The Company believes the adoption of SOP 98-5 will have no material impact on the financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). The Company is required to adopt SFAS 133 in the year ended December 31, 2000. SFAS 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. To date, the Company has not entered into any derivative financial instruments or hedging activities. Reclassifications Certain reclassifications to prior year financial statements have been made to conform to the current year's presentation. (3) NOTE RECEIVABLE In connection with the Merger Agreement (See Note 14) between the Company and DCI, the Company agreed to fund DCI's working capital requirements through the consummation of the merger and executed an unsecured working capital note with a stated interest rate of 10%. As of December 31, 1998, the Company had loaned DCI $1,387,855 and recorded $49,304 of accrued interest receivable. In addition, the Company paid DCI $540,372 for services rendered in connection with the integration of DCI's CommunityWare(R) with the Company's i2u/WEBBbuilder product offerings, the payment for such services was effected as a reduction in the note receivable and as product development expenses in the accompanying 1998 statement of operations. The Company believes that it is probable that the merger will be consummated. If the merger is not approved by the stockholders, or is otherwise not completed, no assurances can be made that any amounts due from DCI will be collected. It is the Company's intent to continue to fund DCI until the business combination is complete. (4) PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ---------------------------------------------- 1998 1997 ------------------- ------------------- Computer equipment $ 1,238,966 $ 1,082,097 Office furniture and equipment 207,639 131,121 Purchased software 243,492 85,850 Leasehold improvements 66,657 58,410 Assets under construction 163,426 12,525 ------------------- ------------------- 1,920,180 1,370,003 Less accumulated depreciation (741,552) (354,371) ------------------- ------------------- Net property and equipment $ 1,178,628 $ 1,015,632 =================== ===================
Certain office equipment is pledged as collateral for capital leases payable (See Note 6). The Company depreciates computer equipment, office equipment, and software over five years, office furnishings over seven years, and leasehold improvements over the life of the lease. Depreciation expense was $387,181 and $196,720 for the years ended December 31, 1998 and 1997, respectively. F-13 (5) CAPITALIZED SOFTWARE COSTS Capitalized software costs consist of the following:
DECEMBER 31, ---------------------------------------------- 1998 1997 ------------------- ------------------- Capitalized i2u/WEBBbuilder software $ 403,805 $ 124,097 Less accumulated amortization (403,805) (2,068) ------------------- ------------------- Net capitalized software costs $ - $ 122,029 =================== ===================
The Company amortizes the i2u/WEBBbuilder software over its estimated useful life of one year or relative revenues, whichever is greater. Amortization expense was $401,737 and $2,068 for the years ended December 31, 1998 and 1997, respectively. During the fourth quarter of 1998, the Company determined that, based on the increasingly short product life cycle of Internet software, its i2u/WEBBbuilder software product life cycle was much shorter than originally anticipated and, accordingly, the carrying amount was no longer realizable. The Company also determined that the time between technological feasibility and general release has become increasingly short. As of December 31, 1998, the Company had fully amortized all capitalized software costs (See Note 1). The effect of the change in the estimated useful life of the capitalized software costs resulted in the Company recording an additional $354,709 in amortization expense in 1998, or $0.10 per share. (6) CAPITAL LEASES PAYABLE Capital leases payable consist of the following:
DECEMBER 31, ----------------------------------------------- 1998 1997 ------------------- -------------------- Capital lease payable in monthly principal and interest payments of $1,627, for thirty-six months beginning November 1, 1998, effective interest rate of 16%, secured by software $ 47,393 $ - Capital lease payable in monthly principal and interest payments of $624, for twenty-four months beginning May 1, 1998, effective interest rate of 12.3%, secured by computer equipment 9,684 - Capital lease payable in monthly principal and interest payments of $195, for thirty-six months beginning March 10, 1998, effective interest rate of 22%, secured by office equipment 4,016 - Capital lease payable in monthly principal and interest payments of $1,733, for thirty-six months beginning January 15, 1996, effective interest rate of 14.9%, secured by office equipment - 19,203 Capital lease payable in monthly principal and interest payments of $471, for thirty-six months beginning July 28, 1995, effective interest rate of 35.8%, secured by a phone system - 2,261 Capital lease payable in monthly principal and interest payments of $198, for thirty-six months beginning April 26, 1996, effective interest rate of 19.7%, secured by a phone system 588 2,676 -------------- ------------- 61,681 24,140 Less current portion (21,766) (23,555) -------------- ------------- $ 39,915 $ 585 ============== =============
F-14 (6) CAPITAL LEASES PAYABLE (CONTINUED) Future minimum lease payments under capital leases as of December 31, 1998 are as follows: 1999 $ 30,586 2000 24,367 2001 21,663 -------- Total minimum lease payments 76,616 Less amount representing interest (14,935) -------- $ 61,681 ========
(7) STOCKHOLDERS' EQUITY 10% Preferred Stock On December 31, 1997, the Company completed a private placement for gross proceeds of $2,450,000. The Company sold 24.5 units, consisting of an aggregate of 245,000 shares of 10% cumulative, convertible, redeemable preferred stock (the "10% Preferred Stock"), 61,250 shares of common stock, and warrants to purchase 49,000 shares of common stock. Net proceeds to the Company were $2,137,321 after deducting $312,679 in offering costs. On March 12, 1998, the Company sold an additional 2.25 units for gross proceeds of $225,000, consisting of an aggregate of 22,500 shares of 10% Preferred Stock, 5,625 shares of common stock, and warrants to purchase 4,500 shares of common stock. Net proceeds to the Company were $198,236 after deducting $26,764 in offering costs. The 10% Preferred Stock entitles the holder to voting rights of one vote per share and specifies a 10% per annum cumulative, non-compounding dividend based on the stated value of $10 per share. The Company may redeem the 10% Preferred Stock at any time for $10 per share. Each share of 10% Preferred Stock is convertible at any time after September 30, 1998, at the election of the holder thereof, into the number of shares of common stock of the Company equal to $10 divided by the lesser of (i) $10 or (ii) 80% of the average per share closing bid price of the Company's common stock for the five trading days immediately preceding the 10% Preferred Stock conversion date. The beneficial conversion feature (a "Guaranteed Return") of the 10% Preferred Stock is considered to be an additional preferred stock dividend. The computed value of the Guaranteed Return of $434,964 and $56,250 from the December 1997 closing and the March 1998 closing, respectively, is initially recorded as a reduction of the 10% Preferred Stock and an increase to additional paid-in capital. The Guaranteed Return reduction to the 10% Preferred Stock was accreted, as additional dividends, by recording a charge to income available to common stockholders during 1998 from the date of issuance to the earliest date of conversion. The Company will also record annual dividends of $1 per share as a reduction of income available to common stockholders, whether or not declared by the Board of Directors, which totaled $259,822 for the year ended December 31, 1998. The Company has the option to pay the dividends either in cash or in common stock upon conversion. It is the Company's intention to pay the accrued dividends on the 10% Preferred Stock through the issuance of its common stock at the time the 10% Preferred Stock is converted. Consequently, the Company has recorded the dividends payable within the preferred stock balance in the accompanying balance sheets, which totaled $241,172 as of December 31, 1998. F-15 (7) STOCKHOLDERS' EQUITY (CONTINUED) The difference between the stated redemption value of $10 per share and the recorded value in the December 31, 1997 and March 12, 1998 sales, totaling $1,364,295, was accreted as a charge to income available to common stockholders during 1998 and was comprised of the following:
Closings ----------------------------------------------------- March 12, 1998 December 31, 1997 ----------------------- ----------------------- Guaranteed return $ 56,250 $ 434,964 Value of common stock 46,406 398,125 Value of common stock warrants 19,035 147,490 10% Preferred Stock offering costs 18,980 243,045 ----------------------- ----------------------- Total accretion recorded $ 140,671 $ 1,223,624 ======================= =======================
The common stock was valued based on the closing price of the Company's common stock on December 31, 1997 and March 12, 1998 of $6.50 and $8.25, respectively. The 53,500 common stock warrants issued with the 10% Preferred Stock, valued at $166,525, entitle the holder to purchase one share of the Company's common stock for a purchase price of $15 per share at any time during the three-year period commencing on the closing date. The warrants were valued utilizing the Black-Scholes option pricing model using the following assumptions:
Closings ------------------------------------------------------ March 12, 1998 December 31, 1997 ----------------------- ----------------------- Exercise price $15.00 $15.00 Fair market value of common stock on grant date $ 8.25 $ 6.50 Option life 3 years 3 years Volatility rate 98% 98% Risk free rate of return 5.13% 5.13% Dividend rate 0% 0%
During 1998, 22,500 shares of the Company's 10% Preferred Stock, including accrued dividends payable of $18,650, were converted into 58,242 shares of the Company's common stock with conversion prices per share ranging from approximately $3.64 to $5.14 as summarized in the following table:
NUMBER OF SHARES --------------------------------------------- 10% COMMON STOCK PREFERRED COMMON CONVERSION CONVERSION DATE STOCK STOCK PRICE PER SHARE ---------------------- ------------------- ------------------- --------------------- November 4, 1998 10,000 29,321 $ 3.64 November 10, 1998 10,000 23,798 4.49 November 11, 1998 2,500 5,123 5.14 ------------------- ------------------- Total 22,500 58,242 =================== ===================
During January and February of 1999, 160,000 shares of the 10% Preferred Stock were converted into 177,106 shares of the Company's common stock (See Note 15). F-16 (7) STOCKHOLDERS' EQUITY (CONTINUED) 5% Preferred Stock On May 22, 1998, the Company completed a private placement for gross proceeds of $3,000,000. The Company sold 3,000 shares of 5% cumulative, convertible, redeemable preferred stock (the "5% Preferred Stock") and warrants to purchase 50,000 shares of common stock. Net proceeds to the Company were $2,678,750 after deducting $321,250 in offering costs. The 5% Preferred Stock entitles the holder to voting rights equal to the number of shares of common stock into which the shares of the 5% Preferred Stock are convertible. The 5% Preferred Stock specifies a 5% per annum cumulative non-compounding dividend based on the stated value of $1,000 per share. Each share of 5% Preferred Stock is convertible, at the option of the holder thereof, into such number of shares of common stock equal to $1,000, plus the amount of any accrued and unpaid dividends the Company elects to pay in common stock, divided by the lesser of (i) $16.33 or (ii) 86% of the average closing bid price of the Company's common stock for the five trading days immediately preceding the 5% Preferred Stock conversion date. The beneficial conversion feature (a "Guaranteed Return") of the 5% Preferred Stock is considered to be an additional preferred stock dividend. The computed value of the Guaranteed Return of $316,410 is initially recorded as a reduction of the 5% Preferred Stock and an increase to additional paid-in capital. The Guaranteed Return reduction to the 5% Preferred Stock was accreted, as additional dividends, by recording a charge to income available to common stockholders from the date of issuance to the earliest date of conversion. The Company also recorded annual dividends of $50 per share as a reduction of income available to common stockholders, whether or not declared by the Board of Directors, which totaled $59,134 for the year ended December 31, 1998. The difference between the stated redemption value of $1,000 per share and the recorded value on May 22, 1998, totaling $1,345,765, was accreted as a charge to income available to common stockholders during 1998 and was comprised of the following: Guaranteed return $ 316,410 Value of common stock warrants 402,500 5% Preferred Stock offering costs 626,855 ------------------- Total accretion recorded $ 1,345,765 ===================
The 50,000 common stock purchase warrants issued with the 5% Preferred Stock, valued at $402,500, entitle the holder to purchase one share of the Company's common stock for a purchase price of $16.33 per share at any time during the three-year period commencing on May 22, 1998. In addition, the Company also issued 50,000 common stock purchase warrants, valued at $402,500, to the placement agent as offering costs with the same terms. The warrants were valued utilizing the Black-Scholes option pricing model using the following assumptions: Exercise price $ 16.33 Fair market value of common stock on grant date $ 13.50 Option life 3 years Volatility rate 98% Risk free rate of return 5.13% Discount rate 0%
F-17 (7) STOCKHOLDERS' EQUITY (CONTINUED) During 1998, all 3,000 shares of the 5% Preferred Stock, including accrued dividends payable of $59,134, were converted into 627,296 shares of the Company's common stock at conversion prices per share ranging from approximately $3.28 to $8.87 as summarized in the following table:
NUMBER OF SHARES --------------------------------------------- COMMON STOCK 5% PREFERRED COMMON CONVERSION CONVERSION DATE STOCK STOCK PRICE PER SHARE ---------------------- ------------------- ------------------- -------------------- July 30, 1998 500 56,907 $ 8.87 September 16, 1998 250 54,950 4.62 September 25, 1998 325 74,646 4.43 October 30, 1998 75 23,379 3.28 November 3, 1998 100 29,722 3.44 November 5, 1998 500 122,617 4.17 November 10, 1998 1,250 265,075 4.83 ------------ ------------ Total 3,000 627,296 ============ ============
Series A Preferred Stock On November 9, 1998, the Company completed a private placement for gross proceeds of $1,400,000. The Company sold 1,400 shares of Series A cumulative, convertible, redeemable preferred stock (the "Series A Preferred Stock") and warrants to purchase 140,000 shares of common stock. Net proceeds to the Company were $1,287,300 after deducting $112,700 in offering costs. The Series A Preferred Stock entitles the holder to voting rights equal to the number of shares of common stock into which the shares of the Series A Preferred Stock are convertible. The Series A Preferred Stock specifies a 5% per annum cumulative, non-compounding dividend based on the stated value of $1,000 per share. Each share of Series A Preferred Stock is convertible, at the option of the holder thereof, into such number of shares of common stock of the Company equal to $1,000, plus the amount of any accrued and unpaid dividends the Company elects to pay in common stock, divided by the lesser of (i) $5.71 or (ii) 80% of the average closing bid price of the shares of common stock for the lowest five consecutive trading days within the 20 days immediately preceding the Series A Preferred Stock conversion date. The beneficial conversion feature (a "Guaranteed Return") of the Series A Preferred Stock is considered to be an additional preferred stock dividend. The computed value of the Guaranteed Return of $1,368,328 is initially recorded as a reduction of the Series A Preferred Stock and an increase to additional paid- in capital. The Guaranteed Return reduction to the Series A Preferred Stock was accreted, as additional dividends, by recording a charge to income available to common stockholders on the date of issuance. The Company will also record annual dividends of $50 per share as a reduction of income available to common stockholders, whether or not declared by the Board of Directors, which totaled $10,164 for the year ended December 31, 1998. The Company has the option to pay the dividends either in cash or in common stock upon conversion. It is the Company's intention to pay the accrued dividends on the Series A Preferred Stock through the issuance of its common stock at the time the Series A Preferred Stock is converted. Consequently, the Company has recorded the dividends payable within the preferred stock balance in the accompanying balance sheets, which totaled $10,164 as of December 31, 1998. F-18 (7) STOCKHOLDERS' EQUITY (CONTINUED) The difference between the stated redemption value of $1,000 per share and the recorded value on November 9, 1998, totaling $2,106,929 (which includes $706,929 of accretion of preferred stock for the Guaranteed Return in excess of the redemption value), was accreted as a charge to income available to common stockholders during 1998 and was comprised of the following: Guaranteed return $ 1,368,328 Value of common stock warrants 635,600 Series A Preferred Stock offering costs 103,001 ----------- Total accretion recorded $ 2,106,929 ===========
The 140,000 common stock purchase warrants issued in the above private placement entitle the holder to purchase one share of the Company's common stock for a purchase price of $5.71 per share at any time during the five-year period commencing on November 9, 1998. The warrants were valued utilizing the Black- Scholes option pricing model using the following assumptions: Exercise price $ 5.71 Fair market value of common stock on grant date $ 6.03 Option life 5 years Volatility rate 94.7% Risk free rate of return 5.13% Dividend rate 0%
During January 1999, the holder converted all 1,400 shares of the Series A Preferred Stock into 247,366 shares of the Company's common stock and exercised the warrants to purchase 140,000 shares of the Company's common stock, resulting in proceeds to the Company of $799,400 (See Note 15). In connection with services provided with the issuance of the Series A Preferred Stock, the Company also issued to the placement agent, warrants to purchase 20,000 shares of the Company's common stock for a purchase price of $5.71 per share. The warrants can be exercised at any time during the three- year period commencing November 1998. The Company recorded $75,948 in offering costs related to the warrants, which were valued utilizing the Black-Scholes option pricing model using the following assumptions: Exercise price $ 5.71 Fair market value of common stock on grant date $ 6.03 Option life 3 years Volatility rate 94.7% Risk free rate of return 5.13% Dividend rate 0%
Liquidation Preference of Preferred Stock The Company's 10% Preferred Stock and Series A Preferred Stock have equal preference in involuntary liquidation before any distribution to the holders of the Company's common stock as follows: 10% Preferred Stock - Holders of the 10% Preferred Stock are entitled to receive from the Company's remaining net assets (after payment of the Company's debts and other liabilities) the amount of $10 per share of 10% Preferred Stock in cash plus payment of all accrued but unpaid cumulative dividends. Holders of the 10% Preferred Stock are not entitled to receive any other payments if the Company liquidates, dissolves or winds-up its business. Series A Preferred Stock - Holders of the Series A Preferred Stock are entitled to receive from the Company's remaining net assets (after payment of the Company's debts and other liabilities) the amount of $1,000 per share of Series A Preferred Stock in cash plus payment of all accrued but unpaid cumulative dividends. F-19 (7) STOCKHOLDERS' EQUITY (CONTINUED) Thereafter, the holders of the Series A Preferred Stock are entitled to share in any distributions made to the holders of the Company's common stock as if each share of Series A Preferred Stock was converted (as defined) into the number of shares of common stock into which it is convertible immediately prior to the close of business on the business day fixed for such distribution. During January 1999, the Company also sold 3,000 shares of its Series C Preferred Stock (See Note 15), which also has preference in involuntary liquidation before any distribution to the holders of the Company's common stock as follows: Series C Preferred Stock - Holders of the Series C Preferred Stock are entitled to receive from the Company's remaining net assets (after payment of the Company's debts and other liabilities) the amount of $1,000 per share of Series C Preferred Stock in cash plus payment of all accrued but unpaid cumulative dividends. The liquidation preference on the Series C Preferred Stock is equal in preference to the liquidation preference on the 10% Preferred Stock and the Series A Preferred Stock. Thereafter, the holders of the Series C Preferred Stock are entitled to share in any distributions made to the holders of the Company's common stock as if each share of Series C Preferred Stock was converted (as defined) into the number of shares of common stock into which it is convertible immediately prior to the close of business on the business day fixed for such distribution. Common Stock On November 5, 1998, the Company executed a one-year consulting agreement with a financial consulting firm to enhance Company activities in corporate finance, mergers and acquisitions, and public and investor relations. If the consulting firm introduces the Company to a lender or equity purchaser, the Company is required to pay the consultant a cash fee at the time of closing. In connection with the agreement, the Company issued 350,000 restricted shares of its common stock for a commencement bonus valued at $1,925,000, which was calculated based on $5.50 per share, the closing price of the Company's common stock on November 5, 1998. The shares are not refundable to the Company, even if the agreement is terminated by either party. In February 1998, the Company entered into two consecutive six month agreements with an individual to provide the Company consulting services in his capacity as the Company's Chief Operating Officer. Pursuant to the terms of the agreement, the consultant was paid $30,000 per month, each month, which was comprised of $15,000 in cash payments and 2,000 shares of the Company's common stock. As of December 31, 1998, the Company had issued 24,000 shares of common stock under this agreement. Stock Option Plan During 1995, the Company adopted the 1995 Stock Option Plan (the "Plan"). Under the terms of the Plan, the Company may grant options for up to 2,800,000 shares, at exercise prices equal to the stock's fair market value on the date of grant. The options vest over various terms with a maximum vesting period of 42 months and expire after a maximum of ten years. As of December 31, 1998, the Company had options outstanding for 1,758,665 shares. A summary of the status of the Plan at December 31, 1998 and 1997 and changes during the years then ended is presented in the tables and narrative below:
1998 1997 ----------------------------------------------- ----------------------------------------- Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price ------------------- ------------------- ----------------- ---------------------- Outstanding at beginning of year 1,002,910 $ 2.26 719,258 $ 1.87 Granted 1,416,350 8.09 924,200 3.24 Exercised (240,331) 1.89 (86,249) 0.72 Forfeited and canceled (420,264) 6.76 (554,299) 3.62 --------- --------- Outstanding at end of year 1,758,665 $ 5.92 1,002,910 $ 2.26 ========= ======= ========= ======= Exercisable at end of year 346,401 $ 2.50 246,998 $ 1.18 ========= ======= ========= ======= Weighted average fair value of options granted during year $ 5.34 $ 1.64 ========= =========
F-20 (7) STOCKHOLDERS' EQUITY (CONTINUED) The status of total stock options outstanding and exercisable under the Plan as of December 31, 1998 is as follows:
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE ------------------------------------------- ------------------------------------ Weighted Weighted Weighted Average Weighted Average Range of Average Remaining Average Remaining Exercise Number of Exercise Contractual Number of Exercise Contractual Prices Shares Price Life (Years) Shares Price Life (Years) - ----------------- ------------ --------- ------------- --------- -------- ----------- $0.50 - 1.25 149,000 $ 0.63 0.6 149,000 $ 0.63 0.6 1.26 - 3.15 281,998 1.71 4.5 95,667 1.85 4.2 3.16 - 7.90 837,817 6.79 6.4 101,734 5.86 5.8 7.91 - 8.50 489,850 8.45 6.1 - - - ---------- ------- $0.50 - 8.50 1,758,665 $ 5.92 5.5 346,401 $ 2.50 3.1 ========== ====== ======= ======= ======= =======
Pro Forma Fair Value Disclosures The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1998 and 1997, respectively: risk-free interest rate of 5.01 and 6.21 percent, no expected dividend yields, expected lives of 3.0 years, and expected volatility ranging from 104 and 98 percent. Fair value computations are highly sensitive to the volatility factor assumed; the greater the volatility, the higher the computed fair value of options granted. Cumulative compensation costs recognized in pro forma net loss available to common stockholders with respect to options that are forfeited prior to vesting are adjusted as a reduction of pro forma compensation expense in the period of forfeiture. Had compensation cost for options granted been determined consistent with SFAS 123, the Company's net loss available to common stockholders and net loss available to common stockholders per common and common equivalent share would have been increased to the following pro forma amounts:
1998 1997 ------------------------------------------- ------------------------------------------ As Reported Pro Forma As Reported Pro Forma ------------------- ------------------ ------------------- ----------------- Net loss available to common stockholders $ (15,762,372) $ (17,124,629) $ (3,375,279) $ (3,730,827) ============== ============== =============== ============= Net loss available to common stockholders per share-basic and diluted $ (4.35) $ (4.73) $ (1.05) $ (1.17) ============== ============== =============== =============
Because the fair value method of accounting required by SFAS 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. F-21 (7) STOCKHOLDERS' EQUITY (CONTINUED) Common Stock Options/Warrants During 1998, the Company granted stock options under the Plan to several consultants in connection with agreements to provide the Company with services related to developing financing sources and strategic alliances as well as investor relations. The terms of the agreements range from approximately six months to three years. The Company issued in the aggregate 89,000 shares of its common stock at exercise prices ranging from $5.50 to $8.50 and valued these options utilizing the Black-Scholes option pricing model using the following assumptions: Exercise price $5.50 to $8.50 Fair market value of common stock on grant date $5.50 to $11.00 Option life 2 to 7 years Volatility rate 95% to 98% Risk free rate of return 4.52% to 5.81% Dividend rate 0% Vesting period Date of grant to 3 years
The Company recorded expense for these options totaling $160,328 for the year ended December 31, 1998, and will record additional aggregate expense of approximately $306,000 in years 1999 through 2001. On November 24, 1998, in connection with the proposed merger with DCI (See Note 14), the Company granted stock options to the employees of DCI under the Plan to purchase an aggregate of 83,000 shares of the Company's common stock at an exercise price of $7.63 per share. The options vest over a three-year period and can be exercised over a seven-year period. The Company valued these options utilizing the Black-Scholes option pricing model using the following assumptions: Exercise price $ 7.63 Fair market value of common stock on grant date $ 7.63 Option life 3 years Volatility rate 98% Risk free rate of return 5.13% Dividend rate 0%
The Company recorded expense for these options totaling $13,549 for the year ended December 31, 1998 and expects to record additional expense of approximately $135,000 in 1999 and 2000, and approximately $120,000 in 2001. In December 1998, the Company granted a warrant to a single customer to purchase 70,162 shares of the Company's common stock at an exercise price of $8.77 per share, which vest one year from the date of the executed contract and are exercisable for two years. The Company recorded deferred customer acquisition costs of $560,824 for the value of these warrants, which was expensed during 1998. The Company's policy with regard to customer acquisition costs is to capitalize costs to acquire customers if the contract contains guarantees of minimum revenue which supports the amount paid. Because the agreement does not contain minimum guaranteed revenue and due to the start-up nature of this service and other uncertainties regarding this arrangement, the Company has expensed the amount during 1998. The Company valued these options utilizing the Black-Scholes option pricing model using the following assumptions: Exercise price $ 8.77 Fair market value of common stock on grant date $ 11.69 Option life 3 years Volatility rate 98% Risk free rate of return 4.52% Dividend rate 0%
In September 1995, in connection with a consulting agreement entered into by the Company with Creative Business Strategies ("CBS") (See Note 12), the Company granted stock options under the Plan to purchase 100,000 shares of the Company's common stock at an exercise price of $.50 per share, which were to vest 18 months after the date of the agreement and were exercisable for a period of 5 years. The Company repurchased all the options in 1997 for $75,000, their intrinsic value on the date of purchase. F-22 (7) STOCKHOLDERS' EQUITY (CONTINUED) In December 1995, in connection with a business relationship entered into among Charlie Spickert, Medical Education Collaborative ("MEC") and the Company (See Note 12), the Company granted stock options under the Plan to purchase 50,000 shares of the Company's common stock at an exercise price of $.50 per share, which are fully vested. At the issuance date, the Company determined the stock options had a nominal value. During 1998, 11,000 options were exercised and as of December 31, 1998, 39,000 options were outstanding. During December 1995, in connection with the acquisition of the equipment described in Note 11, the Company issued warrants to purchase 25,000 shares of the Company's common stock at an exercise price of $.50 per share, which vested immediately and are exercisable for 5 years. On the date of issuance, the Company determined the warrants had a nominal value. As of December 31, 1997, 15,000 warrants were outstanding. During 1998, the 15,000 warrants were exercised and as of December 31, 1998, no warrants remain outstanding. In connection with a private placement of the Company's common stock in March 1996, the Company issued warrants to purchase 18,450 shares of the Company's common stock at an exercise price of $2.25 per share, which vested immediately and are exercisable for 5 years. On the date of issuance, the Company determined the warrants had a nominal value. During 1998 and 1997, 3,600 and 450 warrants were exercised, respectively, and as of December 31, 1998, 14,400 warrants were outstanding. In connection with the initial public offering in May 1996, the Company issued 1,265,000 units (including 165,000 units under the over-allotment), each unit consisting of one share of common stock and one common stock purchase warrant. Two of such warrants entitle the holders to purchase one share of common stock at a price of $9.00 per share during the three-year period commencing May 1996. Commencing one year from the date of the initial public offering, the Company has the right, at its discretion, to call all of the warrants for redemption on 45 days prior written notice at a redemption price of $.05 per warrant if: (i) the closing bid price of the Company's common stock exceeds the exercise price of the warrants ($9.00) by at least 50% during a period of at least 20 of the 30 trading days immediately preceding the notice of redemption; (ii) the Company has in effect a current registration statement covering the common stock issuable upon exercise of the warrants; and (iii) the expiration of the 45 day notice period is within the term of the warrants. If the Company elects to exercise its redemption right, holders of warrants may either exercise their warrants, or their warrants will be redeemed. As of December 31, 1998, 1,265,000 of the warrants remain outstanding. In connection with the initial public offering in May 1996, the Company issued to the underwriters an option to purchase 110,000 units (consisting of one share of common stock and one warrant, of which two warrants entitle the holder thereof to purchase one share of common stock at a price of $9.00 per share) (the "Representative's Securities"). Beginning May 1997, for a period of four years, the Representative's Securities are exercisable at a price of $8.10 per unit. The warrants included in the Representative's Securities are exercisable consistent with those issued in the initial public offering. As of December 31, 1998, 3,300 units had been exercised. F-23 (7) STOCKHOLDERS' EQUITY (CONTINUED) Summary of Outstanding Warrants and Options for Common Stock Issued Outside the Plan
December 31, 1998 December 31, 1997 ------------------------------------ ------------------------------------ Underwriter Underwriter Options and Common Options and Common Conversion Warrants Share Warrants Share Description Ratio Outstanding Equivalents Outstanding Equivalents - --------------------------------- ----------------- ---------------- --------------- ---------------- --------------- Common stock warrants issued in IPO 2:1 1,265,000 632,500 1,265,000 632,500 Option to purchase common stock issued to underwriter 1:1 106,700 106,700 110,000 110,000 in IPO Option to purchase common stock warrants issued to underwriter in IPO 2:1 106,700 53,350 110,000 55,000 Common stock warrants issued in common stock private placement 1:1 14,400 14,400 18,000 18,000 Common stock warrants issued in connection with 10% Preferred Stock 1:1 53,500 53,500 49,000 49,000 Common stock warrants issued in connection with equipment financing 1:1 - - 15,000 15,000 Common stock warrants issued in connection with 5% Preferred Stock 1:1 100,000 100,000 - - Common stock warrants issued in connection with Series A Preferred Stock (See Note 15) 1:1 140,000 140,000 - - Common stock warrants issued to placement agent in Series A Preferred Stock 1:1 20,000 20,000 - - Common stock warrants issued to customer 1:1 70,162 70,162 - - ---------------- --------------- ---------------- --------------- Total 1,876,462 1,190,612 1,567,000 879,500 ================ =============== ================ ===============
(8) STOCK SUBSCRIPTIONS RECEIVABLE During 1996, the Company entered into two stock subscription agreements. The first agreement stipulated that the purchase price of certain shares will be paid through the fair market value of services rendered to the Company. The $36,683 of required services was completed as of December 31, 1996. The second agreement required the payment of $20,000 cash on or before January 31, 1996. The payment was received prior to the expiration date. In 1997, the remaining services of $586 were completed. F-24 (9) MAJOR CUSTOMERS A substantial portion of the Company's sales is derived from a limited number of customers. The Company's sales to customers in excess of 10% of net sales for the years ended December 31, 1998 and 1997, are as follows:
1998 1997 ----------------- ---------------- Customer A $440,109 $ - Customer B 277,301 738,460 Customer C 227,098 141,498 Customer D 185,768 47,092 Customer E 28,033 382,441
The Company's accounts receivable balances from customers in excess of 10% of the accounts receivable and accrued revenue receivables balance for the years ended December 31, 1998 and 1997, are as follows:
1998 1997 ---------------- ---------------- Customer A $72,821 $ - Customer B - 386,233 Customer C 18,350 4,436 Customer D 22,925 2,052
Customer E operates in Buenos Aries, Argentina; however, all 1998 revenue transactions with this customer were denominated in U.S. Dollars. (10) INCOME TAXES At December 31, 1998, for income tax return purposes, the Company has approximately $16,900,000 of net operating loss carryforwards that expire at various dates through the year 2013. The net operating loss for tax purposes differs from that for financial reporting purposes due to differences in reporting certain transactions for income tax and financial reporting purposes. The Tax Reform Act of 1986 contains provisions which may limit the net operating loss carryforwards available to be used in any given year if certain events occur, including significant changes in ownership interests. No provision or benefit has been recorded for any period presented due to the Company's history of net losses. The Company has determined that deferred tax assets resulting from the net operating loss carryforwards, as of December 31, 1998 and 1997, respectively, did not satisfy the realization criteria set forth in SFAS No. 109, "Accounting for Income Taxes." Accordingly, a valuation allowance was recorded against the entire deferred tax asset. No other significant deferred tax assets or liabilities existed at December 31, 1998 or 1997. The difference between the expected statutory rate and the effective rate is primarily a result of the increase in the valuation allowance. (11) RELATED PARTY TRANSACTIONS Customer A director of the Company is also the general partner and chief executive officer for one of the Company's i2u/WEBBbuilder broadband customers. The Company entered into a contract during August 1997, as amended, whereby the Company provides its i2u/WEBBbuilder products and services to the customer for several markets. The expiration dates of the contract and related amendments range from August 1999 to July 2000. The Company earns revenue from the sale of computer hardware and third party software, engineering fees, equipment installation fees, and royalties from subscriber Internet access and content fees. The Company recognized revenue totaling $185,768 and $47,092 for the years ended December 31, 1998 and 1997, respectively. Included in accounts receivable at December 31, 1998 and 1997 are amounts due from the customer totaling $22,925 and $2,052, respectively. Capital Lease-Related Party To provide working capital for the Company, shareholders of the Company formed a partnership that purchased the equipment from the Company for cash and then leased the equipment back through a capital lease (See Note 6). During 1998, the Company paid the balance of the capital lease totaling $19,203, which was outstanding at December 31, 1997. F-25 (11) RELATED PARTY TRANSACTIONS (CONTINUED) Office Lease Prior to July 7, 1998, the Company leased its principal offices in a building managed by an affiliate, in that an officer of the Company is related to the vice president of the management company. On July 7, 1998, the affiliated management sold the building to an unrelated third party. Total rent expense paid to the affiliated management company totaled $95,595 and $160,675 in 1998 and 1997, respectively. (12) COMMITMENTS AND CONTINGENCIES Minimum future annual lease payments as of December 31, 1998, including amounts committed to related parties, are as follows: 1999 $377,438 2000 113,600 2001 35,541 ----------------- $526,579 =================
In connection with an operating lease entered into during 1996, the Company made a security deposit of $222,693, which will be returned to the Company during the lease term as payments are made. The Company has $100,663 remaining on deposit as of December 31, 1998, which is included in short-term deposits in the accompanying balance sheets. The total lease expense for the years ended December 31, 1998 and 1997, was $363,709 and $339,456, respectively. On December 31, 1998, the Company entered into a twelve month facilities lease agreement to house and operate its computer equipment. The lease commences March 31, 1999 and specifies monthly lease payments of $7,451. The Company entered into a business relationship on December 7, 1995 with Charlie Spickert and MEC. Mr. Spickert and MEC will provide the knowledge and reputation to penetrate the medical training and services market. The Company will provide the needed resources and expertise in Internet services. In addition to receiving a percentage of revenues from the results of the joint efforts of the parties, Mr. Spickert was granted 50,000 common stock options (See Note 7). To date, revenue from these services has not been significant. As part of the joint development and marketing arrangement with MEC and Mr. Spickert, the Company has agreed to perform Web site development services as a vendor to MEC. In September 1995, the Company entered into a consulting agreement with CBS wherein CBS assisted the Company in developing its business plan, advises the Company regarding business opportunities and financings and promotes the Company and its services. For these services, CBS was to be paid a fee of $2,500 a month, was granted a stock option to purchase 100,000 shares of the Company's common stock (See Note 7), and was to be paid a transaction-based fee for business combinations or certain other transactions completed by the Company that were initiated by CBS. Effective February 1, 1996, the agreement with CBS was amended to provide for a monthly fee of $4,000 for a period of 36 months and to eliminate any transaction-based compensation. In June 1997, the Company repurchased the 100,000 stock options from CBS for $75,000 (See Note 7) and prepaid $74,663 for the consulting agreement. The Company amortized the prepayment over 20 months and recorded expense of $48,531 and $26,132 for the years ended December 31, 1998 and 1997, respectively. F-26 (13) BUSINESS SEGMENT INFORMATION The Company supports products and services that enable individuals to create and manage their own Internet Web presence, create public or private online communities and manage their own interactions. The Company's i2u/WEBBbuilder foundation software provides users with the ability to create their own home pages using simple, on-screen templates, as well as integrated online communications, e-commerce and publishing tools. The Company has two business segments: Community and Web Services and Financial Services. Each of these is a business segment, with its respective financial performance detailed herein. Community and Web Services consists of customized community and communication portals or start pages for broadband (high bandwidth or high data transmission capabilities) operators who provide Internet access and products and services which enable businesses, associations, and government institutions to create a "virtual office" on the Internet. Financial Services consists of an online banking solution, marketed to financial institutions having less than $500 million in assets, using a service bureau approach to e-banking, which enables them to provide smaller community banks and credit unions with many of the capabilities and services available to the larger banks without the cost associated with the development of bank specific systems. Custom Web Page Development consists of custom Web site development, maintenance and hosting activities for enterprises. During the fourth quarter of 1997, this business was incorporated into other segments of the Company's operations or transitioned to third parties. Corporate Activities consists of general corporate expenses, including capitalized costs that are not allocated to specific business segments. Assets of corporate activities include unallocated cash, receivables, prepaid expenses, note receivable, deferred acquisition costs, deposits and corporate use of property and equipment.
NET SALES ----------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------- 1998 1997 ------------------- ------------------- Community and Web services $1,362,282 $1,671,365 Financial services 227,098 29,818 Custom Web page development - 1,090,373 ------------------- ------------------- Total net sales $1,589,380 $2,791,556 =================== ===================
NET LOSS ----------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------- 1998 1997 ------------------- ------------------- Community and Web services $ (4,578,160) $ (987,436) Financial services (309,523) (38,639) Custom Web page development - (1,121,178) Corporate activities (5,728,580) (1,228,026) ------------------- ------------------- Net loss $(10,616,263) $(3,375,279) =================== ===================
F-27 (13) BUSINESS SEGMENT INFORMATION (CONTINUED)
ASSETS ----------------------------------------------------------------------------------------- DECEMBER 31, --------------------------------------------- 1998 1997 ------------------- ------------------- Community and Web services $ 696,219 $1,253,364 Financial services 416,071 493,266 Custom Web page development - 233,117 Corporate activities 2,272,986 4,346,744 ------------------- ------------------- Total $3,385,276 $6,326,491 =================== ===================
PROPERTY AND EQUIPMENT ----------------------------------------------------------------------------------------- DECEMBER 31, --------------------------------------------- 1998 1997 ------------------- ------------------- Community and Web services $ 516,918 $ 181,314 Financial services 397,721 422,315 Custom Web page development - - Corporate activities 263,989 412,003 ------------------- ------------------- Total $1,178,628 $1,015,632 =================== ===================
DEPRECIATION AND AMORTIZATION ----------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------- 1998 1997 ------------------- ------------------- Community and Web services $ 546,824 $ 63,405 Financial services 140,953 35,193 Custom Web page development - 39,694 Corporate activities 103,378 60,496 ------------------- ------------------- Total $ 791,155 $ 198,788 =================== ===================
PROPERTY AND EQUIPMENT ADDITIONS ----------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------- 1998 1997 ------------------- ------------------- Community and Web services $ 221,672 $ 181,314 Financial services 124,652 422,315 Custom Web page development - 66,010 Corporate activities 135,103 57,455 ------------------- ------------------- Total $ 481,427 $ 727,094 =================== ===================
F-28 (14) PROPOSED BUSINESS COMBINATION On March 19, 1998, the Company entered into an Agreement and Plan of Merger with Durand Acquisition Corporation (a wholly owned subsidiary of the Company) and Durand Communications, Inc. ("DCI"). The Merger Agreement contemplates that the Company will acquire 100% of the outstanding common stock of DCI and in consideration therefore (i) will issue approximately 956,000 shares of the Company's common stock to the stockholders of DCI, (ii) reserve approximately 240,000 shares of common stock for issuance upon exercise of outstanding options and warrants of the Company that will be issued in connection with the DCI Merger, and will reserve approximately 40,000 shares of common stock for issuance upon conversion of convertible securities of DCI that will be assumed by the Company in connection with the DCI Merger, and (iii) will assume approximately $2,300,000 of liabilities of DCI. Located in Santa Barbara, California, DCI is a privately held company that develops and markets Internet "community" building tools and services, training in the use of these tools and services and on-line service for hosting these communities. DCI reported revenues of $813,522 (unaudited), of which $540,371 (unaudited) were sales to the Company, and incurred a net loss of $(1,564,160) (unaudited) for the twelve months ended December 31, 1998. For the twelve months ended December 31, 1997, DCI and an acquired company reported net sales of $740,739 (unaudited) and incurred net losses of $(2,867,973) (unaudited). At December 31, 1998, DCI had an accumulated deficit of (8,397,347) (unaudited). (15) SUBSEQUENT EVENTS Series C Preferred Stock On January 11, 1999, the Company completed a private placement for gross proceeds of $3,000,000. The Company sold 3,000 shares of Series C cumulative, convertible, redeemable preferred stock (the "Series C Preferred Stock"). Net proceeds to the Company were approximately $2,755,000 after deducting approximately $245,000 in offering costs. The Series C Preferred Stock entitles the holder to voting rights equal to the number of shares of common stock into which the shares of the Series C Preferred Stock are convertible. The Series C Preferred Stock specifies a 4% per annum cumulative, non-compounding dividend based on the stated value of $1,000 per share. The Company may redeem the Series C Preferred Stock at any time at a redemption price per share equal to $1,200 plus any accrued but unpaid dividends plus a warrant to purchase a number of shares equal to each holder of Series C Preferred Stock pro-rata allocation of 100,000 shares (based on the number of shares of Series C Preferred Stock held by such holder in relation to the total authorized shares of Series C Preferred Stock). Such warrant has a term of three years from the date of issuance and a per share exercise price equal to the applicable Maximum Conversion Price (as defined) for the Series C Preferred Stock being redeemed. In addition, the Company may redeem the Series C Preferred Stock upon the receipt of a notice of conversion with respect to the Series C Preferred Stock for which the Conversion Price (as defined) is less than $5.40 per share for a per share price equal to the product of (i) the number of shares of common stock otherwise issuable upon conversion of such shares of Series C Preferred Stock on the date of conversion and (ii) the closing bid price of common stock on the date of conversion. Each share of Series C Preferred Stock is convertible, at the option of the holder, at any time after February 1, 1999, into the number of shares of common stock equal to $1,000 divided by the lesser of (i) 140% of the closing bid price of the common stock on the date of the issuance of the Series C Preferred Stock being converted (initially $20.65), or, if less and if the conversion is occurring at least 120 days after the issuance of the Series C Preferred Stock being converted, 100% of the closing bid price of the Company's common stock on the trading day closest to the date that is 120 days after the Series C Preferred Stock that is being converted was issued or (ii) the average of the five lowest closing bid prices of common stock during the 44 consecutive trading days immediately preceding the conversion of the Series C Preferred Stock conversion date. In addition, the Company may require the conversion of the Series C Preferred Stock at any time during the 20 day period immediately following 20 consecutive trading days during which the closing bid price of common stock is not less than 200% of the Maximum Conversion Price of the Series C Preferred Stock being converted. The Series C Preferred Stock must be converted on the date which is five years after the date on which the Series C Preferred Stock being converted was issued. F-29 (15) SUBSEQUENT EVENTS (CONTINUED) The beneficial conversion feature (a "Guaranteed Return") of the Series C Preferred Stock is considered to be an additional preferred stock dividend. The computed value of the Guaranteed Return of $3,914,063 is initially recorded as a reduction of the Series C Preferred Stock and an increase to additional paid-in capital. The Guaranteed Return reduction to preferred stock will be accreted, as additional dividends, by recording a charge to income available to common stockholders from the date of issuance to the earliest date of conversion. The Company will also record annual dividends of $40 per share as a reduction of income available to common stockholders, whether or not declared by the Board of Directors. The difference between the stated redemption value of $1,000 per share and the recorded value on January 11, 1999, totaling $4,158,563 (which includes $1,158,563 of accretion of preferred stock for the Guaranteed Return in excess of the redemption value), will be accreted as a charge to income available to common stockholders during the first quarter of 1999 and is comprised of the following: Guaranteed return $3,914,063 Series C Preferred Stock offering costs 244,500 -------------- Total accretion recorded $4,158,563 ==============
In addition, the Company also issued a warrant that expires June 30, 1999, which entitles the holder to purchase, at a price of $1,000 per share, up to 2,000 shares of the Company's Series C Preferred Stock. This warrant also grants the Company the right to require the holder to exercise such warrants on or before June 30, 1999. During February 1999, the investor converted 2,500 shares of the Series C Preferred Stock, including accrued dividends payable of $9,149, into 232,564 shares of the Company's common stock at a conversion price per share ranging from approximately $10.74 to $11.00 as summarized in the following table:
NUMBER OF SHARES --------------------------------------------- SERIES C COMMON STOCK PREFERRED COMMON CONVERSION CONVERSION DATE STOCK STOCK PRICE PER SHARE ---------------------- ------------------- ------------------- -------------------- February 10, 1999 1,500 140,157 $10.74 February 11, 1999 500 46,724 10.74 February 26, 1999 500 45,683 11.00 ------------------- ------------------- Total 2,500 232,564 =================== ===================
Conversion of Series A Preferred Stock and Exercise of Common Stock Warrant On January 13, 1999, all 1,400 outstanding shares of the Series A Preferred Stock, including accrued dividends payable of $12,465, were converted into 247,366 shares of the Company's common stock at a conversion price per share of $5.71. In connection with the issuance of the Series A Preferred Stock (See Note 7), the Company issued a warrant to the investor to purchase 140,000 shares of the Company's common stock for a purchase price of $5.71 per share. During January 1999, the investor exercised the warrant to purchase 140,000 shares of the Company's common stock, whereby proceeds to the Company totaled $799,400. F-30 (15) SUBSEQUENT EVENTS (CONTINUED) Conversion of 10% Preferred Stock During January and February 1999, 160,000 shares of the 10% Preferred Stock, including accrued dividends payable of $165,093, were converted into 177,106 shares of the Company's common stock at conversion prices ranging from $9.46 to $10.00 as summarized in the following table:
NUMBER OF SHARES --------------------------------------------- 10% COMMON STOCK PREFERRED COMMON CONVERSION CONVERSION DATE STOCK STOCK PRICE PER SHARE ---------------------- ------------------- ------------------- --------------------- January 5, 1999 10,000 11,590 $ 9.46 January 7, 1999 10,000 11,039 9.98 January 14, 1999 5,000 5,422 10.00 January 15, 1999 60,000 66,248 10.00 January 19, 1999 10,000 10,858 10.00 January 20, 1999 25,000 27,636 10.00 January 28, 1999 10,000 11,077 10.00 February 2, 1999 20,000 22,083 10.00 February 25, 1999 10,000 11,153 10.00 ------------------- ------------------- Total 160,000 177,106 =================== ===================
Capital Leases In January 1999, the Company entered into a capital lease for e-commerce software with a total purchase price of $35,000. Under the terms of the lease, the Company will make 35 monthly principal and interest payments of $1,201. Total lease payments, including interest, will be $42,018. Note Receivable During January and February 1999, the Company advanced DCI an additional $162,580 for working capital purposes under terms pursuant to the working capital note (See Note 3). It is the Company's intent to continue to fund DCI until the business combination is complete. Business Acquisition On March 10, 1999, the Company acquired a controlling interest in a newly formed company, NetIgnite 2, LLC ("NetIgnite"). NetIgnite is a development stage company which the Company formed with a predecessor company by the name of NetIgnite, Inc. ("NI"), the sole shareholder and founder of which was Perry Evans, the founder and past President of MapQuest.com. In connection with the formation of NetIgnite, NI contributed all of its rights to certain technology to NetIgnite and the Company agreed to provide $1,500,000 of funding which it is believed will be required to implement NetIgnite's business plan during the next 12 to 18 months. The Company is entitled to 99.5% of NetIgnite's operating income and approximately 60% of any proceeds upon the sale of NetIgnite. NI is entitled to .5% of NetIgnite's operating income and approximately 40% of any proceeds upon the sale of NetIgnite. The Company has entered into a Buy-Sell Agreement with NI pursuant to which either the Company of NI could, subject to certain conditions, acquire all of the other's interest in NetIgnite. In the event that the Company sold its interest to NetIgnite in accordance with the Buy-Sell Agreement, the Company would be entitled to retain a limited non-exclusive license to utilize the technology developed by NetIgnite. Mr. Evans has entered into an Employment Agreement with the Company and NetIgnite which has an initial term of two years, provides for a minimum annual salary of $190,000 and the granting of stock options to purchase 80,000 shares of common stock at an exercise price of $12.25, one-third of such option shares to vest annually during the next three years subject to Mr. Evans' continuous employment by the Company. F-31 (16) UNAUDITED QUARTERLY INFORMATION The Company has revised certain factors used in determining the amounts to be accreted related to issuances of its 10% and 5% Preferred Stock as well as the period for the accretion of the 5% Preferred Stock. These revisions and their impact on unaudited quarterly amounts are presented below.
Three Months Ended March 31, -------------------------- As Reported As Revised (Unaudited) (Unaudited) ------------- ------------ Net sales: Service sales $ 107,572 $ 107,572 Hardware and software sales 619,667 619,667 ------------- ------------ 727,239 727,239 ------------- ------------ Cost of sales: Cost of services 88,519 88,519 Cost of hardware and software 473,034 473,034 ------------- ------------ 561,553 561,553 ------------- ------------ Gross margin 165,686 165,686 ------------- ------------ Operating expenses: Sales and marketing expenses 514,315 514,315 Product development expenses 222,368 222,368 General and administrative expenses 851,474 851,474 Depreciation and amortization 95,377 95,377 ------------- ------------ 1,683,534 1,683,534 ------------- ------------ Loss from operations (1,517,848) (1,517,848) Interest income, net 29,139 29,139 ------------- ------------ Net loss (1,488,709) (1,488,709) Preferred stock dividends 62,399 62,399 Accretion of preferred stock to redemption value 145,334 418,696(a) ------------- ------------ Net loss available to common stockholders $(1,696,442) $(1,969,804) ============= ============ Loss per share, basic and diluted $ (0.51) $ (0.59) ============= ============ Weighted average shares outstanding 3,335,687 3,335,687 ============= ============
(a) Increase in accretion of preferred stock to redemption value is due to the revision of discounts applied to common stock and common stock warrants issued in connection with the preferred stock private placements. F-32
(16) UNAUDITED QUARTERLY INFORMATION (Continued) Three Months Ended Six Months Ended June 30, June 30, - -------------------------------------------------------------- ------------------------- As Reported As Revised As Reported As Revised (Unaudited) (Unaudited) (Unaudited) (Unaudited) ----------- ----------- ----------- ----------- Net sales: Service sales $ 90,820 $ 90,820 $ 198,392 $ 198,392 Hardware and software 209,988 209,988 829,655 829,655 ----------- ----------- ----------- ----------- 300,808 300,808 1,028,047 1,028,047 ----------- ----------- ----------- ----------- Cost of sales: Cost of services 58,919 58,919 147,438 147,438 Cost of hardware and software 207,901 207,901 680,935 680,935 ----------- ----------- ----------- ----------- 266,820 266,820 828,373 828,373 ----------- ----------- ----------- ----------- Gross margin 33,988 33,988 199,674 199,674 ----------- ----------- ----------- ----------- Operating expenses: Sales and marketing expenses 611,451 611,451 1,125,767 1,125,767 Product development expenses 131,202 131,202 353,570 353,570 General and administrative expenses 857,062 857,062 1,708,585 1,708,585 Depreciation and amortization 105,970 105,970 201,347 201,347 ----------- ----------- ----------- ----------- 1,705,685 1,705,685 3,389,269 3,389,269 ----------- ----------- ----------- ----------- Loss from operations (1,671,697) (1,671,697) (3,189,595) (3,189,595) Interest income, net 33,225 33,225 62,414 62,414 ----------- ----------- ----------- ----------- Net loss (1,638,472) (1,638,472) (3,127,181) (3,127,181) Preferred stock dividends 80,585 80,585 142,984 142,984 Accretion of preferred stock to redemption value 848,646 1,818,564 (b) 993,980 2,237,260 (b) ----------- ----------- ----------- ----------- Net loss available to common stockholders $(2,567,703) $(3,537,621) $(4,264,145) $(5,507,425) =========== =========== =========== =========== Loss per share, basic and diluted $ (0.75) $ (1.03) $ (1.26) $ (1.62) =========== =========== =========== =========== Weighted average shares outstanding 3,446,131 3,446,131 3,390,909 3,390,909 =========== =========== =========== ===========
(b) Increase in accretion of preferred stock to redemption value due to the revision of discounts applied to common stock and common stock warrants issued in connection with preferred stock private placements and the revision of the accretion period for the preferred stock. F-33
(16) UNAUDITED QUARTERLY INFORMATION (Continued) Three Months Ended Nine Months Ended September 30, September 30, - -------------------------------------------------------------- ------------------------- As Reported As Revised As Reported As Revised (Unaudited) (Unaudited) (Unaudited) (Unaudited) ----------- ----------- ----------- ----------- Net sales: Service sales $ 120,409 $ 120,409 $ 318,800 $ 318,800 Hardware and software 87,434 87,434 917,090 917,090 ----------- ----------- ----------- ----------- 207,843 207,843 1,235,890 1,235,890 ----------- ----------- ----------- ----------- Cost of sales: Cost of services 103,034 103,034 250,472 250,472 Cost of hardware and software 74,541 74,541 755,476 755,476 ----------- ----------- ----------- ----------- 177,575 177,575 1,005,948 1,005,948 ----------- ----------- ----------- ----------- Gross margin 30,268 30,268 229,942 229,942 ----------- ----------- ----------- ----------- Operating expenses: Sales and marketing expenses 665,616 665,616 1,796,134 1,796,134 Product development expenses 484,017 484,017 837,587 837,587 General and administrative expenses 903,710 903,710 2,607,544 2,607,544 Depreciation and amortization 111,478 111,478 312,825 312,825 ----------- ----------- ----------- ----------- 2,164,821 2,164,821 5,554,090 5,554,090 ----------- ----------- ----------- ----------- Loss from operations (2,134,553) (2,134,553) (5,324,148) (5,324,148) Interest income, net 43,342 43,342 105,756 105,756 ----------- ----------- ----------- ----------- Net loss (2,091,211) (2,091,211) (5,218,392) (5,218,392) Preferred stock dividends 100,635 100,635 243,619 243,619 Accretion of preferred stock to redemption value 1,691,209 472,800 (c) 2,685,189 2,710,060 (c) ----------- ----------- ----------- ----------- Net loss available to common stockholders $(3,883,055) $(2,664,646) $(8,147,200) $(8,172,071) =========== =========== =========== =========== Loss per share, basic and diluted $ (1.09) $ (0.75) $ (2.37) $ (2.38) =========== =========== =========== =========== Weighted average shares outstanding 3,566,951 3,566,951 3,436,922 3,436,922 =========== =========== =========== ===========
(c) Increase in accretion of preferred stock to redemption value due to the revision of discounts applied to common stock and common stock warrants issued in connection with preferred stock private placements and the revision of the accretion period for the preferred stock. F-34 ONLINE SYSTEM SERVICES, INC. INDEX TO EXHIBITS FORM 10-KSB (For Year Ended December 31, 1998)
(a) Listing of Exhibits: 2.1 Agreement and Plan of Merger dated March 19, 1998 among OSS, Durand Acquisition Corporation and Durand Communications, Inc. (3) 3.1 Articles of Incorporation, as amended, of OSS (5) 3.2 Bylaws of OSS (1) 4.1 Specimen form of OSS' Common Stock certificate (2) 4.2 Form of Warrant Agreement dated May 23, 1996 between Corporate Stock Transfer and OSS, including form of Warrant (2) 4.3 Stock Option Plan of 1995 (1) 4.4 Form of Incentive Stock Option Agreement for Stock Option Plan of 1995 (1) 4.5 Form of Nonstatutory Stock Option Agreement for Stock Option Plan of 1995 (1) 4.6 Form of Warrant issued in connection with Sale-Leaseback of Equipment (1) 4.7 Form of Warrant issued in 1996 to private investors (1) 4.8 Specimen of Warrant Certificate--See Exhibit A filed with Exhibit 4.2 4.9 Form of Warrant Agreement issued in 1997 and 1998 to private investors (3) 4.10 Form of Warrant Agreement issued in connection with issuance of Series A Preferred Stock (4) 4.11 Form of Warrant Agreement issued in connection with issuance of Series C Preferred Stock--See Exhibit B filed with Exhibit 10.8 10.1 Equipment Lease Agreement dated December 15, 1995 between OSS and OSS Equipment Leasing General Partnership (1) 10.2 Form of Nondisclosure and Nonsolicitation Agreement between OSS and its employees (2) 10.3 Office Lease for OSS' principal offices (2) 10.4 Long-Term Equipment Sale and Software License Agreement dated October 7, 1997 between OSS and FiberTel TCI2 S.A. (3) 10.5 Agreement dated October 7, 1997 between OSS and Medical Education Collaborative, Inc. (3) 10.6 Form of Change of Control Agreement between OSS and certain employees* 10.7 Securities Purchase Agreement and Exhibits thereto dated January 11, 1999 between OSS and Archer Investors, LLC (6) 10.8 Operating and Member Control Agreement dated March 10, 1999, among NetIgnite2, LLC, OSS and NetIgnite, Inc., Buy-Sell Agreement dated March 10, 1999, among NetIgnite2, LLC, OSS and NetIgnite, Inc. and Employment Agreement dated March 10, 1999, among OSS, NetIgnite2, LLC and Perry Evans* 10.9 Electronic Banking Service Contract dated May 28, 1997 between OSS and Rockwell Federal Credit Union* 10.10 Online Banking Service Agreement dated February 10, 1999 between OSS and CU Cooperative Systems, Inc.* 10.11 Internet/Business Site Development & Host Agreement dated November 12, 1997 between OSS and ReMax International, Inc.* 10.12 Long-Term Equipment Sale and Software License Agreement dated February 16, 1998 between OSS and Boulder Ridge Cable TV Inc. dba Starstream Communications* 10.13 Agreement for the Provision of Internet Services, Equipment, and Software Licenses dated November 26, 1997 between OSS and American Telecasting, Inc.* 10.14 Equipment Sale and Software License Agreement dated August 4, 1997, as amended May 26, 1998, between OSS and Intermedia Partners Southeast* 13 The registrant intends to deliver to its shareholders a copy of 1997 Annual Report on form 10-KSB (without exhibits), in lieu of a separate Annual Report to Shareholders 21 Subsidiaries of Online System Services, Inc. 23.1 Consent of Arthur Andersen LLP* 27 Financial Data Schedule*
- ------------------------ * Filed herewith. (1) Filed with the initial Registration Statement on Form SB-2, filed April 5, 1996, Commission File No. 333-3282-D. (2) Filed with Amendment No. 1 to the Registration Statement on Form SB-2, filed May 3,1996, Commission File No. 333-3282-D. (3) Filed with the Form 10-KSB Annual Report for the year ended December 31, 1997, Commission File No. 0-28462. (4) Filed with the Registration Statement on Form S-3, filed December 22, 1998, Commission File No. 333-69477. (5) Filed with the Registration Statement on Form S-3, filed January 29, 1999, Commission File No. 333-71503. (6) Filed with the Form 8-K Current Report dated January 11, 1999, as amended, Commission File No. 0-28462. EX-10.6 2 FORM OF CHANGE OF CONTROL AGREEMENT EXHIBIT 10.6 ONLINE SYSTEM SERVICES, INC. EMPLOYMENT AGREEMENT AGREEMENT by and between Online System Services, Inc., a Colorado Corporation (the "Company"), and ___________________ (the "Executive"), dated as of the ____ day of __________ 1998. The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the Contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. 2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either (i) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition by the Company, (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iii) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation, joint venture or strategic partner transaction or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then- outstanding shares of common stock and the combined voting power of the then- outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 30% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination, or the combined voting power of the then-outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary of such date (the "Employment Period"). 4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 30 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions, and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. -2- (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than twelve months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash at least equal to the Executive's highest bonus under the Company's incentive plans for the last three full fiscal years prior to the Effective Date (annualized in the event that the Executive was not employed by the Company for the whole of such fiscal year) (the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus . (iii) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. -3- (vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full- time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) Cause. The Company shall terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) The willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from the incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: -4- (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 30 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the higher of (I) the Recent Annual Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), -5- for the most recently completed fiscal year during the Employment Period, if any (such higher amount being referred to as the "Highest Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to the product of (1) three and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus; and C. an amount, if any, equal to the excess of (1) the actuarial equivalent of the benefit under any qualified defined benefit retirement plan maintained by the Company (the "Retirement Plan") (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the Retirement Plan immediately prior to the Effective Date), and any supplemental or excess retirement plan in which the Executive participates (together, the "SERP") which the Executive would receive if the Executive's employment continued for three years after the Date of Termination assuming for this purpose that all accrued benefits are fully vested, and, assuming that the Executive's compensation in each of the three years is that required by Section 4(b)(i) and Section 4(b)(ii), over (2) the actuarial equivalent of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan and the SERP as of the Date of Termination; (ii) for three years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer-provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until three years after the Date of Termination and to have retired on the last day of such period; (iii) the vesting date for all options (including substitute or replacement options or other options granted in connection with any Business Combination) to purchase shares of the Company's common stock which were issued to Executive by the Company or an affiliate of or successor to the Company which would have occurred during the Employment Period but for such earlier termination of employment, shall be accelerated and said Executive shall have the right to exercise such options as so vested at any time during the Employment Period or as provided in accordance with the terms of such options, if longer, provided that the options must, notwithstanding the foregoing, be exercised within the terms of the options. (iv) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in his sole discretion; and (v) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). -6- (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term "Other Benefits" as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum within 30 days of the Date of Termination. 7. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case -7- interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 9(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, would not receive a net after-tax benefit of at least $10,000 (taking into account both income taxes and any Excise Tax) as compared to the net after-tax proceeds to the Executive resulting from an elimination of the Gross-Up Payment and a reduction of the Payments, in the aggregate, to an amount (the "Reduced Amount") such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by an independent certified public accounting firm retained by the Company, which firm may be the Company's independent auditors, or such other certified public accounting firm as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control , the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is required to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, -8- (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or to contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. -9- (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: ________________ ________________ ________________ If to the Company: Online System Services, Inc. 1800 Glenarm Place Denver, CO 80202-3859 Attention: Chairman of the Board of Directors or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communication shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section 1(a) hereof, prior to the Effective Date, the Executive's employment and/or this Agreement may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof. -10- IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day hand year first above written. EXECUTIVE ONLINE SYSTEM SERVICES, INC. ___________________________________ By___________________________________ Its_______________________ -11- EX-10.8 3 OPERATING AND MEMBER CONTROL AGREEMENT EXHIBIT 10.8 OPERATING AND MEMBER CONTROL AGREEMENT OF NETIGNITE 2, LLC This OPERATING AND MEMBER CONTROL AGREEMENT ("Agreement") is made this 9th day of March, 1999, by and among NetIgnite 2, LLC, a Colorado limited liability company (the "Company"), Online System Services, Inc. a Colorado corporation ("OSS") and NetIgnite, Inc., a Colorado corporation ("NetIgnite") (collectively, the "Members" and each, individually, a "Member"). RECITALS The undersigned constitute all of the current Members of the Company. Each of the undersigned desires to enter into this Agreement, which is intended to constitute an operating agreement within the meaning of Colorado Revised Statutes Section 7-80-706. Simultaneously herewith the Members are entering into a Buy-Sell Agreement (the "Buy-Sell Agreement"). In addition, Perry Evans ("Evans"), the sole shareholder of NetIgnite, is also entering into an Employment Agreement with OSS and the Company pursuant to which he will serve as the President of the Company (the "Employment Agreement"). AGREEMENT In consideration of the foregoing and the mutual promises and agreements set forth below, the Members agree as follows: ARTICLE 1 DEFINITIONS The terms defined in this Article 1 (except as otherwise expressly provided in this Agreement or unless the context clearly requires otherwise) shall, for purposes of this Agreement, have the following respective meanings: 1.1 "ACT" means the Colorado Limited Liability Company Act, as amended from time to time, and any successor statute. 1.2 "AGREEMENT" means this Operating and Member Control Agreement, and all amendments, schedules, exhibits, and modifications hereto. 1.3 "ARTICLES OF ORGANIZATION" means the Articles of Organization of the Company, as the same may be amended from time to time. 1.4 "CAPITAL ACCOUNT" means the account of a Member established and maintained in accordance with the provisions of Section 4.1 hereof. 1.5 "CAPITAL CONTRIBUTION" means the total amount of cash and/or the agreed upon fair market value of property contributed to the Company by any Member or all of the Members in the aggregate (including contributions by predecessor Members in the event of any assignment). 1.6 "CODE" means the Internal Revenue Code of 1986, as amended, and any successor thereto. Any reference to specific sections of the Code shall be to the Section as it now exists and to any successor provision. 1 1.7 "COMMITTED AMOUNT" means the amount described in Schedule A. 1.8 "DISTRIBUTION" means the total amount of cash and/or the fair market value of property distributed by the Company to a Member at any time or from time to time with respect to his or her interest as a Member of the Company. 1.9 "MEMBER" means a member of the Company as named herein and any successor or additional member admitted pursuant to this Agreement. 1.10 "SALE GAIN OR LOSS" means the gain or loss on the sale of substantially all of the assets of the Company. 1.11 "UNIT" means a fractional interest in the Company and its assets. ARTICLE 2 FORMATION 2.1 FORMATION OF LIMITED LIABILITY COMPANY. By this Agreement and upon filing Articles of Organization, the Members form a limited liability company under the Act. The rights and liabilities of the Members shall be as provided in the Act, except as otherwise expressly provided herein or in the Articles of Organization. 2.2 MEMBERS. OSS and NetIgnite. 2.3 NAME. The name of the Company is "NetIgnite 2, LLC." 2.4 OFFICES. The Company's registered office shall be located at 1401 Blake Street, Suite 201, Denver, Colorado 80202, or such other place as the Members may from time to time determine. The Company's principal executive office shall be located at 1401 Blake Street, Suite 201, Denver, Colorado 80202, or such other place as the Members may from time to time determine. The Company may maintain such other offices at such other places as the Members deem advisable. 2.5 PURPOSES. The Company is formed for purposes of transacting any or all lawful business for which a limited liability company may be organized under the laws of the State of Colorado. 2.6 TERM. Unless the Company is dissolved earlier in accordance with law, the period of existence of the Company shall be forty (40) years from the date of filing of the Articles of Organization. 2.7 MEMBERS' NAMES AND ADDRESSES. The names and addresses of the Members as of the date hereof are as follows: Online System Services, Inc. 1800 Glenarm Place Suite 700 Denver, CO 80202-3859 NetIgnite, Inc. 1401 Blake Street, Suite 201 Denver, Colorado 80202 2.8 TITLE TO COMPANY PROPERTY. All property owned by the Company, whether real or personal, tangible or intangible, shall be deemed to be owned by the Company as an entity, and no Member, individually, shall have any ownership interest in any such property. 2 2.9 WAIVER OF PARTITION. Each Member hereby waives any and all rights such Member may have to a partition of any Company property or properties. ARTICLE 3 CAPITAL CONTRIBUTIONS 3.1 INITIAL CAPITAL CONTRIBUTIONS. As their initial Capital Contributions to the Company, the Members shall make the Capital Contributions set forth on SCHEDULE A, which is attached hereto and made a part of this Agreement, for which they shall receive the number of Units set forth on SCHEDULE A. 3.2 ADDITIONAL CAPITAL CONTRIBUTIONS. If , after the Company has paid in the Committed Amount, the Company needs additional working capital in accordance with the requirements therefore set forth in the Proforma Statements (as defined on Schedule A), OSS' obligation to make additional capital contributions shall be as follows: (a) OSS shall make such capital contributions equal to the amount of distributions it receives under Section 4.5 hereof less OSS's reasonable estimate of its income tax liability attributable to the allocation of income to OSS under Section 4.3 hereof; (b) In addition to amounts under Section 3.2(a) hereof, OSS shall make additional capital contributions without modifying the income and loss allocation to Members if (i) this increased need is a result of realizable revenue or value (i.e., patent) in excess of that identified in the Proforma Statements (as defined on Schedule A), or (ii) is required to cover short-term (i.e., three months or less) working capital requirements, provided in each case that OSS agrees to the decisions that would give rise to the increased working capital need. (c) OSS may, but is not obligated to, make additional capital contributions in the event the Company requires more working capital than the Committed Amount, or than that which is required by the Company to achieve its pro forma revenue plan under 3.2(b) above, with such amount referred to as the "Proforma Shortfall Funding" subject to an increase in its income allocation as provided in Section 4.3 hereof. NetIgnite may contribute up to a proportionate share (measured by the then allocation of Sale Gain and Loss) of any additional working capital provided by OSS hereunder to reduce or avoid the income adjustment under Section 4.3 hereof. NetIgnite is not obligated to make any additional capital contributions. 3.3 NO RIGHT TO RETURN OF CAPITAL CONTRIBUTION. No Member shall have the right to withdraw or to demand the return of all or any part of such Member's Capital Contribution, except as otherwise expressly provided herein. The Company shall not be liable to Members for repayment of their Capital Contributions. 3.4 LOANS FROM MEMBERS TO COMPANY. Subject to any other restrictions contained herein, the Company may borrow money from one or more Members at such interest rate or rates and upon such other terms as are agreed upon by the Company and the lending Member; provided that the interest rate on any such loans shall not exceed the rate that would apply to Company borrowing on similar terms from recognized banks or financial institutions. 3.5 NO INTEREST ON CONTRIBUTIONS. No interest shall be paid to any Member on Capital Contributions. 3.6 NONASSESSABILITY. No Member shall be required to make any Capital Contribution in excess of the amount stated in Section 3.1 unless agreed by all Members. 3 ARTICLE 4 ALLOCATIONS OF PROFITS AND LOSSES; DISTRIBUTIONS 4.1 CAPITAL ACCOUNTS. A separate Capital Account shall be maintained by the Company for each Member. The Capital Account for each Member shall be increased by such Member's Capital Contributions and shall be decreased by Distributions made to such Member. Each Member's Capital Account shall also be increased or decreased, as the case may be, to account for allocations of profits and losses to such Member. As of the date on which additional Capital Contributions are made by any Member, or Distributions are made in liquidation of any Member's interest in the Company, the Capital Account balances of the Members may be restated to reflect the market values of the Company's properties as of such date and the manner in which profits and losses would have been allocated had the Company disposed of its properties on such date, all in accordance with Treasury Regulations (S)(S) 1.704-1(b)(2)(iv)(f) and (r), as in effect on the date hereof. Subsequent adjustments to Capital Accounts shall be made so as to comply with the requirements of Treasury Regulations (S)(S) 1.704- 1(b)(2)(iv) and 1.704-1(b)(4)(i), as in effect on the date hereof. For example, appreciation and depreciation of assets reflected in the Capital Accounts of the Members by reason of the adjustments described above shall be taken into account in making later Capital Account adjustments for profits and losses. 4.2 RESTATEMENT OF CAPITAL ACCOUNTS. If any additional Capital Contributions are made to the Company, upon agreement of the Members the Capital Accounts of the Members may be restated to reflect the Members' interests in Company assets. Any such restatement shall reflect such increases or decreases in the Capital Accounts of the Members as would reflect the manner in which income, gains, losses, etc., would be allocated if there were a taxable disposition of all Company property for its fair market value on the date of such Capital Contributions. 4.3 ALLOCATIONS OF PROFITS AND LOSSES. Profits and losses of the Company for a year shall be allocated to the members as follows: (a) GENERALLY: Net income (other than Sale Gain or Loss): 99.5% to OSS and .5% to NetIgnite; Net loss (Other than Sale Gain or Loss): 60% to OSS and 40% to NetIgnite; and Sale Gain or Loss: 60% to OSS and 40% to NetIgnite. (b) UPON A FAILURE BY OSS TO PROVIDE THE COMMITTED AMOUNT WHEN REQUIRED TO, THE ALLOCATION OF PROFITS AND LOSSES OF THE COMPANY SHALL BE RECALCULATED AS FOLLOWS AND THEREAFTER, SUBJECT TO FURTHER CHANGE PURSUANT TO THE TERMS OF THIS AGREEMENT, WILL BE AS SO RECALCULATED: Net income (other than Sale Gain or Loss): 99.5% to OSS and .5% to NetIgnite; Net loss (Other than Sale Gain or Loss): x% to OSS and y% to NetIgnite; and Sale Gain or Loss: x% to OSS and y% to NetIgnite, where x is equal to 100 times (i) the amount of the Committed Amount OSS actually contributed, divided by (ii) the sum of the amount of the Committed Amount OSS actually contributed plus $1 million (the value of the technology transferred by NetIgnite), and y is 100 minus x. (c) UPON A CAPITAL CONTRIBUTION BY OSS UNDER SECTION 3.2(C): If OSS provides the Proforma Shortfall Funding and NetIgnite does not contribute its proportionate amount under Section 3.2(c), NetIgnite's interest in the Sale Gain and Loss shall be reduced (and OSS's shall be correspondingly increased) based on the ratio of the Proforma Shortfall Funding to the then calculated value of the Company based on a value of the Company determined, subject to the minimum value for 1999 set forth below, by multiplying an 4 annualization of three months trailing gross revenue at the time of the Proforma Shortfall Funding by 2.8. The parties agree for the purposes of this provision to value the Company during the period from the date hereof through December 31, 1999 at the greater of $2.5 million or the multiple of annualized gross revenue set forth above. For example, assuming an initial Proforma Shortfall Funding of $500,000, at a time when three months trailing revenue equaled $500,000, NetIgnite's interest in Sale Gain and Loss would be reduced to 36.7% as follows: Value of the Company at time of funding = 2.8 x ($500,000 x 4) = $5,600,000 OSS percentage interest following funding = (.6 ($5,600,000) + $500,000)/($5,600,000 + $500,000) = 63.3% NetIgnite's percentage following funding = .4 ($5,600,000)/($5,600,000 + $500,000) = 36.7%. 4.4 SECTION 704(C) ALLOCATION. To the extent required by Section 704(c) of the Code, items of income, gain, loss, or deduction with respect to contributed properties shall be allocated among the Members in such manner as takes into account any variations between the bases of such properties to the Company upon contribution and the fair market values of such properties at the time of contribution. Any allocations made solely to comply with this Section 4.4 and Section 704(c) of the Code shall not be reflected in Capital Account adjustments. 4.5 DISTRIBUTIONS PRIOR TO LIQUIDATION. By no later than March 1st of each year, the Company shall make a Distribution to its Members of its Net Income (other than Sale Gain or Loss), if any, for the preceding tax year (to the extent not distributed in the preceding year) in proportion the allocation of such Net Income to the Members. To the extent reasonably possible, the Company shall make a Distribution to its Members of its Net Income (other than Sale Gain or Loss), if any, for any calendar quarter by the end of the first month of the next calendar quarter in proportion to the allocation of such Net Income to the Members. Except as provided in Section 4.8, all distributions to Members prior to the liquidation, winding up, and dissolution of the Company shall be in cash. 4.6 DISTRIBUTIONS UPON DISSOLUTION AND WINDING UP. At the time of the dissolution and winding up of the Company, following the allocation of all net income and net losses and the payment of all Company obligations, the remaining assets shall be distributed to the Members in accordance with Section 9.2. 4.7 NO DISTRIBUTION BY REASON OF WITHDRAWAL. Neither withdrawal from the Company, transfer of any membership interest, nor demand for the return of capital shall entitle any Member to receive any Distribution from the Company except AS PROVIDED IN ARTICLE 9. 4.8 DISTRIBUTIONS IN KIND. No Member shall have any right to demand or receive a Distribution from the Company in any form other than cash, nor shall any Member be compelled to accept any distribution of property in kind except under circumstances where all Members receive undivided interests in property or substantially equivalent interests in property on the basis of their Capital Accounts. In the event of a Distribution of property in kind, such property shall be assumed to have been sold at its fair market value at the time of the Distribution, and the resulting gain or loss shall be allocated among the Members according to their Capital Accounts, and their Capital Accounts shall be adjusted accordingly. ARTICLE 5 MANAGEMENT 5.1 MANAGEMENT. Except as otherwise specified herein, the right to make decisions concerning the management of the Company is reserved to the Managers, and the Managers shall have all of the rights, power, and authority generally conferred under the Act or other applicable law, on behalf and in the name of the Company to carry out any and all of the purposes of the Company and to perform all acts and, enter into, perform, negotiate and 5 execute any and all leases, documents, contracts and agreements on behalf of the Company that the Mangers, exercising sole discretion, deems necessary or desirable 5.2 MANAGER APPROVAL. Each Manager shall be entitled to one vote on all matters submitted to Managers. Except as otherwise provided in this Agreement, all matters submitted to the Managers shall require approval by the affirmative vote of Managers representing a Majority of the Managers. 5.3 LIMITATIONS ON AUTHORITY OF THE MEMBERS AND MANAGERS. Except upon the written consent of all of the Members, no action shall be taken by or on behalf of the Company to: (a) Adopt a Business and Implementation Plan for the Company, it being the agreement of the Members that a Business and Implementation Plan will be adopted annually and that the Company's business will be conducted in accordance with such plan except as otherwise agreed in writing by the Members; (b) Merge with or into any other entity, exchange securities with any other company, license intellectual property (including, but not limited to licensing terms that contain conditions of exclusivity or access to software code) or sell or lease more than ten percent (10%) of its property and assets to any other entity in any one transaction or series of related transactions or enter into any joint venture or profit sharing agreements with others; (c) Substantially change the present or now intended nature of the Company's business operations. (d) Dissolve or liquidate the Company; (e) Issue, reissue or cause the issuance or reissuance of any securities of the Company, or subscriptions, options, warrants, rights or privileges, preemptive or otherwise, to acquire any securities of the Company; (f) Except as provided in Section 4.5 hereof, make any distribution or declare or pay any dividend; (g) Except as authorized in a Business and Implementation Plan adopted by the Members, loan money or other assets to or guarantee the obligations of any person or entity; (h) Except as authorized in a Business and Implementation Plan adopted by the Members, enter into any other contract, agreement or similar arrangement that could have a material effect upon the Company or its business or assets, including, but not limited to, any contract with a term of more than one year which is not terminable by the Company without penalty upon not more than thirty (30) days notice. 5.4 RIGHT OF PUBLIC TO RELY ON AUTHORITY OF MEMBERS; SIGNATORY AUTHORITY. No person shall be required to determine the authority of the Members or of a Member to make any undertaking on behalf of the Company, or to see to the application or distribution of revenues or proceeds paid to the Members or to a Member. Except as otherwise provided herein or as agreed by Members holding a majority of the outstanding Units, all contracts, deeds, or other instruments or documents shall require only one signature and may be signed on behalf of the Company by the President. 5.5 MANAGERS. (a) The Company shall have a President, who shall be the Company's chief manager, as defined in the Act. The President shall have primary authority to sign and deliver in the name of the Company any deeds, mortgages, bonds, contracts, or other instruments pertaining to the business of the Company, except in cases in which the authority to sign and deliver is required by law to be exercised by another person or is expressly delegated by the Articles of Organization, this 6 Agreement, or the Members to some other Member, manager, or agent of the Company, and shall perform such other duties as may from time to time be prescribed by the Members. (b) The Company shall have a Treasurer, who shall serve as the treasurer of the Company, and shall perform such other duties as may from time to time be prescribed by the Members. (c) A manager, as such, shall not be obligated to devote his or her full time to the conduct of the Company affairs, but shall devote only as much time as he or she deems necessary for the proper conduct thereof, and provided further, that nothing in this Agreement shall be deemed to restrict in any way the freedom of a manager to conduct any other businesses or activities whatsoever without any accountability to the Company. 5.6 INITIAL MANAGERS. The initial managers and their titles shall be as follows: President Perry Evans Treasurer Gwenael Hagan 5.7 ELECTION AND REMOVAL OF MANAGERS. The Members may elect or appoint other managers or agents of the Company, with such titles, duties, and authority as they shall designate. Subject to any limitations that the Members may impose, the President may delegate authority and appoint other managers and agents of the Company, with such titles, duties, and authority as the President shall designate. The President, at any time, may remove or terminate the authority of any manager or agent that was appointed by the President. Managers shall be elected for one-year terms. From and after the date hereof, at all regular, special and adjourned meetings of, and in all actions in writing by, the Members, each Member agrees to vote its Units so as to elect as Mangers of the Company (i) one nominee of each Member and, (ii) if, at the discretion of OSS, one or more additional Managers are to be elected, the nominee or nominees selected by OSS. In the event that a Member wishes to remove a Manager nominated by it, each Member shall vote its Units in favor of such removal. A vacancy in the number of Mangers to serve may be filled only by the Members and only in the manner specifically authorized in this Section 5.7. 5.8 REIMBURSEMENT OF EXPENSES. Except to the extent otherwise provided for herein, and except for items generally constituting Members' overhead, the Company will pay all costs and expenses associated with the Company business, and shall reimburse the Members for the actual costs incurred for goods, materials, and services used by or for the Company. 5.9 INDEMNIFICATION AND LIABILITY OF MEMBERS AND MANAGERS. The Company shall indemnify the Members and managers or any Member or manager against any claim or liability incurred by the Members, managers, or any of them in connection with the conduct of the business of the Company, and neither the Company nor any Member shall have any claim against the Members, managers, or any of them by reason of any such act or omission of the Members, managers, or any of them; provided that, in each instance, a Member or manager shall not be indemnified or exculpated if such act or failure to act was not in good faith or constituted fraud, gross negligence, or willful misconduct. The provisions of this Section regarding liability and indemnification shall apply with equal force and effect to any manager, Member, agent or employee of a Member, and their successors and assigns. 5.10 RETENTION OF COUNSEL, ETC. In engaging counsel, accountants, and other professional advisors for the Company, the Members expressly acknowledge that such advisors shall represent the Company and all Members, and they expressly waive any personal claim of privilege or defense founded on any alleged client relationship based upon the fact that a particular Member engaged them for the Company. ARTICLE 6 BOOKS AND RECORDS; TAX MATTERS 6.1 TAX CHARACTERIZATION. The Members intend that the Company be treated as a "partnership" for tax purposes, and Members shall not take any action inconsistent with that characterization. 7 6.2 FISCAL YEAR. The fiscal year of the Company shall be the calendar year. 6.3 BOOKS AND RECORDS. The Company's books and accounting records and all other papers, records, and documents relating to the Company's affairs shall be kept at the Company's principal executive office or such other place as the Members may agree. Each Member shall have the absolute right to examine, in person or by legal representatives, all Company records at any reasonable time, subject only to such protection as may be necessary to prevent further dissemination of the inventions, trade secrets and other confidential information of the Company. In addition to any other books and records of the Company required by statute, the Company shall maintain the following records: (a) a current list of the full name and last-known address of each Member and the managers of the Company; (b) a copy of the Articles of Organization of the Company and all amendments thereto; (c) a copy of any currently effective written operating agreement; (d) copies of the Company's federal, state, and local income tax returns and reports, if any, for the three most recent years; (e) copies of any Company financial statements for the three (3) most recent years; (f) records of all actions and proceedings of Members for the last three years; (g) a copy of any effective member control agreements; (h) a statement of all Capital Contributions or contributions of services accepted by the Company; and (i) any written consents obtained from Members pursuant to the Act. 6.4 ANNUAL FINANCIAL STATEMENTS. Within one hundred twenty (120) days after the close of each fiscal year, annual financial statements for the Company, including statements of assets and liabilities, income statements, and such other statements as are commonly included in financial statements, or as may be requested by the Members, shall be prepared and delivered to each of the Members. 6.5 TAX RETURNS. As soon as practical following the close of each year of the Company, the partnership income tax return for the Company shall be prepared by such accountant or firm as may be selected by the President. 6.6 TAX ELECTIONS. In the sole discretion of the Members, the Company may make or not make any and all tax elections deemed appropriate, including, in the event of a transfer of all or part of any Member's interest in the Company, the election under Section 754 of the Code to adjust the bases of the assets of the Company. ARTICLE 7 TRANSFERS OF MEMBERSHIP INTERESTS 7.1 LIMITATION ON SALE OR EXCHANGE. The rights of a Member to transfer its interest in the Company are governed by a Buy-Sell Agreement between the Company and its Members dated March 9, 1999 (the Buy-Sell Agreement). 7.2 CONTINUATION OF ASSIGNOR'S STATUS. Anything herein to the contrary notwithstanding, the Company, its managers, and the Members shall be entitled to treat the assignor of a Member's interest in the Company as the absolute owner thereof in all respects, and shall incur no liability for distributions of cash made in good faith to him until such time as a written assignment that conforms to all requirements of this Article 7 has been received by and recorded on the books and records of the Company. Until such time, any payments by the 8 Company to an assigning Member or his executors, administrators, or representatives shall, to the extent of such payments, acquit the Company of liability to any other Person who may have an interest in such payment by reason of an assignment by the Member, such Member's death, or otherwise. 7.3 ASSIGNEE'S RIGHTS. An assignee of any Member's interest shall be entitled to receive Distributions of cash or other property from the Company and to receive allocations of the gains, profits, and losses of the Company attributable to such interest after the effective date of the assignment. The "effective date" of an assignment shall be that date set forth on the written instrument of assignment, which may in no event be any earlier than the date upon which the requirements of this Article 7 have been satisfied. 7.4 REQUIREMENTS FOR ADMISSION AS A SUBSTITUTE OR ADDITIONAL MEMBER. An assignee of an interest in the Company, if not already a Member, may become an additional or substitute Member only with the consent of other Members holding a majority of all Units held by such other Members, which consent may be granted or withheld all in each Member's sole discretion. No assignee of any Member's interest who is not already a Member shall become a substitute or additional Member with respect to such interest without such consent. 7.5 DOCUMENTS AND EXPENSES. As a condition to admission as a substitute or additional Member, an assignee of all or a part of any interest in the Company or the legatee or distributee of all or part of any interest in the Company shall execute and acknowledge such instruments, in form and substance satisfactory to the Company, as the Company deems necessary or advisable to effectuate such admission and to confirm the agreement of the person being admitted as such substitute or additional Member to be bound by all of the terms and provisions of this Agreement. Such assignee, legatee, or distributee shall pay all reasonable expenses in connection with such admission as a substitute or additional Member, including, but not limited to, legal fees and costs of preparing and filing any amendment to the Articles of Organization of the Company if necessary or desirable in connection therewith. 7.6 ACQUIT COMPANY. Until such time as a written assignment that conforms to all requirements of this Article 7 has been received by and recorded on the books of the Company, any payment by the Company to an assigning Member or his executors, administrators, or representatives shall acquit the Company of liability to the extent of such payments to any other person who may have an interest in such payment by reason of an assignment by the Member, such Member's death, or otherwise. ARTICLE 8 ADDITIONAL MEMBERS Additional Members may be admitted to the Company upon such terms and conditions, and for such Capital Contributions, as are approved unanimously by all Members. ARTICLE 9 DISSOLUTION 9.1 DISSOLUTION EVENTS. The Company shall continue until the occurrence of any of the following events (each a "Dissolution Event"): (a) The expiration of the Company's period of existence, as set forth in the Articles of Organization; (b) The agreement of all Members of all Units to dissolve and terminate the Company; and (c) The decree of a court of competent jurisdiction that dissolution and liquidation is required. 9.2 DISSOLUTION AND LIQUIDATION PROCEDURE. Except as otherwise provided by the Act, upon the occurrence of a Dissolution Event, no further business shall be done in the name of or on behalf of the Company except insofar as may be necessary to wind up the business of the Company and distribute its assets to the Members or their successors in interest, and the Company shall execute and file a notice of dissolution as required by the Act. 9 Upon dissolution and termination of the Company, except as otherwise provided in any valid business continuation agreement and by applicable law, the Company's assets shall be applied in the following order: (a) To the payment of the debts and obligations of the Company, including, to the extent permitted by law, obligations to Members who are creditors, in the order prescribed by law; (b) Next, to the setting up of any reserves deemed reasonably necessary by the Members for any contingent or unforeseen liabilities or obligations of the Company; (c) Next, to the Members who are creditors for any debts and liabilities not permitted to be paid under (a), above; and (d) Next, to the Members in accordance with their respective Capital Account balances. For purpose of determining the rights of Members to Distributions in dissolution, in the event of a distribution of property in kind, such property shall be assumed to have been sold at its fair market value, with any gain or loss allocated to the Members in accordance with Article 4. If a Member is indebted to the Company, the Company shall, if possible, offset such indebtedness to satisfy its obligations to said indebted Member rather than distribute a portion of said indebtedness to the other Member(s). ARTICLE 10 MEETINGS OF MEMBERS; VOTING Meetings of the Members for any purpose may be called by any Member by written notice to all Members. Such notice of any such meeting shall be given personally or by first class mail, postage prepaid, to the Members not less than thirty (30) days or more than sixty (60) days before the date of the meeting, and shall state the place, date, hour, and purpose of the meeting. All meetings shall be held at the principal office of the Company or at another location that is reasonably convenient for the Members as a whole and is selected by agreement of Members holding a majority of all outstanding Units. Members may take action by the vote of Members holding a majority of all outstanding Units. Each Member may authorize any other Member or Members to act for him by written proxy in all matters in which a Member is entitled to act. In addition, a Member may designate in writing the manner in which he desires that his vote be cast, which writing must be received by the Company prior to the meeting. Members of record on the date of the meeting shall be entitled to vote. ARTICLE 11 AMENDMENTS This Agreement may be amended at a meeting of the Members called for such purpose upon the approval of Members; provided, however, that any change that reasonably could be expected to materially and adversely affect the rights of any Member shall require the consent of such Member and that any change that may materially and adversely affect the ability of the Company to be taxed as a partnership for federal income tax purposes shall require unanimous approval. ARTICLE 12 ARBITRATION Any controversy or dispute of any nature whatsoever between or among Members or managers involving: (1) the formation, direction and all phases of the operation of the Company, including but not limited to the election and removal of managers, whether or not any of said managers, has been guilty of any misconduct, and all matters of company business, management, purposes, policy, employment and termination thereof, salaries, profits and dividends; (2) termination of, or other change in the Company or its purposes or powers, including but not limited to formal dissolution, merger, consolidation and mortgage, pledge or sale of any or all of its assets, and any amendment of the Articles of Organization; and (3) any change in the Members or their interests in the Company, 10 including but not limited to all questions involving the issuance, transfer, repurchase, redemption and rights to subscribe to newly issued and reissued interests of the Company and the payment of dividends, shall be settled by arbitration in Denver, Colorado in accordance with the Commercial Arbitration Rules of and by the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any Court having jurisdiction thereof. The decision of the arbitrators shall be final and conclusive. With respect to such arbitration: (a) All questions as to the meaning of the above clause, or as to the arbitrability of any dispute under said clause shall be resolved by the arbitrators, and their decision thereon shall be binding and not subject to judicial review. (b) In addition to all methods for enforcement of their award otherwise given by law (including all equitable remedies), the arbitrators shall possess the irrevocable proxy of the parties to vote said parties' Units in conformity with the decisions arrived at by said arbitrators in accordance with the procedure above described. (c) Every aspect of this arbitration clause is intended to be severable. If any term or provision hereof, in general or with respect to a specific situation, is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity of the remainder hereof. ARTICLE 13 WAIVER OF DISSENTERS' RIGHTS The Members waive any and all dissenters' rights under the Act to the extent that the Act permits such waiver. ARTICLE 14 MISCELLANEOUS 14.1 OTHER BUSINESS VENTURES. Any Member may engage in or possess an interest in other business ventures of every nature and description, independently or with others; and neither the Company nor the Members shall have any right by virtue of this Agreement in or to such independent ventures or to the income or profits derived therefrom. Except as provided above, no Member shall have the obligation to bring any business opportunity to the Company or to any other Member. 14.2 CONFLICTS OF INTEREST; CONFIDENTIALITY. The relationship between the Members is one of confidence and trust. Neither Member will disclose confidential information about the Company or the other Member to others without first advising the other Member of its intent to do so and receiving such Member's prior written consent thereto, and such consent will not be unreasonably withheld. In connection with any such disclosure, the disclosing Member will obtain a suitable confidentiality undertaking from the party to whom the disclosures are to be made prior to making any such disclosure. 14.3 REIMBURSEMENT OF EXPENSES. Upon execution of this Agreement, OSS shall pay NetIgnite $50,000 for reimbursement of expenses NetIgnite has incurred in connection with the formation of the Company. 14.4 PRIOR LIMITED LICENSE OF TECHNOLOGY. NetIgnite has previously granted OSS a limited license in certain events (as defined in Section 8.5 of the Buy- Sell Agreement) to the technology NetIgnite is transferring to the Company. The Company acknowledges the existence of such limited license and hereby agrees to recognize and honor such limited license. 14.5 GOVERNING LAW. Notwithstanding the fact that the Company may conduct business in states other than Colorado, and notwithstanding the fact that some or all of the Members may be residents of states other than Colorado, this Agreement and the rights of the parties hereunder will be governed by, interpreted, and enforced in accordance with the laws of the State of Colorado. 11 14.6 ARTICLES OF ORGANIZATION; AMENDMENT OF ARTICLES OF ORGANIZATION. The Articles of Organization are incorporated by reference and hereby made a part of this Agreement. In the event of any conflict between the Articles of Organization and this Agreement, the provisions of this Agreement shall govern to the extent not contrary to law. No Member shall vote its Units in favor of any amendment to the Articles of Organization unless all of the Members have agreed to so act. 14.7 BINDING EFFECT. This Agreement will be binding upon and inure to the benefit of the Members, and their respective heirs, executors, administrators, personal representatives, successors and assigns. 14.8 SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under the present or future laws effective during the term of this Agreement, such provision will be fully severable, and this Agreement will be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. Furthermore, in lieu of such illegal, invalid, or unenforceable provision, there will be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid, and enforceable. 14.9 COUNTERPARTS. This Agreement may be executed in several counterparts, each of which will be deemed an original, but all of which will constitute one and the same instrument. However, in making proof hereof it will be necessary to produce only one copy hereof signed by the party to be charged. 14.10 ADDITIONAL DOCUMENTS AND ACTS. Each Member agrees to execute and deliver such additional documents and instruments and to perform such additional acts as may be necessary or appropriate to effectuate, carry out and perform all of the terms, provisions, and conditions of this Agreement and the transactions contemplated hereby. 14.11 NO THIRD PARTY BENEFICIARY. This Agreement is made solely and specifically among and for the benefit of the parties hereto, and their respective successors and assigns, and no other person will have any rights, interest, or claim hereunder or be entitled to any benefits under or on account of this Agreement, whether as a third party beneficiary or otherwise. 14.12 NOTICES. Any notice to be given or to be served by a Member upon the Company in connection with this Agreement must be in writing and will be deemed to have been given when delivered personally or mailed to the Company at its registered office or its principal executive office or to the Company's President. Notice to a Member will be deemed to have been given when (i) delivered personally to the Member or (ii) deposited in the United States mail, postage prepaid and addressed to a Member at the address specified in Section 2.7 hereof. At any time, by giving five (5) days' prior written notice to the Company, a Member may designate another address in substitution of the foregoing address as the address to which notice is to be given. 14.13 HEADINGS AND TITLES. Article and Section headings and titles are for descriptive purposes and convenience of reference only and shall not control or alter the meaning of this Agreement as set forth in the text. 14.14 ENTIRE AGREEMENT. This Agreement is the final integration of the agreement of the parties with respect to the matters covered by it and supersedes any prior understanding or agreement, oral or written, with respect thereto. 14.15 GENDER, ETC. Except where the context requires otherwise, the use of terminology of any of the masculine, feminine, or neuter genders shall include all such genders, and the use of the singular number shall include the plural and vice versa. 12 IN WITNESS WHEREOF, the undersigned have executed this Agreement on the date first above written. COMPANY: NetIgnite 2, LLC By:_______________________________ Its:____________________________ MEMBERS: Online System Services, Inc. By:_______________________________ Its:____________________________ NetIgnite, Inc. By:_______________________________ Its:____________________________ 13 SCHEDULE A
Member Capital Contributions Number of Units - ------ --------------------- --------------- Online Service Systems, Inc. (1) 60 NetIgnite, Inc. (2) 40
(1) OSS agrees to provide as capital contributions cash of up to $1,500,000 for working capital of the Company (the "Committed Amount) in accordance with the requirements therefor set forth in the proforma financial statements for the Company prepared by NetIgnite and a copy of which has been furnished to OSS (the "Proforma Statements"). OSS's failure to provide the Committed Amount shall not constitute a breach of this Agreement but shall (A) result in a dilution of interest in profits and losses as provided in Section 4.3(b) hereof and (B) constitute a triggering event under Section 4 of the Buy- Sell Agreement. If NetIgnite believes that OSS' funding is not being done in a timely manner, it shall provide written notice thereof to OSS. OSS shall respond to such notice in writing within 10 days of receipt of such notice. If the Members cannot then reach agreement as to the timeliness of funding, the matter will then be immediately submitted to arbitration pursuant Article 12 of this Agreement. (2) All of NetIgnite's rights and interests in certain property, as set forth in Schedule B hereto, subject to certain rights of OSS in the technology conditioned upon certain events. The Members agree that the value of NetIgnite's capital contribution shall be $1 million and NetIgnite's initial Capital Account shall be that amount. 14 SCHEDULE B ASSIGNMENT This, Assignment, dated as of _____________________________, 1999, from NetIgnite, Inc. a Colorado corporation (the "Assignor"), to NetIgnite2, L.L.P., a Colorado Limited Liability Company (the "Assignor"). For good and valuable consideration paid to the Assignor, receipt of which is hereby acknowledged, Assignor by these presents does hereby agree as follows: 1. Assignment of Assets and Properties. The Assignor does hereby sell, ----------------------------------- assign, transfer, convey, grant, bargain, set over, release, deliver, and confirm unto the Assignee, its successors and assigns, forever, all of the assets of the Assignor set forth below: (a) all intellectual property relating to the creation and development of new XML-based internet local market advertising services, including technical designs (including requirements, definitions, technical architecture and development plans) relating thereto; (b) business models (including pricing, service delivery strategies and product packaging plans) relating to 1(a) above; and, (c) data concerning prospective clients relating to 1(a) above. 2. Warranty of Title. Assignor hereby represents that the above described ----------------- property is owned by it free and clear of all mortgages, liens and encumbrances and includes all intellectual property of Perry Evans relating to 1(a) above. Assignor and its officers, directors, shareholders and assigns, do hereby agree to WARRANT and DEFEND the sale of the property to Assignee against all and every person or persons. THERE IS NO WARRANTY OF MERCHANTIBILITY OR FITNESS FOR ANY PURPOSE AND SAID WARRANTY IS EXCLUDED. 3. No Rights in Third Parties. Nothing expressed or implied in this -------------------------- Assignment is intended to confer upon any Person, other than the Assignor and the Assignee and their respective successors and assigns, any rights, remedies, obligations or Liabilities under or by reason of this Assignment. 4. Successors and Assigns. This Assignment shall bind and inure to the ---------------------- benefit of the Assignor and the Assignee and their respective successors and assigns. 5. Governing Law. This Assignment shall be governed by, and construed in ------------- accordance with, the laws of the State of Colorado applicable to contracts executed and to be performed entirely within that State. IN WITNESS WHEREOF, the Assignor has caused this Assignment to be executed as of the date first written above by its officer thereunto duly authorized. NetIgnite, Inc. By:___________________________ 15 BUY-SELL AGREEMENT This BUY-SELL AGREEMENT (the "Agreement") is made effective the 9th day of March, 1999 by and among NetIgnite 2, LLC, a Colorado limited liability company (the "Company"), Online System Services, Inc., a Colorado corporation ("OSS") and NetIgnite, Inc., a Colorado corporation ("NI"), OSS and NI are individually referred to as a "Member" and collectively referred to as the "Members"). RECITALS A. The Members own all of the issued and outstanding interests of the Company. The Company and the Members have entered into an Operating and Member Control Agreement dated March 9, 1999 (the "Operating and Member Control Agreement"). B. The Members desire to preserve the continuity of corporate ownership by restricting the ownership and transferability of interests, providing for the purchase of interests in certain events, and as otherwise provided in this Agreement. C. Perry Evans, a Colorado resident ("Evans"), is the sole shareholder of NI and is entering into an Employment Agreement with OSS and the Company dated as of the date hereof (the "Employment Agreement") pursuant to which he will serve as President of the Company. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and the mutual promises contained in this Agreement, the parties agree as follows: 1. DEFINITIONS. The following terms, when capitalized, will have the meanings indicated: 1.1 "Interest" or "Interests" means any one or more of the issued and outstanding Interests of any class or series of securities of the Company presently owned or hereafter acquired by or on behalf of a party to this Agreement, any transferee, and any other person who in the future acquires any such securities, by purchase, gift, or any other means. 1.2 "Transfer" means, with respect to any Interests, any sale, gift, assignment, exchange, pledge, transfer or other disposition or change in ownership thereof, the creation of a bankruptcy estate which includes such Interests, the assignment for the benefit of creditors which includes such Interests, the appointment of a trustee or receiver with respect thereto, the grant or appointment of an irrevocable proxy coupled with an interest with respect thereto, or the grant or imposition of a security interest or lien thereon, whether voluntary or involuntary, and to "Transfer," when used as a verb, means, with respect to any Interests, to sell, give, assign, exchange, pledge, transfer or otherwise dispose or change ownership thereof, create a bankruptcy estate which includes such Interests, assign such Interests for the benefit of creditors, appoint a trustee or receiver with respect thereto, grant or appoint an irrevocable proxy coupled with an interest with respect thereto, or grant or act to permit the imposition of a security interest or lien thereon, whether voluntarily or involuntarily. 2. RESTRICTIONS ON INTERESTS. All Interests are subject to the terms of this Agreement. No Member may Transfer any Interests, and no Transfer of any Interests will be valid or binding, except upon compliance with and pursuant to the terms of this Agreement or with the express written consent of all other Members. As a condition to the effectiveness of any Transfer of Interests, the proposed transferee must agree to become a party to this Agreement by executing a Consent in the form attached hereto as EXHIBIT A (a "Consent"). The Company may not issue additional Interests of capital stock unless the subscriber becomes a party to this Agreement by executing and delivering a Consent to the Company. 3. TERMINATION OF EMPLOYMENT. If Evans' Employment Agreement is terminated pursuant to either Section 8.2 or 8.3 thereof or Evans gives a notice of non-extension of the Employment Agreement pursuant to Section 8.1 thereof, OSS shall have the option of exercising the Put-Call Offer (defined in Section 7 below), provided that the Put-Call Offer shall not be subject to any Minimum Price (as defined in Section 7 below). In this event, the purchase price shall be the Fair Market Value for Interests (as defined in Section 9 below). 4. CHANGE IN CONTROL; FAILURE TO FUND. If there is a "Change in Control" of OSS as defined in Section 3 of Evans' Option (Exhibit A to the Employment Agreement) or if OSS shall fail to provide the Committed Amount (as defined in Schedule A to the Operating and Member Control Agreement), either Member shall have the option, in the event of a Change in Control, and NI shall have the option, in the event of a failure to fund, of exercising the Put-Call Offer, provided that the Put-Call Offer shall not be subject to any Minimum Price. In this event, the purchase price shall be the Fair Market Value for Interests. 5. INVOLUNTARY TRANSFER. Upon any Transfer (or purported Transfer) of Interests as a result of (i) the creation of a bankruptcy, (ii) the appointment of a receiver or trustee with respect to the Interests, (iii) an order of any court having jurisdiction, (iv) an assignment of the Interests for the benefit of creditors, or (v) any other Transfer that arises out of the exercise of the legal right or remedies of a third party (an "Involuntary Transfer"), the remaining Member will have the option to exercise the Put-Call Offer provided that in such event, there shall be no Minimum Price, the price to be paid in connection therewith to be equal to the Fair Market Value. The Member whose Interests are subject to the Involuntary Transfer must give written notice of the Involuntary Transfer to the remaining Member at the earliest possible date. The option granted by this Section 5 may be exercised commencing upon the Involuntary Transfer and through the period of 90 days following the earlier of the date of receipt of such notice or the receipt of written notice from a court or other third party of the Involuntary Transfer. 6. SWITCHBOARD OPTION. At any time on or before September 30, 1999, NI shall have the right to offer Switchboard Incorporated or its parent, Banyan Systems Incorporated, the option (the "Switchboard Option") of acquiring all of the outstanding Interests, provided that such option shall be subject to the Minimum Price requirement for an offer made prior to December 31, 1999. The exercise of the Switchboard Option shall be subject to the provisions of Section 8, to the extent applicable, and must be closed within 45 days of the exercise thereof (but not later than November 14, 1999, in any event). 7. MEMBER PUT-CALL. Subject to the terms hereof, if a Member (the "Offeror Member") desires to Transfer all of its Interests to the other Member or to acquire all of the other Member's Interests prior to the occurrence of an event that triggers the provisions of any of Sections 3 through 6, the Offeror Member may give to the other Member (the "Offeree Member") written notice of an offer to purchase all of the other's Interests or to sell all of its Interests, which notice must include the price (such price to be based on each one percent (1%) Interest in the Company) and all other material terms and conditions of the offer (the "Put-Call Offer"). The Offeree Member will then have the option for a period of 10 days after the Put-Call Offer is given to agree either to purchase the Offeror Member's Interests or to sell its Interests to the Offeror Member for the price set forth in the Put-Call Offer. If the Offeree Member does not elect to purchase all of the Offeror Member's Interests within such 10 day period, in the case of an offer to sell, then the Offeree Member has the obligation to sell, and the Offeror Member has the option to purchase, all of Offeree Member's Interests, for the price set forth in the Put-Call Offer. If the Offeree Member does not elect to sell all of its Interests within such 10- day period, in the case of any offer to purchase, then the Offeree Member has the option to purchase, and the Offeror Member has the obligation to sell, all of the Offeror Member's Interest, for the price set forth in the Put-Call Offer. In the event that the Member (the "First Member") who as a result of the Put- Call Offer process has an option to purchase the other Member's (the "Second Member") Interests does not close the purchase of such Interests within the 45- day term of the option (the last day of the 45-day term being referred to herein as the "Termination Date"), the First Member's option shall terminate and the Second Member shall have an option to purchase all of the First Member's Interests on the same basis as the terminated option. This secured option must close within 45 days of the Termination Date or it also shall terminate. To be effective, the Offeror Member's offered price for any offer made prior to December 31, 2001 must meet or exceed a price (the "Minimum Price") which for 100% of the Interests in the Company is at least: (i) from the date hereof to December 31, 1999 -- $10 million; (ii) from January 1, 2000 to December 31, 2000 -- $15 million; and (iii) from January 1, 2001 to December 31, 2001 -- $20 million. The Minimum Price requirement is not applicable in certain events as provided herein and there shall be no Minimum Price requirement for any offer made after December 31, 2001. Notwithstanding any proposed closing date set forth in the Put-Call Offer, a closing must occur at the principal offices of the Company no later than 55 days after delivery of the Put-Call Offer by the Offeror Member. 2 8. PROCEDURES. The following procedures govern options and obligations to purchase Interests under this Agreement: 8.1 EXERCISE OF AN OPTION TO PURCHASE INTERESTS. If a Member has an option to purchase or to sell Interests pursuant to this Agreement, the option may be exercised at any time during the applicable option period. 8.2 CLOSING. The closing of a purchase and sale under this Agreement is to be held at the principal offices of the Company no later than 10:00 a.m. on the date 45 days after the delivery of written notice of the exercise of an option to purchase or to sell Interests, or at such other place and on such other date as the parties to the purchase and sale agree. If the closing date falls on a day other than a business day, the next business day will be the closing date. 8.3 TRIGGERING DATES. If there occurs more than one event that, under the provisions of Sections 3 through 7 of this Agreement, gives rise to an option to purchase or to sell Interests under this Agreement, the provisions that apply by reason of the first of such events to occur will govern the purchase and sale of such Interests, provided that the effective date of a Put-Call Offer by a Member pursuant to Section 7 given within 45 days of an option arising pursuant to Sections 3 through 6 shall be deemed to be one day after the later to occur of the events specified in Sections 3 through 6. If such an event gave rise to an option, and Interests were not purchased and sold because options were not exercised to purchase or sell all Interests subject to such option, then, upon the expiration of such option, the provisions applicable to the next in time of such multiple events will be given effect. 8.4 CORPORATE ACTIONS/MEMBER VOTES. Except as otherwise specifically provided herein, decisions of the Company with respect to this Agreement will be determined by a vote of the Members, and will not require the approval of the Managers of the Company. In the event of the exercise of a Put-Call Offer or the Switchboard Option, each Member agrees to cooperate with the other and the Company and to use its best efforts to see that the transaction is completed as soon as reasonably possible. 8.5 TECHNOLOGY LICENSE. Should the Switchboard Option be offered and exercised or should the exercise of a Put-Call Offer result in OSS selling its Interests, the Company will grant to OSS, at no cost to OSS, a non- exclusive royalty-free worldwide source code license to Company-owned or developed technology (the "License"). The License shall be restricted to use within or associated with OSS' products and services. It will be provided in the License that any OSS product or service which integrates Company technology must have substantial and demonstrable value derived from other OSS software or Internet service. OSS will not have the right to license or sub-license the Company-owned or developed technology, although OSS may transfer its rights to the License in connection with a sale of its business or substantially all of its assets, provided that the License, as transferred, shall be limited to using the technology with OSS' products, as such products exist at the time of any such event. Further, in such event, the Company shall make available at cost, reasonable access to its development resources to assist OSS in its use of the Licensed- technology for a period of one year. 8.6 FAILURE TO EXERCISE PUT-CALL OFFER. If neither Member has exercised the Put-Call Offer prior to January 1, 2002, NI shall have the right to require OSS to acquire all of NI's Interest at their Fair Market Value, the purchase price therefor to be paid in shares of OSS' common stock. In this event, the OSS common stock shall be deemed to have a value equal to the average of the closing sale price (or bid price in the event that there is no sale of such stock on a given day) for the OSS common stock for the 20 trading days immediately preceding the exercise of such option. If exercised, NI shall sell and OSS shall purchase all of NI's Interest. The shares of OSS common stock issued upon exercise of such option shall be restricted shares as defined in Rule 144 promulgated by the Securities and Exchange Commission. The Members may agree at any time, but are under no obligation to do so, to convert NI's Interest into shares of OSS common stock. 8.7 RETENTION OF CERTAIN PAYMENTS. In the event that OSS should acquire NI's interests in the Company, Evans has agreed to remain an employee of the Company for one year thereafter, based upon the compensation parameters in effect at the time of such acquisition. NI hereby agrees that should OSS acquire its interests in the Company, that OSS may retain 7% of the purchase price for NetIgnite's interests to provide incentive for Evans to remain employed by the Company or its successor and assigns 3 for two years after OSS' purchase of NetIgnite's interest in the Company. If Evans remains so employed for two years, or such employment is terminated by the Company or its successors and assigns without cause prior to the end of such two-year period, OSS will pay to NI the full retained amount plus interest at the rate of 8% per annum. If Evans does not remain so employed for the full two-year period, OSS shall be entitled to retain the full retained amount. 9. PURCHASE PRICE. Except for an offer pursuant to Section 7, the purchase price of any Interests will be the "Fair Market Value" of the Interests as of the date on which occurred the event giving rise to the option or obligation to purchase the Interests (the "Valuation Date"). For this purpose the "Fair Market Value" of Interests means the value of Interests of the Company as of the last day of the most recent month ending on or prior to the Valuation Date, without regard to any retained earnings of the Company and disregarding any adjustments for minority or majority ownership, all determined in accordance with this Section 9. In the event of an offer pursuant to Section 7, the purchase price shall, subject to any Minimum Price requirement, be the price set forth in the Offeror Member's offer. 9.1 ESTABLISHMENT BY STIPULATION. The Fair Market Value of an Interest will be the purchase price per Interest stipulated by unanimous agreement of the Members. 9.2 ESTABLISHMENT BY APPRAISAL. If the Members do not agree on a Fair Market Value of an Interest, the Fair Market Value of an Interest will be determined based on the criteria set forth above and using the following process: (a) The Members will attempt to mutually agree upon a single appraiser who, if so selected, will establish the Fair Market Value of an Interest. In such case the Members will share the cost of such appraiser equally. (b) If a single appraiser is not mutually selected pursuant to paragraph (a) within 15 days after written demand from one Member to the other, then, upon written demand of a Member, each Member will have 10 days to select one appraiser. Each Member must pay the costs of its respective appraiser. If only one appraiser is selected during this 10-day period, such appraiser, at the cost of the party who selected such appraiser, will establish the Fair Market Value of an Interest. (c) If two appraisers are selected within the 10-day period provided for in paragraph (b), such appraisers are to attempt to agree on the Fair Market Value of an Interest. If such appraisers do not agree upon the Fair Market Value of an Interest within 30 days after the appointment of the second of them, within 45 days after the appointment of the second appraiser each must separately determine the Fair Market Value of an Interest. If the higher of the two values is no more than 110% of the lower of the two values, the Fair Market Value of an Interest will be the average of the two values. (d) If the higher of the two values is more than 110% of the lower of the two values, the two appraisers must jointly appoint a third appraiser within 15 days after the 45 day period provided for in Section 9.2(c) above, the cost of which is to be shared equally by the Members. If the two appraisers do not agree upon a third appraiser within this time period, the District Court for Denver, Colorado will appoint a third appraiser on petition of either Member. Within 15 days of appointment, the third appraiser must then separately determine the Fair Market Value of an Interest. If the Fair Market Value of an Interest as determined by the third appraiser is the same as the Fair Market Value of an Interest as determined by either of the other two appraisers, such value will be the Fair Market Value of an Interest. In other cases the Fair Market Value of an Interest will be determined as follows: The middle value of the three values will be determined. If the two other values differ from the middle value by an equal amount, the Fair Market Value of an Interest will be the middle value. If the difference between each of the other two values and the middle value is not identical, then the value with the greatest difference from the middle value will be disregarded and the Fair Market Value of an Interest will be the average of the two remaining values. The Fair Market Value of an Interest, as so determined, will be binding upon all parties. 4 (e) Unless otherwise agreed, in order to be eligible to be an appraiser under this Section, an individual or entity must be a competent appraiser of businesses. (f) Only appraisals completed in writing and delivered to the Members within the specified time periods will be considered valid for purpose of this Agreement. The Company will allow its books, records, and operations to be available for review by all chosen appraisers for the purposes of determining the Fair Market Value of an Interest. 9.3 CAPITAL CHANGES. The purchase price for Interests under this Agreement is to take into account, as appropriate, any changes in the capital of the Company occurring (a) after the event giving rise to the purchase and sale and/or the establishment of the Fair Market Value of an Interest and (b) before the closing of such purchase and sale. 10. TERMS AND CONDITIONS OF CLOSING. 10.1 PAYMENT OF PURCHASE PRICE. In the case of any purchase of Interests by the remaining Member under this Agreement, the purchase price for such Interests, is to be paid in cash at the closing by the purchasing Member. 10.2 DELIVERY OF CERTIFICATES. At the closing, the transferring Member must deliver to the purchaser transfer instruments, duly endorsed for transfer, representing the Interests purchased. 11. TERMINATION. This Agreement will terminate automatically upon the occurrence of any of the following: 11.1 AGREEMENT. An agreement in writing executed by all Members who are parties to this Agreement and who own Interests; 11.2 ONE MEMBER. One Member becomes the owner of all of the Interests which are then subject to this Agreement; or 11.3 DISSOLUTION. The dissolution of the Company. 12. ARBITRATION. In the event of a dispute, claim and/or disagreement between the Members or between any of the Members and the Company arising out of, under, in connection with, or in relation to, this Agreement or any agreement, note, or other instrument or document executed or to be executed pursuant to the terms and conditions of this Agreement, including any claims or disputes involving fraud or fraud in the inducement, such disputes, claims and/or disagreements must be submitted to binding arbitration by the American Arbitration Association, in accordance with the rules of the American Arbitration Association; provided that the valuation of Interests determined in accordance with Section 9 will not be subject to arbitration. Any arbitration hearing will be limited to not more than 10 day(s). Unless otherwise agreed by the parties, such arbitration will occur in Denver, Colorado. A decision of the arbitrator(s) will be final and binding upon all parties, and judgment upon the award of the arbitrator(s) may be entered in any court having jurisdiction. The arbitrator(s) is entitled to award or include in any award the specific performance of the terms of this Agreement. The costs of any arbitration proceeding will be paid equally by Members, and the parties will pay their own attorneys' fees and expenses, but the prevailing party will be entitled to recover its reasonable attorneys' fees and expenses from the losing party. Notwithstanding the foregoing, any party to this Agreement may seek and obtain injunctive or other appropriate equitable relief from a court of competent jurisdiction to prevent or end a violation of this Agreement that would cause irreparable harm to such party and for which it would be difficult or impossible to determine the damages that would arise from such violation or the continuance thereof; provided, however, that the substance of any dispute is to be resolved through arbitration as provided in this Section and that the court's equitable relief may include an order compelling such arbitration. 13. MISCELLANEOUS. 13.1 GOVERNING LAW; VENUE. This Agreement is made under and is to be governed by, and construed in accordance with, the laws of the State of Colorado (without regard to its conflicts of laws principles), and each of the parties hereto consents to venue of any suit or action arising out of, under, in 5 connection with, or in relation to this Agreement in an appropriate court with jurisdiction in Denver, Colorado. 13.2 CONSTRUCTION; SEVERABILITY. Wherever possible each provision of this Agreement is to be interpreted in such a manner as will be effective and valid under applicable law, but if any provision of this Agreement is prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 13.3 BINDING AGREEMENT. This Agreement is binding not only upon the parties hereto, but also upon their heirs, personal representatives, successors, and assigns; and the parties hereby agree for themselves, their heirs, personal representatives, successors, and assigns to execute any instrument and to perform any acts that may be necessary or proper to carry out the purposes of this Agreement. 13.4 LEGEND. Each Member agrees to cause the following legend to be endorsed upon any instrument representing the Member's Interests, and that all Interests hereafter issued to them will bear the same endorsement: "These Interests are subject to, and are transferable only upon the terms and conditions of, that certain Buy-Sell Agreement and Member Control Agreement between the Company and its Members dated effective March 9, 1999. Copies of said agreements are on file with the Company. Any attempted transfer of these Interests other than in accordance with said agreement, whether by or pursuant to a gift, sale, pledge, or otherwise, and whether voluntarily or involuntarily, is void and of no effect." 13.5 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which will be deemed to be an original, and all of which will constitute one and the same instrument. 13.6 EXTENSION OF TIME FOR PERFORMANCE. If a party's performance of any obligation or exercise of any option under this Agreement might reasonably be expected to be affected by the prior determination of the purchase price and the purchase price cannot administratively be determined within the period of time specified, then the period of time within which such action must be taken will be extended to the date fifteen (15) days after the date on which the purchase price is determined. 13.7 AMENDMENT. This Agreement may be amended or modified only by a writing executed by all of the parties hereto. 13.8 INTEGRATION. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and replaces and supersedes any and all prior oral or written agreements, representations and discussions pertaining to the subject matter hereof or thereof. 13.9 NOTICES. Any notice, offer, acceptance of an offer or other communication provided for by this Agreement must be in writing and will be deemed given or delivered when delivered by hand or when deposited in the United States mail, certified or registered, return receipt requested, postage prepaid and properly addressed. The proper address of the Company is its principal office address and the proper address of any other party is the address on file with the Company, and the Company will make such information available to any Member upon request. The address of a party to whom notices or other communications is to be mailed may be changed from time to time by giving written notice to all other parties to this Agreement. 13.10 CAPTIONS. Captions and headings in this Agreement are for convenience only and in no way define, limit, or describe the scope or intent of the provisions hereof. 6 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed effective as of the day and year first above written. MEMBERS: ONLINE SYSTEM SERVICES, INC. By________________________________________ Its_____________________ NETIGNITE, INC. By________________________________________ Its______________________ COMPANY: NETIGNITE 2, LLC By________________________________________ Its______________________ 7 EXHIBIT A CONSENT This Consent is executed effective the ______ day of __________________________, ________, by the undersigned as required by that certain Buy-Sell Agreement by and among NetIgnite 2, LLC, Online System Services, Inc. and NetIgnite, Inc., dated effective March 9, 1999, as the same may have been thereafter amended (the "Agreement"). The undersigned hereby agrees to be subject to all terms and conditions of the Agreement. The undersigned will hereafter be deemed to be a "Member" as set forth in the Agreement. With the exception of the addition of the undersigned as an additional party, all other provisions of the Agreement will remain in full force and effect. IN WITNESS WHEREOF, the undersigned has executed this Consent effective the date first above written. ___________________________________ Signature ___________________________________ Print Name ___________________________________ ___________________________________ Address EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") made March 9, 1999, by and between ONLINE SYSTEM SERVICES, INC., a Colorado corporation ("OSS"), NETIGNITE 2, LLC, a Colorado limited liability company ("NI"), and PERRY EVANS, an individual residing in Denver, Colorado ("Executive"). RECITALS WHEREAS, OSS and NI desire to hire and employ Executive as President of NI, a 60% owned subsidiary of OSS. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties agree as follows: 1. EMPLOYMENT. OSS, its subsidiaries and affiliate companies (collectively, the "Company") agree to employ Executive and Executive hereby agrees to be employed by the Company on a full-time basis. Executive represents and warrant that the execution of this Agreement and his performance under this Agreement does not breach any other agreement and does not require the consent of any other person. 2. DUTIES. Executive shall be employed as NI's President and shall perform the duties, bear the responsibilities commensurate with his position and serve the Company faithfully and to the best of his ability, under the direction of the Managers (for purposes of this Agreement, the term "Managers" shall mean the Managers of NI). In addition, the Executive will hold, without additional compensation, such other offices and directorships for the Company to which he may be appointed or elected from time to time. Executive's conduct must promote the best interests of the Company and must not discredit the Company, its products or services. 3. EXCLUSIVITY. Executive shall devote his full business time, efforts, attention, skill and energy to the NI's business. Executive shall disclose all other business activities to the Managers and Executive shall not engage in any other business activity that requires significant personal services by Executive. After notifying the Managers, Executive may take reasonable personal time for: 3.1. personal investments that do not require any significant services by Executive; 3.2. participation in volunteer or charitable activities; 3.3. participation in industry-related organizations; 3.4. with the Managers' prior approval, serving as a Director for other companies; and 3.5. activities approved in advance by the Managers; except that Executive shall cease any such outside activity if the Managers determine that such activity will interfere or conflict with the Company's interests. 4. CONFLICTS OF INTEREST. Executive shall not engage in any activity that, in the Managers' judgment, may interfere or conflict with the proper performance of Executive's duties or the NI's interests. If Executive has any interest in a proposed transaction involving the Company, that interest must be fully disclosed to the Managers and the disinterested Managers must approve the transaction. 5. CONFIDENTIALITY. The relationship between the Company and Executive is one of confidence and trust. Executive agrees that the provisions of this Section are fair and reasonable because as a result of his employment by the Company he will have access to proprietary Company information and that such information is a highly-valued asset of the Company. The provisions of this Section 5 shall be interpreted in a manner that is consistent with the provisions of Section 14.2 of the Operating and Member Control Agreement dated March 9, 1999 among NI, OSS and NetIgnite, Inc. 5.1. Confidential Information. The term "Confidential Information" means all information relating to the Company, its affiliates, customers and suppliers considered by the Company to be confidential, including, without limitation: 5.1.1. the Company's plans, products, processes and personnel; 5.1.2. the nature of the Company's services and any area where such services are performed or planned to be performed; 5.1.3. research, development, manufacturing, purchasing, and engineering; 5.1.4. markets, marketing strategies, customer lists and prospect lists; 5.1.5. merchandising, selling, pricing, tariffs or contractual terms, 5.1.6. inventions, discoveries, concepts and ideas, whether patentable or not, processes, methods, formulas, and techniques, trade secrets, related improvements and knowledge; 5.1.7. financial and accounting information; 5.1.8. the Company's technology, expertise or business; and 5.1.9. any component of Confidential Information or anything derived from Confidential Information. The Company's determination that specific information constitutes Confidential Information shall be binding, except for information already in the public domain other than by Executive's act and except for information which is no longer a trade secret as defined by the Uniform Trade Secrets Act. 5.2. Non-disclosure. Executive agrees that, except as permitted by Section 14.2 of the Operating and Member Control Agreement, he shall at no time, whether during his employment or at any time thereafter, disclose or use any Confidential Information for any purpose other than the conduct of the Company's business. Upon the breach or threatened breach of this covenant by Executive, the Company shall be entitled without notice to obtain relief pursuant to Section 12 below. 5.3. Notice to Company. Executive will immediately notify the Company if he learns that Confidential Information has been disclosed or is about to be disclosed, whether by Executive's acts, acts of third parties, law, regulation or court order. Executive will cooperate with the Company's efforts to prevent or limit disclosure of Confidential Information. 5.4. Ownership. Any Confidential Information that is directly originated, developed or perfected to any degree by Executive during his employment hereunder shall be and remain the sole property of the Company and shall be deemed trade secrets of the Company. To the extent that any Confidential Information constitutes an original work of authorship by Executive which is protectable by copyright, Executive acknowledges that such work is a "work for hire" as defined by the U.S. Copyright Act (17 U.S.C. (S)101 et seq.). 5.5. Assignment. The Executive hereby assigns to NI all of his intellectual property rights (including copyrights, patents, and trademarks) that may exist due to his direct involvement in the Company. 10 5.6. Return of Confidential Information. Upon termination of Executive's employment or upon request by the Managers, Executive or his legal representative shall deliver to the Company all original and duplicates and/or copies of all documents, records, notebooks, computer records or media, and similar materials containing Confidential Information then in his possession. 5.7. Further Assurances. Executive agrees to execute such separate and further confidentiality agreements embodying and enlarging upon the provisions of this Section as the Company may reasonably request. further confidentiality agreements embodying and enlarging upon the provisions of this Section as the Company may reasonably request. 6. COMPENSATION AND BENEFITS. In consideration of the services to be rendered pursuant to this Agreement, Executive shall receive the following compensation and benefits during the term of his employment: 6.1. Salary and Bonus. NI shall pay Executive an annual base salary, payable semi-monthly in arrears. The annual base salary during the term hereof shall be $190,000 with annual increases as approved by the Managers. Executive will have an opportunity to earn an incentive bonus based upon Executive's accomplishment of objectives that are mutually defined and agreed upon between Executive and the Managers. The Managers shall annually review the amounts of the base salary and bonus. The bonus for calendar 1999 shall be determined as follows. First, the actual net revenues for NI for 1999 shall be determined, such determination to be consistent with the assumptions made in the projection of net resources in the NI pro forma financial statements previously delivered to OSS. Executive will be paid a bonus based on the level of net revenues for NI in excess of the projected net revenues set forth in the NI pro forma financial statements, the amount of such bonus to be equal to:
Revenue Over Targeted Amount Percentage of Net Revenue ---------------------------- ------------------------- to be Paid as Bonus ------------------- 0% to 19.9% 0% 20%-49.9% 5% in excess of such 20% 50% and greater 7% in excess of such 50%
6.2. Benefits. The Company shall provide Executive with the benefits of such insurance plans, hospitalization plans, retirement plans and other employee benefits generally provided to executive employees of the Company and for which Executive may be eligible under the terms and conditions thereof. 6.3. Stock Options. Executive shall be granted an option to purchase 80,000 shares of OSS Common Stock (the "Option") pursuant to the OSS 1995 Stock Option Plan, the shares subject thereto to vest (subject to acceleration as provided therein) one-third per year subject to Executive's continuous employment by the Company, to have a term of five years and to have an exercise price equal to the fair market value of OSS Common Stock on the first day of Executive's employment by the Company. The Option shall be in the form attached hereto as Exhibit A. 6.4. Annual Leave. Executive shall be entitled to vacations, sick leaves, personal days and other tine off in accordance with the Company's policies in effect for officers and executive employees of the Company. 6.5. Reimbursement of Expenses. Upon receipt of an itemized accounting of such expenses with reasonable supporting documentation, the Company shall reimburse Executive for 11 all reasonable and necessary out-of-pocket expenses incurred by Executive in connection with the business of the Company and in performance of Executive's duties under this Agreement. 7. DURATION. Executive's employment shall commence on the date of this Agreement and continue until terminated in accordance with Section 8. The initial term of Employee's employment shall be two years ("Initial Term"), with renewal terms of one year. After termination of Executive's employment, the applicable provisions of Sections 5, 8, and 9 shall remain in full force and effect in accordance with the provisions of each such section. In the event that the Company acquires NetIgnite, Inc.'s (a company owned by Executive) interests in NI during the Term (as defined below) and the then Term, unless adjusted, would expire within one year of the date of such acquisition by the Company, the Term shall be extended to a date that is one year after the date of such acquisition by the Company. 8. TERMINATION. Executive's employment may be terminated as follows: 8.1. Expiration of Term. Upon written notice by either party delivered at least 30 days before the expiration of the Initial Term or renewal term (collectively, "Term"), Executive's employment will terminate at the expiration of the Term. 8.2. Death; Disability. If Executive dies or becomes disabled during the Term of his employment, his employment shall be deemed terminated on the date of his death or disability. The Company shall provide Executive with any death or disability benefits generally provided to executive employees of the Company. 8.3. Cause. The Company may immediately terminate Executive's employment at any time for: 8.3.1. gross negligence or willful misconduct by Executive of any material duties as an executive officer of the Company which continues after 15 days written notice specifying such negligence or willful misconduct; or 8.3.2. the commission of any theft, fraud, embezzlement or similar crime involving the commission of any felony, for acts of dishonesty or moral turpitude, for intentional violations of the securities laws or for a material breach of any provision of this Agreement which is not cured within 10 days after Executive has received written notice of such breach from the Company. 9. COVENANT NOT TO COMPETE. Since Executive will be a key employee of the Company, Executive shall have access to Confidential Information, and the national scope of the Company's proposed business, Employee agrees that the restrictions on his future activities contained in this Section are fair, reasonable and necessary. 9.1. Covenant Period. The covenants contained in this Section shall continue until the earlier of one year after the termination of Executive's employment or at such time as OSS shall have sold and assigned its ownership interests in NetIgnite to either Executive or the other Member of NetIgnite (such Member being a corporation controlled by Executive (the "Covenant Period"). 9.2. Restrictions on Future Employment. In the event that Executive gives a notice of nonrenewal of the Term of this Agreement in accordance with Section 8.1 hereof, resigns his employment hereunder or is terminated for cause in accordance with Section 8.3 hereof, then, until the Covenant Period expires, Executive shall not own, manage, operate, control, be employed by, assist or participate in the ownership, management, operation or control of a business operating in the United States that is engaged in a business which is in competition with NI's business as such business was being conducted at the time of Executive's employment 12 hereunder. Nothing herein shall prohibit Executive from employment with or providing consulting services to a business whose activities include as a portion of its operations the business described in this subsection; provided that Executive does not assist or otherwise provide services to such business operations. In the event that Executive is terminated without cause, this provision shall not apply. 9.3. Non-solicitation. Executive shall not directly or indirectly: 9.3.1. induce any employee of the Company to leave the employ of the Company; 9.3.2. interfere with the relationship between the Company and any employee; 9.3.3. hire any Company employee to work for any organization of which Executive is an officer, director, employee, consultant, independent contractor or owner of an equity or other financial interest; 9.3.4. solicit or service any actual or prospective supplier, client, customer of the Company who was solicited or serviced during Executive's employment; or 9.3.5. interfere or attempt to interfere with any transaction involving the Company; until the Covenant Period expires. 10. SECURITIES MATTERS. Since the Executive will have access to Confidential Information, his ability to engage in securities transactions (including securities issued by the Company and by others) will be limited. Executive agrees to: 10.1. not engage in any transactions that violate the securities laws; 10.2. file all reports required by securities regulatory authorities; 10.3. provide information about securities transactions when requested by the Company; 10.4. follow written Company policies concerning securities transactions; 10.5. when requested by the Board, execute any "lock-up" agreements or other restrictions on transactions, provided that all executive employees of the Company are being requested to execute similar lock-up agreements; 10.6. comply with securities law requirements for all transactions. While Executive may request the Managers' permission for proposed securities transactions, Executive is still responsible for compliance with legal requirements. 11. SWITCHBOARD FINDER'S FEE. In the event that NI is sold to Switchboard Incorporated or its parent, Banyan Systems Incorporated (such companies herein referred to as "Switchboard"), Executive shall have the opportunity to earn a finder's fee if Executive secures a relationship acceptable to OSS between OSS and Switchboard which is distinct from the acquisition of NI by Switchboard and offers measureable revenue to OSS. In such event, OSS will pay Executive a fee based on the following formula:
Revenues to OSS Fee Paid, Based on % of Revenue --------------- ------------------------------- $ 0 - $1,000,000 5% $1,000,001 - $2,000,000 4% $2,000,001 - $3,000,000 3% $3,000,001 - $4,000,000 2% $4,000,001 + 1%
12. INJUNCTIVE RELIEF. Upon a material breach or threatened material breach by Executive of any of the provisions of Sections 3, 4, 5, 9 and 10 of this Agreement, the Company shall be entitled to an injunction restraining Executive from such breach, together with any other relief or remedy available, for such breach or threatened breach, including the recovery of damages. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies for such breach or threatened breach. If the Company or Executive takes legal action to enforce the provisions of this Agreement or to enjoin Executive or the Company from violating this Agreement, the prevailing party, as part of its damages, shall be entitled to recover its legal fees and expenses incurred in such action from the losing party. 13. SEVERABILITY. It is the desire and intent of the parties that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision or portion of this Agreement shall be adjudicated to be invalid or unenforceable, this Agreement shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such Section in the particular jurisdiction in which such adjudication is made. 14. NOTICES. All communications, requests, consents and other notices under this Agreement shall be given in writing and delivered by facsimile, courier, registered or certified mail (postage prepaid) to the receiving party at the address set forth below or the recipient's last known address. Notice shall be deemed given on the date of delivery as shown by the facsimile confirmation or delivery receipt. 15. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Colorado. 16. ASSIGNMENT. The Company may assign its rights and obligations under this Agreement to any successor corporation and all covenants and agreements hereunder shall inure to the benefit of and be enforceable by or against any such assignee. Neither this Agreement nor any rights or duties hereunder may be assigned or delegated by Executive. 17. NO WAIVER. A waiver by the Company of a breach of any provision of this Agreement by Executive shall not operate or be construed as a waiver of any subsequent or other breach by Executive. 18. AMENDMENTS. No provision of this Agreement shall be altered, amended, revoked or waived, except by an instrument in writing, signed by the Company and Executive. 19. BINDING EFFECT. Except as otherwise provided herein, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective legal representatives, heirs, successors and assigns. 20. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 21. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and understanding of the parties with respect to the subject matter hereof and supersedes all prior understandings, agreements or representations by or between the parties, whether written or oral. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. 14 ONLINE SYSTEM SERVICES, INC., a Colorado corporation By:____________________________________________ Its__________________ 1800 Glenarm Place Suite 700 Denver, Colorado 80202-3859 NETIGNITE 2, LLC By:____________________________________________ Its_________________ 1401 Blake Street Suite 201 Denver, Colorado 80202 EXECUTIVE: By:____________________________________________ PERRY EVANS 1401 Blake Street Suite 201 Denver, Colorado 80202 15 EX-10.9 4 ELECTRONIC BANKING SERVICE CONTRACT EXHIBIT 10.9 Online System Services, Inc. Electronic Banking Service Contract This Contract ("Contract") made and entered into on the 28th day of May, 1997 by and between Online System Services, Inc. ("OSS") having offices located at 1800 Glenarm Place, Denver, Colorado 80202 and Rockwell Federal Credit Union ("Client) located at ______________________________________ is as follows: 1. Scope of the Contract OSS agrees to set-up ("Set-up") an electronic banking system per the description in paragraph 3.1 and to provide Client with electronic banking services ("Services") as described in paragraph 3.2 and Schedule A (attached). This contract is for all Phase I Services only, as defined in Schedule A. Phase II and Phase III services are referenced in Schedule A of this agreement as services which will be made available to the Client by OSS in calendar Q1 1998 and Q3 1998 respectively. Phase II and Phase III services are not included in the pricing of this contract and will be purchased under a separate agreement between OSS and Client. 2. Relationship of the Parties 2.1 OSS will purchase certain software modules as defined in paragraph 3.1 from Edify Corporation ("Edify"). Additionally, OSS will contract with Edify for certain professional services during the Set-up of the electronic banking system. Set-up will include integrating an electronic commerce system which is being sold to Client by Checkfree Corporation ("Checkfree") under a separate agreement with Client 2.2 Upon completion of Set-up (paragraph 3.1.6) OSS will be responsible to provide the Services described in paragraph 3.2. All services related to the Checkfree electronic commerce system will be provided by Checkfree under a separate agreement with the Client. Services in Schedule A which are denoted by "Checkfree" in the column labeled "Implementation Phase" are included for reference only. 3. Statement of Work OSS shall set up an electronic banking system for Rockwell Federal Credit Union ("RFCU") and use it to provide ongoing electronic banking services to RFCU and its members. 3.1 Setup OSS shall establish an electronic banking system to provide the ongoing electronic banking services to RFCU that are specified in Schedule A, "Technical Specifications" as Phase 1 items. (Items designated part 2 of Phase I are not needed for commencement of service - they can be implemented after service is underway.) Specifically, OSS shall provide or acquire and shall assemble, configure and integrate the facilities, hardware, software, telecommunications lines and other components for the required RFCU electronic banking system. OSS shall also work with RFCU to integrate the electronic banking system with RFCU's Re:Member Data Services back-end computer system, and with CheckFree to integrate with the CheckFree bill payment system and service being procured separately by RFCU. 3.1.1 Edify Electronic Banking System OSS shall utilize Edify Electronic Banking System (EBS) software as the basis for RFCU's electronic banking services. This software will include the Electronic Workforce core underlying software layer, and the Home Banking, Personal Profile, Message Center and Bill Payment EBS Modules. The capability to integrate with CheckFree for bill payment is also provided. OSS shall acquire the required EBS software from Edify and, with support from Edify as a subcontractor, shall configure the software to meet the RFCU-specific needs described in Schedule A, including integration with Re:Member and with CheckFree. OSS shall work with RFCU personnel to define and implement the interface between. EBS and Re:Member, and with CheckFree personnel to implement the interface between EBS and CheckFree. It is expected tat RFCU will provide the appropriate permissions and authorizations as well as access to its relevant facilities, systems and personnel, will perform any needed configuration, modification or set up of existing RFCU systems, and will provide needed space or other facilities or equipment (e.g., AC power), in order to support implementation of the RFCU end of the interface to the electronic banking system. It is expected that CheckFree will be fully responsible for implementing its end of the interface to the electronic banking system. 3.1.2 Network and System Operation Center OSS shall provide a Compaq Proliant 2500, 6/200 system running OS/2 Warp as part of its Network and System Operation Center (NSOC) at its facilities in Denver. This server will have a 2 GB Wanglek Tape Backup system and will be running Edify's Electronic Banking System software (EBS). The NSOC will have five (5) modems available to RFCU customers for direct dial in access to the RFCU on-line banking system. Direct point to point connectivity between OSS and RFCU will allow the Edify system to directly talk to RFCU's banking back-end service. An interface with the 56Kbps frame relay connection from CheckFree will support the EBS-CheckFree interface. Redundant T-l connections to the Internet through two different carriers will ensure continuous Internet access. The NSOC has complete redundancy within its environment, this includes multiple redundant web servers, routers, Raid 5 systems, Hubs, Backup Domain controllers and SQL servers. 3.1.3 Backup System OSS shall provide backup or redundant server equipment to be used on behalf of RFCU and housed in an off-site Denver area location as a redundant Backup Site: Compaq 1500R Web server, Compaq Proliant 2500, 6/200 system running OS/2 Warp. This System will have "hot", direct Internet connectivity, a 2 GB Wanglek Tape Backup system and will be redundant to the system that houses RFCU's main interface. "Hot" backup direct point to point connection to RFCU and a "hot" interface with a backup frame relay connection from CheckFree will be provided for within this Backup Site. Three Backup modems will be immediately available for RFCU members should the Backup site need to be made available for use. Daily tape backups will be available to restore the RFCU system within 6 hours should the OSS facility fail. 3.1.4 Help Desk OSS shall provide a service bureau Help Desk to handle all customer inquiries regarding system operation. Sign-up and password protection are also to be provided by the Help Desk. OSS shall work with RFCU personnel to define and implement the interface of the Help Desk with the RFCU Customer Service and IVR systems, and with CheckFree personnel to define and implement the interface of the Help Desk with CheckFree's Customer Service and its Bill Pay D/R as required. It is expected that RFCU and CheckFree will be each be responsible for any modifications to their telephone, Customer Service or D/R systems needed to implement the interface with the Help Desk. -2- 3.1.5 Telecommunications Links OSS shall provide T1 connections to the Internet and 56 Kbps point-to-point lines for direct connectivity to RFCU, for both the NSOC and Backup Sites as described above. OSS shall provide RFCU with the required routers and CSU/DSUs for the RFCU end of the point-to-point connection (as well as for the OSS end). OSS shall also arrange for establishment of an 800 line connecting the RFCU customer service center with the OSS Help Desk center. It is understood that CheckFree will provide the 56 Kbps frame relay lines for direct connectivity between CheckFree and the NSOC and the Backup Site, as well as any router or (35U/DSU required at the OSS end of the connections. OSS will coordinate with CheckFree for interface of its Customer Service and Bill Pay IVR centers with the OSS Help Desk Center. It is understood that CheckFree is to arrange for these lines. OSS will coordinate the interface with CheckFree. 3.1.6 Completion of Set Up OSS intends to have the set up activities sufficiently complete and the system ready for a Pilot Test by September 1, 1997. A Pilot Test Period will be 30 days, unless RFCU and OSS mutually agree to a shorter period. It is the mutual intent of the parties to have full member service commence on or about October 13, 1997. For the Pilot Test, OSS will coordinate with RFCU personnel to exercise the system, in order to demonstrate the effective working of the appropriate functions and features specified in Schedule A. It is expected that RFCU will support this test by setting up appropriate "dummy" accounts or other test databases, establishing a group of nominally 50 RFCU employees to exercise the system using their own accounts, making access available to appropriate systems for test purposes, contributing to establishing the test plan and procedures, and participating in and monitoring the test. OSS and RFCU will jointly conduct the test, making note of any deficiencies discovered with respect to the functions and features of Schedule A. It is intended that OSS will be alerted immediately as to any such deficiencies discovered, and that OSS will promptly work to remedy them, so as to allow appropriate re- testing during the Pilot Test period. Before or at the conclusion of the Pilot Test Period, RFCU will indicate acceptance, conditional acceptance or rejection of test results. if no specific response is given within 5 days of the conclusion of the Pilot Test Period, the test results will be considered to have been accepted. if any deficiencies are outstanding at the conclusion of the Pilot Test Period, OSS will remedy them within 12 days in order to meet the specifications of Schedule A and to achieved acceptance. Upon acceptance of the Pilot Test results, the system will be considered ready to "go live" and online electronic banking service will then be available to RFCU members. 3.2 Ongoing Electronic Banking Services OSS shall provide ongoing electronic banking services to RFCU as specified in Schedule A, "Technical Specifications." 3.2.1 Electronic Banking Service OSS shall utilize the system as set up per section 3.1 above to provide on-line banking services to RFCU members, and associated management services to RFCU staff. -3- 3.2.2 Bill Payment Service For bill payment services, OSS shall provide the user interface to CheckFree, which will provide bill payment services under a separate agreement with RFCU. 3.2.3 Help Desk Service OSS shall provide a Help Desk for telephone-based customer service to RFCU members, for online banking (including interface to CheckFree bill payment) and related technical calls. The Help Desk staff at OSS will also assign all passwords and PIN numbers, distribute sign-up material and sign up all members onto the RFCU system. Members may contact OSS via e-mail, by postcards available in RFCU lobbies, optionally by direct dial, and by RFCU's PBX system. All user D's and passwords will be logged by OSS and usage and call tracking reports made available to RFCU staff. OSS will staff its help desk between 6:00 am and 12:00 midnight Pacific Time to handle all member and staff inquiries about the online banking system operations. Calls from members will be routed through RFCU's PBX telephone system, calls about account information will be handled by RFCU staff. Calls regarding operation and usage of the online banking and bill payment system will be handled by OSS help desk staff, or transferred directly to CheckFree's help desk staff RFCU members will be unaware of any transfers being made. A direct dial 800 number to OSS's help desk will also be provided, along with e-mail access. 3.2.4 Marketing Support OSS shall provide support to RFCU for marketing of the online electronic banking service per section III.A, Marketing Services, of Schedule A. 3.2.5 Training OSS shall provide training support for the electronic banking system. A series of two one-day training sessions will be conducted by OSS personnel at the main RFCU office once the system is set up. Designated RFCU staff, not to exceed twenty (20) trainees, will be trained on all the system's capabilities by OSS, with support from Edify, and OSS will coordinate with CheckFree so that CheckFree can include bill payment training as well if appropriate. 4. Fees and Payment Terms 4.1 Set-up Fee Client agrees to pay a Set-up Fee in the amount specified in Schedule B due upon the execution of this Contract. 4.2 Monthly Service Fees Client agrees to pay to OSS monthly, within 30 days of receipt of invoice, the amounts as set forth in the section titled "Monthly Service Fees" in Schedule B. Invoices will include applicable sales taxes, if any. 4.3 OSS agrees that, on the one (1) year anniversary of the commencement of Services, Client may elect t provide it's own Help Desk services provided Client has notified OSS in writing at least sixty (60) days prior to the one (1) year anniversary date. Upon receipt of such notification, 058 and Client agree to negotiate, in good faith, a mutually agreed upon reduction in Monthly Service Fees which is commensurate with the reduction in OSS provided Help Desk services. The -4- reduction in fees will become effective sixty (60) days after either the one (1) year anniversary date or the date of a written fee reduction agreement signed by both parties, whichever is later. 4.4 Invoices for Services shall be due and payable thirty (30) days after receipt of the invoice. If Client fails to pay such amounts when due, OSS may, at it's option and after giving at least ten (10) days prior written notice, discontinue furnishing the Services until all past due amounts are paid in full. 5. Term of Contract 5.1 This Contract shall be effective as of __________________ and shall remain in force for thirty six (36) months ("Initial Term") from the Completion of Set-up as defined in paragraph 3.1.6. The Contract shall automatically renew and extend for successive one (1) year terms commencing at the conclusion of the Initial Term unless contrary notice in writing is given by Client or OSS at least ninety (90) days prior to termination of the then current term. 5.2 One (1) year from Completion of Set-up (paragraph 3.1.6), Client may, at it's option, terminate this Contract if certain performance criteria, as specified in Schedule C, have not been met by OSS. Client shall notify OSS in writing, at least ninety (90) days prior to termination, of the areas of non compliance to the criteria in Schedule C and OSS shall have forty (45) days to cure such non compliance. If OSS is unable to cure, the Client may, at it's option, proceed with termination. 6. Trade Secrets and Confidentiality. Client acknowledges that all computer programs, data file content and organization, techniques, methods, rules, procedures, protocols, forms, instructions, trade secrets, copyrights and any other proprietary rights of 085 or third parties used in connection with or in any way relating to the System or Services ("Products") are the exclusive and confidential property of OSS or parties from whom OSS has secured such Products. Client, its subsidiary or affiliated corporations, consultants or contractors shall treat the Products as confidential and will not disclose or otherwise make available same in any form to any person other than employees of Client or its data processor who need to know such information for rendition of the Services. Client will instruct such employees and data processors to keep the same confidential using the same care and discretion that Client would use with respect to its own confidential property and trade secrets. Upon termination of this Contract for any reason, Client shall return to OSS any and all Products in its possession or under its control and shall cease using them in any way. 6.1 OSS shall treat as confidential and shall not disclose or otherwise make available the personal account information or other data received by OSS from Client ("Client's Data") or Users ("Users' Data") to any person, other than employees, agents, contractors or affiliates of OSS or Client. OSS shall instruct such employees, agents, affiliates and contractors to keep the same confidential by using the same care and discretion that OSS uses with respect to its own confidential information. OSS shall not release Client's Data to any party without written permission from Client. 7. Reliance on Information Provided. OSS shall rely on the accuracy of all information provided to OSS by Client. Client shall promptly inform OSS of any such incorrect data or information, bear the cost of correction and pay any damages arising therefrom. 8. Warranty and Limitation of Liability. 8.1 OSS warrants that it will exercise reasonable care in the performance of its obligations under this Contract. OSS makes no other warranties, express or implied, including without limitation, any warranty of merchantability or fitness for a particular purpose with respect to the services provided hereunder. Because of the extreme difficulty of fixing actual damages for any failure of -5- OSS to perform its obligations hereunder, or from any failure of OSS to perform any obligations imposed by law, the parties agree that OSS's liability hereunder, if any, shall be limited to liquidated damages in the amount of the Fees paid by Client to OSS for the two calendar months immediately preceding the month in which the event occurred that gave rise to the damages. The provisions of this paragraph apply even though the loss or damage, irrespective of cause or origin, results, directly or indirectly, either from performance or nonperformance of obligations imposed by this Contract. 8.2 IN NO EVENT WILL OSS BE RESPONSIBLE FOR (A) ANY INCIDENTAL, INDIRECT, CONSEQUENTIAL, SPECIAL, PUNITIVE, OR EXEMPLARY DAMAGES OF ANY KIND, INCLUDING LOST REVENUES OR PROFITS, LOSS OF BUSINESS OR LOSS OF DATA REGARDLESS OF WHETHER IT WAS ADVISED, HAD REASON TO KNOW, OR IN FACT KNEW OF THE POSSIBILITY THEREOF; OR (B) FOR ANY LOSS OR DAMAGE TO CLIENT OR USER, DIRECT OR CONSEQUENTIAL, ARISING OUT OF OR IN ANY WAY RELATED TO ACTS OR OMISSIONS OF THIRD PARTIES INCLUDING, BUT NOT LIMITED TO, ELECTRONIC COMMERCE SYSTEM PROVIDERS AND TELECOMMUNICATION CARRIERS. OSS shall not be liable for any delay or other failure of performance caused by factors beyond its reasonable control, such as, but not limited to, strikes, insurrection, war, fire, lack of energy, acts of God, governmental acts or regulation, or acts of third parties. If, alter the date of this Contract, any law, regulation, or ordinance, whether federal, state, or local, becomes effective that substantially alters the ability of OSS to perform services hereunder, OSS shall have the right to terminate this Contract upon thirty (30) days written notice to Client 9. Indemnification. OSS agrees to indemnify Client, its officers, directors, agents and employees from and against any and all loss, liability, cost and expense, including punitive damages and reasonable attorneys' fees, incurred by any one or more of them by reason of any and all claims, demands, suits, or proceedings made or brought against any one or more of them arising from or related to the breach of any obligation, responsibility, warranty, or representation made by OSS herein. Client agrees to indemnify OSS, its officers, directors, and employees from and against any and all loss, liability, cost and expense, including punitive damages and reasonable attorneys' fees, incurred by any one or more of them by reason of any and all claims, demands, suits or proceedings, made or brought against any one or more of them arising from or related to any act or omission of Client or the breach of any obligation, responsibility, warranty, or representation of the Client to OSS related to the operation, promotion, or use of the Services pursuant to this Contract. 10. Default; Remedies Upon Default. 10.1 Should Client (i) default in the payment of any sum of money hereunder, (ii) default in the performance of any of its other obligations under this Contract, (iii) become the subject of any proceeding under the Bankruptcy Code or become insolvent, or (iv) have any substantial part of its property become subject to any levy, seizure, assignment, application or sale for or by any creditor or governmental agency, OSS, at its option, may, upon at least ten (10) days advance written notice thereof, terminate this Contract and declare all amounts immediately due and payable. The remedies contained in this paragraph 10.1 are cumulative and are in addition to all other rights and remedies available to OSS under this Contract or at law or in equity. Conversely, should OSS fall into any of the above situations, the same remedies will apply on behalf of Client, at their option. 10.2 In the event either party defaults in the performance of this Contract, the other, not in default, shall have such remedies, including cancellation of this Contract, as may be appropriate at law or in equity; provided, however, that no legal action shall be brought by. either party unless the other shall have been given at least forty-five (45) days notice in writing specifying the alleged breach thereof and if during said time such breach is cured or remedied no such action shall exist -6- 11. General 11.1 Client acknowledges that it has not been induced to enter into this Agreement by any representation or warranty not set forth in this Agreement. This Agreement contains the entire agreement of the parties with respect to its subject matter and supersedes all existing agreements and all other oral, written or other communications between them concerning its subject matter. This Agreement shall not be modified in any way unless it is in written form and signed by both parties. 11.2 This Contract shall be binding upon and shall inure to the benefit of OSS and Client and their respective successors and permitted assigns. 11.3 If any provision of this Contract (or any portion thereof) shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remainder hereof, shall not in any way to be affected or impaired thereby. 11.4 The headings in this Contract are intended for convenience of reference and shall not affect its interpretation. 11.5 The individuals executing this Contract on behalf of OSS and Client do each hereby represent and warrant that they are duly authorized by all necessary action to execute this Contract on behalf of their respective principals. 11.6 This Agreement is made in the County of Denver, State of Colorado, and shall be construed and interpreted in accordance with the laws of the State of Colorado without regard to choice of law principles. 12. Arbitration. 12.1 Any controversy or claim between or among the parties hereto including but not limited to those arising out of or relating to this Contract or any related agreements or instruments, including any claim based on or arising from an alleged tort, shall be determined by binding arbitration in accordance with the Federal Arbitration Act (or if not applicable, the law of Colorado). Judgment upon any arbitration award maybe entered in any court having jurisdiction. Any party to this Contract may bring an action, including a summary or expedited proceeding, to compel arbitration of any controversy or claim to which this Contract applies in any court having jurisdiction over such action. 12.2 The arbitration shall be conducted in Los Angeles, California. All arbitration bearings will be commenced within ninety (90) days of the demand for arbitration, further, the arbitrator shall only, upon a showing of cause, be permitted to extend the commencement of such heating for up to additional sixty (60) days. 13. Notices. Service of all notices under this Agreement shall be in writing and son by U.S. Certified Mail, return receipt requested, postage paid, addressed to the party to be served notice at the following address: Online System Services, Inc. 1800 Glenarm Place, 8th Floor Denver, Colorado 80202 Attention: Steve Mans, President -7- Rockwell Federal Credit Union 7800 E. Imperial Highway Downey, California 90241 Attention: President EXECUTED in multiple originals on the dates shown below. ROCKWELL FEDERAL CREDIT UNION ONLINE SYSTEM SERVICES By: ___________________________ By:___________________________ Name:__________________________ Name:_________________________ (please print) (please print) Title:_________________________ Title:________________________ Date:__________________________ Date:_________________________ -8- EX-10.10 5 ONLINE BANKING SERVICE AGREEMENT EXHIBIT 10.10 ONLINE BANKING SERVICE AGREEMENT This Agreement ("Agreement") is made and entered into by and between ONLINE SYSTEM SERVICES, INC., a corporation organized under the laws of Colorado and located at 1800 Glenarm Place, Denver, Colorado 80202 ("OSS" or "Company") and CU COOPERATIVE SYSTEMS, INC., a cooperative organized under the laws of California ("CO-OP NETWORK" or "Client") and located at 2350 South Garey Avenue, Pomona, California 91766, with an effective date of FEBRUARY 10, 1999. 1. Recitals Whereas, CO-OP Network is legally organized as a cooperative that is owned by its shareholder credit unions, and Whereas, CO-OP Network's business is supplying electronic transaction switching and related services to its shareholder credit unions and to other credit unions, and Whereas, CO-OP Network desires to include online banking services among the services it offers its shareholder and other credit unions, and Whereas OSS is in the business of providing online banking services to financial institutions, and Whereas, OSS desires to provide online banking services to CO-OP Network and to support it in improving the quality of online banking offered its credit unions, Therefore, OSS and CO-OP Network, intending to be legally bound by this Agreement, agree as follows: 2. Definitions CO-OP Network's network - the network of interconnected ATMs, host computers, and external systems such as credit card processors and other ATM networks. ATMs - Automated Teller Machines. Deluxe Electronic Payment Systems ("Deluxe") - the company that operates CO-OP Network's electronic transaction switch for it on an outsource basis. Switch - the computer at Deluxe that connects and routes ATM and other electronic transactions between CO-OP Network's credit unions and between these credit unions and other parties on the CO-OP Network's network. Host - the computer a particular credit union uses for its internal, back-end account maintenance and processing, which may be on-premises at the credit union, or remote at a processing service center operated on an outsource basis. Online Banking - Internet-based access to various banking functions such as account information, transfers between accounts, and bill pay. Online Banking Service - the Online Banking Service provided under this Agreement by OSS for CO-OP Network, as used by CO-OP Network credit unions and their members. Online Banking System - the computer, network and telecommunications hardware, software and data bases that provide functions and features offered in the Online Banking Service. Online Banking Service Bureau - the providing of Online Banking Services by OSS to CO-OP Network's credit unions and their members on an outsource basis. Subscribers - members of CO-OP Network credit unions enrolled in the Online Banking Service who use the system for online banking. Users (of the Online Banking Service) - Subscribers, personnel of credit unions enrolled in the Online Banking Service who perform administration of their individual credit unions' online banking web sites or customer support, and personnel of CO-OP Network who perform administrative or customer support for CO-OP Network credit unions. EBS - Electronic Banking System licensed from Edify Corporation, which is the software layer upon which the Online Banking System is built. 3. Scope of Services OSS will set up and operate an Online Banking Service Bureau on behalf of CO-OP Network, to provide Internet-based remote banking services to CO-OP Network's credit unions (CUs) and their members on an outsource basis. 3.1 Initial System Design and Implementation OSS will set up an Online Banking System to provide Online Banking Services. OSS will provide or acquire and will assemble, configure and integrate the facilities, hardware, software, network systems, telecommunications lines and equipment, and other components for the required Online Banking System. OSS will employ the Edify Electronic Banking System (EBS) software as the foundation of the service, and will develop a custom Online Banking Service Bureau implementation for CO-OP Network, including integrating with the Deluxe switch and with the Bill Pay provider. OSS will also develop customer support materials for the program. Schedule A specifies the items and activities included in Initial System Design and Implementation. Schedule B specifies the functions and features to be included in the Online Banking System. 3.1.1 Network Operations Center OSS will provide the appropriate computing and network equipment at Network Operations Center (NOC) facilities in the Denver area. 3.1.2 Telecommunications Links OSS will provide T1/T3 connections to the Internet. CO-OP Network shall arrange for and maintain the appropriate telecommunications lines or links for direct connectivity from the Online Banking System to Deluxe and to the Bill Pay Provider. OSS will provide the required local access line, routers, and modems for the OSS end of the OSS-to- Deluxe connection and for the OSS end of the OSS-to-Bill Pay Provider connection, as specified in Schedule A. 3.1.3 Bill Payment For bill payment, OSS will provide the front end User interface for bill payment and the back end system interface from the Online Banking System to the Bill Pay Provider, as specified in Schedule A. CO-OP Network will contract directly with the Bill Pay Provider for bill payment services, including transaction research, adjustment and maintenance services. 3.1.4 Pilot Testing OSS shall have the Initial System Design and Implementation activities sufficiently complete and the system ready for a Pilot Test within six months of the effective date of this Agreement, -2- assuming the Deluxe and Bill Pay provider sides of those interfaces are made available in a timely manner and CO-OP Network provides its inputs in a timely manner. The Pilot Test will involve two or three credit unions, each with a different host system, unless OSS and CO-OP Network mutually decide differently. The Pilot Test Period will be 45 days, unless CO-OP Network and OSS mutually agree to a different period. The pilot credit unions will be brought up on line sequentially. For the Pilot Test, OSS will coordinate with CO-OP Network and pilot CU personnel to exercise the system, in order to demonstrate the effective working of the appropriate functions and features specified in Schedule B. CO-OP Network shall support this test by: contributing to establishing the test plan and procedures; making access available to appropriate systems for test purposes; establishing test accounts at the pilot CUs for OSS personnel; having CO-OP Network and pilot CU employees exercise the system using their own accounts; and participating in and monitoring the test. OSS and CO-OP Network will jointly conduct the test, making note of any deficiencies discovered with respect to the functions and features of Schedule B. OSS shall be alerted immediately as to any such deficiencies discovered, and OSS shall promptly work to remedy them, so as to allow appropriate re-testing during the Pilot Test Period. Before or at the conclusion of the Pilot Test Period, CO-OP Network will indicate acceptance, conditional acceptance or rejection of test results. If no specific response is given within 10 business days of the conclusion of the Pilot Test Period, the test results will be considered to have been accepted. If any deficiencies are outstanding at the conclusion of the Pilot Test Period, OSS will remedy them within 15 business days of notice in order to meet the specifications of Schedule B and to achieve acceptance. Upon acceptance of the Pilot Test results, the system will be considered ready for operation, and the Online Banking Service will then be made available to the pilot CUs' general membership, and then to other CO-OP Network CUs. Acceptance of Pilot Test results will constitute the Completion of Initial System Design and Implementation. 3.2 Service Bureau Operation OSS will configure and implement individual online banking Web sites for the various CUs CO-OP Network enrolls in the program, and will operate them on a service bureau basis. For each CU implementation, OSS will provide training, a User guide, online help and a Web-based customer support knowledge base and will support User enrollment. OSS will provide ongoing 24x7 system operation and management of each Web site, including redundant high bandwidth connections to the Internet and interfaces to Deluxe and the Bill Pay Provider. OSS will serve as Tier 2 technical support for the Online Banking Service, providing the CUs and CO-OP Network with support on technical issues requiring escalation. Schedule C specifies the items and activities included in Service Bureau Operation. Schedule D describes the overall customer service concept of operations, and the part that OSS will fulfill. 3.2.1 Capacity planning OSS shall implement in a timely manner the online banking Web sites for all CUs enrolled in the Online Banking Service Bureau as they are signed up. Implementing such online banking Web sites for CUs will require OSS (and CO-OP Network) labor and other resources. CO-OP Network agrees to work with OSS in planning the volume of CU online banking sites that OSS should be prepared to handle from period to period, so as to avoid implementation delays or over-capacity problems. 3.2.2 Test Accounts, Employee Dishonesty Insurance Each credit union will an online banking site will provide an appropriate test account that OSS can access, to support implementation testing and ongoing testing and troubleshooting by OSS. OSS -3- will maintain during the term of this Agreement coverage in the form of an employee dishonesty policy in the amount of $1,000,000 covering loss of or from damage to money and securities and property other than money and securities, from the fraudulent and dishonest acts, including wire fraud, of its employees. 3.3 Additional Services OSS will provide all services to setup the service bureau and operate it under nominal operating conditions, as specified in paragraphs 3.1 and 3.2 above. Additional charges would apply for work in addition to that specified in paragraphs 3.1 and 3.2. Examples of such additional work, for which additional charges would apply, are: modifying the EBS side of the interface to the Deluxe switch system to accommodate changes on the Deluxe or CU side of the interface (such as specification changes, upgrades, enhancements and migrations); designing or implementing system or service upgrades or modifications at CO-OP Network's request; adding other new or custom functions such as check imaging, real time loan applications, or "screen pops" for CU MSRs; implementing enhancements to the system or service as available and offered by Edify/OSS (such as Open Financial Exchange [OFX], bill presentment, and targeted promotions manager);and providing additional training on online banking. 3.3.1 Additional Functions and Features It is expected that from time to time that CO-OP Network will desire that certain new or enhanced functions and features or related services be added to the Online Banking Service it offers its credit unions. It is the pates' intention that CO-OP Network acquire those additional or enhanced functions, features or services through OSS, under this Agreement or an amendment to it. CO-OP Network and OSS agree to negotiate in good faith to arrive at mutually acceptable terms for incorporating such additions or enhancements. If OSS is unable to provide certain additional or enhanced functions, features or services requested by CO-OP Network or declines to do so, CO-OP Network may obtain those additional or enhanced functions, features or services from a third party without violation of paragraph 4 (Exclusive Provider), but OSS will continue to be the exclusive provider to CO-OP Network for the term of this Agreement of Online Banking Services within the scope of this paragraph 3. 3.3.2 Task Authorization Additional services will be conducted by way of task orders. CO-OP Network will authorize work packages by written task order, which will include a statement of work, deliverables and pricing. Pricing will be as negotiated and mutually agreed for each task order. A task order can be time and materials (T&M) at OSS's current T&M rates, or fixed price, or other mutually agreed terms. Blanket task orders can be established to allow informal authorization (verbally for instance) of a series of small tasks (e.g., periodic graphics updates for a CU not wishing to do it itself) under that blanket task order. 4 Exclusive Provider The pates agree that OSS will be the exclusive provider to the CO-OP Network of Online Banking Services within the scope of paragraph 3 for the term of this Agreement, and that OSS knowingly will provide Online Banking Services to CO-OP Network CUs only through and with CO-OP and, for twenty-four (24) months after Completion of Initial System Design and Implementation (as defined in paragraph 3.1.4), to any CU only after first affording CO-OP the opportunity to contract with such CU for Online Banking Service, unless otherwise mutually agreed on a case by case basis. 4.1 Existing CO-OP Online Banking Service It is recognized that CO-OP Network currently is providing Online Banking Services to certain CUs under the service name Access Anywhere, and certain other CUs are in the process of being enrolled in the -4- service ("Access Anywhere CUs"). As of the effective date of this Agreement, CO-OP Network will enroll all other CUs desiring Online Banking Services directly into the OSS-provided service, will cease marketing the existing Access Anywhere service, and when reasonably possible will migrate the Access Anywhere CUs to the OSS-provided service covered by this Agreement. CO-OP Network agrees to use reasonable effort to persuade the Access Anywhere CUs to change to the OSS service in a reasonably timely manner. It is recognized that the Access Anywhere CUs have certain contractual rights that allow them to make the ultimate decision as to when to migrate. If despite CO-OP Network's reasonable efforts, certain of these CUs decline to change to the OSS-provided service in a reasonably timely manner, CO-OP Network may continue to provide these CUs with Access Anywhere service without violation of the exclusive provider provisions of this paragraph 4. 4.2 Existing OSS Online Banking Service It is recognized that OSS offers services similar or identical to the Online Banking Services to financial institutions other than through this Agreement. Should OSS have any CU as a client, OSS may continue to provide that CU with such services outside the scope of this Agreement without violation of the exclusive provider provisions of this paragraph 4. 5 Fees and Payment Terms CO-OP Network will pay OSS for the services provided under this Agreement in the following manner. 5.1 Initial System Design and Implementation Fee CO-OP Network will pay OSS an Initial System Design and Implementation fee in the amount specified in Schedule F. This fee is payable upon execution of this Agreement. 5.2 Service Bureau Monthly Fee CO-OP Network will pay OSS a monthly fee to operate and maintain the Online Banking System and Service, in the amount specified in Schedule F. OSS will invoice CO-OP Network monthly, and COOP Network agrees to pay monthly. 5.3 Credit Union Setup Fee CO-OP Network will pay OSS a setup fee for each credit union when it is enrolled in the service bureau, in the amount specified in Schedule F. This amount is payable to OSS prior to OSS's commencing work on implementing the online banking Web site for that credit union. 5.4 Credit Union Monthly Fee CO-OP Network will pay OSS a credit union monthly fee for all credit unions enrolled in the system at month end, in the amount specified in Schedule F. OSS will invoice CO-OP Network monthly, and CO-OP Network agrees to pay monthly. 5.5 Subscriber Monthly Fees CO-OP Network will pay OSS a subscriber monthly fee for all Subscribers enrolled in the system at month end, in the amount specified in Schedule F. OSS will invoice CO-OP Network monthly, and CO-OP Network agrees to pay monthly. -5- 5.6 Transaction Fee CO-OP Network will pay OSS a transaction fee for transactions performed through Deluxe, in the amount specified in Schedule F. OSS will invoice CO- OP Network monthly, and CO-OP Network agrees to pay monthly. 5.7 Months and Years Defined The fees to be paid monthly are based on activity during the month (such as operating the service for the month, adding CUs, or processing a certain number of transactions through Deluxe) or totals at end of month (such as number or enrolled CUs or Subscribers). And several fee levels as specified in Schedule F vary according to year. For invoicing purposes, a month is a calendar month, and years begin counting at the 1st of the next calendar month after Completion of Initial System Design and Implementation as defined in paragraph 3.1.4. Any fractional month between Completion of Initial System Design and Implementation and the l~ of the next calendar month, or at the end of the Term of this Agreement, will be treated on a pro rata basis based on number of days. 5.8 Future Changes in Laws or Regulations If future changes in the laws or regulations affecting the business of CO- OP Network or any CO-OP Network CU require OSS to incur material changes to the Online Banking Services provided under this Agreement, the pates agree that they will negotiate and mutually agree to the changes required and any resulting adjustments in the fees payable by CO-OP Network to OSS under this Agreement. 5.9 Changes in Technology OSS will render the Online Banking Services under this Agreement using the EBS software available from and supported by Edify. CO-OP Network will cooperate with OSS with the use of any upgrades to the EBS required by Edify. If at any time during the term of this Agreement other changes in the software or other technology used for rendering the Online Banking Services under this Agreement are reasonably required or requested by either party, OSS and CO-OP Network will negotiate and mutually agree to the applicable changes and any resulting adjustments in the fees payable by CO-OP Network to OSS under this Agreement. 5.10 Fees for Additional Services OSS will invoice CO-OP Network monthly for any additional service work performed under the provisions of paragraph 3.3, with amounts detailed by task order. Billing will include any incurred T&M charges, as well as any initial, progress or final payments that are part of fixed price task orders. 5.11 Residual Costs Fee Upon conclusion of the Term of this Agreement, or upon any early termination, CO-OP Network will pay OSS a Residual Costs Fee, which is intended to cover unabsorbed setup costs associated with adding new Subscribers towards the end of the service, in the amount specified in Schedule F. 5.12 Invoices Invoices will include applicable sales taxes, if any. Invoices will be due and payable thirty (30) days of receipt of the invoice. If with respect to any amount which is not at the time subject to a good-faith dispute, CO-OP Network fails to pay such amounts when due, OSS may, at its option and after giving at least twenty-one (21) days' prior written notice, discontinue furnishing the Online Banking Services specified in paragraph 3 until all past due amounts are paid in full. -6- 6 Term of Agreement This Agreement will remain in force for five (5) years ("Initial Term") from the date of Completion of Initial System Design and Implementation, as defined in paragraph 3.1.4. At its sole option to be exercised by CO-OP Network by written notice given not less than 270 days before the end of the Initial Term, this Agreement may be extended for an additional term of five (5) years. Thereafter (or at the end of the Initial Term if CO-OP Network fails to extend for an additional five year (5) term), the Agreement will automatically renew and extend for successive one (1) year terms unless contrary notice in writing is given by CO-OP Network or OSS at least one hundred eighty (180) days prior to termination of the then current term. The Initial Term and any renewal terms are together referred to as the "Term" of this Agreement. If CO-OP Network exercises its option to extend for an additional five (5) year term, then within thirty days of receipt of that notice by OSS, OSS may nonetheless terminate this Agreement and the relationship at the end of the Initial Term by arranging for a transfer to CO-OP Network of all items held in escrow pursuant to Section 14.1, below, to occur at the end of the Initial Term. Upon such transfer, CO-OP Network shall pay through the escrow the sum of Two Hundred Fifty Thousand Dollars ($250,000) to OSS, in addition to any amounts payable pursuant to Section 14.1. 7 Early Termination for Business Reasons The parties acknowledge that they are entering into this Agreement with the expectation that a significant number of CO-OP Network CUs and their members will subscribe to the Online Banking Service covered by this Agreement. If there are fewer than 25,000 Subscribers (actual or reasonably anticipated) enrolled in the Online Banking Service by the third anniversary of Completion of Initial System Design (as defined in paragraph 3.1.4), either party may, no later than (30) days after the third anniversary date, give notice of its intent to terminate this Agreement early, provided the effective date of termination as specified in said notice follows the date of the notice by at least one hundred eighty (180) days. Should a party make such a call for early termination, the parties agree to work together to plan and implement a controlled wind-down of service. It is acknowledged that this controlled wind-down may entail OSS performing additional work that will need to be covered under the provisions of paragraph 3.3, and the parties agree to work together in good faith to define and implement the wind-down and termination of the Agreement. 8 Confidential Information 8.1 Acknowledgment of Confidentiality Each party hereby acknowledges that it may be exposed to confidential and proprietary information of the other party, or related third parties such as Edify or Deluxe, including, without limitation, technical information (specifications, designs, drawings, analysis, research, processes, computer programs, methods, ideas, "know how" and the like), business information (sales and marketing research, materials, plans, accounting and financial information, personnel records and the like) and other information designated as confidential expressly or by the circumstances in which it is provided ("Confidential Information"). Confidential Information does not include (i) information already known or independently developed by the recipient; (ii) information in the public domain through no wrongful act of the recipient, or (iii) information received by the recipient from some third party who was free to disclose it. 8.2 Covenant Not to Disclose With respect to the other party's Confidential Information or a related third party's Confidential Information obtained from the other party, the recipient hereby agrees that during the Term and at all times thereafter it will not use, commercialize or disclose such Confidential Information to any person or entity, except to its own employees having a "need to know" (and who are themselves bound by similar nondisclosure restrictions), and to such other recipients as the other party may approve in writing; provided, that all such recipients will have first executed a confidentiality agreement in a form acceptable -7- to the owner of such information. Neither party nor any recipient may alter or remove from any software or associated documentation owned or provided by the other party any proprietary, copyright, trademark or trade secret legend. Each party will use at least the same degree of care in safeguarding the other party's Confidential Information as it uses in safeguarding its own confidential information. Upon termination of this Agreement for any reason, each party will use its best effort to effect the return of all such Confidential Information obtained from the other party in its possession or under its control and will cease using it in any way. The terms and conditions of this Agreement, including, without limitation, the fees payable by CO-OP Network, shall be considered confidential information of OSS, subject to the nondisclosure restrictions under this paragraph 8.2. 9 Reliance on Information Provided OSS will rely on the accuracy of all information provided to OSS by CO-OP Network. CO-OP Network will promptly inform OSS of any such incorrect data or information, bear the cost of correction and pay any damages arising therefrom. 10 Data Security The Online Banking System will contain data on the members of the CO-OP Network credit unions who use the system (CO-OP Network User Data). This data will include such items as User IDs, PINs, bill payment payee and payment lists, and certain bill payment and account history data. OSS acknowledges that CO-OP Network User Data will remain the property of CO-OP Network, and agrees to provide CO-OP Network, upon its reasonable request, with copies of the CO-OP Network User Data in a mutually agreed form. 10.1 Restricted Access OSS will implement reasonable security precautions designed to restrict external access to CO-OP Network User Data so that a User will only be able to access his own data in the CO-OP Network User Data, and only his credit union and CO-OP Network will have administrative access to a User's data. 10.2 Data Integrity OSS will implement reasonable security precautions designed to prevent the loss or alteration of COOP Network User Data. 10.3 Data Retention OSS shall retain copies of all CO-OP Network User Data and Online Banking System transaction logs and reports for at least 1 year. OSS agrees to notify CO-OP Network 30 days in advance of any plan to dispose of any such data, and will provide archive copies of such data to CO-OP Network prior to such disposition if so requested. 11 Disaster Recovery OSS will maintain a disaster recovery plan and will perform disaster recovery preparations including maintenance of current backup tapes stored off-site from the Network Operations Center (NOC). In the event of a disaster, OSS shall execute its disaster recovery plan, which will include provisions for acquiring and integrating appropriate replacement computing and network equipment at the NOC or at a backup NOC as required, re-establishing appropriate telecommunications links as required, and re-installing software and databases from backup tapes as required. Such disaster recovery systems shall be tested no less than annually and results made available to CO-OP Network. OSS shall exercise its best efforts, consistent with its obligations to its entire customer base and to the extent within the reasonable control of OSS, to reestablish the Online Banking Service at the earliest possible time following a disaster. -8- 12 Minimum Performance Requirements OSS recognizes the importance to CO-OP Network of high availability of the Online Banking Services specified in paragraph 3.2, including high reliability of the online banking web site and high levels of responsiveness to customer support requirements. OSS therefore agrees to meet the minimum performance criteria specified in Schedule E. 13 Default 13.1 Declaration of Default Either party may be declared in default of this Agreement upon written notice thereof (describing the default and [as best the party is able] the steps necessary to correct the default) if it breaches any material provision of this Agreement and fails for ten (10) days after receipt of written notice of default to correct such default or to commence corrective action reasonably acceptable to the other party and proceed with due diligence to completion. If the alleged default cannot reasonably be corrected within such ten (10) day period, the party allegedly in default will have up to an additional twenty (20) days to correct the default so long as that party uses all reasonable efforts to correct the default as soon as reasonably possible during that twenty (20) day period. 13.2 Bankruptcy, Insolvency Either party may be declared in default of this Agreement upon written notice thereof if it files for bankruptcy or has a petition filed against it which has not been dismissed within ninety (90) days, or becomes insolvent, or if any substantial part of such party's property becomes subject to any levy, seizure, assignment, application of sale for or by any creditor or governmental agency, and in any such event, the non-defaulting party may also declare all amounts due, and to become due, immediately due and payable. 13.3 Termination for Default Should either party be declared in default and that default not be timely corrected, the party not in default, at its option, may, upon written notice thereof after expiration of the applicable time period in Section 13.1 above, terminate this Agreement and declare all amounts immediately due and payable. The remedies contained in this paragraph are cumulative and are in addition to all other rights and remedies available under this Agreement or at law or in equity. 14 Software Escrow OSS agrees to keep and maintain in escrow pursuant to an escrow agreement attached hereto as Schedule G with an escrow agent acceptable to CO-OP current executed copies of an Edify License Transfer Agreement (an unexecuted copy of which is attached hereto as Schedule H) and the EBS Application Software together with all reasonably available documentation for said Software and business processes employed in providing the Online Banking Service. The escrow agreement will authorize and obligate the escrow agent to release the EBS Application Software and documentation to CO-OP Network upon receipt of a letter of request from CO-OP Network. CO-OP agrees that it will only execute and deliver a letter of request to the escrow agent if it is able to represent therein that OSS is in default under this Agreement and such default has not been timely cured pursuant to this Agreement. 14.1 Edify License Transfer OSS will maintain with the escrow agent a current executed Edify License Transfer Agreement. This agreement will effect a transfer from OSS to CO-OP Network of the Edify Electronic Banking System software and service bureau licenses obtained by OSS and in use for the Online Banking Services pursuant to this Agreement. The Transfer Agreement will include provisions for CO-OP Network to pay OSS the -9- then remaining value of the Edify licenses, calculated using a straight- line 5-year amortization schedule applied to the actual purchase prices and dates of original acquisition by OSS from Edify. 14.2 EBS Application Software OSS will provide the escrow agent with a copy of the EBS Application Software and a license for COOP Network to use that software to provide Online Banking Services to CO-OP Network member credit unions. EBS Application Software is that software developed and implemented by OSS for use in support of the Online Banking Services delivered to CO-OP Network under this Agreement. This software includes the configuration parameters needed to operate the CO-OP Network EBS system, the application code needed to execute the CO-OP Network EBS system (including EBS application code for the Deluxe and Bill Pay Provider interfaces), the CO-OP Network EBS database schemas, and the supporting HTML and active server page scripts, and applicable operating manuals. OSS agrees to provide the escrow agent copies of this Application Software on no less than a quarterly basis throughout the term of this Agreement, and also when major upgrades occur. 15 Insurance, Indemnity Each party will maintain adequate insurance protection covering its respective activities hereunder, including coverage for statutory workers' compensation, comprehensive general liability for bodily injury and property damage, as well as adequate coverage for vehicles. Each party hereto waives any claim against the other to the extent it is reimbursed by its own insurance carrier. To the extent a party is not reimbursed by its own insurance carrier, each party will indemnify, defend and hold the other harmless from all claims, liability, settlements, costs and expenses, including reasonable attorneys' fees, for loss or damage to the extent and in the proportion resulting from the acts or omissions of its own officers, agents, employees or representatives. Each party does waive as against the other party to this Agreement all rights of subrogation it or those claiming through it might have. 16 Covenants, Representations, Warranties and Limitation on Liability The parties acknowledge that the following provisions reflect a fair allocation of risk: 16.1 Warranties OSS warrants, to the extent warranted by Edify to OSS, that (i) the use of the EBS for the Online Banking Services rendered under this Agreement will not infringe any patents or copyrights under United States law and (ii) the EBS is "Year 2000 Compliant." "Year 2000 Compliant" means (to the extent that other information technology, used in combination with the EBS, properly exchanges date/time data with the EBS) the EBS as provided by Edify will accurately process date/time data from, into and between the twentieth and twenty-first centuries, and the years 1999 and 2000 in accordance with the Edify-supplied documentation. OSS warrants that it will exercise reasonable care in the performance of its obligations under this Agreement. OSS makes no other warranties, express or implied, including without limitation, any warranty of merchantability or fitness for a particular purpose with respect to the services provided hereunder. OSS agrees to provide to CO-OP timely and substantive responses to any inquiries submitted by CO-OP concerning the status of the Online Banking System in relation to year 2000 compliance. If such responses will require OSS to incur costs outside the normal course of business, CO-OP will reimburse OSS for these costs. 16.2 Limitation of Liability OSS's MAXIMUM AGGREGATE LIABILITY FOR DAMAGES TO CO-OP NETWORK SHALL BE LIMITED TO ACTUAL, DIRECT AND OUT-OF-POCKET MONEY DAMAGES SUFFERED OR INCURRED BY CO-OP NETWORK IN AN AMOUNT NOT TO EXCEED THE AMOUNT OF THE FEES PAID BY CO-OP NETWORK TO OSS FOR THE THREE CALENDAR MONTHS IMMEDIATELY PRECEDING THE MONTH IN WHICH THE EVENT OCCURRED THAT GAVE -10- RISE TO THE DAMAGES, OR $2,500,000, WHICHEVER IS LESS. THE PROVISIONS OF THIS PARAGRAPH APPLY EVEN THOUGH THE LOSS OR DAMAGE, IRRESPECTIVE OF CAUSE OR ORIGIN, RESULTS, DIRECTLY OR INDIRECTLY, EITHER FROM PERFORMANCE OR NONPERFORMANCE OF OBLIGATIONS IMPOSED BY THIS AGREEMENT. 16.3 Limitation on Certain Kinds of Damages and Third Party Actions IN NO EVENT WILL OSS BE RESPONSIBLE FOR (A) PUNITIVE OR EXEMPLARY DAMAGES OF ANY KIND, OR LOST REVENUES OR PROFITS, REGARDLESS OF WHETHER IT WAS ADVISED, HAD REASON TO KNOW, OR IN FACT KNEW OF THE POSSIBILITY THEREOF; OR (B) FOR ANY LOSS OR DAMAGE TO CO-OP NETWORK, DIRECT OR CONSEQUENTIAL, ARISING OUT OF OR IN ANY WAY RELATED TO ACTS OR OMISSIONS OF THIRD PARTIES INCLUDING, BUT NOT LIMITED TO, BILL PAYMENT SYSTEM PROVIDERS AND TELECOMMUNICATION CARRIERS. NEITHER PARTY SHALL SEEK, OR OTHERWISE APPLY FOR, ANY PUNITIVE OR EXEMPLARY DAMAGES. 16.4 Factors Beyond Control OSS will not be in default under this Agreement or liable for any delay or other failure of performance caused by factors beyond its reasonable control, such as, but not limited to, strikes, insurrection, war, fire, floods, earthquakes, lack of energy, acts of God, governmental acts or regulation, power outages, telecommunications failures or delays, or acts of third parties. Any right of termination or other remedy under this Agreement shall be delayed during the occurrence of any event described in this Section 16.4 so long as OSS continues to use reasonable efforts to restore its ability to continue to comply with this Agreement. OSS will not be in default under this Agreement if, after the date of this Agreement, any law, regulation, or ordinance, whether federal, state, or local, becomes effective that substantially prevents the ability of OSS to perform services hereunder. In such event OSS will have the right to terminate this Agreement upon one hundred eighty (180) days written notice to Client. 16.5 CO-OP Network Covenants CO-OP Network covenants and agrees that it shall include in its customer contracts covering the resale of Online Banking Service a provision substantially as follows: "The CO-OP Network, its officers, directors, employees, agents and suppliers shall have no liability for delay or failure of performance in any manner whatsoever caused or contributed to by factors beyond the reasonable control of such parties." 16.6 Authority, No Conflict Each party represents that it has the full right, power and authority to enter into this Agreement and to perform its obligations under this Agreement. Each party acknowledges that this Agreement constitutes a legal, valid and binding obligation on it enforceable against it in accordance with the terms of this Agreement. Each party warrants that its entering into and performing under this Agreement will not result in a breach nor constitute a default under its certificate of incorporation or bylaws or any agreement or instrument to which it is a party or by which it or its assets are bound. 17 Disputes, Governing Law 17.1 Arbitration Any controversy, claim or dispute between the parties hereto including but not limited to those arising out of or relating to this Agreement or any related agreements or instruments, including any claim based-on or arising from an alleged tort, shall be determined by binding arbitration in accordance with the Federal Arbitration Act (or if not applicable, the law of Colorado). Judgment upon any arbitration award may be entered in any court having jurisdiction. Any party to this Agreement may bring an action, including a summary or expedited proceeding, to compel arbitration of any controversy or claim to which this -11- Agreement applies in any court having jurisdiction over such action. Neither party will initiate an arbitration proceeding until the parties have, during at least a thirty (30) day period, used reasonable efforts to attempt to resolve any dispute or claim under this Agreement. 17.2 Venue The arbitration shall be conducted in Denver, Colorado, if initiated by CO- OP Network, and in Los Angeles County, California, if initiated by OSS. All arbitration hearings will be commenced within ninety (90) days of the demand for arbitration; further, the arbitrator shall only, upon a showing of cause, be permitted to extend the commencement of such hearing for up to an additional sixty (60) days. 17.3 Governing Law This Agreement shall be construed and enforced in accordance with the laws of the State of Colorado without regard to choice of law principles. 18 Audit and Inspection Upon reasonable advance notice to OSS, CO-OP Network may at its expense during business hours inspect and audit the records of OSS pertaining to the calculation of fees payable under this Agreement. In addition, OSS will arrange annually for a third party review of its systems, controls and operations, and will make the results of that review available to CO-OP Network. 19 Notices Service of all notices under this Agreement shall be in writing and sent by U.S. Certified Mail, return receipt requested, postage paid, or by national overnight delivery carrier such as FedEx, addressed to the party to be served notice at the following address: Online System Services, Inc. 1800 Glenarm Place, 8th Floor Denver, Colorado 80202 (303) 296-9200 Attention: ____________________ The CO-OP Network 2350 South Garey Avenue Pomona, California 91766 (800) 782-9042 Attention: ____________________ 20 Trademarks, Publicity and Branding OSS and CO-OP Network will not use each other's trademarks or service marks without the other party's prior written consent, which will not be unreasonably withheld. OSS and CO-OP Network may use each other's name, with consent, in customer lists and will cooperate with each other with publicity and marketing activities. CO-OP may "brand" the Online Banking Service provided by OSS by using the "ACCESS ANYWHERE" brand or another brand of its determination. -12- 21 Continuing Obligations CO-OP Network's and OSS's continuing obligations under this Agreement include, without limitation, those relating to Confidential Information as set forth in paragraph 8, those relating to limitation of liability as set forth in paragraph 16, those relating to indemnification as set forth in paragraph 15, and all other obligations which expressly state that they survive. These continuing obligations shall survive and continue in effect after the termination of this Agreement. 22 General 22.1 Client acknowledges that it has not been induced to enter into this Agreement by any representation or warranty not set forth in this Agreement. This Agreement contains the entire agreement of the pates with respect to its subject matter and supersedes all existing agreements and all other oral, written or other communications between them concerning its subject matter. This Agreement shall not be modified in any way unless it is in written form and signed by both pates. 22.2 Neither party will assign this Agreement without the prior written consent of the other party, such consent not to be unreasonably withheld. No consent shall be required for the assignment of this Agreement by either party in connection with a merger or sale of substantially all of the assets of a party, provided that the affected party provides the other party prompt notice of the transaction. This Agreement shall be binding on OSS and CO-OP Network and their respective successors and assigns. Any assignment in violation of this Section 22.2 shall be void. 22.3 If any provision of this Agreement (or any portion thereof) shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remainder hereof, shall not in any way to be affected or impaired thereby. 22.4 Waiver of any provision hereof in one instance shall not preclude enforcement thereof on future occasions. 22.5 The headings in this Agreement are intended for convenience of reference and shall not affect its interpretation. 22.6 The individuals executing this Agreement on behalf of OSS and Client do each hereby represent and warrant that they are duly authorized by all necessary action to execute this Agreement on behalf of their respective principals. 22.7 This Agreement includes each of the Schedules referred to herein, which are incorporated in this Agreement by reference. -13- EXECUTED in multiple originals on the dates shown below. THE CO-OP NETWORK ONLINE SYSTEM SERVICES By: /s/ By: /s/ ------------------------------- --------------------------------- Name:_____________________________ Name:_______________________________ (please print) (please print) Title:____________________________ Title:______________________________ Date:_____________________________ Date:_______________________________ -14- EX-10.11 6 INTERNET/BUSINESS SITE DEVELOPMENT & HOST AGMT. EXHIBIT 10.11 INTERNET/BUSINESS SITE DEVELOPMENT & HOST AGREEMENT This Agreement ("AGREEMENT") is entered into and effective this 12th day of November, 1997 by and between RE/MAX International, Inc. ("RE/MAX"), a Colorado corporation with its principal place of business soon to be relocated to 8390 East Crescent Parkway, Suite 600, Greenwood Village, CO 80111 and Online Systems Services, Inc. ("OSS"), a Colorado corporation with its principal place of business at 1800 Glenarm Place, Denver, CO 80202. WHEREAS, RE/MAX is interested in creating for itself and providing to its affiliates a private site on the World Wide Web ("WWW") for their use in communicating with RE/MAX and other affiliates and benefiting from an array of other service capabilities and is desirous of assuring that such site is always competitive, if not state of the art, and regularly enhanced to take full advantage of emerging technologies, such site is to be a password protected area on the WWW using HTML documents, Active Server Pages, Databases, Forums, Chat Rooms and other features, all combined to present a virtual RE/MAX community which initially will be referred to as "RE/MAX Mainstreet," and such site will include, among other functions, security, help desk, billing, and Email and will be hosted and administered for RE/MAX; and WHEREAS, OSS is a company with expertise in the design and development of Internet web pages and their placement on the World Wide Web ("WWW"), a company that desires to serve the needs of RE/MAX and is capable of developing from its proprietary OSS FORUMS software and format a custom software product and a unique, password protected web site on the WWW which meets the needs and specifications of RE/MAX, is interested in hosting the web site and providing the other ancillary services required by RE/MAX, and is willing to grant RE/MAX an industry specific exclusive license respecting the desired customized version of OS S's proprietary software products to be known herein as the R/M Customized Software. NOW THEREFORE, in consideration of the mutual covenants set forth herein, the parties hereto agree as follows: 1. DEFINITIONS For purposes of this AGREEMENT and their relationship, the following terms shall have the meanings assigned to them. a. "HOST SERVICES": That collection of services specified to be provided by the entity acting as host of RE/MAX Mainstreet, including without limitation, services such as security, help desk, billing, Email and other specified ancillary services commonly or customarily performed by a site host. b. "DELIVERABLES": The components of the online services and capabilities specified for subscribers to RE/MAX Mainstreet, including without limitation, Host Services, HTML documents, Active Server Pages, Databases, Forums, Message Conferences, Chat, a Moderated Library and other services and capabilities specified in this AGREEMENT. c. "EMBEDDED SOFTWARE": Commercially available, third party software such as Microsoft SQL Server, Microsoft Internet Information Server, Microsoft Commerce Server, Internet Explorer 4.0 Browser, VPOS, which software is not owned by OSS, but is or will be used by OSS in its solutions to RE/MAX's business web site objectives. d. "DEVELOPED SOFTWARE": Software developed and owned exclusively by OSS, including without limitation, that software developed using ASP Technology for highly flexible, database-driven WWW web sites and that software developed by OSS to enhance or supplement the OSS FORUMS Software and/or compliment or integrate the Embedded Software in the creation of the R/M Customized Software. e. "`OSS FORUMS' SOFTWARE": An integrated, creatively interfaced combination of Developed Software and Embedded Software which serves as OSS's basic suite of virtual community products. The operational software package from which OSS's response to RE/MAX's RFP was developed. f. "R/M CUSTOMIZED SOFTWARE": "OSS FORUMS Software as customized, enhanced and modified by Developed Software and Embedded Software to meet the objectives of RE/MAX for "RE/MAX Mainstreet" and which, when properly interfaced, supported, and integrated, will provide the Deliverables specified by RE/MAX for "RE/MAX Mainstreet." g. "RE/MAX MAINSTREET": The RE/MAX highly flexible, functional, scalable, portable, easy-to-use, database driven business, virtual community web site which utilizes the R/M Customized Software and which satisfies all criteria and specifications identified in the RE/MAX RFP and related meetings between RE/MAX and OSS and contemplated by this AGREEMENT. h. "RESIDUAL INFORMATION": Information in non-tangible form, which may be retained by persons within OSS's organization who have participated in the development and delivery of the R/M Customized Software anchor the RE/MAX Mainstreet site. i. "INDUSTRY EXCLUSIVE LICENSE": An exclusive license within the real estate industry, for the term of this license and any renewals thereof, to use the OSS FORUMS Software and the Developed Software in the bundled product comprising the R/M Customized Software and to use exclusively the un-bundled customized Developed Software components of the R/M Customized Software. Under the exclusivity terms, OSS agrees not to resell or replicate the R/M Customized Software, the bundled package comprising the R/M Customized Software page 3 missing consistent with the specifications set forth in Exhibit A thru F attached. f. LINKING AND BRIDGING CAPABILITIES: System flexibility for creating data entry, transfer, and retrieval and communication links to third party service and content providers, e.g., CyberHomes, on the WWW consistent with the specifications set forth in Exhibit E attached. g. ADMINISTRATIVE CAPABILITIES: An OSS FORUMS administrator interface which provides for administering and reporting on the subscriber accounts, structure of the conferences, chat rooms, libraries, content (text), and other components of RE/MAX Mainstreet and otherwise consistent with Exhibit F attached. In addition, RE/MAX shall have file transfer protocol access for upgrading graphics and layout content for the RE/MAX Mainstreet site. h. TELEPHONE HELP DESK: On call subscriber help desk and support capabilities which will provide subscribers the ability to speak to a technical support agent within (3) minutes of receiving the call. Support will be available from 6:00 a.m. until 12 midnight, Mountain time, (7) days a week. In addition, technical support will be accessible via Email with a response within 24 hours and otherwise consistent with Exhibit G attached. i. BILLING CAPABILITIES: Each subscriber will be billed for the subscription fee on a monthly basis after initial Conference and Email setup is completed and authorization is performed by RE/MAX. The subscriber will be billed via an automatic debit to a registered credit card and OSS is responsible for collecting the monthly fee. Billing disputes and questions can be answered via the on-line Telephone Help Desk provided by OSS. -2- 3. BENCH MARKS TOWARD COMPLETION To assure regular progress toward the timely completion of all required software customization and ultimately, the timely availability of RE/MAX Mainstreet, OSS and RE/MAX shall meet the following "bench marks": a. On or before November 30, 1997, RE/MAX shall provide to OSS the initial requirements for all front page and related graphic and textural content. All text to appear shall be provided in a word processing format (Microsoft WORD, WordPerfect or ASCII test) via computer disk or via Email. Art work, logos, and photos to be used in the site shall be provided in the form of digital files. b. On or before December 15, 1997, OSS shall demonstrate online the RE/MAX Mainstreet site, accessible via the agreed upon URL address "_______________ _______________." Such demonstration need not include all graphics and/or text content provided or to be provided by RE/MAX, but such demonstration shall include successful functional performance of not less than eighty percent (80%) of the OSS FORUMS Software features checked as "Yes" in OSS's proposal in response to RE/MAX's RFP. c. On or before December 19, 1997, RE/MAX shall provide to OSS the final rendition of all front page and related graphic and textural content in the formats specified in sub-paragraph "a." above. The parties hereto agree that RE/MAX is, and will remain, the exclusive owner of all rights in the graphic and textural material, including but not limited to its marks, provided by RE/MAX, and the benefit of all use thereof in RE/MAX Mainstreet shall enure exclusively to RE/MAX. d. On or before January 10, 1998, OSS shall demonstrate online the RE/MAX Mainstreet site, including 100% of the OSS FORUMS features checked as "Yes" in OSS's proposal in response to RE/MAX's RFP and not less than 90% of the additional features to be provided by the R/M Customized Software together with 100% of the final renditions of all graphic and textural content provided by RE/MAX. e. On or before January 15, 1998, OSS shall demonstrate online 100% of all Host Services and 100% of the features to be provided by the R/M Customized Software, all in a Pilot program format. Beta testing will begin. f. All Deliverables under this AGREEMENT shall be demonstrated by OSS for acceptance by RE/MAX on or before March 15, 1998 at which time Beta testing will end and RE/MAX Mainstreet will "go live". OSS's ability to meet its bench marks is dependent upon receiving certain information from RE/MAX as defined in the bench marks in Paragraphs 3(a) and 3(c) above. Should RE/MAX fail to meet either or both of those bench marks, OSS will make a reasonable effort to adhere to its bench marks, however, a new bench mark schedule which reflects a day for a day slip to all bench marks will be developed by OSS and become the effective schedule of bench marks for purposes of this AGREEMENT. It is acknowledged by both parties that any failure of either party to meet any then effective bench mark, however justified the reason may be, will necessarily cause the other party concern and reaction, including the potential for embarrassment. To compensate for such concern and to provide a proper incentive for not missing any bench mark, the parties hereto agree that the final payment shall be increased by $5,000 for each bench mark missed by RE/MAX through no fault of OSS and decreased by $5,000 for each bench mark missed by OSS through no fault of RE/MAX. 4. SOFTWARE LICENSE On and subject to the terms and conditions set forth below in this Paragraph 4, OSS hereby grants to RE/MAX a one site industry exclusive license to use the R/M Customized Software, including all components of the Developed Software, the Embedded Software and the OSS FORUMS Software that are included in the R/M Customized Software by OSS. -3- a. OSS TO ACQUIRE EMBEDDED SOFTWARE: To the extent Embedded Software is used in the R/M Customized Software and/or to make RE/MAX Mainstreet fully operational, OSS shall acquire on behalf of and in the name of RE/MAX all Embedded Software and shall configure, interface, and/or modify such Embedded Software and then modify, interface and/or integrate the same with the Developed Software and the OSS FORUMS Software to create a complete, fully operational duplicate of the R/M Customized Software. b. COPY OF R/M CUSTOMIZED SOFTWARE TO RE/MAX: OSS shall deliver to RE/MAX, for safe keeping by RE/MAX, a fully operational duplicate of the R/M Customized Software hereby licensed once it has been completed, Beta tested, and found to functionally and effectively provide to subscribers all Deliverables contemplated by this AGREEMENT. c. LICENSE COVERS FUTURE ENHANCEMENTS, ETC.: The license right conferred by this Paragraph 4 shall extend for the initial term and all renewal terms of this license and shall be deemed to cover all upgrades, enhancements, modifications, revisions, additions, substitutions, and replacements of the software created for and/or utilized in the R/M Customized Software. d. TERM AND RENEWAL OF LICENSE: This license shall extend for an initial term of three (3) years and shall automatically renew for consecutive like terms unless RE/MAX gives notice of its intent not to renew in writing at least thirty (30) days prior to the expiration of the then existing term of license. e. LICENSE SURVIVES THIS AGREEMENT/OSS: This license shall survive termination of this AGREEMENT and shall be deemed to be separate and apart from the development, hosting, and other services contemplated by this AGREEMENT. This license shall survive OSS and be binding on its successors, assigns, creditors, parent and/or subsidiary corporations, and any other person or entity coming to have knowledge of this license. This license shall also survive every transfer of the Host Service responsibility to any entity other than OSS, provided, however, the monthly fees shall be paid to the entity identified in those fee provisions set forth below in this Paragraph 4. f. SOFTWARE SUPPORT BY OSS: OSS shall fully support the software licensed for the term of this license and any renewals hereof at the monthly software maintenance fee specified in sub-paragraph I of this Paragraph 4, provided, however, that in the event of a transfer of the Host Service responsibility to an entity other than OSS, which entity is willing and capable to take over such software support, OSS shall have the option to continue to provide software support at the cost specified for the monthly software maintenance fee in sub-paragraph 1 of this Paragraph 4 or, in the alternative, to forego such monthly software maintenance fee and provide RE/MAX with full documentation and source codes so that RE/MAX can contract with such third party for, or provide its own, software support. g. ESCROW OF DOCUMENTATION AND SOURCE CODES: To assure continuity of RE/MAX Main-street irrespective of events which may interfere with or preclude OS S's performance under this license or this AGREEMENT, OSS agrees to place with a mutually agreeable escrow agent a regularly updated copy of the R/M Customized Software together with all the source codes and documentation for that and all software included in R/M Customized Software, provided, however, the escrow instructions shall authorize the release of the source codes and documentation to RE/MAX only in the event RE/MAX presents to the escrow agent documentation showing the discontinuation of OSS's business operations or the bankruptcy of OSS or that OSS has failed to maintain the OSS FORUMS Software and/or any Developed Software built into the R/M Customized Software. The costs of such escrow shall be borne entirely by RE/MAX. h. CONFIDENTIALITY MAINTAINED: In no event shall RE/MAX have the right to sell, disseminate, or disclose in any way such source codes or documentation other than is necessary for a contractor to provide software support/enhancement or to use the source codes or documentation for any -4- purpose other than the maintenance and/or enhancement of the R/M Customized Software or RE/MAX Mainstreet business site. i. SALE/TRANSFER OF SOFTWARE BY OSS: Any sale, assignment, or transfer by OSS of any software or software rights licensed hereunder shall be made expressly subject to this license and the support obligations specified herein, provided, however, that in no event shall OSS sell, assign, or transfer any rights in such software, or the right to collect monthly fees under this AGREEMENT, to any competitor of RE/MAX or the parent, subsidiary, agent, or representative of any competitor of RE/MAX. This provision shall not be construed to preclude or limit in any way OSS's right to license its Developed Software or its OSS FORUMS Software or any derivative versions thereof j. NOT ASSIGNABLE: The license conferred upon RE/MAX by this Paragraph 4 shall not be assignable by RE/MAX without the prior written consent of OSS, provided, however, that in the event of the reorganization of RE/MAX such that its satellite communication and Internet communications are grouped together under a new or existing corporate affiliate of RE/MAX, RE/MAX shall have the right to assign this license to such corporate affiliate. k. ONE TIME PAID UP LICENSE FEE: The one time advance paid up license fee, i.e., $_____ ($_____ for the license to use the VPOS software and $_____ for the license to use those components of the OSS FORUMS Software built into the R/M Customized Software). Such license fee shall be paid initially as part of the Contract Price specified in Paragraph 10 hereof and broken out in Paragraph 11 hereof and upon each renewal for a three year term of this license. Such license fee shall be deemed to include the cost of all upgrades and enhancements to the VPOS software and to those components of the OSS FORUMS Software built into the R/M Customized Software. l. MONTHLY SOFTWARE MAINTENANCE FEE: The monthly maintenance fee, i.e., $________, shall compensate for the continuing maintenance of those components of the Developed Software and/or the OSS FORUMS Software built into the R/M Customized Software and for regular upgrades, enhancements, modifications, and expansions for keeping the site competitive and state of the art. Such monthly maintenance fee to be paid to OSS or the entity providing maintenance, upgrade, and enhancement services for such components of the Developed Software and OSS FORUMS Software. m. TERMINATION OF LICENSE: RE/MAX shall have the right to terminate this license for cause upon thirty (30) days prior written notice in the event OSS ceases to exist, is acquired by or merges with any other entity that directly or indirectly competes with RE/MAX or its affiliates, files bankruptcy or goes into receivership, or becomes insolvent, fails to meet the minimum performance measures established or fails to maintain the R/M Customized Software as required herein, or breaches this AGREEMENT and fails to cure such breach within thirty (30) days of its receipt of written notice of such breach and demand for cure. 5. SOFTWARE UPGRADES/ENHANCEMENTS Consistent with Microsoft's commitment to product enhancements and upgrades, OSS hereby agrees that included within the software license set forth above in Paragraph 4 hereof is a commitment for the term of the license to meet every six (6) months with RE/MAX to discuss possible relevant upgrades of possible interest for inclusion in the R/M Customized Software and RE/MAX Mainstreet. As to any enhancements of interest to RE/MAX, OSS will endeavor to develop a proposal for the inclusion of the desired upgrades in the R/M Customized Software and RE/MAX Mainstreet. Enhancements and/or upgrades made by OSS in its OSS FORUMS Software or any subsequently created custom version thereof shall be made available for inclusion in the R/M Customized Software and RE/MAX Mainstreet at the request of and at no expense to RE/MAX. Upgrades and enhancements requested by RE/MAX that are not otherwise already adapted by OSS to the OSS FORUMS Software shall be made the subject of a proposal at fair market value to Re/MAX for inclusion in the R/M Customized Software and such proposal shall include plans and terms for maintaining such upgrades and enhancements. OSS's modifications to software shall be accomplished with a minimum of disruption in Host Services and RE/MAX Mainstreet's online availability. -5- Additionally, in the event RE/MAX becomes aware of any software, feature, enhancement, or of new technology that RE/MAX believes may be advantageous for RE/MAX Mainstreet. RE/MAX will notify OSS and OSS will endeavor to develop a proposal at fair market value to RE/MAX for the inclusion of the same in RE/MAX Mainstreet and such proposal shall include plans and terms for maintaining such software, feature enhancements or new technology. RE/MAX shall have the right to seek directly other bids from third parties and to present the same to OSS. If OSS is unwilling or unable to include the feature of interest at a cost below or not more than ten percent (10%) above the best competing proposal, RE/MAX shall have the right to have such feature built into the R/M Customized Software and RE/MAX Mainstreet by a third party selected by RE/MAX. OSS agrees to cooperate with such third party or, in the alternative, to provide such access to its documentation and source codes as may be necessary to enable such third party to include such feature in the R/M Customized Software and RE/MAX Mainstreet. The function of maintaining the R/M Customized Software as modified shall still be the responsibility of OSS or the assigned party receiving the monthly maintenance fee and the costs thereof shall still be deemed to be included in the monthly maintenance fee except where additional costs are approved as part of the proposal approval process in which case RE/MAX shall bear such additional costs. 6. LINKS WITH THIRD PARTY SERVICE & CONTEST PROVIDERS OSS hereby agrees that RE/MAX shall have the right to develop or require OSS to accommodate data insertion and retrieval links and communication links on the WWW with third party providers of services and/or content. For example, RE/MAX shall have the right at any time during the term of this AGREEMENT, to develop itself, or require OSS to develop, a link between RE/MAX Mainstreet and the CyberHomes web she, through which link subscribers to RE/MAX Mainstreet could insert listing information, carry out searches based upon property characteristics, and retrieve property listing information, all without leaving the RE/MAX Mainstreet web site. Should there be costs to OSS involved in satisfying RE/MAX's request for any such link, it is understood that such costs shall be paid or reimbursed by RE/MAX, but only to the extent they are reasonable and that such costs are consistent with estimates, quotes, or proposals submitted to RE/MAX by OSS in advance. It is further understood that if there is a subscriber fee or access fee associated with access to any such third party provider, RE/MAX shall have the right to charge back or recover such fee from the subscribers actually using such link in the form of a special user fee or to increase the monthly subscriber fee to reasonably reflect the value of the link or both. Furthermore, RE/MAX shall have the right to divide any additional income generated from any such link with the third party provider, and do so with no duty to account or disclose to OSS the details of its relationship with such third party provider, and without sharing with OSS any portion of the additional income. 7. HARDWARE REQUIRED FOR RE/MAX MAINSTREET RE/MAX hereby agrees to pay upon receipt of the vendor's invoice, as part of the contract price broken out in Paragraph 11 hereof, the sum of $______ for the acquisition by OSS of the site server (Compaq Proliant 2500R, 128Mb RAM, 8.6Gb Raid 5 Disk Storage and Tape), the Email Server (Compaq Proliant 850R, 64Mb RAM, 4Gb Disk Storage), and Embedded Software needed for the development of the R/M Customized Software, development of the Pilot for RE/MAX Mainstreet, and, ultimately, for use in providing the Deliverable required by this AGREEMENT at the web site created. It is agreed and understood that the computer equipment purchased with such $_____ shall be and remain the property of RE/MAX. Additional hardware required due to the increase in the subscriber volume over time during the term of this AGREEMENT shall be purchased by OSS and be and remain the property of OSS, provided, however, that should this AGREEMENT be terminated or not renewed, or should the Host Service function be transferred to an entity other than OSS, RE/MAX shall have the right to acquire such additional computer hardware from OSS at the then used, depreciated value. In the event that additional hardware is needed as a result of a change in the requirements as specified by RE/MAX, RE/MAX agrees to pay for such additional hardware and such hardware shall be and remain the property of RE/MAX. RE/MAX shall have the right to direct the shipment of any hardware owned initially or acquired by it to its headquarters or to the business location of any third party that may be selected to assume responsibility for providing the Host Services required for RE/MAX Mainstreet. -6- 8. HOST SERVICES FOR RE/MAX MAINSTREET OSS hereby agrees to host RE/MAX Mainstreet and to provide all services contemplated by the role of community web site host and all services of an administrative or ancillary nature, including without limitation, security, help desk, subscriber billing, and billing administration, online credit card validation and/or charge authorizations, monthly, or, if required, more frequent, ongoing, maintenance of the foregoing functions as well as the basic functions of the RE/MAX Mainstreet web site, all consistent with the specifications set forth in Exhibit H attached hereto. 9. TRANSFER OF HOST SERVICES RE/MAX reserves the right to move RE/MAX Mainstreet to a new hosting entity and to use its copy of the R/M Customized Software if necessary to continue RE/MAX Mainstreet in any of the following circumstances: a. A failure on the part of OSS for any reason to fulfill its Host Services obligations under this AGREEMENT; b. Any failure or disruption in the business of OSS due to any bankruptcy filing by or on behalf of OSS or any other event which threatens the ability of OSS to continue to perform its obligations under this AGREEMENT; c. Any change in ownership of OSS or any transfer of control of OSS to any entity or organization which competes directly or indirectly with RE/MAX or its affiliates; e. The disruption of access by subscribers to RE/MAX Mainstreet which persists for more than three working days or any repeated disruptions of duration greater than four (4) hours in such access, any three (3) of which occur within any sixty (60) day period; and f. Reports to RE/MAX from 1.0% of subscribers or fifty (50) subscribers, which ever is greater, to the effect they cannot get online or they have difficulty getting access to RE/MAX Mainstreet, that chat rooms are not available, Email is not functioning, security has been breached, access to the Help Desk at RE/MAX Mainstreet is difficult, or any other similar type of problem which continues to be reported to RE/MAX thirty (30) days after OSS has been notified in writing of such problem. The transfer of the Host Services function to a new entity shall not relieve OSS of its other obligations under this AGREEMENT or the software license set forth herein, nor shall it affect the monthly software maintenance fee to OSS so long as OSS continues to provide software support, enhancements, and upgrades as required by this AGREEMENT. In the event, however, that OSS is placed in receivership under any bankruptcy order, the obligations of RE/MAX to continue to pay a monthly maintenance fee shall be modified automatically to allow RE/MAX to properly compensate the third party who will be substituting for OSS in the providing of software support. In the event of a transfer of the Host Services function to a new entity, all monthly subscription fees paid following the effective date of such a transfer shall be paid to the new entity assuming responsibility for such Host Services, and no portion of any such monthly subscription fees shall be due OSS. OSS hereby agrees to cooperate in the orderly transfer of Host Services to any third party selected by RE/MAX toward the goal of minimizing, if not avoiding entirely, disruptions in RE/MAX Mainstreet accessibility and performance. 10. CONTRACT PRICE Pricing for development of the R/M Customized Software and the RE/MAX Mainstreet site together with Hosting, Maintenance, Help Desk, and the software license set forth herein is specified in Exhibit I attached hereto, provided, however, that the final payment (and thus the actual contract price) may be -7- adjusted up or down to reflect the amounts to be added or deducted for failures to meet the bench marks, all as set forth in Paragraph 3 hereof 11. PAYMENT TERMS Payment terms for hardware costs and the development of the R/M Customized Software and the RE/MAX Mainstreet site, i.e., $_________ are as follows: $ upon execution of this AGREEMENT $ for computer hardware within ten (10) days of the date of receipt of the vendor's invoice and after execution of this AGREEMENT. $ one time per term paid up license fee for use of the VPOS Software, and $ one time per term paid up license fee for use of the components of the OSS FORUMS Software built into the R/M Customized Software, both such paid up license fees payable upon execution of this AGREEMENT. Balance As adjusted for any failure by either party to meet any of its bench marks, upon acceptance by RE/MAX of all Deliverables specified under this AGREEMENT. OSS shall be paid for Host Services via the Internet based, credit card payment system, which is provided within the R/M Customized Software. Each such subscriber payment will be made in the first month that Host Services are provided and monthly thereafter. Monthly subscription fee shall be collected by OSS as part of its Host Services, provided, however, that if in the aggregate the monthly subscription fees due for any month, i.e., $7.00 x #of subscribers, is less than $10,500, OSS shall invoice RE/MAX for the difference, minus any rebate that may be due to RE/MAX, and such difference shall be paid by RE/MAX to OSS within fifteen (15) days of the end of the month in which such difference was invoiced. If the aggregate of subscription fees due OSS is greater than $10,500 and if RE/MAX is due a rebate under the schedule set forth in Exhibit I attached hereto, such rebate shall be paid by OSS to RE/MAX within fifteen (15) days of the end of the month for which such subscription fees were due, i.e., RE/MAX's obligation to subsidize monthly subscription fees or enjoy a rebate shall be determined by subscription fee collections. In any case, whether payment is due from or to RE/MAX, OSS agrees to provide with its invoice or remittance a monthly report, listing the names and OSS account numbers for all subscribers, indicating which are current and which are delinquent, with totals supporting the calculation of amounts due. RE/MAX reserves the right to adjust the format of this report from time-to-time as it may reasonably need such information for other programs, marketing efforts, etc. 12. SUBSCRIBERS & SUBSCRIBER FEES RE/MAX reserves the right to determine who is and who is not entitled to access to RE/MAX Mainstreet and to modify and update the listings of those in either or both categories. Initially, it is the intent of RE/MAX to grant access privilege and subscriber rights to all individuals in good standing with RE/MAX, who are affiliated with RE/MAX's independently owned and operated offices as sales associates, broker associates, broker owners, and office managers in addition to the directors, officers, and employees of RE/MAX itself and the RE/MAX Regional Operations. The privilege of access is linked to continuing affiliation with the RE/MAX organization, which in turn is linked annually to the prompt payment of dues to RE/MAX. OSS agrees to honor the directions of RE/MAX as to those entitled to access, and further agrees to terminate access for anyone who ceases for any reason to be affiliated with a RE/MAX office and/or fails to pay when due his or her annual dues to RE/MAX. Initially, the access of such persons to RE/MAX Mainstreet shall be suspended with a message posted to the individual that his or her access is "denied" because records indicate they are no longer in good standing with RE/MAX International, Inc. If good standing is reestablished, their subscription shall be reinstated and access restored without any penalty or re-connection fee. If their good standing is not restored, OSS shall cancel their subscriber AGREEMENT, their access password, and effectuate a permanent "Lock Out" from access to the web site. -8- RE/MAX will periodically provide OSS with a computer readable list of individuals who have ceased to be affiliates in good standing of RE/MAX so that OSS can implement this provision. The monthly subscriber fee for access to RE/MAX Mainstreet shall be determined exclusively by RE/MAX, and RE/MAX shall have the right during the initial and any renewal term of this AGREEMENT to add to or change the monthly subscriber fee. RE/MAX agrees to publish on RE/MAX Mainstreet a notice of monthly subscriber fee changes at least sixty (60) days before the effective date of such change. Initially, the monthly subscriber fee shall be $___ and such fees shall be divided between RE/MAX and OSS in accordance with the gradient schedule set forth in Exhibit I attached hereto. If and as subscriber fees are added to or changed, the additional revenues generated shall go entirely to RE/MAX for reimbursement of development costs of RE/MAX Mainstreet, reimbursement of the monthly license fee, and to provide RE/MAX with a royalty for use of its name and marks in connection with the RE/MAX Mainstreet web site. OSS agrees that access to RE/MAX Mainstreet by the directors, officers, and employees of RE/MAX and of the headquarters staff of RE/MAX Regional Operations shall be by free subscriber agreements, i.e., a regular subscriber agreement will be required, an access name and password will be assigned, but no monthly subscriber fee will be charged or accepted by OSS. To facilitate implementation of this subscriber fee waiver provision, RE/MAX will provide OSS with a directory and/or periodically updated list of the individuals who will be entitled to this status. 13. OWNERSHIP OF OSS INTELLECTUAL PROPERTY Except for the rights under the license herein granted to RE/MAX and otherwise specifically addressed in this AGREEMENT, it is hereby acknowledged and agreed to by OSS and RE/MAX that all rights of any nature whatsoever in and to the Developed Software, the OSS FORUMS Software and the R/M Customized Software, excluding in all cases Embedded Software, are retained by OSS. 14. OWNERSHIP OF OSS PROPRIETARY TECHNOLOGY OSS shall own all worldwide rights, title, and interest in and to the Developed Software, including copyright right, and also in and to any software tools, specifications, ideas, concepts, know-how, processes, and techniques used by OSS in performing the services covered by this AGREEMENT (collectively "Proprietary Technology"), including all Intellectual Property rights therein. Nothing in this AGREEMENT or otherwise shall be deemed to prohibit or limit in any way OSS's right to use the Proprietary Technology (as defined herein) or Residual Information, in whole or in part, to develop and market any software that is the same in any or all respects as the Developed Software, or to develop other software products or applications for OSS customers, provided, however, that OSS agrees not to sell, resell or license to any third party the R/M Customized Software, or any similarly customized version of its OSS FORUMS Software, in its entirety or any of the customized components created with funds paid by RE/MAX under this AGREEMENT without the written consent of and reasonable compensation to RE/MAX. The reasonable compensation demanded by RE/MAX for its consent shall not exceed the Contract-Price set forth in Paragraph 10 hereof and RE/MAX shall not unreasonably withhold its consent for any reason, provided, however, that RE/MAX shall not be deemed to be unreasonable for withholding its consent absolutely to any proposed sale or license of such software to any franchising or real estate competitor of RE/MAX or to any entity which in turn is likely to make the same available to any such competitor. For purposes of this AGREEMENT, the term "competitor" shall be deemed to include the parent, owner, subsidiary, trustee or controlling entity over any direct franchising or real estate competitor of RE/MAX. 15. RE/MAX ACKNOWLEDGMENT RE/MAX hereby acknowledges that the Documentation and Source Codes for the R/M Customized Software may contain trade secrets and confidential information of OSS and that providing the R/M Customized Software, in whole or in part, to any unauthorized third parties would be harmful to the interests of OSS. RE/MAX agrees, therefore, to use reasonable efforts to supervise, manage and control the R/M Customized Software, and to safeguard all copies of the same licensed under this AGREEMENT using the same degree of care that RE/MAX uses to safeguard its own proprietary materials. RE/MAX -9- agrees that, except to the extent expressly authorized in this AGREEMENT or the license contained herein, it will not sub-license, re-sell, or otherwise authorize any other party to possess or obtain the R/M Customized Software. 16. RE/MAX OWNERSHIP OF DATA, CONTENT & SUBSCRIBER INFORMATION RE/MAX shall own all worldwide rights, title, and interest in and to its name and logos and all other components of graphical and textural content used in, or in connection with, the promotion of RE/MAX Mainstreet and RE/MAX shall own all rights, title, and interest in the name "RE/MAX Mainstreet" and in the URL address selected for the site. All use of the RE/MAX marks in connection with the web site shall enure exclusively to the benefit of RE/MAX. RE/MAX shall also own exclusively all data entered by subscribers and/or by RE/MAX or third parties and OSS shall periodically create back-up tapes of such data and provide a copy of each such back-up tape to RE/MAX for its safekeeping. RE/MAX shall also own exclusively all subscriber data, including without limitation, subscriber name, address, telephone number, FAX number, credit card numbers and expiration dates, and all other data collected or developed in reference to subscribers individually or collectively as a subscriber base. In no event shall OSS disclose, sell, market, use, distribute, or provide to any third party or governmental agency any form of name, address, phone number, user name, Email address or other listing, either physically or electronically, or provide any form of online solicitation rights or opportunities to any third party or governmental agency. OSS itself shall not solicit or communicate directly with the subscriber base for RE/MAX Mainstreet, except with the prior written consent of RE/MAX to the subject matter and content of such communication, and such prior written authority shall be required of RE/MAX for each proposed communication. the overall objective being to minimize the volume of unwanted solicitations over RE/MAX Mainstreet. OSS and RE/MAX shall develop a guideline for responding to requests by subscribers, for global Email messages to all or large groupings of subscribers, and OSS shall follow such guideline. OSS shall periodically provide RE/MAX with a back-up tape setting forth all subscriber information on file for safekeeping by RE/MAX. 17. OSS ACKNOWLEDGMENT OSS hereby acknowledges that RE/MAX's venture into the area of WWW web site development for its affiliates is a matter of trade secret competitive business plans and strategy which, upon completion in confidence, will give RE/MAX and its affiliates a competitive advantage over other entities and organizations that compete directly or indirectly with RE/MAX or its affiliates and that RE/MAX estimates that such competitive advantage will extend for a period of at least eighteen (18) months. OSS further acknowledges that the name "Mainstreet" for a real estate industry related web site is unique to RE/MAX and that the database, subscriber information, and content of RE/MAX Mainstreet may contain trade secrets, confidential information, and/or highly sensitive data. OSS acknowledges and understands that RE/MAX and/or its subscriber base will be irreparably damaged if such information or its business plans to develop a WWW web site for its affiliates were disclosed, sold, or otherwise distributed or made public. OSS acknowledges that RE/MAX is the exclusive owner of such business plans and such data, content, and information and OSS agrees not to disclose such business plans or strategy or such data, content and information and not to challenge the validity of any mark owned by RE/MAX, or RE/MAX claim to ownership to the site name, "RE/MAX Mainstreet," or of the URL address for the site. OSS agrees, therefore, to use its best efforts to protect and secure such business plans and strategy and such data, content, and subscriber information from third parties and to incorporate into the R/M Customized Software such security measures as it deems reasonable and appropriate to protect the RE/MAX Mainstreet web site from unauthorized use, access, or invasion by third parties. OSS hereby agrees that the terms of this AGREEMENT and any knowledge of RE/MAX's business plans and strategy and its intentions, relationships, uses, designs, content, drawings, partnerships or strategy concerning the application of the R/M Customized Software and/or the OSS FORUMS Software and the Developed Software and the terms of its REP leading to this AGREEMENT with OSS, third party products, membership service goals or other information or technology are to remain confidential and will not be disclosed to , discussed with or shared with any third party for any reason whatsoever or in any way publicized. No information shall be released or made public or disclosed by OSS regarding this AGREEMENT or the purposes of the -10- relationship created between OSS and RE/MAX until and unless RE/MAX approves in advance and in writing the content and circulation thereof. 18. DESIGN CHANGES Changes to the specifications for the R/M Customized Software or for the RE/MAX Mainstreet site or Deliverables requested by RE/MAX may affect pricing or completion schedules or both. Any requested design changes will be priced on an individual basis, and the specifications and pricing for such changes accepted by RE/MAX will be added to this AGREEMENT as an addendum. Design changes not withstanding, all elements of this AGREEMENT, including pricing, will remain in effect. The parties hereto agree that RE/MAX shall have the exclusive right, without consultation with or notice to OSS, at any time and from time-to-time to modify the structural, graphical, and textural content and appearance of RE/MAX Mainstreet and/or to change the name of the web site to something other than RE/MAX Mainstreet. OSS agrees to provide RE/MAX with access codes and information sufficient to enable RE/MAX to effectuate such changes via online modifications, invisible to OSS or subscribers. Changes effectuated by RE/MAX of the foregoing type shall not be deemed to be "Design Changes" such as would concern OSS or result in any charges or proposals for change by or from OSS. 19. COMPLETION SCHEDULE & DELAYS The pricing under this AGREEMENT was developed in part based on certain work flow assumptions consistent with the schedule in the OSS proposal in response to RE/MAX's RFP and the bench marks set forth in Paragraph 3 hereof. OSS agrees to provide the necessary resources and to apply those resources to the development of the RE/MAX Mainstreet site pursuant to the Schedule agreed upon. In the event that the work flow at OSS is disrupted for thirty (30) days or more due to delays caused by RE/MAX for any reason, including the scheduled delivery of RE/MAX content, RE/MAX will be invoiced for project restart charges of 10% of the total value of the web site development portion of the contract. If, due to RE/MAX's delay in providing its graphical or textural content, and as a result, the project's scheduled completion date is extended beyond May 1, 1998, then the web site development portion of the price will then become due and payable in full, in advance of completion of the development and other OSS responsibilities under this AGREEMENT. 20. LIMITATIONS ON LIABILITY OSS makes no direct or implied guarantee regarding the response or business which will be generated from the RE/MAX Mainstreet site nor will RE/MAX attempt to hold OSS responsible for any economic or legal liabilities which may result from the presence or distribution of the material contained in the RE/MAX Mainstreet web site, provided, however, that OSS will work with RE/MAX in developing guidelines for subscriber uses and message content, and OSS, as Host Services provider, shall exercise its best efforts to assure compliance by subscribers with such guidelines and terminate any subscriber who refuses or fails repeatedly to honor such guidelines. To this end, the parties hereto agree that the subscriber agreement shall include both the obligation to honor guidelines established, and from time- to-time amended, for RE/MAX Mainstreet. Such subscriber agreement will also expressly recite the right to terminate RE/MAX Mainstreet access privileges for failure to honor such guidelines. Neither OSS nor anyone else who has been or will be involved in the creation, production, or delivery of the RE/MAX Mainstreet web site shall be liable for any direct, indirect, consequential or incidental damages (including damages for loss of business profits, business interruption, loss of business information and the like) arising out of the use or inability to use RE/MAX Mainstreet even if OSS has been advised of the possibility of such damages. 21. RE/MAX INDEMNIFICATION OF OSS RE/MAX hereby acknowledges that OSS employees, agents, and officers have assumed no liability or responsibility for the content generated by RE/MAX, subscribers to RE/MAX Mainstreet or others and supplied to OSS for mounting on OSS's servers for Password Protected access via the Internet and World -11- Wide Web (WWW). RE/MAX agrees to indemnify, save, and hold harmless OSS and its directors, officers, employees, and agents from and against any and all claims arising out of RE/MAX's publication of content on RE/MAX Mainstreet and to pay reasonable attorney fees incurred in the defense of any such claim, provided, however, that RE/MAX's obligation hereunder for liability and defense costs together shall be limited strictly by the amount for which such claim could have been settled. This indemnification shall include any and all claims of copyright infringement, slander, or libel, but excludes any claim to the effect that the Developed Software, the R/M Software or RE/MAX Mainstreet as such, infringe any copyrights or other rights of third parties. This AGREEMENT does not create or imply and shall not be construed to create or imply an agency relationship between OSS and RE/MAX. OSS agrees under these terms to provide the specific development and Host Services described in this AGREEMENT. 22. OSS INDEMNIFICATION OF RE/MAX OSS hereby acknowledges that neither RE/MAX nor any of its directors, officers, employees, or agents have assumed any liability whatsoever for the conduct, actions, or performance of OSS under this AGREEMENT, or for OSS's performance of Host Services hereunder. OSS hereby agrees to indemnify, save, and hold harmless RE/MAX and its directors, officers, employees, and agents from and against any and all claims whatsoever, including without limitation, claims arising out of the software or software development efforts or undertakings of OSS, and claims to the effect that any software used in the R/M Customized Software infringes the copyrights of any third party or that OSS wrongfully obtained, is not entitled to use, or is not the rightful owner of the Developed Software, OSS FORUMS Software, R/M Customized Software, Residual Information, Intellectual Property, Proprietary Technology and/or trade secrets, and confidential information as those terms are defined herein, and claims relating in any way to OSS relationships with any employee or independent contractor working on the development of the RE/MAX Mainstreet web site or involved at any level in providing Host Services under this AGREEMENT. OSS further agrees to pay reasonable attorney fees incurred by RE/MAX in the defense of any such claim, provided, however, that OS S's obligation hereunder for liability and defense costs together shall be limited strictly by the amount for which such claim could have been settled. OSS does not warrant the license or the reliability of work conducted by any third party. 23. OSS WARRANTIES OSS hereby warrants that its Developed Software, its OSS FORUMS Software and its other claimed proprietary tools and residual information were originally developed by OSS or rightfully and lawfully acquired, and that OSS has the rights therein to enter into this AGREEMENT, to enter into and license the R/M Customized Software in accordance with the license contained herein, to provide the Deliverables contemplated, and perform the Host Services agreed to, and that in doing so, OSS will not be violating the rights of privacy, the copyrights or any other rights of any third party and that its performance of its obligations hereunder will not place it in breach of any other contract or commitment. 24. SECURITY MEASURES & PASSWORD ACCESS Access to RE/MAX Mainstreet shall be restricted to individuals affiliated in good standing with RE/MAX International, Inc. and who have executed and returned a current form subscriber agreement. Each such individual shall have a unique user name and a confidential password. Such names and passwords will be assigned in accordance with the procedure outlined in Exhibit J attached hereto. Access to RE/MAX Mainstreet will require the use of industry standard encrypted and secure communication protocols for those portions of the subscriber's access, file transfers, messaging, or other activities which contain content which is deemed to be sensitive by RE/MAX and, more specifically, those involving the transfers of billing, credit card or other sensitive data and information exchange. On site system security will be provided by hardware, protocol, and Windows-NT based security consistent with specifications set forth on Exhibit J attached beret.. -12- 25. DATA & CONTENT BACK-UP As an added safeguard against the possible loss or destruction by fire or other means of the R/M Customized Software and other components of the RE/MAX Mainstreet web site, OSS shall provide to RE/MAX, in addition to the back-up copy of the R/M Customized Software required by the license included herein, a monthly copy of all application software, content, subscriber identity data, subscriber payment history information with billing address, subscriber Email address and password information, and operating software residing on the servers allocated to providing access to RE/MAX Mainstreet. Such back-up copy shall be maintained by RE/MAX for the benefit of itself and OSS should the software and web site become corrupted or inoperable for any reason. 26. MINIMUM PERFORMANCE STANDARDS In the performance of its obligations under this AGREEMENT, OSS shall demonstrate to RE/MAX that access to RE/MAX Mainstreet will satisfy the minimum performance standards of simultaneous use by 10, 25, 50, 75, and 100 concurrent users performing a mixture of chat, library downloads, and messaging without any significant (i.e., less than 10%) degradation of response time. 27. TERM AND TERMINATION The initial term of this AGREEMENT is three years from the effective date of this AGREEMENT. This AGREEMENT may be renewed on the same terms and conditions set forth herein for up to two consecutive like terms. Thereafter, RE/MAX shall have the right to renew the relationship hereby created with OSS, but to do so subject to negotiated mutually agreeable adjustments in OSS minimum share of monthly subscriber fees to reflect circumstances then existing. RE/MAX may terminate this AGREEMENT on any annual anniversary of the effective date hereof in the event the service does not generate subscription fees sufficient to cover the monthly minimum guaranteed to OSS as specified in Addendum A. RE/MAX may terminate this AGREEMENT at any time in the event OSS fails to meet or satisfy the Minimum Performance Standards established by Paragraph 26 hereof. Either party may terminate this contract in the event that the other party breaches this AGREEMENT provided that the breach has not been cured, notwithstanding that the non-breaching party has given the breaching party written notice of the alleged breach and thirty (30) days to cure. This AGREEMENT will automatically renew for successive three (3) year terms, commencing at the conclusion of the initial three (3) year term, unless written notice of intent not to renew is provided by RE/MAX to OSS or by OSS to RE/MAX at least ninety (90) days prior to the expiration of the then current term. This Paragraph 27 shall be deemed to be separate and apart from the license agreement included in Paragraph 4 of this AGREEMENT which itself is renewable and terminable, but on the terms specified in Paragraph 4 hereof. 28. MOST FAVORED NATIONS CLAUSE OSS hereby agrees that the terms of this AGREEMENT and the license set forth in Paragraph 4 hereof, are at least as favorable as the similar terms of similar development agreements, license arrangements, and Host Service contracts. In the event OSS hereafter enters into any contract of a similar nature that includes additional benefits and/or more favorable terms than the benefits and terms of this AGREEMENT and/or the license contained herein, OSS agrees to amend this AGREEMENT and/or such license, as the case may be, to include such additional benefits and/or more favorable terms. 29. NOT ASSIGNABLE This AGREEMENT is uniquely between OSS and RE/MAX and is based in large measure on the trust, confidence, mutual respect, and unique attributes of the parties. This AGREEMENT shall not be assignable by either party without the express written consent of the other, and such written consent may be withheld for any reason whatsoever. Notwithstanding the foregoing, RE/MAX shall have the right to assign this AGREEMENT to any new corporation formed or any existing corporation to oversee, own and/or manage RE/MAX Mainstreet so long as the same group of individuals who own a majority of shares in RE/MAX also control such new or existing corporation. -13- 30. CHOICE OF LAW This AGREEMENT shall be construed and interpreted in accordance with the laws of the state of Colorado and of the United States of America. 31. INCORPORATION BY REFERENCE Exhibits A through K attached to this AGREEMENT are hereby incorporated herein by reference. 32. ARBITRATION IN THE EVENT OF ANY DISPUTE BETWEEN THE PARTIES HERETO REGARDING DUTIES OR RESPONSIBILITIES UNDER THIS AGREEMENT, OR ANY OTHER CLAIM BY ONE PARTY AGAINST THE OTHER ARISING OUT OF THEIR RELATIONSHIP UNDER THIS AGREEMENT, OR THEIR PERFORMANCE OF ANY DUTY OR OBLIGATION RELATING TO THIS AGREEMENT, OR ITS SUBJECT MATTER, OR THE RE/MAX MAINSTREET WEB SITE, SUCH DISPUTE SHALL BE SUBMITTED TO BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT AM! SHALL BE ARBITRATED BY THE AMERICAN ARBITRATION ASSOCIATION IN ACCORDANCE WITH ITS RULES AND PROCEDURES FOR COMMERCIAL ARBITRATION. 33. NO WAIVER Any failure by either party hereto to enforce at any time any term or condition of this AGREEMENT shall not be considered a waiver of that party's right thereafter to enforce that same term or condition or any other term or condition of this AGREEMENT. 34. ENTIRE AGREEMENT This AGREEMENT constitutes the entire agreement between RE/MAX and OSS regarding the subject matter hereof, and this AGREEMENT may not be amended, altered, or changed except 35. HEADINGS The headings used in this AGREEMENT are used solely for convenience and are not an aid in the interpretation of this AGREEMENT or a limitation to the application of any term or condition hereof. IN WITNESS WHEREOF, RE/MAX INTERNATIONAL, INC. AND ONLINE SYSTEMS SERVICES, INC. HAVE EXECUTED THIS AGREEMENT. ONLINE SYSTEM SERVICES, INC. RE/MAX INTERNATIONAL, INC. /s/ /s/ - ----------------------------------- --------------------------------------- By By ___________________________________ _______________________________________ Title Title ___________________________________ _______________________________________ Date Date -14- EX-10.12 7 LONG-TERM EQUIPMENT SALE & SOFTWARE LIC. AGMT EXHIBIT 10.12 LONG-TERM EQUIPMENT SALE AND SOFTWARE LICENSE AGREEMENT By and between ONLINE SYSTEM SERVICES, INC. ("OSS") a Colorado corporation with its principal place of business located at 1800 Glenarm Place, Denver, Colorado and BOULDER RIDGE CABLE TV INC. a California corporation, dba Starstream Communications, with its principal place of business located at 4120 Citrus Ave, Rocklin, CA ("Starstream"), dated as of February 16, 1998. 1. PURPOSE I DESCRIPTION OF THE SYSTEM. EQUIPMENT. APPLICATION PROGRAMS AND ------------------------------------------------------------------------ RELATED MATERIALS AND SERVICES: OSS is a company generally engaged in the - ------------------------------ business of providing Internet related equipment software and services such as hardware and software selection, installation, initial training, consulting and general assistance in the implementation and operation of a turn-key Internet Service Provider ("ISP") business as well as documentation and supporting materials for administration, marketing, sales and web site design and development support for ISP systems; OSS provides and/or has the right to license a package of OSS proprietary programs developed by OSS including but not limited to the "Community Access Partnership" ("CAP") Web site software, with future versions to include, without limitation, "Electronic Banking" and "Electronic Commerce" functionality, and user documentation, as well as the SAGE Application which performs subscriber management and billing functions (hereinafter collectively described as the "Application Program"). Starstream desires to license the Application Programs set forth on Schedule "A"(the "Software License") and purchase certain Equipment set forth on Schedule "B" along with certain related materials and services set forth on Schedule "C" from OSS to establish an Internet point of presence, to design web pages for customers to perform such services and, generally, to enable Starstream to become an ISP provider to its own customers in its franchise territory in the city of Rocklin, California and adjacent localities defined by the following ZIP codes: 95630 Folsom 96577 Rocklin 95648 Lincoln 95765 Rocklin 95650 Loomis 95746 Granite Bay 95658 Newcastle 96818 Hickam 95663 Penryn 96853 Hickam 2. TERM: The term of the Agreement shall commence on March 30, 1998, and shall continue for a period of five (5) years unless sooner terminated in accordance with the terms of this Agreement including but not limited to Section 15 hereunder (the "Term"). Upon completion of this Term, Starstream may at its sole discretion extend the contract for an additional five years. 3. PROVISIONS APPLICABLE TO EQUIPMENT SALE AND PURCHASE: 3.1 Purchase and - -- ---------------------------------------------------- ---------------- Sale: Starstream hereby agrees to purchase from OSS, and OSS agrees to sell to - ---- Starstream, the Equipment set forth on Schedule "B" (attached hereto) along with the materials and services set forth on Schedule "C" (attached hereto) at the price set forth on Schedule "B" ("Equipment Purchase Price"). 3.2 Payment: (a) A payment of ten (10%) percent of the Equipment Purchase --- ------- Price shall be made to OSS at the address set forth herein, or any other address designated by OSS on or before April 30, 1998; such amount payable in U.S. funds by electronic wire transfer to OSS' account at NORTHWEST BANK, COLORADO, N.A. Account # 101-8048688, ABA # 102000076. A second payment of ten (10%) percent shall be due and payable on or before May 31, 1998. The remaining eighty (80%) percent shall be paid to OSS within 60 days upon completion and testing of the ISP POP by OSS, and Starstream has accepted certifying document stating testing and certification of the ISP POP by OSS, and Starstream has received from OSS certifying document stating that the Internet Point of Presence is working according to manufacturers specifications including but not limited to the DNS, e-mail, Web services, News Groups, ftp, ping, dial-up access, dedicated access, associated software is installed and working local loop and Internet backbones are complete, as well as other OSS Supplied equipment software or related services located at the Starstream's POP. The Equipment Price is calculated net --- of any and all taxes, duties, customs, deductions or withholdings or any other moneys required to be withheld by any other government regulation which Starstream shall bear on its own account and pay. (b) OSS shall provide a written invoice to Starstream for all amounts due. Notwithstanding anything to the contrary contained herein, in the case of Starstream's Acceptance of a Partial Delivery of Equipment, Starstream will receive equipment from OSS but will not make any payments to OSS until complete testing and certification of the ISP POP has been completed by OSS and certifying documents have been accepted by Starstream. Starstream's utilization of the equipment for any commercial purpose shall be deemed acceptance by Starstream. 3.3 System Upgrades Prior to Installation: OSS agrees that should it make --- ------------------------------------- any changes, upgrades or improvements to its standard equipment configuration between the date of execution of this Agreement and the date of actual system installation, but not later than June 1, 1998, such improvements shall be incorporated into the Starstream system at no added cost. 4. PROVISIONS APPLICABLE TO LICENSE OF THE APPLICATION PROGRAM: 4.1 Grant of ----------------------------------------------------------- ------------ Software License: During the Term in the Territory and subject to Starstream's - ---------------- compliance with the terms and conditions herein, OSS hereby grants to Starstream a Software License granting Starstream the right to use and execute the Application Program and its future releases and versions throughout the Term, including but not limited to those specified on Schedule "G," with no further costs to Starstream than those set forth in Section 8. Except for the license herein granted to Starstream, it is hereby acknowledged and agreed to by the parties that as between OSS and Starstream all rights of any nature whatsoever in and to the Application Program and any other intellectual property relating to OSS are retained exclusively by OSS. The License shall be non-exclusive to Starstream, subject to the provisions set forth in Section 15.5. 4.2 Reservation of Rights: The Software License may not, under any --- --------------------- circumstances whatsoever be considered a transfer, either direct or indirect of the intellectual and/or industrial property rights of the licensed software and Starstream shall not have the right to assign, sub-license, rent, lease, sell, encumber, or otherwise transfer any of the rights granted hereunder. Subject to the same terms, conditions and qualifications; except for the rights expressly granted herein, any and all rights in and to the Application Programs are hereby reserved to OSS. 4.3 Software Upgrades Prior to Installation: OSS agrees that should it --- --------------------------------------- make any changes, upgrades or improvements to the standard Applications Programs between the date of execution of this Agreement and the date of actual system installation, but not later than June 1, 1998, such improvements shall be incorporated into the Starstrearn system at no added cost. 5. RESPONSIBILITIES OF STARSTREAM: Starstream shall be solely responsible for ------------------------------ the provision of telecommunication services provided by the local telephone company, interchange carriers and any other telecommunications company which may be necessary for the Starstream's use of the System. In addition, Starstream shall be responsible for insuring for the provision of adequate 110/220 volt power circuits for the System, including backup (uninterruptible) power supply, if desired) power. 6. OSS INSTALLATION: 6.1 Installation Plan and Acceptance: With respect to ---------------- ------------------------------------ Equipment purchased by Starstream from OSS, OSS will provide an Installation Time Line similar to Exhibit D-l developed specifically for Starstream's system which shall be incorporated by reference into Schedule "D." OSS will promptly provide onsite installation of the equipment as set forth in Schedule "B," providing materials and services as outlined in Schedule "C" using its best efforts to comply with the Installation Plan and Time Line in Schedule "D" attached hereto and such other services as the panics mutually agree are necessary to permit Starstream to begin use of the System in accordance with such Installation Plan in compliance with the testing, certification and acceptance set forth in this Agreement. An OSS technician shall be responsible to test, certify and demonstrate to Starstream that all material and equipment successfully operates according to manufacturers specifications and performs all functions outlined in this Agreement and attachments prior to completing the certification documents that the installation has been completed and is operating in accordance with this Agreement and the specifications for the ISP POP. In the event of alleged non-compliance, OSS shall receive written notice and have 30 days within which to cure or to take reasonable steps to cure alleged non-compliance in which OSS shall be deemed to have been in full compliance with its obligations under this agreement. 6.2 Passage of Title/Risk of Loss/Equipment Delivery: Title to the System --- ------------------------------------------------ shall pass to Starstream upon delivery. Until such time as title passes to Starstream hereunder, OSS shall bear the risk of loss or damage to the System, or any part thereof. Unless otherwise determined by OSS, OSS shall deliver all Equipment and Additional Equipment to Starstream F.O.B. OSS' or manufacturer's principal place of business, whichever is least expensive. OSS reserves the right to make partial deliveries and to ship the Equipment or Additional Equipment as -2- it becomes available. Delivery dates are approximate. Starstream shall provide an acceptable installation and operation environment suitable for computer equipment. 6.3 Starstream Responsibilities: Starstream shall promptly perform all --- --------------------------- responsibilities it is assigned under the Installation Plan. Starstream shall also furnish to OSS, free of charge, for the period of time required for installation of the System: I) access during normal business hours to the location in which the Equipment is to be placed; 2) the cooperation of a management-level employee (hereinafter the Project Leader) knowledgeable in aspects of Starstream's business and technical operations. 7. OSS SUPPORT AND TRAINING: OSS agrees to furnish Starstream with on-going ------------------------ support and training, including Tier I and Tier II End-User telephone support. The parameters of such on-going support and training are defined in Schedules "E" and "F" attached hereto. 8. OSS PROFESSIONAL MANAGEMENT AND INTELLECTUAL PROPERTY FEES: In ---------------------------------------------------------- consideration of the rights and licenses granted hereunder. Starstream shall pay to OSS: (a) ________ percent of all "Internet Access Gross Receipts" which shall be defined as all billings by Starstream or its Assignees attributable to the provision of "Internet Access" to be defined for the purpose of this Agreement as dial-up, telco return and two way cable modem Internet access revenues (including web hosting revenues) minus uncollectible billings, installation charges, franchise fees value added, sales and other transactional taxes (other than those taxes which Starstream is legally obligated to pay on its own behalf): (b) __________ percent of all "Content Related Gross Receipts" which shall be defined as all fees by Starstream or its Assignees attributable to all content related activities, including but not limited to sponsorships, electronic advertising, electronic banking and electronic commerce minus custom software and web-design development cost, uncollectible billings, installation franchise fees, value added sales and other transactional taxes (other than those taxes which Starstream is legally obligated to pay on its own behalf). (c) In addition, Starstream shall be responsible for payment to OSS of those percentages of Internet Access Gross Receipts and Content Related Gross Receipts set forth above for any expansion of Starstream's offering of the OSS products and services to other systems within the Territory in which Starstream, its subsidiaries, parent companies or partners have or may acquire an interest. (d) The Professional Management and Intellectual Property Fees provided for in Section 8 shall be paid by Starstream on or before the thirtieth day --------- following each month for Gross Receipts collected by the Starstream, with respect to the Starstream Business during the previous month. (e) Starstrearn may exclude from all "Internet Access Gross Receipts" revenues and fees associated with the direct connection of an organization's internal or corporate network ("LAN/WAN Extension") to its cable/fiber optic distribution network, plus fees or charges to an organization for providing dial-up or dedicated access to the organization's corporate network. This exclusion shall not apply to fees charged to remote offices or employees of the corporation for access via the ISP POP or Internet. Starstream may also exclude all revenues and fees directly associated with the provision of discounted services to bonafide non-profit organizations when such services are offered for the express purpose of fulfilling conditions of Starstream's franchise. 9. TAXES: Except as set forth herein to the contrary, Starstream shall have ----- the right to deduct the amount of any withholding taxes, value added taxes, sales and other transactional taxes (other than those taxes which Starstream is legally obligated to pay on its own behalf) from the moneys .due to OSS hereunder; provided, however, that Starstream shall furnish to OSS, at Starstream's expense, the following information and documents: (a) an original receipt from taxing authority with respect to the tax paid (and if such receipt is in a language other than English, a certified English translation thereof); (b) a report setting forth the fees with respect to which the tax is paid, including the statutory citations and general description of the provision; and (c) such other information as OSS may from time to time reasonably request to evidence OSS' right to credit such tax against its income tax liability in the United States. -3- 10. AUDITS/INSPECTIONS: Starstream and its Assignees shall prepare and maintain ------------------ complete and accurate records of all matters directly relating to this Agreement, in accordance with generally accepted accounting principles, on a calendar annual basis, throughout the Term and for not less than two years thereafter. During each calendar year of the Term, and within one year after the expiration of this Agreement, OSS, or its designated representative, may inspect and audit such books and records, once per three month period, upon at least thirty (30) days prior notice to Starstream for the purpose of verifying and confirming the accuracy of the payments made to OSS. In the event that any await reveals any error in the calculation of the amounts due to OSS, Starstream shall immediately pay or be refunded the difference unless Starstream contests such audit in good faith. In the event that the amount due to OSS exceeds five (5%) percent of the total amount due to OSS for such audited period, Starstream shall pay the costs associated with the audit unless Starstream contests such audit in good faith. In the event Starstream contests such audit, the dispute shall be subject to Section 17.5 hereunder. 11. FORCE MAJEURE: 11.1 If OSS' or Starstream's performance of any of its ------------- ---- obligations hereunder are delayed or impaired by reason of any Act of God, or, civil disturbance, strike, adverse weather condition, inability to arrange for or delays in transportation, unavoidable casualty, inability to acquire or delays in acquiring any component from a manufacturer or supplier, inability to obtain or delays in obtaining any permits or any law, rule or order of any governmental agency or official or any cause not reasonably within OSS' or Starstream's control including without limitation the non-renewal or termination of or inability to obtain an OSS license of any of the Application Program, and not due to any fault, neglect, act or omission on the part of OSS or Starstream, then OSS or Starstream, as the case may be shall be entitled to an extension of time for completion of same for a period equivalent to the time lost by reason thereof; provided, however, that such party gives the other party notice thereof within five (5) business days (unless circumstances require immediate notification) of the commencement of such claim of delay or impairment. 11.2 Withdrawal and Replacement: Subject to Section 11.1 above, and ---- -------------------------- notification to and approval by Starstream, at anytime during the Term, OSS shall have the right to withdraw the Application Program or any component and upon Starstream's consent replace same with another comparable application program. 12. PERMITS: Starstream shall at its sole cost, obtain all consents, licenses, ------- permits, approvals, authorizations, and inspections from federal, state, and local governmental authorities, agencies, or officials required for the execution and completion of the installation and construction work to be performed hereunder. Starstream shall also be responsible for and correct any violations of any such laws resulting from or in connection with their performance of the work hereunder. Starstream shall furnish OSS with such proof of its compliance as OSS may reasonably request by giving Starstream notice thereof. 13. CONFIDENTIALITY / PUBLIC DISCLOSURE / PROPRIETARY RIGHTS: 13.1 ---- Confidentiality: Each of the parties agrees to keep all proprietary ideas, plans - --------------- and information received by or otherwise disclosed to the receiving party from or by the disclosing party, that is marked proprietary or confidential (or bears a marking of like import) during these proposed transactions confidential for a period of two years from the date hereof, except those disclosures which are required by law or by order of a court having lawful jurisdiction. The parties agree that all such proprietary ideas, plans and information shall remain the property of the disclosing party. The parties agree that the terms of this Agreement shall be considered confidential and subject to all provisions of this paragraph 13.1. 13.2 Public Disclosure: OSS and Starstream shall obtain the others ---- ----------------- consent prior to making any press release, announcement or other public disclosure concerning this Agreement, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, each party shall be free to discuss with third parties Internet services and the design and development of ISP business, subject to the NonDisclosure Agreement between the parties, and to Section 15.5 hereunder. 13.3 Proprietary Rights: As between Starstream and OSS, Starstream ---- ------------------ acknowledges that OSS is the sole owner of all "System Information," defined as all proprietary information of OSS relating to the System or OSS' services, and Starstream shall not, by reason of disclosure or access to any System Information during the course of the parties' relationship or otherwise, acquire any right, title, or interest in or to any System Information. No license, or other right in or to the System Information is intended to be granted to Starstream pursuant to this Agreement or otherwise and no license or other right shall be incorporated herein by reference, implication, or any other means with respect to or under any invention, patent, copyright, trademark, (or any pending application for -4- same) trade secret, or other proprietary right contained in or in any way relating to the System Information disclosed pursuant to this Agreement or to which Starstream may be given or have access. Starstream shall not itself, nor shall it permit, by way of carrying out its reasonable commercial efforts, any third panics to remove any copyright except as specifically authorized hereunder. 14. WARRANTIES AND INDEMNITIES/SPECIFICATIONS AND CAPACITY: 14.1 SERVICES AND ------------------------------------------------------ ----------------- SYSTEM WARRANTY: OSS MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, AS - --------------- TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, ITS SERVICES, THE SYSTEM, THE DESIGN OR CONDITION OF THE EQUIPMENT OR ANY APPLICATION OR ANY OUTPUT BASED ON THE USE OF THE SYSTEM. OSS SPECIFICALLY DISCLAIMS, WITHOUT LIMITATION. ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 14.2 Assignment of Warranty: OSS hereby assigns to Starstream (to the ---- ---------------------- extent OSS has the right to so assign) the benefits of any warranties or guarantees provided to OSS by the manufacturer(s) of the System or any parts, replacements, or additional units and agrees to provide a detailed description of same to Starstream within thirty (30) days as of the date hereof Said assignment is not intended to deprive OSS of its rights under said warranties and shall not be construed to do so. 14.3 Compatibility: (a) OSS warrants and represents that the Equipment ---- ------------- being sold to Starstream by OSS and the Software being Licensed to Starstream by OSS hereunder are compatible. (b) Starstream acknowledges that certain software and equipment may not be compatible with the System and Starstream therefore agrees that it shall not use any equipment on which the Application Program is run other than the Equipment, the Application Program and other software provided hereunder without first consulting OSS. In the event that Starstream fails to inform OSS of such use, any damages to the Equipment or otherwise as a result of such use shall be borne by Starstream. 14.4 System Functions: The System under fully loaded conditions which ---- ---------------- shall not exceed 1800 simultaneous residence subscribers, or 900 simultaneous business subscribers or any combination thereof shall accommodate and/or perform in an efficient and cost effective manner in accordance with generally accepted industry standards, including but not limited to, the following primary and commonly used Internet functions: Domain Name Service; Internet E-Mail processing; World Wide Web Access, News Groups, File Transfer Protocol (ftp), Telnet, and dial-up user access and perform all accounting and control functions of Starstream. Starstream agrees that additional random access memory and semi- permanent (hard disk) memory made need to be added from time to time based on growth of subscriber traffic. 14.5 Repair of Manufacturer Defects: OSS shall coordinate all calls with ---- ------------------------------ system component manufacturers and suppliers concerning repair or warranty issues and shall use its best efforts to assist Starstream in obtaining the repair of any operational deficiencies from third party manufacturer in accordance with manufacturer's warranty assigned to Starstream herein. OSS has made arrangements with manufacturers of two critical system components (Cisco Router, 3Com, formerly USR Modem Hub) for replacement of defective parts within 24 hours. Sample copies of these Original Equipment Manufacturers extended maintenance program agreements are included as Attachments El and E2. Other items are generally available locally, such that repairs can be effected within one business day. Nothing contained in this section shall be deemed to require OSS to maintain the Equipment or Additional Equipment or to repair any defect caused by Starstream s failure to properly maintain the Equipment or Additional Equipment. Notwithstanding the above, all repair, replacement and restoration of any Equipment or Additional Equipment manufactured by OSS will be done by OSS without extra costs or charges to Starstream. 14.6 OSS Indemnification: OSS shall indemnify and hold Starstream ---- ------------------- harmless from and against any claims, liabilities, damages and expenses, including, without limitation, reasonable attorney's fees relating to or arising out of OSS' breach of any of its material obligations under this Agreement. OSS shall not be liable for any third party claims based upon or arising from Starstream's negligent operation of the System or for any indirect, incidental or consequential damages arising from the use of or inability to use the System attributable to Starstream's negligence, provided that OSS is not also negligent. -5- 14.7 Starstream Indemnification: Starstream shall indemnify and hold ---- -------------------------- harmless OSS from and against any claims, liabilities, damages and expenses, including, without limitation, reasonable attorney's fees relating to or arising out of a breach of any of Starstream's material obligations hereunder. 14.8 OSS Indemnification: OSS shall indemnify and hold harmless ---- ------------------- Starstream from and against any claims, liabilities, damages and expenses, including, without limitation, reasonable attorney's fees relating to or arising out of a breach of any of OSS's material obligations hereunder. 14.9 Service: Notwithstanding any of the foregoing, in view of the nature ---- ------- of the System and its complexity and conditions of use, OSS does ensure that the functions of the System shall meet industry standard performance criteria. In the event that the System does not meet industry standard performance criteria as a result of OSS' responsibilities, Starstream shall notify OSS in writing and both parties agree to immediately consult in order to ascertain the urgency of the situation and OSS shall utilize best efforts to rectify the problem within the agreed upon timetable but in any event no later than thirty (30) days. Upon investigation and remedy of the problem, if it is determined that the problem was primarily and directly attributable to Starstream's negligent actions or enhancements to the System, Starstream agrees to pay time and materials plus out of pocket expenses to remedy the situation. 14.10 Two-Way Operations: OSS warrants that all software furnished in the ----- ------------------ system headend equipment and ISP POP shall be fully compatible with two-way system operations. This notwithstanding, the Starstream agrees that it will be necessary to add additional hardware and two-way subscriber modems to support two-way operations. 15. DEFAULT / TERMINATION: 15.1 Default: Either party may immediately terminate --------------------- ------------- this Agreement upon thirty (30) days prior written notice to the other party (the "Non-Terminating Party") and upon the occurrence of any of the following events of default by the Non-Terminating Party and the Non-Terminating Party's failure to cure same within fifteen (IS) days of notice: the Non-Terminating Party's breach of any material obligation under this Agreement; the Non- Terminating Party's failure to make timely payment to OSS in accordance with the payment obligations set forth in this Agreement; the Non-Terminating Party ceases to do business or sells all or a portion of its assets used in the business of providing Internet service using the System:, or the Non-Terminating Party files for bankruptcy or a trustee or receiver is appointed or the Non- Terminating Party makes an assignment for the benefit of creditors. 15.2 Effect of Termination: Upon the termination of this Agreement: 1) ---- --------------------- the Non-Terminating Party, its receivers, trustees, assigns or other representatives shall immediately surrender all rights, licenses and privileges granted under this Agreement, cease using or displaying the other party's trademarks, service marks or logos, shall cease to identify itself with the other party in any way, shall immediately pay any and all outstanding payments due to the other party; and shall return to the other party any and all property belonging to such other party including without limitation, all manuals, billing, and other proprietary software and informational materials furnished by the other party to the breaching party, and 2) Any Equipment fully paid for shall remain Starstream Equipment; provided, however, that as to am Equipment for which Starstream has made partial payment, Starstream shall: provide full payment immediately upon termination and the Equipment shall be delivered to Starstream upon full payment; or such Equipment shall be returned to OSS and OSS shall refund Starstream the difference between the fair market value of the returned Equipment (after deduction of costs of retrieving and shipping such Equipment) and the total amount due for the purchase of the Equipment. 15.3 Non Release of Obligations: No termination of this Agreement shall ---- -------------------------- release Starstream from any obligation to pay OSS any amounts accrued or become payable prior to the date of termination. 15.4 Survival: The provisions of Sections 13, 14, 15.2, 15.4 and 17.1 ---- -------- shall survive the expiration or termination of this Agreement. 15.5 Performance Standards: OSS agrees that it will employ its best ---- --------------------- efforts to maintain the system and software within the most advanced state of performance and technology available through the use of release version hardware and software. As from the first anniversary of this Agreement and on each subsequent yearly anniversary of the same, and for an extra (30) day period, Starstream shall have the option to request OSS to meet so as to have -6- a performance review carried out by an independent and well-known consultant with an established practice in the field of Internet technology. Failing the parties' agreement to the same, the appointment of the independent consultant will be made by Starstream. The independent consultant's review will be limited to an assessment of whether the level of technical performance of the hardware/software and services provided by OSS are substantially similar or better than those provided by the three top-ranked companies who provide similar services. Should the report of the consultant indicate that said level of technical performance is below said threshold, Starstream shall notify OSS so that within a thirty (30) day period OSS can take steps to upgrade its services to meet the said threshold. If at the end of such thirty (30) day period, OSS has not upgraded its level of performance to meet or exceed said threshold, Starstream will be authorized to declare a material breach of contract in which case Starstream's remedies will be limited to termination of this Agreement without any indemnification or obligation towards OSS, subject to the provisions of Paragraph 4 - Application Program. Starstream shall bear -expenses of consultant, except in the event of termination of this agreement under the provisions of this paragraph, whereupon OSS shall pay consultant fees. 16. INTELLECTUAL PROPERTY / INFRINGEMENT CLAIMS: If Starstream receives a claim ------------------------------------------- that any Equipment or Application Program manufactured or provided by OSS infringes upon any patent, copyright, or other intellectual property interest, Starstream shall immediately notify OSS in writing. OSS shall have the exclusive authority to handle any such claims and, at its sole option will: 1) settle or defend the claim; 2) procure for Starstream the right to use the Equipment and Application Program or compatible Equipment and Application Program; 3) replace or restore the Equipment and Application Program; and 4) indemnify Starstream from liability arising from any of the foregoing. In the event that any Equipment or Application Program is not manufactured nor provided by OSS, OSS shall not be required to indemnify Starstream except to the extent such infringement arises from OSS' integration of such Equipment or Application Program or the System. OSS shall also not be required to indemnify Starstream for any claims of infringement relating to Equipment or Application Program modified or altered in any way or made to Starstream s designs or specifications without OSS consent. 17. MISCELLANEOUS: 17.1 Non Waiver: A failure by either party to enforce any ------------- ---------------- right hereunder shall not constitutes a waiver of such right or any other right, and shall not modify the rights or obligations of either party under this Agreement; 17.2 Notice: Any notice required to be given under this Agreement shall be ----------- provided in writing and delivered by hand or by registered mail to the party's address indicated herein; 17.3 Severability: The invalidity or unenforceability of any provisiopn of ----------------- this Agreement shall not affect the validity or enforceability of any other provision, the remaining provisions being deemed to continue in full force and effect; 17.4 Governing law: The Agreement shall be governed by and consttued under ------------------ the laws of Colorado; 17.5 Dispute Resolution: All claims or disputes arising out of this ----------------------- Agreement or the breach thereof shall be decided by arbitration in accordance with the appropriate rules of the American Arbitration Association, which cannot be settled amicably by the parties, then obtaining unless the parties mutually agree otherwise. Notice of demand for arbitration shall be filed in writing with the other party to the Agreement and with the American Arbitration Association and shall be made within a reasonable time after the dispute has arisen. The arbitration hearing shall be held in San Francisco, California. The arbitration award shall be binding and enforceable in any court having jurisdiction thereover. The cost of the arbitration proceedings, exclusive of each party's own attorney's fees and out of pocket costs, shall be shared equally by both parties. 17.6 Entire Agreement: This Agreement constitutes the entire agreement --------------------- between the parties and supersedes all prior agreements and communications, whether oral or in writing, between the parties with respect to the subject matter of this Agreement. No amendment or modification of this Agreement shall be effective unless made in writing and signed by OSS and Starstream; 17.7 Relationship of Parties: There is no intent within this Agreement to ---------------------------- grant a franchise, create a partnership, joint venture, or business relationship between the parties other than that described within this -7- Agreement. Starstream and OSS are and at all times shall remain independent contractors and shall have no authority to bind the other to any commitments of any kind; 17.8 Assignment: This Agreement is non-assignable except to any Affiliate. --------------- Any assignment by either party hereto, except as provided above, shall require the written approval of the other party, such approval not to be unreasonably withheld; 17.9 Successors in Interest: This Agreement shall inure to the benefit of --------------------------- and be binding upon the successors in interest to either of the parties. 18. LIMITED EXCLUSIVITY: OSS agrees that it will not enter into any similar ------------------- arrangement with any other operator whose focus is primarily directed at subscribers in the Territory prescribed in Section 1. Neither will OSS enter into any similar arrangement with any other operator who proposes to provide similar services in areas adjacent to the Territory without giving the Starstream first right of refusal to extend this Agreement to provide its services into the subject adjacent territories on terms no less favorable to OSS than those contained within this agreement. 19. FAVORED NATIONS: OSS agrees that from the date of this agreement should it --------------- enter into any similar agreement with another cable operator located in the United States of America with fewer than 15,000 subscribers under overall terms which are more favorable than the terms incorporated herein, it will notify Starstream of this agreement and extend to Starstream similar or equivalent terms. Starstream agrees that as a systems integrator OSS has no control over Original Equipment Manufacturer's prices and that this clause shall not apply to any sales amount or terms related to hardware or software purchased from 3rd parties. Therefore this clause shall only be applied to revenue sharing percentages, scope of services rendered, and general operating terms and conditions. Each of the parties hereto who have executed and delivered this binding Agreement hereby confirm its effectiveness and validity as of the date first written above. ONLINE SYSTEM SERVICES [Corporate Seal] By: /s/ ------------------------------------- R. Steven Adams President and Chief Executive Officer Date: February 16, 1997 Date Accepted:______________________________ STARSTREAM [Corporate Seal] By: /s/ ------------------------------------- ZoeHazen President Date: ___________________ -8- EX-10.13 8 AGMT. FOR THE PROVISION OF INTERNET SERVICES EXHIBIT 10.13 AGREEMENT FOR THE PROVISION OF INTERNET SERVICES, EQUIPMENT, AND SOFTWARE ------------------------------------------------------------------------- LICENSES -------- By and between ONLINE SYSTEM SERVICES, INC. ("OSS") a Colorado corporation with its principal place of business located at 1800 Glenarm Place, Denver, Colorado and American Telecasting, Inc., a Delaware corporation, with its principal place of business located at 5575 Tech Center Drive, Suite 300, Colorado Springs, Colorado 80919 ("Customer"), dated as of November 26, 1997. 1. PURPOSE / DESCRIPTION OR THE SYSTEM, EQUIPMENT, APPLICATION PROGRAMS AND ------------------------------------------------------------------------ RELATED MATERIALS AND SERVICES: 1.1 General: OSS is a company generally engaged - ------------------------------ ----------- in the business of providing Internet related equipment software and services such as hardware and software selection, installation, initial training, consulting and general assistance in the implementation and operation of a turn- key Internet Service Provider ("ISP") business as well as documentation and supporting materials for administration, marketing, sales and web site design and development support for ISP systems; OSS provides and/or has the right to license a package of OSS proprietary programs developed by OSS including but not limited to the "Community Access Partnership" ("CAP" ) Web site software, with future versions to include, without limitation, "Electronic Banking" and "Electronic Commerce" functionality, and user documentation, as well as the SAGE Application which performs subscriber management and billing functions (hereinafter collectively described as the "Application Program "). 1.2 Scope of this Agreement: This Agreement includes the terms and --- ----------------------- conditions applicable to all Internet systems purchased by ATI from OSS. The parties agree that six (6) systems will be selected and measured against certain performance criteria, mutually agreed to by the parties as detailed in Schedule A. Upon the successful achievement of these performance criteria or by any other replacing criteria, mutually agreed between the parties, ATI agrees to enter into good faith negotiations with OSS to use the services of OSS in offering Internet services in other markets. The six (6) markets include Colorado Springs' Denver, Portland, and the other three (3) markets will be determined at some subsequent date by ATI management. 2. TERM: The term of the Agreement shall commence on the date set forth above, ---- and shall continue for a period of five (5) years unless sooner terminated in accordance with the terms of this Agreement including but not limited to Section 15 hereunder (the "Term"). 3. PROVISIONS APPLICABLE TO EQUIPMENT SALE AND PURCHASE: Customer and OSS have ---------------------------------------------------- executed two (2) Memorandums of Agreement (MOA) dated September 29, 1997, and November 11, 1997 which provided for the purchase of hardware/software, Application Program, and the Installation of all hardware and software. These MOAs are incorporated herein by reference as Schedule "B". The unit pricing terms found in these Memoranda will apply to all ISP systems sold by OSS to the Customer. The price for any market will be determined by individual market requirements and agreed to between OSS and Customer. 4. PROVISIONS APPLICABLE TO LICENSE OF THE APPLICATION PROGRAM: 4.1 Grant of ----------------------------------------------------------- ------------ Software License: During the Term in the Customer's Internet POP locations and - ---------------- subject to Customer's compliance with the terms and conditions herein, OSS hereby grants to Customer a Software License granting Customer the right to use and execute the Application Program and its future releases and versions --- throughout the Term, with no further costs to Customer than those set forth in Section 8. Except for the license herein granted to Customer, it is hereby acknowledged and agreed to by the parties that as between OSS and Customer all rights of any nature whatsoever in and to the Application Program and any other intellectual property relating to Cable Access America are retained exclusively by OSS. The License shall be non-exclusive to Customer, subject to the provisions set forth in Section 15. 4.2 Reservation of Rights: The Software License may not, under any --- --------------------- circumstances whatsoever be considered a transfer, either direct or indirect of the intellectual and/or industrial property rights of the licensed software and Customer shall not have the right to assign, sub-license, rent, lease, sell, encumber, or otherwise transfer any of the rights granted hereunder. Subject to the same terms, conditions and qualifications, except for the rights expressly granted herein, any and all rights in and to the Application Programs are hereby reserved to OSS. 5. RESPONSIBILITIES OF CUSTOMER: Customer shall be solely responsible for the ---------------------------- costs of telecommunication services provided by the local telephone company, interchange carriers and any other telecommunications company which may be necessary for the Customer's use of the System. In addition, Customer shall be responsible for insuring for the provision of adequate 110/220 volt power circuits for the System, including backup (uninteruptible power supply, if desired) power. 6. OSS INSTALLATION: 6.1 Installation Plan and Acceptance: With respect to ---------------- ------------------------------------ Equipment purchased by Customer from OSS, OSS agrees that it shall promptly provide on-site installation assistance comprised of the installation and other services described in the Installation Plan set forth in Schedule "B" attached hereto and such other services as the parties mutually agree are necessary to permit Customer to begin use of the System in accordance with such Installation Plan in compliance `with the timetable set forth therein. An OSS technician shall be responsible to demonstrate to Customer the successful material operation of all functions of the installed System prior to certifying in writing that the installation has been completed. 6.2 Passage of Title/Risk of Loss/Equipment Delivery: Title to the System --- ------------------------------------------------ shall not pass to Customer until the issuance of the certification of the Installation Plan and payment of the Equipment Purchase Price and any related installation fees due and owing. Until such time as title passes to Customer hereunder, OSS shall bear the risk of loss or damage to the System, cc any part thereof. Unless otherwise determined by OSS, OSS shall deliver all Equipment and Additional Equipment to Customer ROB. OSS' or manufacturer's principal place of business, whichever is least expensive. OSS reserves the right to make partial deliveries and to ship the Equipment or additional Equipment as it becomes available. Delivery dates are approximate. Customer shall provide an acceptable installation and operation environment suitable for computer equipment 6.3 Customer Responsibilities: Customer shall promptly perform all --- ------------------------- responsibilities it is assigned under the Installation Plan. Customer shall also furnish to OSS, free of charge, for the period of time required for installation of the System: 1) access during normal business hours to the location in each territory in which the Equipment is to be placed; 2) the cooperation of a management-level employee in each market (hereinafter the Project Leader) knowledgeable in aspects of Customer's business and technical operations. 7. OSS ACCESS SUPPORT, COMMUNITY ACCESS PARTNER SUPPORT, TRAINING, AND ------------------------------------------------------------------- DOCUMENTATION: OSS agrees to furnish Customer with on-going support, training, - ------------- and documentation which supports the Internet access, Community Access Partnership, and Web hosting services provided by the Customer. The parameters of this support, training, and documentation are defined in Schedule "C" attached hereto. 8. OSS PROFESSIONAL MANAGEMENT AND INTELLECTUAL PROPERTY FEES: In ---------------------------------------------------------- consideration of the rights and licenses granted hereunder and the support, training, and documentation provided, Customer shall pay to OSS: 8.1 Installation and License Fee: Upon executing purchase order for the --- ---------------------------- POP equipment for each individual market, Customer agrees to pay OSS a non- refundable Installation and License Fee of $_______ per market The current markets to which this fee is applicable are Colorado Springs, Denver, and Portland. 8.2 Access Revenue Sharing: The percentages, as found in the following --- ---------------------- table, of all Internet Access Gross Receipts "Access" which shall be defined as all billings by Customer or its Assignees attributable to the provision of" Internet Access" to be defined for the purpose of this Agreement as dial-up, dedicated, telco return and two way wireless cable modem Internet access revenues (including webhosting revenues) minus uncollectible billings, installation charges, value added, sales and other transactional taxes (other than those taxes which Customer is legally obligated to pay on its own behalf): 8.3 Content Revenue Sharing: The percentages, as found in the following --- ----------------------- table, of Content Related Gross Receipts "Content" which shall be defined as all fees by Customer or its Assignees attributable to all content related activities. including but not limited to sponsorships, electronic advertising, electronic banking and electronic commerce minus custom software and web-design development cost, uncollectible billings, installation charges, value added, sales and other transactional taxes (other than those taxes which Customer is legally obligated to pay on its own behalf). [Table] -2- 8.4 All Systems: The above percentages apply to those markets for which --- ----------- the Customer purchases the hardware/software and other services associated with the CAA product. 8.5 Payment Dates: The Professional Management and Intellectual Property --- ------------- Fees provided for in Section 8 shall be paid by Customer on or before the thirtieth day following each month for Gross Receipts collected by the Customer, - --------- with respect to the Customer Business during the previous month. 9. TAXES: Except as set forth herein to the contrary, Customer shall have the ----- right to deduct the amount of any withholding taxes, value added taxes, sales and other transactional taxes (other than those taxes which Customer is legally obligated to pay on. its own behalf) from the moneys due to OSS hereunder; provided, however, that Customer shall furnish to OSS, at Customer's expense, the following information and documents: (a) an original receipt from taxing authority with respect to the Lax; (b) a report setting forth the fees with respect to which the tax is paid, including the statutory citations and general description of the provision; and (c) such other information as OSS may from time to time reasonably request to evidence .OSS' right to credit such tax against its income tax liability. 10. AUDITS/INSPECTIONS: Customer and its Assignees shall prepare and maintain ------------------ complete and accurate records of all matters directly relating to this Agreement, in accordance with-generally accepted accounting principles, on a calendar annual basis, throughout the Term and for not less than two years thereafter. During each calendar year of the Term, and within one year after the expiration of this Agreement, OSS, or its designated representative, may inspect and audit such books and records, once per three month period, upon at least thirty (30) days prior notice to Customer for the purpose of verifying and confirming the accuracy of the payments made to OSS. In the event that any audit reveals any error in the calculation of the amounts due to OSS, Customer shall immediately pay or be refunded the difference unless Customer contests such audit in good faith. In the event that the amount due to OSS exceeds five (5%) percent of the total amount due to OSS for such audited period, Customer shall pay the costs associated with the audit unless Customer contests such audit in good faith. In the event Customer contests such audit, the dispute shall be subject to Section 17.5 hereunder. 11. FORCE MAJEURE: 11.1 If OSS' or Customer's performance of any of its ------------- ---- obligations hereunder are delayed or impaired by reason of any Act of God, or, civil disturbance, strike, adverse weather condition, inability to arrange for or delays in transportation, unavoidable casualty, inability to acquire or delays in acquiring any component from a manufacturer or supplier, inability to obtain or delays in obtaining any permits or any law, rule or order of any governmental agency or official or any cause not reasonably within OSS' or Customer's control including without limitation the non-renewal or termination of or inability to obtain an OSS license of any of the Application Program, and not due to any fault, neglect, act or omission on the part of OSS or Customer, then OSS or Customer, as the case may be shall be entitled to an extension of time for completion of same for a period equivalent to the time lost by reason thereof; provided, however, that such party gives the other party notice thereof within five (5) business days (unless circumstances require immediate notification) of the commencement of such claim of delay or impairment. In the event any delay or impairment continues for a period of one month, either party shall have the right to terminate this Agreement in accordance with Section 15 below. 11.2 Withdrawal and Replacement: Subject to Section 11.1 above, and ---- -------------------------- notification to and approval by Customer, at anytime during the Term, OSS shall have the right to withdraw the Application Program or any component and upon Customer's consent replace same with another comparable application program. 12. PERMITS: Customer shall at its sole cost, obtain all consents, licenses, ------- permits, approvals, authorizations, and inspections from federal, state, and local governmental authorities, agencies, or officials required for the execution and completion of the installation and construction work to be performed hereunder. Customer shall also be responsible for and correct any violations of any such laws resulting from or in connection with their performance of the work hereunder. Customer shall furnish OSS with such proof of its compliance as OSS may reasonably request by giving the Customer notice thereof. 13. CONFIDENTIALITY / PUBLIC DISCLOSURE / PROPRIETARY RIGHTS: 13.1 -------------------------------------------------------- ---- Confidentiality: Each of the parties agrees to keep all proprietary ideas, - --------------- plans and information received by or otherwise disclosed to the receiving party from or by the disclosing party, that is marked proprietary or confidential (or bears a marking of like import) during -3- these proposed transactions confidential for a period of two years from the date hereof The parties agree that all such proprietary ideas, plans and information shall remain the property of the disclosing party. 13.2 Public Disclosure: OSS and Customer shall obtain the others consent ---- ----------------- prior to making any press release, announcement or other public disclosure concerning this Agreement, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, each party shall be free to discuss with third parties Internet set-vices and the design and development of ISP business, subject to the Non-Disclosure Agreement between the parties, and to Section 15-5 hereunder. 13.3 Proprietary Rights: As between Customer and OSS, Customer ---- ------------------ acknowledges that OSS is the sole owner of all "System Information", defined as all proprietary information of OSS relating to the System or OSS' services, and Customer shall not, by reason of disclosure or access to any System Information during the course of the parties' relationship or otherwise, acquire any right, title, or interest in or to any System Information. No license, or other right in or to the System Information is intended to be granted to Customer pursuant to this Agreement or otherwise and no license or other right shall be incorporated herein by reference, implication, or any other means with respect to or under any invention, patent, copyright, trademark, (or any pending application for same) trade secret, or other proprietary right contained in or in any way relating to the System Information disclosed pursuant to this Agreement or to which Customer may be given or have access. Customer shall not itself, nor shall it permit, by way of carrying out its reasonable commercial efforts, any third parties to remove any copyright except as specifically authorized hereunder. 14. WARRANTIES AND INDEMNITIES/SPECIFICATIONS AND CAPACITY: 14.1 SERVICES AND ------------------------------------------------------ ----------------- SYSTEM WARRANTY: OSS MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, - --------------- AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, ITS SERVICES, THE SYSTEM, THE DESIGN OR CONDITION OF THE EQUIPMENT OR ANY APPLICATION OR ANY OUTPUT BASED ON THE USE OF THE SYSTEM. OSS SPECIFICALLY DISCLAIMS, WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 14.2 Assignment of Warranty: OSS hereby assigns to Customer (to the extent ---- ---------------------- OSS -has the right to so assign) the benefits of any warranties or guarantees provided to OSS by the manufacturer(s) of the System or any pans' replacements, or additional units and agrees to provide a detailed description of same to Customer within thirty (30) days as of the date hereof. Said assignment is not intended to deprive OSS of its rights under said warranties and shall not be construed to do so. 14.3 Compatibility: (a) OSS warrants and represents that the Equipment ---- ------------- being sold to Customer by OSS and the Software being Licensed to Customer by OSS hereunder are compatible. (b) Customer acknowledges that certain software and equipment may not be compatible with the System and Customer therefore agrees that it shall not use any equipment on which the Application Program is run other than the Equipment, the Application Program and other software provided hereunder without first consulting OSS. In the event that Customer fails to inform OSS of such use, any damages to the Equipment or otherwise as a result of such use shall be borne by Customer. 14.4 System Functions: The System shall accommodate and/or perform in an ---- ---------------- efficient and cost effective manner in accordance with generally accepted industry standards, including but not limited to, the following primary and commonly used Internet functions: Domain Name Service; Internet e-mail processing; World Wide Web Access, News Groups, File Transfer Protocol (ftp), Telnet, and dialup user access and perform accounting and control functions of Customer. 14.5 Repair of Manufacturer Defects: OSS shall use best efforts to assist ---- ------------------------------ Customer in obtaining the repair of any operational deficiencies from third party manufacturer in accordance with manufacturer's warranty assigned to Customer herein. Nothing contained in this section shall be deemed to require OSS to maintain the Equipment or Additional Equipment or to repair any defect caused by Customer's failure to properly maintain the Equipment or Additional Equipment. Notwithstanding the above, all repair, replacement and restoration of any Equipment or Additional Equipment manufactured by OSS will be done by OSS without extra costs or charges to Customer. -4- 14.6 OSS Indemnification: OSS shall indemnify and hold Customer harmless ---- ------------------- from and against any claims, liabilities, damages and expenses, including, without limitation, reasonable attorney's fees relating to or arising out of OSS' breach of any of its material obligations under this Agreement. OSS shall not be liable for any third party claims based upon or arising from Customers negligent operation of the System or for any indirect, incidental or consequential damages arising from the use of or inability to use the System attributable to Customer's negligence, provided that OSS is not also negligent. 14.7 Customer Indemnification: Customer shall indemnify and hold harmless ---- ------------------------ OSS from and against any claims, liabilities, damages and expenses, including, without limitation, reasonable attorney's fees relating to or arising out of a breach of any of Customer's material obligations hereunder. 15. DEFAULT / TERMINATION: 15.1 Default: Either party may immediately --------------------- ------------ terminate this Agreement upon thirty (30) days prior written notice to the other party (the "Non-Terminating Party") and upon the occurrence of any of the following events of default by the Non-Terminating Party and the Non-Terminating Party's failure to cure same within fifteen (15) days of notice: the Non- Terminating Party's breach of any material obligation under this Agreement; the Non-Terminating Party's failure to make timely payment to OSS in accordance with the payment obligations set forth in this Agreement; the Non-Terminating Parry ceases to do business or sells all or a portion of its assets used in the business of providing Internet service using the System:, or the Non-Terminating Party files for bankruptcy or a trustee or receiver is appointed or the Non- Terminating Party makes an assignment for the benefit of creditors. 15.1.a Mutual Termination: Anything herein to the contrary ------ ------------------ notwithstanding, Customer and OSS may mutually elect to terminate this Agreement at any time by counter-signing a Notice of Termination setting forth the effective date of such termination no sooner than thirty (30) days following the delivery of such counter-signed document to both parties. If Customer and OSS terminate this Agreement in accordance with the provisions of this Subsection 15.1.A, in addition to any payment required to be made to OSS pursuant to Subsection 15.2 hereunder, OSS shall be entitled to be reimbursed by Customer for all of OSS' Professional Management and Intellectual Property Fees earned by OSS prior to the effective date of such termination. 15.1.b Performance based termination: Should any market fail to meet the ------ ----------------------------- performance criteria as defined in schedule "A" within the specified time frame, then either party may elect to terminate this agreement for that specific market by a written notice of termination. 15.1.c Termination Upon Sale of Customer: Anything herein to the contrary ------ --------------------------------- notwithstanding, Customer may, upon ninety (90) days prior written notice to OSS terminate this Agreement in the event that any "unaffiliated entity" acquires control of Customer. For purposes hereof, an "unaffiliated entity" shall mean a person, company or business whose ownership or management is not controlled by, controlling or under common control with Customer. If Customer and OSS terminate this Agreement in accordance with the provisions of this Subsection 15.1.b and 15.1c, in addition to any payment required to be made to OSS pursuant to Subsection 15.2 hereunder, OSS shall be entitled to be reimbursed by Customer or to retain from the amount of monies previously paid by Customer under this Agreement the amount of non-cancelable costs actually incurred or committed in connection with OSS' performance under this Agreement, in addition to all of OSS Professional Management and Intellectual Property Fees earned by OSS prior to the effective date of such termination and the purchase price of any equipment delivered to Customer prior to such effective date. 15.1d Other Termination: Customer reserves the right to terminate this ----- ----------------- agreement for any of the markets in which they have deployed Internet services and which is bound by the terms of this Agreement The following Termination Fees to be paid to OSS apply to each market for which Customer desires to terminate this Agreement, (1) If this agreement is terminated within the first twelve (12) months there will be no additional fees due OSS. (2) If this Agreement is terminated between the end of month 12 and prior to the end of month 24 of the date of first commercial launch of Internet services in a market, Customer shall pay OSS a fee of $50,000; (3) For the period from the beginning of month 25 to the end of the term of this Agreement, the Termination Fee shall be the greater of $100,000 or an amount equal to the Earned OSS Professional Management and Intellectual Property Fee for the month immediately preceding the issuance of the Notice of Termination multiplied by the number of -5- months remaining in the unelapsed portion of the Five (5) Year Term had such termination not have taken effect ("Termination Fee"). For example, assuming the OSS' Fee for the month prior to the issuance of the Termination Notice is $4,000 and 30 months of the Term has elapsed at the effective date of termination, the Termination Fee owing to OSS would be $120,000. 15.2 Effect of Termination: Upon the termination of this Agreement: 1) ---- --------------------- the Non-Terminating Party, its receivers, trustees, assigns or other representatives shall immediately surrender all rights, licenses and privileges granted under this Agreement, cease using or displaying the other party's trademarks, service marks or logos, shall cease to identify itself with the other party in any way, shall immediately pay any and all outstanding payments due to the other party; and shall return to the other party any and all property belonging to such other party including without limitation, all manuals, billing, and other proprietary software and informational materials furnished by the other party to the breaching party, and 2) Any Equipment fully paid for shall remain Customer Equipment; provided, however, that as to any Equipment for which Customer has made partial payment, Customer shall: provide full payment immediately upon termination and the Equipment shall be delivered to Customer upon full payment; or such Equipment shall be returned to OSS and OSS shall refund Customer the difference between the fair market value of the returned Equipment (after deduction of costs of retrieving and shipping such Equipment) and the total amount due for the purchase of the Equipment. 15.3 Non Release of Obligations: No termination of this Agreement shall ---- -------------------------- release Customer from any obligation to pay OSS any amounts accrued or become payable prior to the date of termination. 15.4 Survival: The provisions of Sections 13, 14, 15.2, 15.4 and 17.1 ---- -------- shall survive the expiration or termination of this Agreement. 16. INTELLECTUAL PROPERTY / INFRINGEMENT CLAIMS: If Customer receives a claim ------------------------------------------- that any Equipment or Application Program manufactured or provided by OSS infringes upon any patent, copyright, or other intellectual property interest, Customer shall immediately notify OSS in writing. OSS shall have the exclusive authority to handle any such claims and, at its sole option will: I) settle or defend the claim; 2) procure for Customer the right to use the Equipment and Application Program or compatible Equipment and Application Program; 3) replace or restore the Equipment and Application Program; and 4) indemnify Customer from liability arising from any of the foregoing up to the amount of any fees theretofore paid by Customer to OSS under this Agreement. In the event that any Equipment or Application Program is not manufactured nor provided by OSS, OSS shall not be required to indemnify Customer except to the extent such infringement arises from OSS' integration of such Equipment or Application Program or the System. OSS shall also not be required to indemnify Customer for any claims of infringement relating to Equipment or Application Program modified or altered in any way or made to Customer's designs or specifications without OSS consent. 17. MISCELLANEOUS: 17.1 Non Waiver: A failure by either party to enforce any ------------- --------------- right hereunder shall not constitutes a waive of such right or any other right, and shall not modify the rights or obligations of either party under this Agreement; 17.2 Notice: Any notice required to be given under this Agreement ----------- shall be provided in writing and delivered by hand or by registered mail to the party's address indicated herein; 17.3 Severability: The invalidity or ----------------- unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision, the remaining provisions being deemed to continue in full force and effect, 17.4 Governing law: The ------------------ Agreement shall be governed by and construed under the laws of Colorado; 17.5 ---- Dispute Resolution: The parties hereby agree and consent to the exclusive - ------------------ jurisdiction and venue of the state courts situated in Colorado, USA for resolution of any dispute arising from this Agreement 17.6 Entire Agreement: --------------------- This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements and communications whether oral or in writing, between the parties with respect to the subject matter of this Agreement. No amendment or modification of this Agreement shall be effective unless made in writing and signed by OSS and Customer; 17.7 Relationship of Parties: There is ---------------------------- no intent within this Agreement to grant a franchise, create a partnership, joint venture, or business relationship between the parties other than that described within this Agreement. Customer and OSS are and at all times shall remain independent contractors and shall have no authority to bind the other to any commitments of any kind; 17.8 Assignment. This Agreement is non-assignable --------------- except to any Affiliate. Any assignment by either party hereto, except as provided above, shall require the written approval of the other party, such approval not to be unreasonably withheld; 17.9 Successors in Interest: This --------------------------- Agreement shall inure to the benefit of and be binding upon the successors in interest to either of the parties. -6- Each of the parties hereto who have executed and delivered this binding Agreement hereby confirm its effectiveness and validity as of the date first written above. ONLINE SYSTEM SERVICES [Corporate Seal] By: /s/ --------------------------------- R. Steven Adams Date: _________________________________ STARSTREAM [Corporate Seal] By: /s/ --------------------------------- Robert Hostetler, President Date: _________________________________ -7- EX-10.14 9 EQUIPMENT SALE AND SOFTWARE LICENSE AGMT. EXHIBIT 10.14 EQUIPMENT SALE AND SOFTWARE LICENSE AGREEMENT This EQUIPMENT SALE AND SOFTWARE LICENSE AGREEMENT (this Agreement) is being entered into between Online System Services, Inc. (OSS), having its principal office at 1800 Glenarm Place, Denver, Colorado, and Intermedia Partners Southeast, 424 Church Street, Suite 1600, Nashville, Tennessee 37219 (Customer). PRELIMINARY STATEMENT OSS is generally in the business of providing Internet related equipment, software and service to enable a customer to establish a turn-key Internet package which generally enables a customer to become an Internet service provider to its own customers. OSS is also generally in the business of assisting customers in establishing designing, programming, and implementing web page design and establishing a web site presence on the Internet ("OSS Business"). The concept underlying OSS Business is that there is a business opportunity in non-urban areas of this county for the establishment of an Internet Service Provider ("ISP") operation which can connect local residents to the worldwide Internet by dialing a local telephone number. OSS has recognized that one major barrier which discourages local operators from entering the ISP business is a lack of technical, administrative, and marketing expertise about the Internet Service Provider business. In response to these observations OSS has developed a business model in which OSS provides the needed expertise and services which support a local operator in establishing and maintaining a local ISP business. OSS provides a range of services, such as hardware and software selection, installation, initial training, consulting, and general assistance in implementing and operating an ISP business. OSS also provides extensive documentation and supporting materials for ISP administration, marketing, sales, Web development support, and other materials for successful ISP operations. OSS provides this turnkey package and post-installation support and receives the fixed initial fee set forth herein and subsequent royalties which are dependent on the revenue stream of the ISP operation. In connection with the OSS Business, OSS owns and/or has the right to license various software which OSS has generally named Community Access America which consists of computer software programs. The software consists of various programs set forth on Schedule A attached hereto including a proprietary program developed by OSS known as the Accounting and Control System together with various user documentation prepared by the OSS to assist the Customer to operate the Customer Business. Such materials are referred to in this Agreement as the Application Programs. This Agreement grants Customer a right and license to the Application Programs provided that certain software has been provided to OSS by Microsoft for sublicense to the Customer conditioned on the Customer executing the Microsoft License attached hereto as Schedule B (the "Microsoft License" ). OSS also sells equipment and related software some or all of which may be purchased by OSS from others for use with the Application Programs in connection with the operation of the Customer Business (the "Equipment"). For purposes of this Agreement, the Application Programs and the Equipment are collectively referred to as the "System". Customer desires to establish an Internet point of presence, to design web pages for customers and to perform such services generally to enable it to become an Internet Service Provider ("Customer Business") to its own customers. Customer desires to conduct the Customer Business using the System only in the location(s) specified herein and OSS desires to establish the Customer as the only user of the System in such location. OSS AND CUSTOMER, INTENDING TO BE LEGALLY BOUND, HEREBY AGREE AS FOLLOWS: SECTION 1 PROVISIONS APPLICABLE TO EQUIPMENT SALE AND PURCHASE 1.1 PURCHASE AND SALE. Customer hereby agrees to buy, and OSS hereby agrees to sell to Customer, subject to the terms and conditions of this Agreement, the Equipment set forth and described on Schedule C described at the price also set forth on in Schedule C ("Equipment Purchase Price"), together with the materials and services shown in Schedule D attached hereto. 1.2 PAYMENT. Payments of the Equipment Purchase Price will be made to OSS at the address set forth above, or at any other place designated by OSS. Upon execution of this Agreement, Customer agrees to pay fifty percent (50%) of the Equipment Purchase Price set forth in Schedule C. Twenty-five percent (25%) of the Equipment Purchase Price shall be paid to OSS upon delivery of the equipment to the Customer. OSS agrees to provide customer with a written invoice upon delivery of the Equipment. The remaining twenty-five percent (25%) is due upon completion of the Installation Plan as defined herein and acceptance of the installation of the System by the Customer as also defined herein. In the event any components of the Equipment are found to be defective prior to Customer's acceptance under Section 3.6, then OSS shall, at its sole cost and expense, repair such Equipment or replace same with comparable Equipment within five (5) days of notice Customer agrees to pay when due (or, if necessary, reimburse OSS for) any applicable sales, use, property, excise, and other similar taxes. The cost of packing, crating, shipping, in-transit insurance, and all training/installation-related travel expenses incurred by OSS (OSS Expenses) is an additional charge and will, at OSS's option, be added to the Equipment Purchase Price, reimbursed upon written request, or paid by Customer directly. In the event the OSS Expenses exceed one thousand five hundred dollars ($1,500.00) in the aggregate, OSS shall advise Customer of the amount of any such charges in excess of such amount prior to incurring same and secure Customer's written consent to such charges. 1.3 OTHER EQUIPMENT. In light of possible equipment and software incompatibility, Customer agrees that it shall not use any equipment or other devices or hardware in conjunction with the Equipment without first consulting with OSS. SECTION 2 PROVISIONS APPLICABLE TO SOFTWARE LICENSE 2.1 GRANT OF LICENSE. So long as this Agreement is in full force and effect, OSS hereby grants to Customer a license which shall be exclusive to the extent provided for in paragraph 3.3 hereof, to install, use, and execute the Application Programs on Equipment owned by Customer at the Approved Location(s) (as specified in Section 3.1 hereof) solely to conduct the Customer Business. Customer shall have the right, but not the obligation, to use the name Community Access America in conjunction with customer's name and logo in offering the product at the Approved Location(s). If the Customer desires to use the Microsoft Internet Explorer Administration Kit, Customer agrees to execute the Microsoft License and comply with the terms and conditions thereof 2.2 LICENSE FEE. Customer has paid a one time license fee of $_______ for one Approved Location and shall thereafter pay a one time licence for each additional Approved Location ("License Fee") of $_____ dollars in consideration of the license of the Application Programs. The License Fee shall be included in the total price as shown in Schedule C and is due and payable within ten (10) days of the Customer's commencement of the commercial launch of the Customer's business in the Approved Location. 2.3 OWNERSHIP OF SOFTWARE. Subject only to the right and license expressly granted hereunder, all right, title, and interest in and to all intellectual property are and shall remain the property of the party who owned such rights prior to licensing same to the other party. 2.4 USE OF APPLICATION PROGRAMS. The Application Programs are for use solely on the Equipment and solely at the Approved Location(s). Use of the Application Programs at other locations is expressly forbidden unless OSS has provided the Customer with written approval to copy, reproduce, or assign the Application Programs for use at other locations. -2- 2.5 ROYALTY. In consideration of the rights and licenses granted hereunder, Customer shall pay OSS a monthly royalty ("Royalty" ) provided for in Schedule E hereto. The Royalty provided for in Schedule B will be separately determined for Customer's revenues attributable to the provision of Internet access and for other Web services provided by Customer. 2.6 PAYMENT OF ROYALTY. The Royalty shall be paid by Customer on or before the thirtieth (30th) day following each month for gross revenue collected by the Customer, with respect to the Customer Business during the previous month. Customer agrees to maintain and provide to OSS a Royalty Report Form with each royalty payment in the format of the monthly Royalty Report Form set forth in Schedule F (attached hereto) to enable the parties to accurately compute the Royalty. The Royalty shall be paid to OSS and submitted with the Royalty Report at the address herein. 2.7 UPGRADES. OSS agrees to make all upgrades and enhancements to the Application Programs available to Customer at the lowest price charged by OSS to any of its customers. 2.8 USE OF OTHER SOFTWARE. In light of possible equipment and software incompatibility, Customer agrees that it shall not use any software in conjunction with the Equipment and Application Software without first consulting with OSS. SECTION 3 PROVISIONS APPLICABLE TO EQUIPMENT SALE AND SOFTWARE LICENSE 3.1 APPROVED LOCATION. The Approved Location(s) are specified in Schedule G hereto. The parties may add, delete, or change the Approved Location(s) at any time through a signed addendum to this Agreement. 3.2 SELECTION OF APPROVED LOCATION(S). OSS and Customer hereby acknowledge that the Approved Location(s) have been and will be selected and proposed by Customer and mutually agreed to by Customer and OSS based upon Customer's own independent judgment of its needs and objectives. Neither party provides any assurance with respect to the suitability or profitability of the use of the System in Customer's business or the selection of the Approved Location. 3.3 EXCLUSIVE RIGHT. So long as this Agreement is in full force and effect, OSS hereby grants to Customer the exclusive right to exploit the license to the Application Programs in the Approved Location solely in pursuit of the Customer's Business. So long as this Agreement is in full force and effect, OSS agrees that it will not enter into any agreement granting rights similar to those rights granted herein to any other party whose approved location is in the same telephone local calling area as the Approved Location(s) granted to the Customer herein. 3.4 ANCILLARY SERVICES. Customer shall be solely responsible for arranging for the provision of telecommunication services provided by the local telephone company, interchange carriers, and any other telecommunications company, which may be necessary for the Customer to utilize the System at the Approved Location(s). In addition, Customer shall be solely responsible for insuring the provision of adequate 110 volt power circuits for the System, including backup (uninterruptible power supply, if desired) power. 3.5 INSTALLATION. OSS is responsible for staging, configuration, installation, and testing of the System. The System will accommodate and/or perform the following primary and commonly used Internet functions; Domain Name Service, Internet e-mail processing, World Wide Web access, News groups, File Transfer Protocol (ftp), Telnet, and dialup user access. The System will also perform all of the accounting and control functions for dialup customers gaining access to the System. 3.6 ACCEPTANCE. OSS's technician is responsible for the initial acceptance of the System at the time of installation. OSS's technician will demonstrate to Customer the successful operation of all material functions of the installed System prior to certifying in writing to Customer that the installation has been completed. In the event the Customer contests that all material functions of the installed System are operating successfully, or the certification of the installation, Customer shall provide written notice of such claimed defects to OSS within thirty (30) days following OSS's certification that the System operates successfully. The parties shall thereafter diligently -3- resolve any such disputes. The System will be considered to have received final acceptance by the Customer thirty (30) days following the completed installation unless Customer provides written notice to OSS specifying in reasonable detail the claimed defects. 3.7 REPAIR OF DEFECTS. OSS is responsible for repairing any operational deficiencies believed to be caused by the System at its sole cost, or explaining to the Customer's satisfaction that perceived deficiencies or operational problems are not caused by the System. 3.8 CAPACITY OF SYSTEM. The parties hereto agree and acknowledge that the system capacities set forth on Schedule H represent the design capabilities for the System. In the event the Customer desires to expand the capacity of the System in any regard, the Customer first agrees to contact OSS and advise them as to the projected expansion. OSS shall then advise Customer whether or not the proposed expansion is technically possible and the cost thereof. In the event Customer determines to so modify or expand the System, Customer may elect to enter into a modification of this Agreement with OSS to provide such expansion. Alternatively, and in its sole discretion, Customer may elect to conduct a bid process on the same terms and conditions used by OSS to provide the initial estimate to Customer and may elect to enter into a separate agreement regarding expansion of the System. 3.9 ERROR CORRECTION. OSS shall correct any material reproducible error or malfunction in the System. OSS agrees to cure such material reproducible error or malfunction within forty-eight (48) business hours after such error or malfunction is detected and reported to OSS. If OSS, in its discretion, requests written verification of an error or malfunction discovered by Customer, Customer shall immediately provide such verification to the extent possible, by facsimile or overnight mail, setting forth in reasonable detail the respects in which the System fails to perform. An error or malfunction shall be material if it represents a nonconformity with OSS's current published specifications for the System, and/or if Customer, in its reasonable discretion, determines (and notifies OSS) that such error or malfunction interferes with the use of the System. In the event OSS has diligently pursued the correction of such errors and such errors are not corrected within such forty-eight (48) hours, OSS shall be deemed in default of this Agreement. 3.10 SERVICE. Customer shall reimburse OSS at $75.00/hour plus materials for all work of OSS spent investigating an error or malfunction that OSS reasonably determines to have been caused by a modification to the System that was neither made nor authorized by OSS, unless the error or malfunction was not caused by OSS's negligence, recklessness or willful misconduct. 3.11 ACT OF GOD. The date on which the parties obligations are required to be fulfilled will be extended for a period equal to the time lost by reason of any delay arising directly or indirectly from (1) acts of God, unforeseeable circumstances, acts (including a delay or failure to act) of any governmental authority (de jure or de facto), war (declared or undeclared), riot, revolution, priorities, fires, floods, strikes, labor disputes, sabotage, or epidemics; (2) inability due to causes beyond either party's reasonable control and either party's best efforts to timely obtain instructions or information from the other party, to or obtain necessary and proper labor, materials, components, facilities, or transportation; or (3) any other cause beyond the applicable party's reasonable control. The foregoing extension will apply even though such cause(s) may occur after the applicable party's performance of its obligations has been delayed for other causes. 3.12 CUSTOMER SUPPORT. OSS shall, during the hours of 8:00 A.M. to 5:00 P.M., MOUNTAIN TIME ZONE on weekdays (exclusive of holidays), make reasonable telephone support available to Customer's Project Leader and other personnel of Customer who have been trained by OSS in the use of the System. OSS also will provide a digital pager number to the Customer to which emergency calls can be made to OSS's technicians on a 24 hour per day basis. In addition, OSS shall agree with Customer what, if any, additional telephone support shall be made available. Such telephone support shall not exceed five (5) hours per month. Additional hours above the five (5) basic hours will be charged at OSS's normal hourly rate of $75.00 per hour, billable in 1/4 hour increments, beginning with the month first commencing sixty (60) days after installation of the System. -4- SECTION 4 INSTALLATION, DELIVERY AND TITLE 4.1 TITLE. Title to the Equipment and risk of loss shall pass to Customer on Acceptance as provided for in paragraph 3.6 hereof. 4.2 DELIVERY OF EQUIPMENT. Unless otherwise determined by OSS, OSS will deliver all Equipment to Customer F.O.B. OSS's principal place of business. OSS reserves the right to make partial deliveries and to ship the Equipment as it becomes available. Delivery dates are approximate. Customer shall provide a mutually agreeable installation and operations environment suitable for computer equipment. 4.2 INSTALLATION PLAN. OSS shall promptly provide on-site installation assistance comprised of the installation and other services described in the Installation Plan set forth in Schedule I attached hereto and such other services as the parties mutually and reasonably determine are necessary to permit Customer to begin use of the System in accordance with such Installation Plan. 4.3 CUSTOMER RESPONSIBILITIES. Customer shall promptly perform all responsibilities it is assigned under the Installation Plan. Customer shall also furnish to OSS, free of charge for the period of time required for installation of the System, (1) access to the location in which the Equipment is to be placed during normal business hours, and (2) the time and attention of a management-level employee (hereinafter the Project Leader ) knowledgeable in aspects of Customer's business and operations. SECTION 5 OPTIONAL TELEPHONE SUPPORT AND STARTUP SOFTWARE FOR CUSTOMER'S USERS 5.1 Customer Internet User Support. OSS will provide customer support for the Customer's Internet users if requested by the Customer. This support will consist of telephone consultation in response to Customer's Internet Users' request for assistance. OSS will provide a toll-free (to the Internet user) number for handling of these calls. The terms and pricing for this service shall be as mutually agreed between the parties. 5.2 NEWSGROUP SERVICES. OSS will provide Usenet Newsgroup Services for the Customer's end users from its server located at OSS headquarters. The pricing for Newsgroup Services is shown in Schedule E. 5.3 INTERNET USER STARTUP SOFTWARE. OSS will provide Internet user startup software if requested by the Customer. The software includes the Microsoft(R) Internet Explorer, which is provided under a no-fee license agreement between OSS and Microsoft. The Customer must also sign an identical License and Distribution Agreement with Microsoft if the Customer desires OSS to prepare the user startup software. The terms and pricing for software shall be as mutually agreed between the parties. SECTION 6 CONFIDENTIALITY 6.1 CONFIDENTIAL INFORMATION. For purposes of this Agreement, "Confidential Information" shall mean all confidential and proprietary information disclosed by one party to the other party, including (i) information disclosed in writing and marked "confidential", (ii) information disclosed orally and identified as confidential at the time of disclosure, and (iii) information which the receiving party knows or has reason to know is confidential, trade secret, or proprietary information of the disclosing party, and (iv) the terms and conditions of this Agreement. Customer and OSS will maintain each other's Confidential Information in confidence, will not use such Confidential Information other than in connection with this Agreement, and will not disclose such Confidential Information to any persons other than their employees with a need to know except: (i) to the extent necessary to comply with law of the valid order of a court or governmental agency or authority in which case the disclosing party will so notify the other in writing as promptly as practicable (and, if possible, prior to making any disclosure) and will seek confidential treatment of such terms and conditions; (ii) as part of normal reporting or review procedure to parent companies, auditors and attorneys; provided, that such parent company, auditors and attorneys are bound by substantially similar obligations; and (iii) in order to enforce their respective rights pursuant to this Agreement in a legal proceeding. The provisions of this Section 6 shall in no event apply to information that (i) is in or enters the -5- public domain without breach of this Agreement; (ii) is lawfully received from a third party without restriction on disclosure and without breach of nondisclosure obligation; or (iii) is developed independently. 6.2 INJUNCTIVE RELIEF. Each party acknowledges that the unauthorized disclosure and/or use of any Confidential Information of the other party would cause irreparable harm that could not be remedied by the payment of damages alone. Accordingly, the party whose Confidential Information has been improperly disclosed and/or used will be entitled to preliminary and permanent injunctive relief and other equitable relief for any breach of this Section 6. SECTION 7 INSPECTION 7.1 INSPECTION. OSS's authorized representatives shall provide seven (7) days written notice to contact Customer for an appointment to be promptly scheduled at the parties mutual convenience to visit the Customer's premises and to be granted access to the Customer's offices, employees, and managers during normal business hours for the purpose of inspecting Customer's equipment, physical plant, and applicable books and records necessary to verify the accuracy of Customer's Royalty Payments, and Customer's compliance with the material provisions of this Agreement. All such books and records will be retained by Customer for inspection and audit by OSS for not less than six (6) months and no longer than one (1) year after the creation of such books and records. In furtherance of the foregoing, Customer also agrees to grant OSS reasonable access to the Customer's billing database via the Internet for such verification. Permission for such access shall not unreasonably be withheld by Customer. Customer shall maintain full and complete records in accordance with generally accepted accounting principles and shall submit to OSS the monthly Royalty Report Form pursuant to Section 2.6 herein. SECTION 8 INITIAL CUSTOMER TRAINING 8.1 INITIAL CUSTOMER TRAINING. Before commencing its use of the System, Customer and OSS shall determine a training schedule acceptable to Customer and the Customer shall make its managers and employees available during normal business hours for training of such duration and scope as the parties may mutually agree. Reasonable out of pocket expenses incurred by OSS for such training, and agreed to in advance by Customer, shall be borne by Customer and reimbursed to OSS within thirty (30) days of being invoiced by OSS to Customer. Employees of the Customer shall include a technician familiar with computers, computer networks, communications and data protocols. Such technician shall be competent to deal with routine questions from current and potential customers obtaining Internet access from the Customer. SECTION 9 WARRANTIES AND LIMITATION OF LIABILITY 9.1 SERVICE WARRANTY. OSS warrants that it will render its services provided for herein in a good and workmanlike manner. As OSS's sole responsibility and Customer's exclusive remedy in the event of any material failure to meet such standard, OSS shall make its best efforts to remedy any resulting discrepancies or defects which are required to be remedied by OSS as provided for herein. Any claim based on the foregoing warranty must be submitted in writing in accordance with OSS's standard procedures within ninety (90) days after delivery or the date of required delivery of the pertinent service. Except as expressly set forth in this Agreement, OSS makes no warranty or representation, express or implied, as to any matter whatsoever, including, without limitation, its services, the System, the design or condition of the equipment or any programming, or any output based on use of the System. OSS specifically disclaims, without limitation, any implied warranty of merchantability or fitness for a particular purpose. 9.2 SYSTEM WARRANTY. OSS warrants, for Customer's sole benefit, that the System, when delivered, properly installed, and used in accordance with OSS's instructions, will conform to OSS's most current version of the published specifications (Schedule 1) for the System in all material respects. As OSS's sole responsibility and Customer's exclusive remedy in the event of any material nonconformity, OSS shall, at its option, make a reasonable effort to repair or replace the System so that it conforms to such written specifications or shall reimburse Customer's license fee. Any claim based on the foregoing warranty must be submitted in writing in accordance -6- with OSS's standard procedures within ninety (90) days after delivery of the Application Programs. Such warranty shall not apply if the System has been modified by Customer. 9.3 PARTY TO WARRANTIES AND REPRESENTATIONS. Neither party shall have the authority to and shall not make any representations or warranties to others on behalf of the other party. 9.4 LIMITATION ON LIABILITY. The total liability of either party (including their subcontractors and suppliers) for all claims, whether in contract, tort (including negligence and product liability) or otherwise, arising out of, connected with, or resulting directly or indirectly from this Agreement, the license, delivery, installation, use, support, or maintenance of the Application Programs shall not exceed the amount of the License Fee. Notwithstanding any other provision in this Agreement to the contrary, in no event shall either party be liable for any incidental, consequential, indirect, or special damages, including, without limitation, damages for loss of profits or revenue, cost of capital, claims of customers for service interruptions or failure of supply, and costs and expenses incurred in connection with labor, overhead, transportation, installation, or removal of equipment or programming or substitute facilities or supply resources, whether arising in contract, tort (including negligence) or otherwise. 9.5 LIMITATION OF WARRANTY. Except as set forth in this Agreement or another written agreement signed by a duly appointed officer of such party, neither party makes any warranty or representation, express or implied, with respect to any matter whatsoever, including, without limitation, the application programs, the system, or any output based on use of the system, and both Customer and OSS specifically disclaim, without limitation, any implied warranty of merchantability, fitness for a particular purpose. 9.6 LIMITATION OF DAMAGES ON EXPIRATION OR TERMINATION OTHER THAN FOR CAUSE. Neither party will be liable to the other for damages of any kind or upon its termination of this Agreement in accordance with its terms or upon its termination other than for a material breach. Both parties waive any right it may have to receive any compensation or reparations under the law of any jurisdiction in the event of such an expiration or termination other than for a material breach. SECTION 10 TERM AND TERMINATION 10.1 TERM. This Agreement shall commence on the date of both parties written acceptance of this Agreement, as set forth at the end of this Agreement. Unless sooner terminated in accordance with this Section, this Agreement shall continue in effect for two (2) years, and thereafter may be renewed upon the mutual written agreement of the parties. 10.2 TERMINATION ON DEFAULT. Either party may send thirty (30) days written notice of termination to the other party specifying in detail one or more of the following events 1. Ether Party defaults in the performance of any material requirement or obligation contained in this Agreement; 2. Either Party fails to make a required payment to the other Party within fifteen (15) days of its due date; 3. Customer or OSS ceases doing business or otherwise sells all or a portion of its assets used in connection with providing Internet Services in the Approved Location(s); 4. Customer or OSS is the subject of bankruptcy, insolvency, or similar proceeding, or makes an assignment for the benefit of creditors; or a receiver is appointed for Customer's or OSS's assets related to providing Internet Services in the Approved Location(s). 10.3 OPPORTUNITY TO CURE DEFAULT. Except as otherwise provided in this Agreement, upon receipt of a written notice asserting an event of default, the party receiving such notice shall have an opportunity to cure such -7- default within thirty (30) days of such notice, or at a minimum, dispute the claimed event of default, or if such default cannot be reasonably cured within such thirty (30) day period, then the party in default shall demonstrate, to the other party's 10.4 EFFECT OF TERMINATION. Upon and after any termination of this Agreement or the expiration of the Term: 1. Customer, its receivers, trustees, assignees, or other representatives shall immediately surrender all rights, licenses, and privileges granted under this Agreement. 2. Customer, its receivers, trustees, assigns, or other representatives shall immediately cease using and return without delay all equipment and property owned by OSS, including, without limitation, all manuals, billing and other proprietary software, and informational materials furnished by OSS to Customer. Any equipment delivered to Customer by OSS and fully paid for by Customer and all non-proprietary software provided by OSS to Customer (to the extent permitted by the original seller thereof) shall not be deemed equipment or property owned by OSS. 3. Except as may be necessary for a short duration following termination, neither Customer nor OSS, nor its receivers, trustees, assigns, or other representatives shall continue to market, advertise or otherwise, use or display any of the other Party's, OSS's trademarks or any name, mark, or logo that is the same as or similar to the other Party's trademarks, represent itself to be a licensee of the other, or in any way identify itself with the other Party. 4. If Customer has paid for all Equipment in full, Customer shall be entitled to keep such Equipment. Upon termination, Customer shall pay Royalties then due and payable up to the date of termination, less any amounts due and owing Customer from OSS. Upon termination, if Customer has not paid for all Equipment, Customer shall return all Equipment to OSS and OSS shall reimburse Customer for the difference between the reasonable value of the returned Equipment (after deducting the costs of retrieving and shipping such Equipment) and the total amount due for the purchase of the Equipment and any Royalties then due and payable. 10.4 NON-RELEASE OF OBLIGATIONS. No termination of this Agreement shall release either party from any obligation to pay the other any amount that has accrued or become payable at or prior to the date of termination. 10.5 SURVIVAL OF PROVISIONS. The provisions of paragraphs 2.3, 2.4, 6.1, 9.1, 9.4, 9.5, 9.6, 11, and 12 shall survive the termination of this Agreement. SECTION 11 INDEMNIFICATION 11.1 To the extent of each parties negligence, OSS and Customer will each defend, indemnify and hold harmless the other's affiliated companies and partners and their respective officers, directors, employees and agents from all liabilities, damages, costs and expenses (including, without limitation, reasonable counsel fees and expenses) directly or indirectly incurred in connection with any third party claim arising directly or indirectly out of a breach of any material term or condition set forth in this Agreement or the performance of either party hereunder. 11.2 To assert its rights of indemnification hereunder in cases involving third party claims, the party seeking indemnification must: -8- 1. promptly notify the indemnifying party in writing of any claim or legal proceeding which gives rise to such right; 2. afford the indemnifying party the opportunity to participate in, or, at its option, fully control any proceeding and the compromise, settlement, resolution or other disposition of such claim or proceeding; and 3. fully cooperate with the indemnifying party, at the indemnifying party's expense, in such indemnifying party's participation in, and control of, any claim or proceeding and the compromise, settlement, resolution or other disposition of such claim or proceeding; provided, however, that if such compromise, settlement, resolution or the disposition could have an adverse effect on the indemnified party, then indemnified party's consent to such compromise, settlement, resolution or other disposition will be required but will not be unreasonably withheld. SECTION 12 INTELLECTUAL PROPERTY RIGHTS AND OWNERSHIP 12.1 "Intellectual Property Rights" means all patent rights, copyright rights (including, but not limited to, rights in music and audiovisual works and moral rights), trademark rights, trade secret rights, and any other intellectual property rights recognized by the law of each applicable jurisdiction. 12.2 Except as specified in Section 12.3 below, (I) Customer will not acquire any proprietary or other rights by reason of this Agreement in any names, trademarks, and logos used by OSS and (ii) OSS will not acquire any proprietary or other rights by reason of this Agreement in "InterMedia" or any other names, trademarks, and logos used by Customer. Materials used by one party that incorporate any of the other party's names, trademarks, and logos (the "Marks") will not be made available to third parties unless they comply with the trademark guidelines then in effect for such Marks. 12.3 Subject to the terms and conditions of this Agreement, each party grants the other party a non-exclusive, non-transferable license for the term of this Agreement for its use in accordance with the trademark guidelines then in effect for such Marks. Such use must reference the owner of the Marks. The license grant set forth herein will automatically terminate for any further use of the Marks in the Approved Locations upon the termination or expiration of the Agreement. Upon any such termination or expiration, neither party will use the Marks of the other party. 12.4 Each party will have the exclusive right to own, use, hold, apply for registration for, and register its own Marks during the term of, and after the expiration or termination of, this Agreement. Neither party will take nor authorize any activity inconsistent with these exclusive rights of the other party. 12.5 Customer's ownership rights under this Section 12 will include, but not be limited to (i) all Intellectual Property Rights held by Customer; and (ii) all modifications to, and derivative works base upon, such Intellectual Property Rights. 12.6 OSS represents that the Application Programs, including associated report formats, screen displays, and menu features, constitute copyrightable works protected by federal and international copyright laws. In addition to and in furtherance of the protection afforded by such copyright laws, Customer shall not knowingly permit any one, including its personnel, to remove any proprietary or other legends or restrictive notices, which are specifically designated as such, contained or included in any materials provided by OSS, and Customer shall not knowingly permit any persons to copy or modify any such materials except as specifically authorized hereunder. 12.7 Neither party will delete or in any manner alter the Intellectual Property Rights notices of the other party or its suppliers, if any. Each party will reproduce and display the other party's Intellectual Property Notices where appropriate. Each party will use its reasonable efforts to protect the other party's Intellectual -9- Property Rights and will report promptly to the other party any actual or suspected infringement or misappropriation of such rights of which it becomes aware. 12.8 THIRD PARTY INFRINGEMENT. Each party reserves the sole and exclusive right at its discretion to assert claims against third parties for infringement or misappropriation of its Intellectual Property Rights. 12.9 INFRINGEMENT. If Customer receives a claim that any item of Equipment, when used in accordance with OSS's instructions, infringes a U.S. patent, copyright, or other intellectual property interest, Customer will notify OSS promptly in writing and give OSS all necessary information and assistance and the exclusive authority to evaluate, defend, and settle such claim. OSS shall indemnify Customer against any such claim. OSS, at its own expense and option, will then (1) settle or defend against such claim; (2) procure for Customer the right to use such item of Equipment; (3) replace or modify inch item of Equipment to avoid infringement; or (4) remove such item of Equipment and refund the purchase price less a reasonable amount for depreciation. Provided such timely notice has been given by Customer, should any court of competent jurisdiction hold the manufacture or use of such item of Equipment to constitute infringement, OSS will pay any costs and damages finally awarded on account of such infringement and, if the use of such item of Equipment is enjoined, OSS will take, at its option, one or more of the actions described in this Section 12. With respect to any item of Equipment or part thereof not manufactured by OSS, only the indemnity, if any, given by the manufacturer thereof will apply. The foregoing indemnity will not apply to any item of Equipment made to the specification or design of Customer or modified or altered in any way or to the use of the Equipment outside the scope of the System. The rights and obligations of the parties with respect to patents and all other intellectual property rights are solely and exclusively as stated herein. SECTION 13 MISCELLANEOUS 13.1 NON-WAIVER. A failure by either party to enforce any right under this Agreement shall not at any time constitute a continuing waiver of such right or any other right, and shall not modify the rights or obligations of either party under this Agreement. 13.2 WRITTEN NOTICE. Any notice to a party required or permitted by this Agreement shall be sufficiently given only when provided in writing, and either personally delivered or sent via certified or registered mail express mail delivery, with receipt confirmation, or via fax with receipt confirmation to the party's address indicated below. Each party shall promptly give the other party notice of any address change. No sales person or field representative of either party shall be authorized to act or make any commitment for such party except pursuant to written instructions made and signed by a duly appointed officer of such party. Notice to OSS: Online System Services, Inc. 1800 Glenarm Place Denver, Colorado ZIP ATTN: Notice to InterMedia: InterMedia Partners of Tennessee, L.P. c/o 105 Jack White Drive Kingsport, TN 37664 ATTN: General Manager With Copy to: InterMedia Partners 424 Church Street, Suite 1600 Nashville, TN 37219 ATTN: Legal Department -10- 13.3 SUCCESSORS. This Agreement shall obligate and benefit the parties, and their permitted receivers, trustees, assignors, and other representatives. Neither party may assign all or any part of this Agreement without the prior written consent of the other party. No assignment or transfer of any interest in this Agreement or any other agreement relating to the subject matter hereof (including sublicenses, hypothecations, security interests, and the like) may be made by either party without the prior written consent of the other party, which shall not be unreasonably withheld. In the event that Customer ceases doing business or sells all or a portion of the assets used in connection with providing Internet services in the Approved Location(s), then if the transferee does not agree to assume the terms of this Agreement for such Approved Location(s), Customer shall have the right to terminate this Agreement upon thirty (30) days written notice to OSS. 13.4 SEVERABILITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision, the remaining provisions being deemed to continue in full force and effect. 13.5 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of Colorado. 13.6 ENTIRE AGREEMENT. This Agreement is the entire agreement of the parties, and supersedes all prior agreements and communications, whether oral or in writing, between the parties with respect to the subject matter of this Agreement. No amendment or modification of this Agreement shall be effective unless made in writing and signed by OSS and Customer. 13.7 CREDIT REPORTS. Both parties understand and agree that credit reports concerning the other party may be requested by and shall be furnished to the requesting party in connection with this Agreement, not more than once per year. 13.8 RELATIONSHIP OF PARTIES. There is no intent within this Agreement to grant a franchise, create a partnership, joint venture, or business relationship between the parties other than that described within this Agreement. Customer and OSS are and at all times shall remain independent contractors and shall have no authority to bind the other to any commitments of any kind. 13.9 FORCE MAJEURE. Notwithstanding any other provision in this Agreement to the contrary, neither party will have any liability to the other with respect to its failure to perform its obligations under this Agreement, except of the payment of amounts due, if such failure is due to any of the following events (each a "Force Majeure" event): (i) the failure of any equipment or software under the control of a person, firm or entity not affiliated with such party; (ii) any labor dispute, fire, flood, riot, law, government regulation or delay, or act of God; or (iii) any other cause beyond the reasonable control of such party. In any such case, the parties' time for performance under this Agreement and the term hereof, to the extent affected by any of the foregoing, will be correspondingly extended. -11- SECTION 14 ACCEPTANCE 14.1 Acceptance. This Agreement shall not become effective until accepted in writing by both parties. Such acceptance shall be evidenced by the signature of the Chairman of the Board, President, Treasurer, or any Vice President, or other authorized party with OSS or Customer and the entry of the acceptance date in the space provided below. INTERMEDIA PARTNERS ONLINE SYSTEMS SERVICES Southeast (Customer) BY /s/ BY /s/ ---------------------------- ------------------------------------ Authorized Signature Authorized Signature ______________________________ Printed Name and Title Paul Spieker - VP -Network Development Printed Name and Title ______________________________ ______________________________________ - ------------------------------ 1800 Glenarm Place, Suite 800, Denver CO Address Address August 4, 1997 -12- AMENDMENT NO. 1 TO EQUIPMENT SALE AND SOFTWARE LICENSE AGREEMENT WHEREAS, Online System Services, Inc. ("OSS") and InterMedia Partners Southeast ("Customer") have entered into that EQUIPMENT SALE AND SOFTWARE LICENSE AGREEMENT (the "Agreement") dated August 4, 1997; and WHEREAS, OSS and Customer desire to set forth terms which shall govern Customer's use of the OSS System in additional Approved Locations; and WHEREAS, OSS and Customer desire to modify the Agreement such that wherever language contained in this Amendment conflicts with the terms of the Agreement or any exhibit thereto, the language contained in this Amendment shall control; NOW, THEREFORE, the parties agree as follows: 1. The first five sentences of Section 1.2 shall be replaced with the following: Payments of the Equipment Purchase Price, including the design and integration fee, will be made to OSS at the address set forth above, or at any other place designated by OSS. Customer agrees to make payments for Equipment which Customer agrees to buy and OSS agrees to sell to Customer in accordance with the following schedule: (a) fifty percent (50%) of the Equipment Purchase Nice, including the design and integration fee, as set forth in Schedule C shall be paid upon execution of this Agreement or, as applicable, an amendment thereto which provides for the purchase of additional Equipment; (b) twenty-five percent (25%) of the Equipment Purchase price shall be paid to OSS upon delivery of the Equipment to Customer with a written invoice; and (c) the remaining twenty-five percent (25%) of the Equipment Purchase Price shall be due ninety (90) days after the date of delivery of the Equipment unless OSS fails to complete the Installation Plan as defined herein or Customer provides notice that the installation is unacceptable pursuant to Section 3.6 herein. 2. The following new Section IA entitled "Expansion Markets and New Markets" is added to the Agreement: 1A.1 EXPANSION MARKETS. For the purposes of this Agreement, an Expansion Market shall be defined as any Approved Location in the East Tennessee region that is utilizing the backbone connection to the Internet existing in Kingsport, Tennessee. All terms and conditions in this Agreement shall apply to any Expansion Market, except that (i) the License Fee shall not be applicable in any Expansion Markets, (ii) the Royalty for an Expansion Market shall be set forth in Schedule E-l, and (iii) Customer agrees to pay the "Installation Fees" set forth in Section 4.3 and Schedule I-1 for the installation and integration of the System in Expansion Markets. 1A.2 NEW MARKETS. For the purposes of this Agreement, a New Market shall be deemed any Approved Location, excluding any Expansion Market and excluding the Kingsport, Tennessee market as currently defined in Schedule G. All terms and conditions in this Agreement shall apply to any New Market, except that (i) the License Fee shall not be applicable in any New Markets, (ii) the Royalty for a New Market shall be set forth in Schedule E-1,(iii) Customer agrees to pay the "Installation Fees" set forth in Section 4.3 and Schedule I-1 for the installation and integration of the System in New Markets, and (iv) the length of the term of this Agreement for such New Markets shall be five (5) years unless otherwise agreed upon by the parties. 1A.3 MATCHING OPTIONS FOR OSS. Should Customer seek to utilize the OSS System in an Expansion Market and/or a New Market (collectively an "Additional Market"), then within thirty (30) days of Customer's request for a proposal to use the OSS System in an Additional Market, OSS agrees to provide Customer with a proposal which includes an itemized list of Equipment with related maintenance information and the cost therefor which is necessary to provide the OSS system in such Additional Market. For thirty (30) days following receipt of the proposal, Customer may -13- seek to obtain competitive proposals for comparable equipment. After receipt of competitive proposals, should Customer have an interest in accepting a competitive proposal, Customer agrees to first provide OSS with written notice and the right to match the competitive proposal. Should OSS fail to match the competitive proposal with an offer containing comparable equipment that is no greater than 5% of the total cost of the competitive proposal within ten (10) days of the notice, then Customer shall be entitled to accept the competitive proposal. 3. The sentence in Section 4.1 is hereby deleted in its entirety and the following is substituted therefor: Title to the Equipment and risk of loss pass to Customer upon delivery of the Equipment to Customer. 4. Section 4.2 entitled Installation Plan shall be renamed "Installation Fees Plan", shall be designated as Section 4.3, and the language in such section shall be deleted in its entirety and the following shall be substituted therefor: 4.3 INSTALLATION FEES PLAN. OSS shall promptly provide on-site installation assistance comprised of the installation and other services described in the Installation Plan set forth in Schedule 1 attached hereto and such other services as the parties mutually and reasonably determine are necessary to permit customer to begin use of the System in accordance with such Installation Plan. The Installation Fees set forth in Schedule I-1 shall be paid by Customer to OSS for the performance by OSS of the services described in the Installation Plan concerning the installation and integration of the System in Additional Markets. 5. Section 4.3 entitled "Customer Responsibilities" shall be designated as Section 4.4. 6. The second sentence of Section 10.1 of the Agreement is deleted in its entirety and the following is substituted therefor: This Agreement shall continue for a period of three (3) years from July 1, 1997, unless sooner terminated in accordance with the terms of this Agreement. 7. The title of Section 8 of the Agreement shall be revised to read: "Internet Access Support, Community Access Partner Support, Training and Documentation". 8. The following new Section 8.2 is added to the Agreement: 8.2 OSS agrees to furnish Customer with on-going web support, training and documentation which supports the Internet access, Community Access Partnership, and Web hosting services provided by the Customer, and with additional services to support the access and content business. The parameters and scope of the foregoing services, support, training and documentation are defined in Schedules "K" and "J" attached hereto. 9. Section 2.5 of the Agreement is deleted in its entirety, and the following is substituted therefor: 2.5 Royalty & Content Fees. In consideration of the rights and licenses granted hereunder and the support training and documentation provided, Customer shall pay to OSS: 2.5.1 Royalty. In consideration of the rights and licenses granted hereunder, Customer shall pay OSS a monthly royalty ("Royalty") provided for in Schedule E hereto. The Royalty provided for in Schedule E will be separately determined for Customer's revenues attributable to the provision of Internet access and for other Web services provided by Customer. 2.5.2 Content Revenue Sharing. The parties hereby agree to the following Content Revenue sharing arrangement: (a) For Content Revenues generated or derived from sales by Customer, Customer shall retain _____% of the Content Revenues, and shall pay OSS -14- ___% of such Content Revenue; (b) For Content Revenues generated or derived from sales by OSS, OSS shall retain ____% of the Content Revenues, and shall pay Customer ____% of such Content Revenue. For purposes of this section, Content Revenues shall be defined as all fees generated from or attributable to all content sales related activities on the service in the Territory, including but not limited to sponsorships, electronic advertising, electronic banking and electronic commerce minus custom software and web-design development costs, uncollectible billings, installation charges, and value added, sales and other transactional taxes (other than those which Customer is obligated to pay on its own behalf'). 2.5.3 Newsgroups. Newsgroup service will be provided by OSS for an additional S___ per end-user per month with a cap of $_____ per month. If $_______ cap is reached on Schedule E, then Customer shall receive the newsgroup service for no charge. 10. Schedule C-1, which is attached hereto, is hereby added to the Agreement. 11. Schedule E is hereby revised to add the Royalty Payment terms for months 25 through 36. A revised Schedule E is attached hereto. 12. Schedule I is hereby amended to include the following item Number 10: 10. Consulting assistance in the following areas will be provided by OSS on an "as needed" basis and upon the mutual agreement of the parties: . Technical Support for Operation of the POP . Internet Backbone Services . Telecommunications Connections to the POP and Other General Telecommunications Issues . Financial Modeling of the Internet Access and Web Content Business . Domain Name Registration Process . Marketing and Promotional Materials such as Brochures, Flyers, Ad Formats . Sample Customer Contracts & Agreements for Access and Web-based Services . Administrative Procedures for Operating the Internet Access Business 13. Schedule K, which is attached hereto, is hereby added to the Agreement. 14. Schedule L, which is attached hereto, is hereby added to the Agreement. All terms and conditions of the Agreement shall remain in full force and effect unchanged, except as modified herein. -15- IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of May 26, 1998. CUSTOMER: OSS: INTERMEDIA PARTNERS SOUTHEAST ONLINE SYSTEM SERVICES, INC. By: /s/ By: /s/ --------------------------- ------------------------------ Name:_________________________ Name:_________________________ Title:________________________ Title:________________________ -16- EX-21 10 SUBSIDIARIES OF ONLINE SYSTEMS SERVICES, INC. Exhibit 21 Subsidiaries of Online System Services, Inc. Durand Acquisition Corporation, a Minnesota corporation. This corporation is a wholly-owned subsidiary of Online System Services, Inc. formed solely for the purpose of facilitating the acquisition of Durand Communications, Inc. NetIgnite 2, LLC, a Colorado limited liability company. EX-23.1 11 CONSENT OF ARTHUR ANDERSEN Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated March 10, 1999, included in this Form 10-KSB, into Online System Services, Inc.'s previously filed Registration Statement (File No. 333- 13983) on Form S-8, Registration Statement (File No. 333-03282-D) on Form S-3, Registration Statement (File No. 333-58653) on Form S-3, Registration Statement (File No. 333-69477) on Form S-3 and Registration Statement (File No. 333-71503) on Form S-3. Arthur Andersen LLP Denver, Colorado April 15, 1999. EX-27 12 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 698,339 0 165,837 18,000 55,126 2,203,113 1,920,180 741,552 3,385,276 1,326,022 0 0 4,101,336 16,410,300 (20,774,129) 3,385,276 1,103,717 1,589,380 905,234 1,291,537 11,053,912 0 (139,806) (10,616,263) 0 (10,616,263) 0 0 (5,146,109) (15,762,372) (4.35) (4.35)
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