-----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, OrJsVP2BQY+MfzrQTLD6OGEiP4WVFdGQgHxHQ3mDOcxm89sqOvcXkp892ByDyOdI /TP9yk1903bUq8ouzLRSWQ== 0001045969-98-000518.txt : 19980623 0001045969-98-000518.hdr.sgml : 19980623 ACCESSION NUMBER: 0001045969-98-000518 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19980622 SROS: NASD 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: POS AM SEC ACT: SEC FILE NUMBER: 333-03282-D FILM NUMBER: 98652005 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 POS AM 1 POST-EFFECTIVE AMEND NO. 1 As filed with the Securities & Exchange Commission on June 22, 1998 Registration No. 333-3282 D ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- POST-EFFECTIVE AMENDMENT NO. 1 TO FORM SB-2 ON FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------- ONLINE SYSTEM SERVICES, INC. (Exact name of issuer as specified in its charter) Colorado 84-1293864 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 1800 GLENARM PLACE, SUITE 700 DENVER, COLORADO 80202 (303)296-9200 (Address and telephone number of principal executive offices) ------------------------- R. Steven Adams Online System Services, Inc. 1800 Glenarm Place, Suite 700 Denver, Colorado 80202 (303) 296-9200 (Name, address and telephone number of agent for service) Copy to: Lindley S. Branson Gray, Plant, Mooty, Mooty & Bennett, P.A. 33 South Sixth Street 3400 City Center Minneapolis, Minnesota 55402 (612) 343-2800 ------------------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If the only securities being registered on this form are being offered pursuant to dividend or reinvestment plans, please check the following box. [ ] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of earlier effective registration statement for same offering. [ ] ____________________________________ If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for same offering. [ ] _________________________________________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. NOTE REGARDING POST-EFFECTIVE NO. 1 This Post-Effective Amendment No. 1 to Form SB-2 Registration Statement (Registration No. 333-3282 D) on Form S-3 by Online System Services, Inc. is intended to cover the issuance of up to 797,500 shares of its common stock, no par value, issuable upon the exercise of certain common stock purchase warrants and certain options issued in connection with the Company's initial public offering on May 23, 1996 and the issuance of up to 110,000 common stock purchase warrants issuable upon the exercise of such options. The common stock and common stock purchase warrants registered by this Post-Effective Amendment No. 1 were initially registered under such Registration Statement. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION, DATED JUNE 22, 1998 PROSPECTUS ONLINE SYSTEM SERVICES, INC. 797,500 SHARES OF COMMON STOCK 110,000 WARRANTS This Prospectus relates to (i) 632,500 shares of common stock, no par value, of Online System Services, Inc. (the "Company" or "OSS"), issuable by the Company upon the exercise of an aggregate of 1,265,000 common stock purchase warrants issued by the Company in connection with its initial public offering on May 23, 1996 (the "IPO Warrants"), (ii) 106,700 shares of common stock, no par value, of the Company issuable upon the exercise of options to purchase common stock and IPO Warrants issued by the Company to Cohig & Associates, Inc., the representative of the underwriters involved in such initial public offering (the "Representative's Options"), (iii) 106,700 IPO Warrants issuable upon the exercise of the Representative's Options, (iv) 55,000 shares of common stock, no par value, of the Company issuable upon the exercise of the IPO Warrants referred to in (iii) above and (vi) below, (v) 3,300 shares of common stock which may be sold from time to time by the Selling Shareholders, and (vi) 3,300 IPO Warrants which may be sold from time to time by the Selling Shareholders. The IPO Warrants are exercisable during the three year period ending May 22, 1999. The Representative's Options are exercisable for the four year period ending May 22, 2001. The Company's common stock and the IPO Warrants are traded on the Nasdaq SmallCap Market under the symbols "WEBB" and "WEBBW", respectively. On June 17, 1998, the last reported sale price of the Company's common stock and the IPO Warrants, as reported on the Nasdaq Small Cap Market were $11.625 per share and $2.625 per IPO Warrant, respectively. See "Market for Common Stock and Related Stockholder Matters" and "Description of Securities." _______________ THE SECURITIES OFFERED HEREBY ARE SPECULATIVE, INVOLVE A HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY PERSONS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" AT PAGE 6. _______________ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), NOR HAVE THEY BEEN APPROVED BY THE SECURITIES REGULATORY AUTHORITY OF ANY STATE. NEITHER THE SEC NOR ANY REGULATORY AUTHORITY HAVE PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Two IPO Warrants entitle the holder thereof to purchase one share of common stock at a price of $9.00 per share. The Representative's Options to purchase common stock entitle the holder thereof to purchase an aggregate total of 106,700 shares of common stock at $8.10 per share. The Representative's Options to purchase IPO Warrants entitle the holder thereof to purchase an aggregate total of 106,700 IPO Warrants at $.001 per IPO Warrant. Each two IPO Warrants issuable upon the exercise of the Representative's Options and each two IPO Warrants beneficially owned by the Selling Shareholders entitle the holder thereof to purchase one share of common stock at a price of $9.00 per share. If the IPO Warrants (including the IPO Warrants issuable upon the exercise of the Representative's Options and the IPO Warrants beneficially owned by the Selling Shareholders), the Representative's Option to purchase common stock, and the Representative's Option to purchase IPO Warrants are all exercised in full for a cash payment to the Company, the Company will receive an aggregate total of $7,051,877 (before deducting expenses of the filing and preparation of the Registration Statement relating to this Prospectus estimated to be $20,000, all of which expenses will be paid by the Company). However, the exercise price payable upon the exercise of the IPO Warrants is payable, at the option of the holder thereof, by the surrender of IPO Warrants having a value equal to the difference between the exercise price an the average of the current market prices of the common stock for the 20 consecutive trading days commencing 21 trading days before the IPO Warrant is tendered for exchange (a "cashless exercise"). If a holder of IPO Warrants elects to exercise his or her IPO Warrants pursuant to this "cashless exercise" the Company will not receive any cash proceeds from such exercise. The date of this Prospectus is June , 1998. 2 AVAILABLE INFORMATION The Company is subject to the information requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files reports, proxy or information statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices located at 500 West Madison, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can also be obtained at prescribed rates from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can also be obtained through the Web site maintained by the Commission located at http://www.sec.gov. The Company has filed with the Commission a Registration Statement on Form S-3 under the Securities Act of 1933, as amended (the "Act"), with respect to the securities offered hereby. This Prospectus omits certain information included in such Registration Statement. For further information about the Company and its securities, reference is made to such Registration Statement and to the exhibits filed as part thereof or otherwise incorporated therein. Each summary in this Prospectus of information included in the Registration Statement or any exhibit thereto is qualified in its entirety by this reference to such information or exhibit. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents, which have been filed by the Company with the Commission pursuant to the Exchange Act (File No. 0-28462), are incorporated by reference in this registration statement: (a) The Company's Annual Report on Form 10-KSB, as amended, for the year ended December 31, 1997. (b) The Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1998. (c) The description of the Company's Common Stock contained in the Company's Registration Statement on Form 8-A, as amended, filed under the Exchange Act on May 22, 1996. All documents subsequently filed by the Company with the Commission pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act, prior to the filing of a post-effective amendment that indicates that all securities offered have been sold or that deregisters all securities then remaining unsold, shall be deemed to be incorporated by reference herein and to be a part hereof from the date of filing such documents. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein, or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein, modifies or supersedes such document. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitut a part of this Prospectus. The Company undertakes to provide without charge to each person, including any beneficial owner, to whom a Prospectus is delivered, upon written or oral request of such person, a copy of any and all of the information that has been incorporated by reference in this Prospectus. Requests may be directed to Thomas S. Plunkett, Chief Financial Officer, Online System Services, Inc., 1800 Glenarm Place, Suite 700, Denver, Colorado 80202. The Company's phone number is (303) 296-9200. 3 THE COMPANY Online System Services, Inc. (the "Company" or "OSS") develops, markets and supports products and services that enable broadband operators to provide high-speed Internet access to their customers. The Company's objective is to partner with cable television companies (wired and wireless), telephone companies and other broadband operators, both domestically and internationally, to create online communities that drive commerce and communications. The Company's I2U(TM) software further permits the broadband operators to offer a wide range of online services. The broadband operator, its subscribers and local merchants can develop and update local content on the Internet. The local content portion of I2U promotes the sharing of local information and the fostering of e-commerce and e-banking through data-based Internet Web sites. A time-saving and cost advantage to the broadband operators from the use of the Company's software is that a significant portion of the local content is generated by the people actually using the Internet, thus enhancing content quality and developing a commitment to the local community of Internet Web sites. Prior to the quarter ended September 30, 1997, the Company's focus generally was on three markets: general Web site development, maintenance and hosting; rural or small market Internet service providers ("ISPs"); and healthcare information services and continuing medical education ("CME"). These activities were divided into three separate units early in fiscal 1997, the Business Resource Group ("BRG") for Web site-related activities; Community Access America ("CAA") for the ISP activities; and Healthcare for the CME and healthcare information activities. Each of these activities involved in varying degrees the establishment of online communities. As an outgrowth of the Company's BRG and CAA activities, and in recognition of the need to increase the availability of high-speed Internet access, the Company's focus during fiscal 1997 increasingly was on the development of online communities for broadband (high bandwidth or high data transmission capabilities) operators such as cable TV operators (wired and wireless) who the Company believes are in the best position today to provide high-speed Internet access. This focus has resulted in the introduction of the Company's I2U (formerly "CAP" or "Community Access Partnership") products and services which include a wide range of online services which enable operators and operators' customers to generate online local content, create Web pages and conduct online commerce and banking and a turnkey product and service package which provides the equipment, training and systems necessary for the broadband operator to become a fully operational ISP. The Company intends to focus its future efforts primarily on its I2U products and services. During November 1997, the Company announced to its customers that it was terminating Web site development, maintenance and hosting activities and began to transition this business to other companies. OSS is ceasing Web site development activities which are not related to the development of products for its I2U products and services or which do not involve the creation of online communities for particular businesses or information purposes. In addition, during October 1997, the Company licensed its MD Gateway Web site to Medical Education Collaborative ("MEC") and is no longer developing products for the healthcare market. In the future, revenues from the healthcare market are expected to be limited to license fees received from MEC in connection with the use of MD Gateway. On March 19, 1998, the Company executed an Agreement and Plan of Merger pursuant to which the Company agreed to acquire Durand Communications, Inc. ("DCI") in exchange for up to 971,250 shares of the Company's common stock (the "DCI Merger"). DCI develops and markets Internet "community" building tools and services; training in the use of these tools and services; and online service for hosting these communities. The information regarding DCI included in this Prospectus has been provided by DCI. See "Recent Developments--DCI Acquisition." On May 22, 1998, the Company issued 3,000 shares of its 5% Preferred Stock (the "5% Preferred Stock") in a private placement offering of such stock. In connection with such offering, the Company issued warrants to purchase up to 100,000 shares of its common stock at $16.33 per share. The Company received $3,000,000 in gross proceeds from such offering. The Company intends to use such proceeds for general working capital purposes. See "Risk Factors--Ability to Issue Common Stock and Preferred Stock; Anti-Takeover Devices," "Risk Factors-- Affect of Issuance of 10% Preferred Stock and 5% Preferred Stock on Net Loss," and "Risk Factors--No Dividends." On June 5, 1998, the Company executed an Agreement and Plan of Merger pursuant to which the Company agreed to acquire Skyconnect, Inc. ("Skyconnect") in consideration for 1,100,000 shares of the Company's common stock, the assumption of approximately $8,500,000 in liabilities of Skyconnect, and the issuance of warrants 4 representing the right to acquire 250,000 shares of the Company's common stock at the initial exercise price of $18.00 per share (the "Skyconnect Merger"). Skyconnect is a leading provider of software-based products that manage, store, and distribute digital video for cable television operators. The information regarding Skyconnect in this Prospectus has been provided by Skyconnect. See "Recent Developments--Skyconnect Acquisition." 5 RISK FACTORS THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE, INVOLVE A HIGH DEGREE OF RISK AND SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS AND SPECULATIVE FACTORS INHERENT IN AND AFFECTING THE BUSINESS OF THE COMPANY, AS WELL AS ALL OF THE OTHER MATTERS SET FORTH ELSEWHERE IN THE PROSPECTUS, PRIOR TO THE PURCHASE OF ANY OF THE SECURITIES OFFERED HEREBY. CAUTIONARY STATEMENTS The following cautionary statements are made pursuant to the Private Securities Litigation Reform Act of 1995 in order for the Company to avail itself of the "safe harbor" provisions of that Act. The discussions and information in this Prospectus may contain both historical and forward-looking statements. To the extent that the Prospectus contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, prospective investors should be aware that the Company's actual financial condition, operating results and business performance may differ materially from that projected or estimated by the Company in forward-looking statements. The Company has attempted to identify, in context, certain of the factors that it currently believes may cause actual future experience and results to differ from the Company's current expectations. The differences may be caused by a variety of factors, including but not limited to adverse economic conditions, intense competition, including entry of new competitors, adverse federal, state and local government regulation, inadequate capital, unexpected costs, lower sales and net income (or higher net losses) than forecasted, price increases for equipment, inability to raise prices, failure to obtain new customers, the possible fluctuation and volatility of the Company's operating results and financial condition, inability to carry out marketing and sales plans, loss of key executives, and other specific risks that may be alluded to in this Prospectus or in other reports issued by the Company. RISKS RELATED TO THE COMPANY LIMITED OPERATING HISTORY; ACCUMULATED LOSSES. The Company was founded in March 1994, commenced sales in February 1995 and was in the development stage through December 31, 1995. Accordingly, the Company has only a limited operating history upon which an evaluation of the Company and its prospects can be based. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets. To address these risks, the Company must, among other things, respond to competitive developments, continue to attract, retain and motivate qualified persons, and continue to upgrade and commercialize products and services. There can be no assurance that the Company will be successful in addressing such risks. The Company has incurred net losses since inception totaling $6,974,392 through March 31, 1998. ADDITIONAL ANTICIPATED LOSSES. OSS currently intends to increase its capital expenditures and operating expenses in order to expand its I2U products and services and to support additional subscribers of OSS' broadband customers in future markets and to market and provide the Company's products and services to a growing number of potential subscribers. As a result, the Company expects to incur additional substantial operating and net losses for the balance of fiscal 1998 and for one or more fiscal years thereafter. The profit potential for the Company's I2U business model is unproven, and to be successful, the Company must, among other things, develop and market products and services that are widely accepted by consumers and businesses at prices that will create a profit. The Company's I2U products and services have only recently been launched and there can be no assurance that they will achieve broad consumer or commercial acceptance. The success of the Company's I2U products and service will depend upon the willingness of subscribers of the Company's broadband customers to pay monthly fees and installation costs of the Internet service, both of which will be set by local broadband operators. In addition, since a significant portion of the Company's future sales are expected to be transaction based, the success of the Company's I2U products and services may also be dependent upon the extent to which consumers and businesses conduct e-commerce and e-banking. Accordingly, it is difficult to predict whether OSS' pricing model will prove to be viable, whether demand for the Company's products and services will materialize at the prices the Company expects the broadband operators to charge or whether current or future pricing levels will be sustainable. If such pricing levels are not achieved or sustained or if the Company's products and services do not achieve or sustain broad market acceptance, the Company's business, operating results and financial condition will be materially adversely affected. OSS' ability to generate future sales will be dependent on a number of factors, many of which are beyond the Company's control, including, among others, the success of broadband operators in marketing Internet services to subscribers in their local areas, the extent that subscribers conduct online e-commerce and e-banking transactions 6 and the prices that the broadband operators set for Internet services. Because of the foregoing factors, among others, OSS is unable to forecast its sales with any degree of accuracy. There can also be no assurance that the Company will ever achieve profitability. In addition, if the DCI Merger and the Skyconnect Merger are consummated, the portion of the purchase price for DCI and Skyconnect which are allocated to in-process research and development, estimated to be $11 million for DCI and estimated to be $14 million for Skyconnect, will be recognized in the fiscal period of OSS that the Mergers are consummated. In the event of the Mergers, OSS' net loss for the year ending December 31, 1998, will therefore be increased by up to $25 million. In connection with the Mergers, the Company will also record goodwill and other intangible assets estimated to be $4.3 million which will be amortized over the estimated useful life of three years. The amortization of the balance of the goodwill and other intangible assets to be acquired in the Mergers will increase OSS' expenses by an estimated $350,000 for fiscal 1998, $1,400,000 for fiscal 1999 and 2000 and $1,150,000 for fiscal 2001. In addition, DCI and Skyconnect, which had accumulated deficits of ($6,833,187) at December 31, 1997 for DCI and ($31,499,847) at March 31, 1998 for Skyconnect, respectively, have incurred net losses in each of their respective fiscal years since their formation. There can be no assurance that the acquisition of either DCI or Skyconnect will ever make a positive contribution to OSS' results of operations. INCREASED NEED FOR WORKING CAPITAL. OSS believes that its cash and cash equivalents and working capital will be adequate to sustain operations only to September 1998. The acquisition of DCI, if consummated, is expected to increase monthly working capital needs by approximately $130,000 for at least the balance of the fiscal year ending December 31, 1998. In addition, if the Company is required to redeem the 5% Preferred Stock, such redemption could have a materially adverse effect on the Company's ability to maintain an adequate amount of working capital. See "Ability to Issue Common Stock and Preferred Stock; Anti-Takeover Devices." OSS has entered into a letter of intent with an underwriter for a secondary offering of its securities for proceeds of $15-20 million, which is expected to occur during the third or fourth quarter of 1998. OSS estimates that it needs to raise $25 million or more through equity, debt or other external financing, to implement its business development plan. There can be no assurance that OSS will be able to complete such offerings in amounts required by OSS or upon terms acceptable to OSS. In its report accompanying the audited financial statements for the years ended December 31, 1997 and 1996, the Company's auditor, Arthur Andersen LLP, expressed substantial doubt about the Company's ability to continue as a going concern. NEW AND UNCERTAIN MARKETS. The market for Internet products and services has only recently developed. Since this market is relatively new and because current and future competitors are likely to introduce competing Internet products and services, it is difficult to predict the rate at which the market will grow or at which new or increased competition will result in market saturation. If the Internet markets fail to grow, grow more slowly than anticipated or become saturated with competitors, the Company's business, including the business of DCI and Skyconnect that will be acquired if the Mergers are consummated, operating results and financial condition will be materially adversely affected. PRODUCT DEVELOPMENT; TECHNOLOGICAL CHANGE. The Company's success depends upon its ability to develop new products and services that meet changing customer requirements. The market for the Company's products and services is characterized by rapidly changing technology, evolving industry standards, emerging competition and frequent new product and service introductions. There can be no assurance that the Company can successfully identify new product and service opportunities or develop and bring new products and services to market in a timely manner, or that products and services or technologies developed by others will not render the Company's products, services, and technologies, including the products and services and technologies of DCI and Skyconnect that will be acquired if the Mergers are consummated, noncompetitive or obsolete. GENERAL RISKS OF BUSINESS. The Company has formulated its business plans and strategies based on the rapidly increasing size of the Internet markets, the Company's anticipated participation in those markets, and the estimated sales cycle, price and acceptance of the Company's products and services. Although these assumptions are based on the best estimates of management, there can be no assurance that these assumptions will prove to be correct. No independent marketing studies have been conducted on behalf of or otherwise obtained by the Company, either with respect to its current business or the business, products and technologies of DCI and Skyconnect that will be acquired if the Mergers are consummated, nor are any such studies planned. Any future success that the Company might enjoy will depend upon many factors including some beyond the control of the Company or that it cannot predict at this time. INTENSE COMPETITION. The market for Internet products and services is highly competitive and the Company expects that this competition will intensify in the future. The Company's current and prospective competitors include many companies that have substantially greater financial, technical, marketing and other resources than the 7 Company. Increased competition could result in price reductions and increased spending on marketing, sales and product development. Any of these events could have a materially adverse effect on the Company's financial condition and operating results. Many nationally known companies and regional and local companies across the country are involved in Internet applications and the number of competitors is growing. The Company will also compete with broadband companies who are developing their own Internet access and content and the internal departments of prospective customers who are choosing whether to outsource Internet-related activities or retain or develop that function in-house. Customers who desire to outsource these services may desire to work with companies larger than OSS. Increased competition could result in significant price competition, which in turn could result in significant reductions in the average selling price of the Company's products and services. There is no assurance that the Company will be able to offset the effects of any such price reductions through an increase in the number of its customers, higher sales from enhanced services, cost reductions or otherwise. Increased competition or price reductions could adversely affect the Company's operating results. There is no assurance that the Company will have the financial resources, technical expertise or marketing, sales and support capabilities to continue to compete successfully. LIMITED AVAILABILITY OF PROPRIETARY PROTECTION. The Company does not believe that its current products or services, or the products or services of DCI and Skyconnect that will be acquired if the Mergers are consummated, are patentable. The Company relies on a combination of copyright, trade secret and trademark laws, and nondisclosure and other contractual provisions to protect its proprietary rights. Notwithstanding these safeguards, it may be possible for competitors of the Company to imitate the Company's, DCI's and Skyconnect's products and services or to develop independently competing products and services. LENGTH OF SALES CYCLE. The decision to enter the Internet services provisioning business and the development and implementation of interactive Web sites are often enterprise-wide decisions by prospective customers and may require the Company to engage in lengthy sales cycles. The pursuit of sales leads typically involves an analysis of the prospective customer's needs, preparation of a written proposal, one or more presentations and contract negotiations. The Company often provides significant education to prospective customers regarding the use and benefits of Internet technologies and products. While the sales cycle varies from customer to customer, it typically has ranged from one to three months for I2U projects. The sales cycle may also be subject to a prospective customer's budgetary constraints and internal acceptance reviews, over which the Company has little or no control. Consequently, if sales forecasted from a specific customer for a particular quarter are not realized in that quarter, the Company is unlikely to be able to generate revenue from alternate sources in time to compensate for the shortfall. If a larger order is delayed or lost to a competitor, the Company's revenues for that quarter could be materially diminished. Moreover, to the extent that significant sales occur earlier than expected, operating results for subsequent quarters may be adversely affected. A significant portion of the Company's future sales are expected to come from Internet access fees paid by subscribers of the Company's broadband operator customers and in connection with e-commerce and e-banking transactions these subscribers conduct on the broadband operators' systems. OSS expects that it may take broadband operators several months or more to market and sell high-speed Internet access to their subscribers and that it will take even longer for these subscribers to conduct significant e-commerce or e-banking transactions. For these reasons, OSS does not expect to realize significant sales, if at all, from these activities until a significant time after OSS has licensed its I2U products and services to broadband operators. DEPENDENCE ON KEY PERSONNEL; ABSENCE OF EMPLOYMENT AND NONCOMPETITION AGREEMENTS. The Company is highly dependent on the technical and management skills of its key employees, including in particular R. Steven Adams, the Company's founder, President and Chief Executive Officer. The loss of Mr. Adams' services could have a material adverse effect on the Company's business and operating results. The Company has not entered into employment agreements with Mr. Adams, or any of its other officers or employees and has not purchased key person insurance for Mr. Adams or any other member of management. The Company generally enters into written nondisclosure and nonsolicitation agreements with its officers and employees which restrict the use and disclosure of proprietary information and the solicitation of customers for the purpose of selling competing products or services. Thus, if any of the Company's officers or key employees left the Company, they could compete with the Company, so long as they di not solicit the Company's customers, which could have a material adverse effect on the Company's business. The Company's future success also depends in part on its 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 the Company can identify or hire additional qualified personnel. In addition, the success of the DCI Merger, if consummated is highly dependent on the technical and management skills of Andre Durand, the founder, President and CEO of DCI and of the Skyconnect 8 Merger, if consummated, is highly dependent on the skills of Michael Pohl, President of Skyconnect. The loss of Mr. Durand's services could have a material adverse affect on the value of the DCI Merger, and the loss of Michael Pohl's services could have a material adverse affect on the value of the Skyconnect Merger. The DCI Merger is contingent on Mr. Durand entering into a three-year non-compete agreement with OSS, and the Skyconnect Merger is contingent upon Mr. Pohl entering into a one-year employment and noncompete agreement with the Company. MANAGEMENT OF GROWTH. The Company has and expects to continue to experience significant growth in the number of its employees, the scope of its operating and financial systems, and the geographic area of its operations, including an expansion of its recently initiated international operations. This growth will result in new and increased responsibilities for both existing and new management personnel. In addition, as the Company expands its I2U products and services, it will be necessary to hire additional employees who will be located at many widely separated offices, including international offices. The Company's success depends on the ability of its managers to operate effectively, both independently and as a group. The Company's ability to effectively manage any such growth will require it to continue to implement and improve its operational, financial and management information systems and to train, motivate and manage its employees. This will require the addition of new management personnel and the development of additional expertise by existing management. There can be no assurance that the Company's management or other resources will be sufficient to manage any future growth in the Company's business or that the Company will be able to implement in whole or in part its growth strategy, and any failure to do so could have a material adverse effect on the Company's operating results. POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. As a result of the Company's limited operating history and the recent increased focus on its I2U products and services, the Company does not have historical financial data for a sufficient number of periods on which to base planned operating expenses. Accordingly, the Company's expense levels are based in part on its expectations as to future sales and to a large extent are fixed. The Company typically operates with little backlog and the sales cycles for its products and services may vary significantly. As a result, quarterly sales and operating results generally depend on the volume and timing of and ability to close customer contracts within the quarter, which are difficult to forecast. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected sales shortfalls. Accordingly, any significant shortfall of demand for the Company's products and services in relation to the Company's expectations would have an immediate adverse effect on the Company's business, operating results and financial condition. In addition, since a significant portion of the Company's future sales are expected to be based on Internet access fees and e-commerce and e-banking activities, OSS does not expect to realize significant sales, if at all, from these activities until a significant time after OSS has licensed its I2U products and services to broadband operators. Further, the Company plans to increase its operating expenses to fund product development and increase sales and marketing. To the extent that such expenses precede or are not subsequently followed by increased sales, the Company's business, operating results and financial condition will be materially adversely affected. SECURITY RISKS. The Company's software and equipment are vulnerable to computer viruses or similar disruptive problems caused by OSS customers or other Internet users. Computer viruses or problems caused by third parties could lead to interruptions, delays or cessation in service to the Company's customers. Furthermore, inappropriate use of the Internet by third parties could also potentially jeopardize the security of confidential information stored in the computer systems of the Company's customers. The Company has information technology insurance which provides limited coverage for losses caused by computer viruses. However, certain losses resulting from misuse of software or equipment by third parties or losses from computer viruses which exceed the liability limits under such insurance may not be protected. Although the Company attempts to limit its liability to customers for these types of risks through contractual provisions, there is no assurance that these limitations will be enforceable. DEPENDENCE ON THE INTERNET. Sales of the Company's Internet related products and services will depend in large part upon a robust industry and infrastructure for providing Internet access and carrying Internet traffic. The Internet may not prove to be a viable commercial marketplace because of inadequate development of the necessary infrastructure, such as a reliable network backbone or timely development of complementary products. Because global commerce and online exchange of information on the Internet and other similar open wide area networks are new and evolving, it is difficult to predict with any assurance whether the Internet will prove to be a viable commercial marketplace. There can be no assurance that the infrastructure or complementary products necessary to make the Internet a viable commercial marketplace will be developed, or, if developed, that the Internet will become a viable commercial marketplace. If the necessary infrastructure or complementary products are not developed, or if 9 the Internet does not become a viable commercial marketplace, the Company's business, operating results and financial condition will be materially impaired. LIMITATION OF DIRECTORS' LIABILITY. The Company's Articles of Incorporation provide, as permitted by Colorado law, that its directors shall have no personal liability for certain breaches of their fiduciary duties to the Company. This provision 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. In addition, the Company's Bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by Colorado law. POSSIBLE VOLATILITY OF STOCK PRICES; PENNY STOCK RULES. The over-the-counter markets for securities such as the Company's common stock and IPO Warrants historically have experienced extreme price and volume fluctuations during certain periods. These broad market fluctuations and other factors, such as new product developments and trends in the Company's industry and the investment markets generally, as well as economic conditions and quarterly variations in the Company's results of operations, may adversely affect the market price of the Company's common stock. Although the common stock and IPO Warrants are listed on the Nasdaq Small Cap Market, there can be no assurance that they will remain eligible to be included on Nasdaq. In the event that the Company's common stock and IPO Warrants were no longer eligible for quotation on Nasdaq, the common stock and IPO Warrants could become subject to rules adopted by the Securities and Exchange Commission (the "Commission") regulating broker-dealer practices in connection with transactions in "penny stocks." If the Company's common stock or IPO Warrants became subject to the penny stock rules, many brokers may be unwilling to engage in transactions in the Company's securities because of the added regulation, thereby making it more difficult for purchasers in this Offering to dispose of their securities. CONTROL BY EXISTING MANAGEMENT. As of May 31, 1998, the current officers and directors of the Company own beneficially approximately 33% of the Company's outstanding common stock. Accordingly, it should be anticipated that the current executive officers and directors of the Company will continue to have the ability to significantly influence the outcome of elections of the Company's directors and other matters presented to a vote of shareholders. SHARES ELIGIBLE FOR FUTURE SALE. Approximately 1,130,000 of the currently outstanding shares of the Company's common stock are "restricted securities," as defined under the Securities Act of 1933 ("Securities Act") and the rules and regulations thereunder. Restricted shares and shares of the Company's common stock owned by "affiliates" may be publicly sold only by complying with Rule 144 under the Securities Act unless further registered under the Securities Act, or some other exemption from further registration thereunder is available. Sales of substantial amounts of these shares, or even the potential for such sales, could have an adverse effect on the market price for shares of the Company's common stock or IPO Warrants, and could impair the ability of purchasers of the securities covered hereby to resell them to recoup their investment or make a profit, and the Company's ability to raise capital through the sale of its equity securities. RIGHTS TO ACQUIRE SHARES. The following warrants and options to acquire common stock were outstanding as of May 31, 1998: (i) options and warrants to purchase 1,406,500 shares of the Company's common stock issuable upon exercise of such options and warrants, exercisable at prices ranging from $0.50 to $15.00 per share, with a weighted average exercise price of approximately $4.75 per share, (ii) IPO Warrants to purchase 634,150 shares of the Company's common stock issuable upon exercise of the IPO Warrants at an exercise price of $9.00 per share, (iii) the Representative's Option to purchase 106,700 shares of the Company's common stock issuable upon exercise of the Representative's Option at a purchase price of $8.10 per share and (iv) 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. The IPO Warrants referred to in (iv) above entitle the holder thereof to purchase up to 53,350 shares of the Company's common stock issuable upon exercise of such IPO Warrants at an exercise price of $9.00 per share. During the terms of the outstanding options and warrants, the holders thereof will have the opportunity to profit from an increase in the market price of the Company's common stock with resulting dilution to the holders of common stock who purchased shares for a price higher than the respective exercise price. The existence of such stock options and warrants may adversely affect the terms o which the Company can obtain additional financing, and the holders of such options or warrants can be expected to exercise or convert those securities at a time when the Company, in all likelihood, would be able to obtain additional capital by offering shares of its common stock on terms more favorable to the Company than those provided by the exercise or conversion of such options or warrants. 10 POSSIBLE DILUTION TO OSS SHAREHOLDERS CAUSED BY THE DCI MERGER AND THE SKYCONNECT MERGER. If the DCI Merger and the Skyconnect Merger are consummated, the Mergers will result in an increase in the Company's outstanding shares of Common Stock by approximately 2,070,000 shares (approximately 62%). The Company, on a pro forma basis, estimates that the issuance of such shares of common stock would have resulted in a decrease to the Company's net book value per share as of March 31, 1998 from $1.14 (actual) to $.71 (estimated pro forma). In addition, in connection with the Mergers, OSS will be required to reserve approximately 330,000 shares of its common stock for issuance upon exercise or conversion of outstanding options, warrants and convertible securities of OSS which will be issued to replace similar securities of DCI in connection with the Mergers. There can be no assurance that OSS' results of operations will be improved enough, if at all, as a result of the either the DCI Merger or the Skyconnect Merger, to offset possible future dilution which could occur to current shareholders of OSS in the event that OSS' operations achieve profitability. ABILITY TO ISSUE COMMON STOCK AND PREFERRED STOCK; ANTI-TAKEOVER DEVICES. The Company is authorized to issue up to 10,000,000 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 the Company's shareholders, and may include voting rights, preferences as to dividends and liquidation, conversion and redemptive rights and sinking fund provisions. As of May 31, 1998, the Board of Directors has authorized the issuance of up to 500,000 shares of 10% Preferred Stock (the "10% Preferred Stock"), of which 267,500 shares were outstanding as of May 31, 1998, and the Board of Directors has authorized the issuance of up to 3,000 shares of 5% Preferred Stock, of which 3,000 shares were outstanding as of May 31, 1998. If not redeemed by the Company on or before October 1, 1998, then each share of the outstanding 10% Preferred Stock becomes convertible, at the election of the holder thereof, into the number of shares of common stock of the Company equal to $10.00 divided by the lesser of (i) $10.00 or (ii) 80% of the average per share closing bid price of the Company's common stock for the five trading days immediately preceding the election by the holder thereof. In addition, upon any redemption or conversion of the 10% Preferred Stock, the Company may pay dividends owing on the 10% Preferred Stock either (i) in cash, or (ii) by issuing additional shares of common stock utilizing a price per share equal to the lesser of (a) $10.00 or (b) if a redemption or a conversion occurring in connection with the receipt of a notice of redemption, the average per share closing bid price for the five trading days immediately preceding the date on which notice of such redemption is first given to the holders of the 10% Preferred Stock, or, if a conversion occurring without connection to the receipt of a notice of redemption, the average per share closing bid price of the Company common stock for the five trading days immediately preceding the election to convert by the holder of the 10% Preferred Stock. Each share of the outstanding 5% Preferred Stock is convertible, at any time at the election of the holder thereof, into the number of shares of common stock of the Company equal to $1,000.00 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 per share closing bid price of the Company's common stock for the five trading days immediately preceding the date on which the holder thereof elects to convert such 5% Preferred Stock. The Company may redeem the 5% Preferred Stock at any time prior to September 19, 1998. If, upon the conversion of the 5% Preferred Stock, the number of shares of common stock of the Company issued upon such conversion is equal to 574,281 shares, the Company must redeem all of the then remaining outstanding shares of 5% Preferred Stock. Although the Company has no present plans to issue any other shares of preferred stock, the issuance of preferred stock in the future could affect the rights of the holders of common stock and thereby reduce the value of common stock. In particular, specific rights granted to future holders of preferred stock could be used to restrict the Company's ability to merge with or sell its assets to a third party, or otherwise delay, discourage, or prevent a change in control of the Company. AFFECT OF ISSUANCE OF 10% PREFERRED STOCK AND 5% PREFERRED STOCK ON NET LOSS. Based on current accounting standards, the Company estimates that it will be required to record a non-operating expense of approximately $2,300,000 for the fiscal year ending December 31, 1998 as a result of the issuance of the 10% Preferred Stock and the 5% Preferred Stock. While these charges will not affect the Company's operating loss or working capital during such period, they are expected to result in an increase of approximately $2,300,000 in the Company's net loss for the fiscal year ending December 31, 1998. Further, the Company's working capital will be reduced by the amount of the dividends paid on the 10% Preferred Stock and the 5% Preferred Stock if such dividends are paid in cash. NO DIVIDENDS. No cash dividends have been paid on the common stock of the Company. It is anticipated that profits, if any, received from operations will be devoted to the Company's future operations. The Company does not anticipate the payment of cash dividends on its common stock in the foreseeable future, and any decision to pay dividends will depend upon the Company's profitability at the time, cash available therefor, and other factors. Except as otherwise required by law, the Company is required to pay a quarterly cumulative noncompounded dividend on the 10% Preferred Stock of 10% per annum based on the stated value of $10.00 per share of 10% 11 Preferred Stock, and the Company is required to pay all accrued but undeclared dividends on the 5% Preferred Stock on the earlier of (i) the redemption or conversion of the 5% Preferred Stock, or (ii) the liquidation of the Company. USE OF PROCEEDS The net proceeds to be received by the Company from the securities offered hereby, assuming that all of the securities offered hereby are exercised in full for a cash payment to the Company, after deducting expenses payable by the Company (including printing, legal and accounting expenses) estimated at $20,000 are estimated to be $7,031,877. There can be no assurance that the securities offered hereby will be exercised, or if exercised, at what time they will be exercised. In addition, if any holder of the IPO Warrants elects to exercise such IPO Warrants pursuant to the cashless exercise option, the Company will not receive any cash proceeds from such exercise. Such proceeds, if any, are intended to be used for general working capital purposes. 12 RECENT DEVELOPMENTS DCI ACQUISITION On March 19, 1998 the Company executed an Agreement and Plan of Merger (the "DCI Merger Agreement") pursuant to which the Company agreed to acquire Durand Communications, Inc., a California corporation ("DCI"), via a merger of the Company's wholly owned subsidiary, Durand Acquisition Corporation, with DCI (the "DCI Merger"). As consideration for the DCI Merger, the Company will issue up to 971,250 shares of its common stock and will acquire 100% of the outstanding shares of common stock, no par value, of DCI. In connection with the DCI Merger, OSS will also assume DCI liabilities of approximately $1,400,000 and issue options, warrants and convertible securities for up to 200,000 shares of OSS Common Stock at exercise or conversion prices ranging from $4.31 to $16.26 in replacement of similar securities of DCI. Under the rules of The Nasdaq SmallCap Market the issuance of common stock by the Company as consideration in the DCI Merger requires the approval of the Company's shareholders. Approva by the Company's shareholders is a condition precedent to the Company's obligation to consummate the DCI Merger. If the issuance of shares of common stock is not approved by the shareholders, it is unlikely that the Company will consummate the DCI Merger. The Company anticipates that the meeting at which the shareholders will consider the issuance of such common stock will occur in August or September 1998. It is intended that the DCI Merger, for federal income tax purposes, will be treated as a reorganization within the meaning of Section 368 of the Internal Revenue Code (the "Code") and that each of the Company, DCI and Durand Acquisition Corporation will be a party to the reorganization within the meaning of Section 368(b) of the Code. Based on the facts, representations, warranties and agreements set forth in the DCI Merger Agreement, the Company believes that the DCI Merger will so qualify. However, no ruling has been requested from the Internal Revenue Service (the "IRS") with respect to these matters. Therefore, the IRS may determine that the DCI Merger does not qualify to be treated as a reorganization within the meaning of Section 368 of the Code. The long-term success of the Company's business development strategy is highly dependent upon the Company's ability to develop proprietary systems for establishing online communities and online commerce which distinguishes OSS' product and service offerings for broadband operators from those offered by other Internet product and service providers. The providing of high-speed Internet access by broadband operators is in the early development stage. The Company believes it is important to quickly establish OSS as one of the leaders in providing high-speed Internet access products and services for broadband operators, as those companies that are among the first established providers of these products and services, will have a distinct advantage in obtaining market share as this business continues to develop. OSS believes that the primary value of DCI to OSS is (i) DCI's proprietary technology, including DCI's CommunityWare(R) product, (ii) DCI's software development capabilities which management believes is important to OSS' ability to continue to develop state-of-the-art proprietary software products required to maintain long-term relationships with OSS' broadband operator customers, and (iii) the ability the DCI acquisition will give OSS to greatly reduce the time it will take OSS to introduce new proprietary software products. Management of OSS believes DCI's technology can be quickly integrated with OSS' I2U products to expand the breadth and functionality of this product offering. Andre Durand, Chief Executive Officer of DCI, will become Vice President-Product Development of OSS following the DCI Merger and will be responsible for the Company's product development efforts. A condition to the DCI Merger is that Mr. Durand enter into a three-year noncompete agreement with the Company. OSS intends to continue to employ all of DCI's product development personnel following the DCI Merger. OSS also believes that DCI's Electronic University Network ("EUN") business, which offers accredited online courses for colleges, universities and corporations, represents a valuable business opportunity. OSS expects to continue to develop this business both as a separate product offering and as an adjunct to OSS' product offerings for broadband operators. OSS did not seek an opinion from an independent financial advisor as to the value of the DCI transaction, as management and the Board of Directors determined that management of OSS was best able to determine the value of the acquisition since its value was primarily based on the capabilities and prospects for DCI's technology, the compatibility of DCI's and OSS' technologies and the ability to quickly integrate the two technologies in order to significantly reduce OSS' time to develop and introduce new products. 13 The acquisition of DCI will increase the outstanding number of shares of the Company's common stock by 971,250 shares (approximately 29%, not including the shares of common stock which may be issued in connection with the Skyconnect Merger) (excluding shares issuable upon the exercise of options and warrants or the conversion of convertible securities issued in connection with the DCI Merger), will increase the Company's liabilities, on a consolidated basis, by approximately $1,400,000 and is expected to increase the Company's operating net loss by approximately $140,000 per month for at least the balance of fiscal 1998. The acquisition of DCI will also increase the Company's working capital requirements. As indicated in the Risk Factors section of this Prospectus, the Company has initiated efforts to obtain additional working capital. However, there can be no assurance that the Company will be successful in obtaining additional working capital or, if successful, the cost of such capital. The DCI Merger Agreement contemplates that OSS will acquire 100% of the outstanding common stock of DCI. Based on the closing price of the Company's common stock on and around March 19, 1998, the day that the transaction was announced, the total purchase price is estimated to be $12,400,000, consisting of (i) 971,250 shares of the Company's common stock to be issued to the stockholders of DCI, (ii) approximately 200,000 shares of the Company's common stock to be reserved for issuance pursuant to exercise or conversion of options, warrants and convertible securities of DCI to be converted to similar securities of OSS; (iii) $1,400,000 of liabilities to be assumed; and (iv) approximately $380,000 of expenses to be incurred. 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 and liabilities assumed. A significant portion of the purchase price has been identified as intangible assets, including approximately $11 million of research and development in process. The portion of the purchase price which is allocated to in-process research and development will be recognized as expense in the period the DCI Merger is consummated and will cause a resulting increase in the accumulated deficit of the Company of approximately $11 million. DCI completed the acquisition of CompuLearning Systems, d/b/a Electronic University Network ("EUN") during January 1998. Based on financial information provided by DCI and EUN, the combined revenues for DCI and EUN for the year ended December 31, 1997 totaled $740,739 and their combined loss for the same period equaled ($2,867,973). In addition, their combined accumulated deficit and stockholder's deficit for the same period were ($7,709,344) and ($1,804,709), respectively. The Company estimates that, on a pro forma basis, the acquisition of DCI would have resulted in a decrease to the net book value of its shares of common stock as of December 31, 1997 from $1.54 (actual) to $1.18 (pro forma). SKYCONNECT ACQUISITION On June 5, 1998 the Company executed an Agreement and Plan of Merger (the "Skyconnect Merger Agreement") pursuant to which the Company agreed to acquire Skyconnect, Inc., a Colorado corporation ("Skyconnect"), via a merger of the Company's wholly owned subsidiary, Skyconnect Acquisition Corporation, with Skyconnect (the "Skyconnect Merger"). As consideration for the Skyconnect Merger, the Company will issue up to 1,100,000 shares of its common stock and will acquire 100% of the outstanding share of common stock, no par value, of Skyconnect. In connection with the Skyconnect Merger, OSS will also assume Skyconnect liabilities of approximately $8,500,000 and issue options and warrants for up to 130,000 shares of OSS common stock at exercise or conversion prices ranging from $12.00 to $14.40 or the market value for the Company's common stock, if less, in replacement of similar securities of Skyconnect. In addition, OSS will issue to a Skyconnect shareholder a warrant to acquire 250,000 shares of its common stock at an initial exercise price of $18.00 per share. Under the rules of The Nasdaq SmallCap Market the issuance of common stock by the Company as consideration in the Skyconnect Merger requires the approval of the Company's shareholders. Approval by the Company's shareholders is a condition precedent to the Company's obligation to consummate the Skyconnect Merger. If the issuance of shares of common stock is not approved by the shareholders, it is unlikely that the Company will consummate the Skyconnect Merger. The Company anticipates that the meeting at which the shareholders will consider the issuance of such common stock will occur in August or September 1998. It is intended that the Skyconnect Merger, for federal income tax purposes, will be treated as a reorganization within the meaning of Section 368 of the Internal Revenue Code (the "Code") and that each of the Company, Skyconnect and Skyconnect Acquisition Corporation will be a party to the reorganization within the meaning of Section 368 of the Code. Based on the facts, representations, warranties and agreements set forth in the Skyconnect Merger Agreement, the Company believes that the Skyconnect Merger will so qualify. However, no 14 ruling has been requested from the Internal Revenue Service (the "IRS") with respect to these matters. Therefore, the IRS may determine that the Skyconnect Merger does not qualify to be treated as a reorganization within the meaning of Section 368 of the Code. The long-term success of the Company's business development strategy is highly dependent upon the Company's ability to develop proprietary systems which distinguishes OSS' product and service offerings for broadband operators from those offered by other Internet product and service providers. The providing of high-speed Internet access by broadband operators is in the early development stage. The Company believes it is important to quickly establish OSS as one of the leaders in providing high- speed Internet access products and services for broadband operators, as those companies that are among the first established providers of these products and services, will have a distinct advantage in obtaining market share as this business continues to develop. OSS believes that the primary value of Skyconnect to OSS is (i) Skyconnect's proprietary technology, including Skyconnect's advertising, scheduling and insertion systems, as well as its near-video-on-demand ("NVOD") and video-on-demand ("VOD") systems for cable television and hotel operators, (ii) Skyconnect's product development and sales capabilities, (iii) the ability the Skyconnect acquisition will give OSS to integrate advertising insertion and NVOD and VOD capabilities with OSS' I2U product to expand the breadth and functionality of this product offering, and (iv) Skyconnect's existing revenue base with cable television operators. The acquisition of Skyconnect will increase the outstanding number of shares of the Company's common stock by 1,100,000 shares (approximately 32% not including the shares which may be issued in the DCI Merger) (excluding shares issuable upon the exercise of options and warrants in connection with the Skyconnect Merger) and will increase the Company's liabilities, on a consolidated basis, by approximately $8,500,000. The acquisition of Skyconnect may also increase the Company's working capital requirements. As indicated in the Risk Factors section of this Prospectus, the Company has initiated efforts to obtain additional working capital. However, there can be no assurance that the Company will be successful in obtaining additional working capital or, if successful, the cost of such capital. The Skyconnect Merger Agreement contemplates that OSS will acquire 100% of the outstanding common stock of Skyconnect. Based on the closing price of the Company's common stock on and around June 9, 1998, the day that the transaction was announced, the total purchase price is estimated to be $24,700,000, consisting of (i) 1,100,000 shares of the Company's common stock to be issued to the stockholders of Skyconnect, (ii) approximately 130,000 shares of the Company's common stock to be reserved for issuance pursuant to exercise or conversion of options and warrants of Skyconnect to be converted to similar securities of OSS; (iii) 250,000 shares of the Company's common stock to be reserved for a warrant to be granted to a Skyconnect shareholder; (iv) $8,500,000 of liabilities to be assumed; and (v) approximately $60,000 of expenses to be incurred. The Skyconnect Merger will be accounted for under the purchase method of accounting, with the purchase price allocated to the fair value of assets acquired and liabilities assumed. A significant portion of the purchase price has been identified as intangible assets, including up to approximately $14,000,000 of research and development in process. The portion of the purchase price which is allocated to in-process research and development will be recognized as expense in the period the Skyconnect Merger is consummated and will cause a resulting increase in the accumulated deficit of the Company of up to approximately $14,000,000. Based on financial information provided by Skyconnect, the revenues for Skyconnect for the year ended March 31, 1998 totaled $11,820,779 and its loss for the same period equaled ($6,754,688). In addition, its accumulated deficit was ($31,499,847). The Company estimates that, on a pro forma basis, the acquisition of Skyconnect would have resulted in a decrease to the net book value of its shares of common stock as of March 31, 1998 from $1.14 (actual) to $1.35 (estimated pro forma). SELLING SHAREHOLDERS The following table sets forth, as of May 31, 1998, the name of each Selling Shareholder, certain beneficial ownership information with respect to each of the Selling Shareholders, and the number of securities offered hereby that may be sold from time to time by each pursuant to this Prospectus. There can be no assurance that the securities offered hereby will be sold. 15
Shares of Common Stock / Shares of Common Percentage of IPO Warrants Shares of Common Stock / IPO Common Stock Owned Stock / IPO Warrants Owned Owned Beneficially Name of Selling Beneficially Warrants Offered Beneficially After Before Offering/After Shareholder Before Offering Hereby Offering Offering - ---------------- ----------------- ------------------ ------------------ --------------------- Cheryl Bostater 1,650 (1) / 3,300 1,650 (1) / 3,300 0 / 0 * * Bayard Kessler 3,300 / 0 3,300 / 0 0 / 0 * *
* Less than 1% of shares outstanding. (1) Represents the number of shares of common stock issuable to Ms. Bostater upon the exercise of her 3,300 IPO Warrants. PLAN OF DISTRIBUTION The issuance of the securities offered hereby is not underwritten. The common stock offered hereby will be issued by the Company upon the exercise of certain IPO Warrants. The IPO Warrants offered hereby will be issued upon the exercise of the Representative's Options. There can be no assurance that any of the IPO Warrants or the Representative's Options will ever be exercised. The Representative's Options were issued by the Company in connection with its initial public offering for an aggregate price of $100. No commissions are other remunerations will be paid for any activities in connection with the issuance of the common stock and the warrants contemplated hereby. Upon the issuance of the securities offered hereby, this Prospectus may be utilized for the purpose of reselling such securities from time to time by persons who may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, as amended, in connection with such sales. Such sales may be made in the over-the-counter market or otherwise at prices and at terms then prevailing or at prices related to the then current market price or in negotiated transactions. Such securities ma be sold by one or more of the following: (a) a block trade in which the broker or dealer so engaged will attempt to sell Shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; (b) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus; (c) ordinary brokerage transactions and transactions in which the broker solicits purchasers; and (d) in privately negotiated transactions not involving a broker or dealer. In effecting sales, brokers or dealers engaged to sell such securities may arrange for other brokers or dealers to participate. Brokers or dealers engaged to sell such securities will receive compensation in the form of commissions or discounts in amounts to be negotiated immediately prior to each sale. Such brokers or dealers and any other participating brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, as amended, in connection with such sales. The Company will receive no proceeds from any resales of the securities offered hereby, and it is anticipated that the brokers or dealers, if any, participating in the sales of such securities will receive the usual and customary selling commissions. DESCRIPTION OF SECURITIES GENERAL The Company is authorized to issue 15,000,000 shares of capital stock, including 10,000,000 shares of common stock, no par value, and 5,000,000 shares of preferred stock, with such par value and such rights, preferences and privileges as are determined by the Company's Board of Directors. COMMON STOCK As of May 31, 1998, 3,386,307 shares of common stock were outstanding. Holders of common stock are entitled to dividends when, as and if declared by the Board of Directors out of funds available therefor, subject to loan agreement limitations and priority as to dividends for preferred stock that may be outstanding. Holders of common stock are entitled to cast one vote for each share held at all stockholder meetings for all purposes, including the election of directors. The holders of more than 50% of the voting power of the common stock issued and 16 outstanding and entitled to vote, present in person or by proxy, (together with any preferred stock issued and outstanding and entitled to vote, present in person or by proxy) constitute a quorum at all meetings of stockholders. The vote of the holders of a majority of common stock present at such a meeting (together with any preferred stock present and entitled to vote at such meeting) will decide any question brought before such meeting, except when a greater vote is required by law, the Company's Articles of Incorporation, or the Company's Bylaws and except when a vote of any preferred stock issued and outstanding, voting as a separate class, is required by law to approve a question brought before such meeting. Upon liquidation or dissolution, the holder of each outstanding share of common stock will be entitled to share equally in the assets of the Company legally available for distribution to such stockholder after payment of all liabilitie and after distributions to holders of preferred stock legally entitled to such distributions. Holders of common stock do not have any preemptive, subscription or redemption rights. There is no cumulative voting for the election of directors. All outstanding shares of common stock are fully paid and nonassessable and the shares of common stock offered hereby will be, upon issuance, fully paid and nonassessable. The holders of the common stock do not have any registration rights with respect to the common stock. IPO WARRANTS As of May 31, 1998, there were 1,268,300 IPO Warrants outstanding. The holder of two IPO Warrants is entitled to purchase one share of the Company's common stock at a price of $9.00 per share at any time prior to May 23, 1999. The Warrant exercise price is payable in cash or through the surrender of warrants having a value equal to the difference between the exercise price and the average of the current market prices for the Company's common stock for the 20 consecutive trading days commencing 21 trading days before the date the warrant is tendered for exchange. The holders of IPO Warrants are not entitled to vote, to receive dividends or to exercise any of the rights of shareholders for any purpose. The Company may, at its discretion, call the IPO Warrants for redemption on 45 days' prior written notice at a redemption price of $.05 per warrant, if the closing bid price of the Company's common stock exceeds the exercise price of the IPO Warrants by at least 50% during a period of at least 20 of the 30 trading days immediately preceding the Notice of Redemption and the expiration of the 45 day waiting period is within the term of the IPO Warrants. LEGAL MATTERS The legality of the Common Stock will be passed upon for the Company by the firm of Gray, Plant, Mooty, Mooty & Bennett, P.A. EXPERTS The audited financial statements of the Company for the years ended December 31, 1997 and 1996, which are included by reference in this Registration Statement have been audited by Arthur Andersen LLP, as indicated in their reports with respect thereto, and are incorporated by reference in reliance upon the authority of said firm as experts in accounting and auditing in giving such report. Reference is made to said report, which includes an explanatory paragraph that discusses substantial doubt about the Company's ability to continue as a going concern. INDEMNIFICATION The Company's Articles of Incorporation provide that the Company shall indemnify, to the full extent permitted by Colorado law, any director, officer, employee or agent of the Company made or threatened to be made a party to a proceeding, by reason of the former or present official of the person, against judgments, penalties, fines, settlements and reasonable expenses incurred by the person in connection with the proceeding if certain standards are met. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent of the Company where indemnification will be required or permitted. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. 17 The Company's Articles of Incorporation limit the liability of its directors to the fullest extent permitted by the Colorado Business Corporation Act. Specifically, directors of the Company will not be personally liable for monetary damages for breach of fiduciary duty as directors, except for (i) any breach of the duty of loyalty to the Company or its shareholders, (ii) acts or omissions not in good faith or that involved intentional misconduct or a knowing violation of law, (iii) dividends or other distributions of corporate assets that are in contravention of certain statutory or contractual restrictions, (iv) violations of certain laws, or (v) any transaction from which the director derives an improper personal benefit. Liability under federal securities law is not limited by the Articles of Incorporation. 18 ================================================================================ No dealer, salesman or any other person has been authorized to give any information or to make any representations other than those contained in this Prospectus in connection with the offer made by this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company. This Prospectus does not constitute an offer to sell or the solicitation of any offer to buy any security other than the securities offered by this Prospectus, nor does it constitute an offer to sell or a solicitation of any offer to buy the securities offered hereby by anyone in any jurisdiction in which such offer or solicitation is not authorized, or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that information contained herein is correct as of any time subsequent to the date hereof. --------------- TABLE OF CONTENTS Page ---- Available Information......................................................3 Incorporation of Certain Documents by Reference............................3 The Company................................................................4 Risk Factors...............................................................6 Use of Proceeds...........................................................12 Recent Developments.......................................................13 Selling Shareholders......................................................15 Plan of Distribution......................................................16 Description of Securities.................................................16 Legal Matters.............................................................17 Experts...................................................................17 Indemnification...........................................................17 ================================================================================ 797,500 SHARES OF COMMON STOCK 110,000 WARRANTS ONLINE SYSTEM SERVICES, INC. --------------- PROSPECTUS --------------- JUNE ___, 1998 ================================================================================ ================================================================================ PART II INFORMATION NOT REQUIRED TO BE IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses of the Company in connection with the sale and distribution of the Shares being registered pursuant to this Post Effective Amendment No. 1 to Form SB-2 Registration Statement. All of the amounts shown are estimates, except for the Securities and Exchange Commission registration fee and the Nasdaq listing fee. All of such expenses will be paid by the Company. Securities and Exchange Commission fee N/A Accounting fees and expenses $3,000.00 Legal fees and expenses $8,000.00 Printing, Mailing $5,000.00 Transfer Agent fees $1,000.00 Miscellaneous $3,000.00 ---------- TOTAL $20,000.00 ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS The Company's Articles of Incorporation provide that the Company shall indemnify, to the full extent permitted by Colorado law, any director, officer, employee or agent of the Company made or threatened to be made a party to a proceeding, by reason of the former or present official of the person, against judgments, penalties, fines, settlements and reasonable expenses incurred by the person in connection with the proceeding if certain standards are met. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent of the Company where indemnification will be required or permitted. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. The Company's Articles of Incorporation limit the liability of its directors to the fullest extent permitted by the Colorado Business Corporation Act. Specifically, directors of the Company will not be personally liable for monetary damages for breach of fiduciary duty as directors, except for (i) any breach of the duty of loyalty to the Company or its shareholders, (ii) acts or omissions not in good faith or that involved intentional misconduct or a knowing violation of law, (iii) dividends or other distributions of corporate assets that are in contravention of certain statutory or contractual restrictions, (iv) violations of certain laws, or (v) any transaction from which the director derives an improper personal benefit. Liability under federal securities law is not limited by the Articles. ITEM 16. EXHIBITS 3.1 Articles of Incorporation, as amended, of the Company* 3.2 Bylaws of the Company (1) 4.1 Specimen form of the Company's Common Stock certificate (2) 4.2 Form of Warrant Agreement dated May 23, 1996 between Corporate Stock Transfer and the Company, including form of Warrant (2) 4.3 Specimen of Warrant Certificate--See Exhibit A filed with Exhibit 4.2 5.1 Opinion of Counsel (1) 23.1 Consent of Arthur Andersen LLP* - ---------------------- * Filed herewith (1) Filed with the initial Registration Statement on Form SB-2, filed April 5, 1996, Commission File No. 333-3282-D. II-1 (2) Filed with Amendment No. 1 to the Registration Statement on Form SB-2, filed May 3,1996, Commission File No. 333-3282-D. ITEM 17. UNDERTAKINGS A. The undersigned registrant hereby undertakes: (1) to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) that, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (3) to remove from registration by means of a post-effective amendment any of the securities being registered that remain unsold at the termination of the offering. B. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the registrant as discussed above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this amendment to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Denver, State of Colorado, on June 22, 1998. ONLINE SYSTEM SERVICES, INC. By /s/ R. Steven Adams ------------------------------------ R. Steven Adams, President and Chief Executive Officer KNOW ALL BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints R. Steven Adams and Robert M. Geller, and each of them, his/her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him/her and in his/her name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full powers and authority to do and perform each and every act and things requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or their or his/her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this amendment to the registration statement has been signed below on the 22nd day of June, 1998, by the following persons in the capacities indicated: /s/ R. Steven Adams - ------------------------------------------------ R. Steven Adams, (President, Chief Executive Officer and a Director) /s/ Thomas S. Plunkett - ------------------------------------------------ Thomas Plunkett (Vice President, Chief Financial Officer and Chief Accounting Officer) /s/ Paul H. Spieker - ------------------------------------------------ Paul H. Spieker (Director) /s/ Robert M. Geller - ------------------------------------------------ Robert M. Geller (Director) /s/ Robert J. Lewis by RMG - ------------------------------------------------ Robert J. Lewis (Director) /s/ H. Robert Gill - ------------------------------------------------ H. Robert Gill (Director) /s/ Richard C. Jennewine - ------------------------------------------------ Richard C. Jennewine (Director) II-3 /s/ Charles P. Spickert - ------------------------------------------------ Charles P. Spickert (Director) /s/ William R. Cullen - ------------------------------------------------ William R. Cullen (Director) II-4 ONLINE SYSTEM SERVICES, INC. FORM S-3 INDEX TO EXHIBITS 3.1 Articles of Incorporation, as amended, of the Company* 3.2 Bylaws of the Company (1) 4.1 Specimen form of the Company's Common Stock certificate (2) 4.2 Form of Warrant Agreement dated May 23, 1996 between Corporate Stock Transfer and the Company, including form of Warrant (2) 4.3 Specimen of Warrant Certificate--See Exhibit A filed with Exhibit 4.2 5.1 Opinion of Counsel (1) 23.1 Consent of Arthur Andersen LLP* - -------------------- * Filed herewith (1) Filed with the initial Registration Statement on Form SB-2, filed April 5, 1996, Commission File No. 333-3282-D. (2) Filed with Amendment No. 1 to the Registration Statement on Form SB-2, filed May 3,1996, Commission File No. 333-3282-D. EX-3.1 2 ARTICLES OF INCORPORATION, AS AMENDED EXHIBIT 3.1 ARTICLES OF INCORPORATION, AS AMENDED ONLINE SYSTEM SERVICES, INC. ARTICLES OF INCORPORATION ------------------------- OF -- ONLINE SYSTEM SERVICES, INC. ---------------------------- The undersigned incorporator, being a natural person of the age of eighteen years or more hereby establishes a corporation pursuant to the statutes of the State of Colorado and adopts the following Articles of Incorporation: ARTICLE I --------- NAME ---- The name of the corporation shall be Online System Services, Inc. ARTICLE II ---------- PERIOD OF DURATION ------------------ This Corporation shall exist in perpetuity, from and after the date of filing these Articles of Incorporation with the Secretary of State of the State of Colorado unless dissolved according to law. ARTICLE III ----------- PURPOSES -------- The purpose for which this corporation is organized is to engage in any lawful act or activity for which corporations may be organized under the laws of the State of Colorado. In furtherance of the foregoing purposes, the Corporation shall have and may exercise all of the rights, powers and privileges now or hereafter conferred upon corporations organized under the laws of the State of Colorado. In addition, it may do everything necessary, suitable or proper for the accomplishment of any of its corporate purposes. ARTICLE IV ---------- CAPITAL ------- 1. Authorized Shares. The aggregate number of shares which this corporation shall have authority to issue is 10,000 shares, all of one class, Common Stock, having no par value. 2. Restrictions. The Corporation shall have the right to impose restrictions on the transfer of shares of the Corporation. 3. Dividends. The Board of Directors may from time to time distribute to shareholders in partial liquidation, or out of stated capital or capital surplus of the Corporation, a portion of its assets, in cash or property, subject to the limitations contained within the statutes of the State of Colorado. 4. Distribution in Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, and after paying or adequately providing for the payment of all its obligations, the remainder of the assets of the Corporation shall be distributed, either in cash or in kind, pro rata to the holders of the Common Stock. ARTICLE V --------- VOTING BY SHAREHOLDERS ---------------------- 1. Voting Rights; No Cumulative Voting. Each outstanding share of Common Stock is entitled to one vote and each fractional share of Common Stock is entitled to a corresponding fractional vote on each matter submitted to a vote of shareholders. Cumulative voting shall not be allowed in the election of directors of the Corporation and every shareholder entitled to vote at such election shall have the right to vote the number of shares owned by him for as many persons as there are directors to be elected, and for whose election he has a right to vote. 2. Denial of Preemptive Rights. No shareholder of the Corporation, whether now or hereafter authorized, shall have any preemptive or similar right to acquire any additional unissued or treasury shares of stock or securities of any class or rights, warrants or options to purchase stock or scrip or securities in any kind, including shares or securities convertible into shares or carrying stock purchase warrants or privileges. 3. Majority Vote. A quorum for the purpose of stockholder meetings will consist of a majority of the shares issued and outstanding and entitled to vote at the meeting. When a quorum is present, and when the statute requires a vote of two- thirds of the shares entitled to vote to take action, the affirmative vote of a majority of the shares issued and outstanding and entitled to vote on the subject matter shall be the act of the stockholders. ARTICLE VI ---------- BOARD OF DIRECTORS ------------------ The initial Board of Directors shall consist of three (3) directors, and the names and addresses of the persons who shall serve as directors until the first annual meeting of the shareholders or until their successors are elected and shall qualify are: NAME MAILING ADDRESS R. Steven Adams 1800 Glenarm Place, Suite 700 Denver, Colorado 80202 Craig A. Snapp 9063 S. Bermuda Run Circle Highlands Ranch, CO 80126 Thomas D. Smart 1700 Broadway, Suite 1800 Denver, CO 80290 The number of directors shall be prescribed by the Bylaws except that there need be only as many directors as there are shareholders in the event that the outstanding shares are held of record by fewer than two persons. ARTICLE VII ----------- RIGHT OF DIRECTORS TO CONTRACT WITH CORPORATION ----------------------------------------------- The following provisions are inserted for the management of the business and for the conduct of the affairs of the Corporation, and the same are in furtherance of and not in limitation of the powers conferred by law. 1. No contract or other transaction between this Corporation and one or more of its directors or any other corporation, firm, association, or entity in which one or more of its directors are directors or officers or are financially interested shall be either void or voidable solely because of such relationship or interest or solely because such directors are present at the meeting of the Board of Directors or a committee thereof which authorizes, approves, or ratifies such contract or transaction or solely because their votes are counted for such purpose if: (a) The material facts as to such relationship or interest and as to the contract or transaction are disclosed or are otherwise known to the Board of Directors or committee and the board or committee authorizes, approves, or ratifies such contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the directors are less than a quorum; or (b) The material facts of such relationship or interest and as to the contract of transaction are disclosed or otherwise known to the shareholders entitled to vote thereon and they authorize, approve, or ratify such contract or transaction by vote or written consent; or (c) The contract or transaction is fair and reasonable to the Corporation. 2. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or a committee thereof which authorizes, approves or ratifies such contract or transaction. ARTICLE VIII ------------ CORPORATE OPPORTUNITY --------------------- The officers, directors and other members of management of this Corporation shall be subject to the doctrine of "corporate opportunities" only insofar as it applies to business opportunities in which this Corporation has expressed an interest as determined from time to time by this Corporation's Board of Directors as evidenced by resolutions appearing in the Corporation's minutes. Once such areas of interest are delineated, all such business opportunities within such areas of interest which come to the attention of the officers, directors, and other members of management of this Corporation shall be offered first to the Corporation. In the event the Corporation declines to pursue any or all such business opportunities, the officers, directors and other members of management of this Corporation shall be free to engage in such areas of interest on their own and this doctrine shall not limit the right of any officer, director or other member of management of this Corporation (other than an officer, director, or member of management) from any duties which he may have to this Corporation. ARTICLE IX ---------- Indemnification of Officers, ---------------------------- Directors and Others -------------------- 1. To the full extent permitted by the Colorado Corporation Code, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a Director, Officer, employee, fiduciary or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, Officer, employee, fiduciary or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he conducted himself in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 2. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a Director, Officer, employee, fiduciary or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, Officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. 3. To the extent that a Director, Officer, employee, fiduciary or agent of the Corporation has been wholly successful on the merits or otherwise in defense of any action, suit or proceeding referred to in paragraphs 1 and 2 of this Article, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. 4. Any indemnification under paragraphs 1 and 2 of this Article (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the Director, Officer, employee, fiduciary or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs 1 and 2. Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of Directors who were not parties to such action, suit or pending, or (2) if such a quorum is not attainable, or, even if obtainable a quorum of disinterested Directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. 5. Expenses (including attorneys' fees) incurred in defending a civil or criminal action, suit or pending may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized in the manner provided in paragraph 4 of this Article upon receipt of an undertaking by or on behalf of the Director, Officer, employee, fiduciary or agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this section. 6. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a Director, Officer, employee, fiduciary or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this section. 7. In addition to the foregoing, the Corporation shall have the power to indemnify current or former directors, officers, employees and agents to the fullest extent provided by the laws of the State of Colorado. ARTICLE X --------- DIRECTOR LIABILITY ------------------ To the fullest extent permitted by the Colorado Corporation Code, as the same exists or may hereafter be amended, a director of this Corporation shall not be liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director. ARTICLE XI ---------- REGISTERED OFFICE AND REGISTERED AGENT -------------------------------------- The address of the initial registered office of the Corporation is 1800 Glenarm Place, Suite 700, Denver, Colorado 80202 and the name of the initial registered agent at such address is R. Steven Adams. Either the registered office or the registered agent may be changed in the manner permitted by law. ARTICLE XII ----------- INCORPORATOR ------------ The name and address of the incorporator is as follows: NAME ADDRESS Kim P. Castillo 1800 Glenarm Place, Suite 700 Denver, Colorado 80202 IN WITNESS WHEREOF, the above-named incorporator has signed these Articles of Incorporation this 22nd day of March, 1994. ----- ----- /s/ Kim P. Castillo ------------------- Kim P. Castillo STATE OF COLORADO ) )ss. COUNTY OF DENVER ) I, the undersigned, a Notary Public, hereby certify that on the 22nd ---- day of March, 1994, personally appeared before me, Kim P. Castillo, who being by ------ me first duly sworn, severally declared that she is the person who signed the foregoing document as incorporator, and the statements therein contained are true. WITNESS my hand and official seal. /s/ Colleen K. Overocker ------------------------ Notary Public My Commission Expires: 05/17/1995 ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION OF ONLINE SYSTEM SERVICES, INC. The undersigned, R. Steven Adams, President of Online System Services, Inc., a Colorado corporation (the "Corporation"), DOES HEREBY CERTIFY that the number of votes cast for the following amendment by each voting group entitled to vote separately on the amendment was sufficient for approval by that group, in that the sole shareholder of the Corporation approved and adopted the amendment in all respects: ARTICLE IV of the Articles of Incorporation of the Corporation is amended ---------- and replaced in its entirety to read as follows: ARTICLE IV ---------- CAPITAL ------- 1. Authorized Shares. The aggregate number of shares that the Corporation has authority to issue is 15,000,000. The shares are classified in two classes, consisting of 10,000,000 shares of Common Stock , no par value, and 5,000,000 shares of Preferred Stock, with such par value as the Board of Directors of the Corporation may designate. The Board of Directors of the Corporation is authorized to establish one or more series of Preferred Stock, setting forth the designation of each such series, and fixing the preferences, limitations and relative rights of each such series of Preferred Stock. 2. Transfer Restrictions. The Corporation shall have the right to impose restrictions on the transfer of shares of the Corporation. 3. Dividends. The Board of Directors of the Corporation may from time to time distribute to shareholders in partial liquidation, or out of stated capital or capital surplus of the Corporation, a portion of its assets, in cash or property, subject to the limitations contained within the statutes of the State of Colorado. 4. Distributions in Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, and after paying or adequately providing for the payment of all its obligations, the remainder of the assets of the Corporation shall be distributed, either in cash or in kind, and subject to any preferences of any series of Preferred Stock, to the shareholders of the Corporation. I FURTHER CERTIFY that the foregoing amendment was approved and adopted by the Corporation's sole shareholder effective as of the 17th day of March, 1995. IN WITNESS WHEREOF, the undersigned has executed these Articles of Amendment this 31st day of July, 1995. ---- /s/ R. Steven Adams ------------------- R. Steven Adams, President ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION OF ONLINE SYSTEM SERVICES, INC. The undersigned, Thomas S. Plunkett, Chief Financial Officer of Online System Services, Inc., a Colorado corporation (the "Corporation"), DOES HEREBY CERTIFY that pursuant to actions taken by the Board of Directors on December 16, 1997 in accordance with Sections 7-106-101, 7-106-102 and 7-110-102 of the Colorado Business Corporation Act, the following amendment was duly adopted by the Board of Directors without shareholder approval as permitted by Section 7- 106-102(4) of the Colorado Business Corporation Act: ARTICLE IV of the Articles of Incorporation of the Corporation, as amended, ---------- is further amended by adding a new Section 5, the text of which is set forth on Exhibit A attached hereto. IN WITNESS WHEREOF, the undersigned has executed these Articles of Amendment this 30th day of December, 1997. /s/ Thomas S. Plunkett ---------------------- Thomas S. Plunkett, Chief Financial Officer EXHIBIT A 5. Designation of 10% Preferred Stock. The Corporation shall establish and reserve for issuance from its 5,000,000 authorized shares of Preferred Stock a class of preferred stock consisting of 500,000 shares to be known as the 10% Preferred Stock (the "10% Preferred Stock"). The 10% Preferred Stock shall have a stated value of $10.00 per share. The preferences, limitations and relative rights of the 10% Preferred Stock shall be as provided in this Section 5. A. Voting Rights. (1) Each outstanding share of the 10% Preferred Stock is entitled to one vote on each matter submitted to a vote of shareholders. The holders of the 10% Preferred Stock shall be entitled to vote on all matters voted upon by the holders of the Corporation's Common Stock. Unless otherwise required by law, the holders of the Common Stock and the holders of the 10% Preferred Stock shall vote as a single class on all matters submitted to a vote of shareholders. (2) The holders of the 10% Preferred Stock shall not be entitled to any rights of cumulative voting with respect to their shares. B. Preemptive Rights. No holder of the 10% Preferred Stock shall have any preemptive or similar right to acquire any additional unissued or treasury shares of stock or securities of any class or rights, warrants or options to purchase stock or scrip or securities in any kind, including shares or securities convertible into shares or carrying stock purchase warrants or privileges. C. Dividends. (1) Dividends shall accrue on the 10% Preferred Stock at the rate of ten percent (10%) per annum on the stated value of the 10% Preferred Stock and shall be paid quarterly on the first of each January, April, July and October, beginning July 1, 1998, to the record holder thereof on the 15th of the previous month, subject to the limitations contained within the statutes of the State of Colorado. Dividends not paid in any quarter shall accumulate until paid, with interest on the unpaid balance, if any, accruing simple interest at the rate stated above. Subject to the foregoing limitations, dividends may be paid out of any funds legally available for such purpose. (2) Dividends on the 10% Preferred Stock shall be declared and paid before dividends of any kind may be declared and paid on the Common Stock or any inferior class or series of stock and before distribution or any liquidation or distribution of any kind may be made upon the issued and outstanding Common Stock or any inferior class of stock. (3) Upon any redemption or conversion of the 10% Preferred Stock pursuant to paragraphs G and H below, the Corporation shall pay all accrued but unpaid dividends on the 10% Preferred Stock called for redemption or converted, as the case may be. The Corporation may pay such accrued but unpaid dividends either (i) in cash or (ii) by issuing shares of Common Stock at a price per share equal to the lesser of (a) $10.00 or (b) if a redemption or a conversion occurring with respect to shares of the 10% Preferred Stock for which the Corporation has given a Notice of Redemption (as that term is defined in subparagraph G(2), below), the Average Per Share Closing Bid Price (as defined below) for the five trading days immediately preceding the date on which the Notice of Redemption was first given to the holders of the 10% Preferred Stock called for redemption, or, if a conversion occurring with respect to shares of the 10% Preferred Stock for which the Corporation has not given a Notice of Redemption, the Average Per Share Closing Bid Price for the five trading days immediately preceding the date on which the Conversion Notice (as that term is defined in subparagraph H(3), below) was first given to the Corporation. (4) Upon payment by the Corporation of dividends on the basis described in subparagraphs C(1)-C(3), the holders of the 10% Preferred Stock shall have no further right to dividends and shall not participate in any manner in dividends declared and paid or other distributions on the Common Stock or any inferior class or series of stock. D. Liquidation Preference. In the event of the liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, the holders of the 10% Preferred Stock shall be entitled to receive, after payment by the Corporation of its debts and liabilities, the stated value of all shares of the 10% Preferred Stock in cash plus any all accrued but unpaid dividends out of the assets of the Corporation before any payment shall be made or any assets distributed to the holders of the Common Stock or any other inferior class or series of stock. If sufficient assets are not available to pay all holders of the 10% Preferred Stock in full, the available assets shall be distributed to the holders of the 10% Preferred Stock on a pro rata basis. Except as provided in this paragraph D, the holders of the 10% Preferred Stock shall not be entitled to receive any other payments from the Corporation in the event of the liquidation, dissolution or winding up of the affairs of the Corporation. E. Other Securities, Obligations. (1) Subject to any limitations contained in these Articles of Incorporation, the Board of Directors of the Corporation reserves the right to establish additional classes and/or series of capital stock of the Corporation and to designate the preferences, limitations and relative rights of any such classes and/or series; provided, however, that no such class and/or series may have preferences, limitations and relative rights which are superior to or senior to the preferences, limitations and relative rights granted to the holders of the 10% Preferred Stock. (2) At any time during which any shares of the 10% Preferred Stock are outstanding, the Corporation shall not incur any obligation or liability other than trade payables and other short-term indebtedness incurred in the ordinary course of business that is superior to or senior to the 10% Preferred Stock in any respects, including liquidation preferences. F. Capital Reorganization. If the Corporation shall at any time hereafter subdivide or combine its outstanding shares of Common Stock, declare a dividend payable in Common Stock, or in case of any capital reorganization or reclassification of the shares of Common Stock of the Corporation, the number of shares and stated value of the 10% Preferred Stock shall be adjusted appropriately to allow the holders of the 10% Preferred Stock, as nearly as reasonably possible, to maintain (i) the aggregate stated value of their 10% Preferred Stock and (ii) their pro rata interest in the Corporation and in the Common Stock upon conversion of the 10% Preferred Stock, that they had prior to any such subdivision, combination, stock dividend, reorganization or reclassification. G. Redemption. (1) The 10% Preferred Stock may be redeemed by the Corporation, in whole or in part, at any time for $10.00 per share (the "Redemption Price"). It is the Corporation's intent to use its best efforts to raise sufficient capital to both fund its operations and to permit it to redeem the 10% Preferred Stock as soon as is reasonably possible. In addition, if the Corporation completes a public offering of its securities that raises net proceeds of at least $5,000,000 (the "Public Offering") within nine months from the date on which the initial closing of the offering of the 10% Preferred Stock occurs (the "Closing Date"), then the Corporation shall redeem all of the outstanding 10% Preferred Stock. (2) The Corporation shall give not more than sixty (60) nor less than thirty (30) days notice (the "Notice of Redemption") of the date fixed for any redemption (as fixed, the "Redemption Date") of the 10% Preferred Stock by mailing the Notice of Redemption to the record holders of the 10% Preferred Stock to such holder's address as it appears on the records of the Corporation; provided, however, that the Corporation shall not be required to give notice of any redemption of the 10% Preferred Stock that occurs within nine months from the Closing Date. In the case of a partial redemption of the 10% Preferred Stock, the shares to be redeemed shall be selected in any manner the Corporation may determine. The Notice of Redemption shall be deemed given when it is deposited in the United States mail with sufficient postage affixed or when it is delivered to the record holder at such holder's address as it appears on the records of the Corporation. (3) On the Redemption Date, all rights of the holders of the 10% Preferred Stock called for redemption shall cease and terminate with respect to such shares except (i) the right to receive the Redemption Price upon surrender of the certificates representing the shares of the 10% Preferred Stock called for redemption and (ii) the right to receive payment of all dividends with respect to the shares of 10% Preferred Stock called for redemption which are accrued but unpaid on the Redemption Date. H. Conversion. (1) If the 10% Preferred Stock is not redeemed within nine months from the Closing Date, each share of the outstanding 10% Preferred Stock shall become convertible, at the election of the holder thereof (the "Conversion Right"), into the number of shares of Common Stock of the Corporation equal to $10.00 divided by the lesser of (i) $10.00 or (ii) 80% of the Average Per Share Closing Bid Price of the Corporation's Common Stock as calculated pursuant to the next sentence The "Average Per Share Closing Bid Price" shall be (a) if the conversion occurs with respect to shares of the 10% Preferred Stock for which the Corporation has given a Notice of Redemption, the average per share closing bid price for the Corporation's Common Stock for the five trading days immediately preceding the date on which the Notice of Redemption was first given to the holders of the 10% Preferred Stock called for redemption or (b) if the conversion occurs with respect to shares of the 10% Preferred Stock for which the Corporation has not given a Notice of Redemption, the average closing bid price for the five trading days immediately preceding the date on which the holder gives the Conversion Notice (as that term is defined in subparagraph H(3), below) to the Corporation. The Closing Bid Price for the Common Stock at any date shall be (i) the Closing Bid Price of the Common Stock as reported in The Wall Street Journal (or, if not so reported, as otherwise reported by The Nasdaq Stock Market or, (ii) in the event that the Common Stock is listed on a stock exchange or on the Nasdaq National Market (or other national market), the Closing Bid Price shall be the closing price on the exchange or the Nasdaq National Market (or other national market), as the case may be, as reported in The Wall Street Journal (or, if not so reported, as otherwise reported by the stock exchange, Nasdaq or other national market). In the event that there is no reported Closing Bid Price or sale price, as the case may be, for a given day, the Closing Bid Price or sale price, as the case may be, for that day shall be deemed to be the Closing Bid Price or sale price, as the case may be, for the first day preceding such day for which there was a reported Closing Bid Price or sale price, as the case may be. (2) The Conversion Right shall expire and terminate five (5) days prior to the Redemption Date. In the case of a partial redemption of the 10% Preferred Stock, the Conversion Right shall so expire and terminate only with respect to the shares of the 10% Preferred Stock called for redemption. (3) In order to exercise the Conversion Right, the holder of the 10% Preferred Stock to be converted shall give written notice (the "Conversion Notice") to the Corporation at its principal office or, at the option of the Corporation, at the offices of a conversion agent which the Corporation may designate from time to time by giving written notice of such designation to the holders of the 10% Preferred Stock, that the holder elects to convert such shares. The Conversion Notice shall be accompanied by the certificate or certificates representing the shares of the 10% Preferred Stock to be converted, duly endorsed to the Corporation. The Conversion Notice shall be deemed given when it is deposited in the United States mail with sufficient postage affixed or when it is delivered to the Corporation at its principal office (or to the offices of such conversion agent, if one be designated). (4) As soon as practicable after the receipt of the Conversion Notice and the certificates representing the shares of the 10% Preferred Stock to be converted, the Corporation shall issue and shall deliver to the record holder of the shares so surrendered for conversion by mail to the address of such record holder as it appears on the records of the Corporation, a certificate or certificates for the number of shares of Common Stock issuable upon conversion of the shares of the 10% Preferred Stock and a residual certificate for shares of the 10% Preferred Stock, if any, not converted. Such conversion shall be deemed to have been effected on the date on which the Corporation (or the conversion agent, if one be designated), shall have received the Conversion Notice and the certificate or certificates representing shares of the 10% Preferred Stock to be converted, and the record holder shall be deemed to have become on such date the holder of record of the shares of Common Stock to be received upon conversion; provided, however, that any such surrender on any date when the stock transfer books of the Corporation shall be closed in accordance with the bylaws of the Corporation shall not be deemed to constitute the record holder as the holder of shares of Common Stock to be received upon conversion for any purpose until the close of business on the day succeeding the day on which such stock transfer books shall become open. (5) The Corporation shall not be required to issue fractional shares of Common Stock upon conversion of shares of the 10% Preferred Stock. If any fractional interest in a share of Common Stock would be deliverable upon conversion of any shares of the 10% Preferred Stock, the Corporation shall make an adjustment therefor in cash at the current market value thereof, computed on the basis determined by the Corporation in its sole discretion. ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION OF ONLINE SYSTEM SERVICES, INC. The undersigned, Thomas S. Plunkett, Chief Financial Officer of Online System Services, Inc., a Colorado corporation (the "Corporation"), DOES HEREBY CERTIFY that pursuant to actions taken by the Board of Directors on May 7, 1998 in accordance with Sections 7-106-101, 7-106-102 and 7-110-102 of the Colorado Business Corporation Act, the following amendment was duly adopted by the Board of Directors without shareholder approval as permitted by Section 7-106-102(4) of the Colorado Business Corporation Act: ARTICLE IV of the Articles of Incorporation of the Corporation, as amended, is further amended by adding a new Section 6, the text of which is set forth on Exhibit A attached hereto. IN WITNESS WHEREOF, the undersigned has executed these Articles of Amendment this 22nd day of May, 1998. /s/ Thomas S. Plunkett ---------------------- Thomas S. Plunkett Chief Financial Officer EXHIBIT A 6. Designation of Preferred Stock. The Corporation shall establish and reserve for issuance from its 5,000,000 authorized shares of Preferred Stock a class of convertible preferred stock consisting of 3,000 shares to be designated as the 5% Preferred Stock (the "5% Preferred Stock"). The 5% Preferred Stock shall have a stated value of the Liquidation Preference (as hereinafter defined). Except as otherwise expressly stated in this Section 6, all shares of the 5% Preferred Stock shall be identical to the shares of 10% Preferred Stock, and the holders of 5% Preferred Stock shall be entitled to the same preferences, limitations and relative rights as the holders of 10% Preferred Stock. A. Dividends. (1) Holders of the 5% Preferred Stock shall be entitled to receive, out of funds legally available therefor, dividends at a rate equal to 5% (the "Dividend Rate") of the Liquidation Preference per share per annum (subject to appropriate adjustments in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares), and no more, payable in accordance with the provisions of this Section 6. Notwithstanding the foregoing sentence of this Subsection A(1), in the event the Registration Statement (as hereinafter defined) is not declared effective by the Securities and Exchange Commission (the "Commission") within 90 days following the Initial Closing Date (as defined in that certain Securities Purchase Agreement (the "Securities Purchase Agreement"), dated as of May 22, 1998, among the Corporation, the purchasers named therein and West End Capital LLC), then the Dividend Rate shall increase to 18% until the Registration Statement is declared effective; provided, however, that if the Commission conducts a review of the Registration Statement, the Dividend Rate shall not increase unless it is not declared effective by the Commission within 120 days following the Initial Closing Date, at which time the Dividend Rate shall increase to 18% until the Registration Statement is declared effective. (2) At the election of the Corporation, each dividend on 5% Preferred Stock shall be paid either in shares of Common Stock or in cash on the Delivery Date (as defined in Subsection H(2)(a) of this Section 6) with respect to any shares of 5% Preferred Stock which are the subject of a Notice of Conversion (as defined in Subsection H(2)(a) of this Section 6). Dividends paid in shares of Common Stock shall be paid (based on an assumed value of $1,000 per share) in full shares only, with a cash payment equal to the value of any fractional shares. Each dividend paid in cash shall be mailed to the holders of record of the 5% Preferred Stock as their names and addresses appear on the share register of the Corporation or at the office of the transfer agent on the corresponding dividend payment date. Holders of 5% Preferred Stock will receive written notification from the Corporation or the transfer agent if a dividend is paid in kind, which notification will specify the number of shares of Common Stock paid as a dividend and the recipient's aggregate holdings of Common Stock as of that dividend payment date and after giving effect to the dividend. All holders of shares of Common Stock issued as dividends shall be entitled to all of the rights and benefits relating to shares of Common Stock as set forth in the Corporation's Articles of Incorporation, as amended, and By-laws. (3) Holders of the 5% Preferred Stock shall be entitled to payment of any dividends in preference and priority to any payment of any cash dividend on Common Stock or any other class or series of capital stock of the Corporation other than any other class or series of stock ranking senior ("Senior Preferred Stock") to the 5% Preferred Stock in respect of dividends, when and as declared by the Board of Directors of the Corporation. The rights of the holders of 5% Preferred Stock and 10% Preferred Stock to receive any dividends shall be equal in preference and priority. Dividends on the 5% Preferred Stock shall accrue with respect to each share of the 5% Preferred Stock from the date on which such share is issued and outstanding and thereafter shall be deemed to accrue from day to day whether or not earned or declared and whether or not there exists profits, surplus or other funds legally available for the payment of dividends, and shall be cumulative so that if such dividends on the 5% Preferred Stock shall not have been paid, or declared and set apart for payment, the deficiency shall be fully paid or declared and set apart for payment before any dividend shall be paid or declared or set apart for any Common Stock or other class or series of capital stock ranking junior to the 5% Preferred Stock (such stock being collectively referred to herein as the "Junior Stock") and before any purchase or acquisition of any Junior Stock is made by the Corporation, except the repurchase of Junior Stock from employees of the Corporation upon termination of employment. At the earlier of: (1) the redemption or conversion of the 5% Preferred Stock or (2) the liquidation of the Corporation, any accrued but undeclared dividends shall be paid to the holders of record of outstanding shares of the 5% Preferred Stock in accordance with the provisions of this Section 6. No accumulation of dividends on the 5% Preferred Stock shall bear interest. B. Liquidation, Dissolution or Winding Up. (1) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of the 5% Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, after and subject to the payment in full of all amounts required to be distributed to the holders of any Senior Preferred Stock ranking on liquidation prior and in preference to the Preferred Stock, but before any payment shall be made to the holders of Junior Stock by reason of their ownership thereof, an amount equal to $1,000 per share of 5% Preferred Stock (the "Liquidation Preference") plus any accrued but unpaid dividends (whether or not declared). The rights of the holders of 5% Preferred Stock and 10% Preferred Stock to receive any such distributions shall be equal in preference and priority. If upon any such liquidation, dissolution or winding up of the Corporation the remaining assets of the Corporation available for distribution to its shareholders shall be insufficient to pay the holders of shares of the 5% Preferred Stock the full amount to which they shall be entitled, the holders of shares of the 5% Preferred Stock shall share ratably in any distribution of the remaining assets and funds of the Corporation in proportion to the respective amounts which would otherwise be payable in respect of the -3- shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. (2) After the payment of all preferential amounts required to be paid to the holders of the 5% Preferred Stock and the 10% Preferred Stock upon the dissolution, liquidation, or winding up of the Corporation, all of the remaining assets and funds of the Corporation available for distribution to its shareholders shall be distributed ratably among the holders of the 5% Preferred Stock and the Junior Stock, with each share of 5% Preferred Stock being deemed, for such purpose, to be equal to the number of shares of Common Stock, including fractions of a share, into which such share of 5% Preferred Stock is convertible immediately prior to the close of business on the business day fixed for such distribution. C. Voting. (1) Each holder of outstanding shares of 5% Preferred Stock shall be entitled, at each meeting of shareholders of the Corporation (and with respect to written consents of shareholders in lieu of meetings) with respect to any and all matters presented to the shareholders of the Corporation for their action or consideration, to the number of votes equal to the number of whole shares of Common Stock into which the shares of 5% Preferred Stock held by such holder are convertible (as adjusted from time to time pursuant to Subsection H hereof) immediately after the close of business on the record date fixed for such meeting or the effective date of such written consent. Except as provided by law, by the provisions of Section J below, or by the provisions establishing any other series of preferred stock, holders of 5% Preferred Stock shall vote together with the holders Common Stock as a single class. (2) The holders of the 5% Preferred Stock shall not be entitled to any rights of cumulative voting with respect to their shares. D. Preemptive Rights. No holder of Preferred Stock shall have any preemptive or similar right to acquire any additional unissued or treasury shares of stock or securities of any class or rights, warrants or options to purchase stock or scrip or securities in any kind, including shares or securities convertible into shares or carrying stock purchase warrants or privileges. E. Other Securities. Subject to any limitations contained in these Articles of Incorporation, the Board of Directors of the Corporation reserves the right to establish additional classes and/or series of capital stock of the Corporation and to designate the preferences, limitations and relative rights of any such classes and/or series; provided, however, that no such class and/or series may have preferences, limitations and relative rights which are superior to or senior to the preferences, limitations and relative rights granted to the holders of the 5% Preferred Stock. F. Capital Reorganization. If the Corporation shall at any time hereafter subdivide or combine its outstanding shares of Common Stock, declare a dividend payable in Common Stock, or in case of any capital reorganization or reclassification of the shares of Common Stock of the Corporation, the number of shares of the 5% -4- Preferred Stock and the stated value of the 5% Preferred Stock shall be adjusted appropriately to allow the holders of the 5% Preferred Stock, as nearly as reasonably possible, to maintain (i) the aggregate stated value of the 5% Preferred Stock and (ii) their pro rata interest in the Corporation and in the Common Stock upon conversion of the 5% Preferred Stock, that each holder had prior to any such subdivision, combination, stock dividend, reorganization or reclassification. G. Optional Redemption (1) At any time within the 120 days following the Initial Closing Date, the Corporation may, at its option, redeem all or any portion of the shares of 5% Preferred Stock then outstanding upon not less than ten (10) days' notice at a redemption price per share equal to (A) the quotient of (i) the Liquidation Preference per share of 5% Preferred Stock plus all accrued but unpaid dividends on such shares of 5% Preferred Stock and (ii) the Conversion Price as if the 5% Preferred Stock has been converted on the 5% Preferred Stock Redemption Date (as hereinafter defined) multiplied by (B) the average Closing Bid Price (as hereinafter defined) of shares of Common Stock for the five (5) trading days immediately preceding the 5% Preferred Stock Redemption Date. Notwithstanding the foregoing, a redemption shall not occur pursuant to this Subsection G(1) with respect to any 5% Preferred Stock for which a holder has previously submitted a Notice of Conversion pursuant to Subsection H of this Section 6. For purposes of this Section 6, the term "Closing Bid Price" means, for any security as of any date, the closing bid price on the principal securities exchange or trading market where the Common Stock is listed or traded as reported by Bloomberg, L.P. ("Bloomberg") or, if applicable, the closing bid price of the Common Stock in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price is reported for the Common Stock by Bloomberg, then the average of the bid prices of any market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price of the Common Stock cannot be calculated on such date on any of the foregoing bases, the Closing Bid Price of the Common Stock on such date shall be the fair market value as mutually determined by the Corporation and holders of a majority of the outstanding shares of 5% Preferred Stock being converted for which the calculation of the Closing Bid Price is required in order to determine the Conversion Price of such shares. "Trading day" shall mean any day on which the Corporation's Common Stock is traded for any period on the principal securities exchange or other securities market on which the Common Stock is then being traded. (2) Upon receipt of a notice given pursuant to Subsection G(1), each holder of 5% Preferred Stock shall accept its ratable portion (based on its holdings of 5% Preferred Stock as compared to the aggregate number of shares of 5% Preferred Stock then outstanding) of such offer by tendering such holder's shares to the Corporation for redemption, at an address to be set forth in such notice, at any time prior to 5:00 p.m. New York time on the 11th day following the mailing of such notice (the "5% Preferred Stock Redemption Date"). Upon receipt of a notice given pursuant to Subsection G(1) of this Section 6, the 5% Preferred Stock which is the subject of such notice may not thereafter be -5- converted in accordance with Subsection H(1)(a) of this Section 6, unless a Notice of Conversion relating to such 5% Preferred Stock had previously been submitted. Within three (3) business days after the 5% Preferred Stock Redemption Date, the Corporation shall remit the applicable redemption price, calculated pursuant to Subsection G(1) of this Section 6, by wire transfer to each holder of the 5% Preferred Stock to the most recent address of each holder as set forth on the records of the Corporation or its transfer agent. (3) Any shares of 5% Preferred Stock redeemed pursuant to this Subsection G or otherwise acquired by the Corporation in any manner whatsoever shall be canceled and shall not under any circumstances be reissued. The Corporation may from time to time take such appropriate corporate action as may be necessary to reduce accordingly the number of authorized shares of the Corporation's capital stock. H. Conversion. (1) Subject to Subsection G(2) of this Section 6, the holders of the 5% Preferred Stock shall have conversion rights as follows (the "5% Preferred Stock Conversion Rights"): (a) Each share of 5% Preferred Stock shall be convertible, at the option of the holder thereof, at any time and from time to time, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $1,000, plus the amount of any accrued and unpaid dividends the Corporation elects to pay in Common Stock, by the Conversion Price in effect at the time of conversion. The Conversion Price at which shares of Common Stock shall be deliverable upon conversion of 5% Preferred Stock without the payment of additional consideration by the holder thereof (the "Conversion Price") shall be the lower of (i) $16.33 or (ii) 86% of the average Closing Bid Price of the shares of Common Stock for the five (5) trading days immediately preceding the 5% Preferred Stock Conversion Date (as hereinafter defined). (b) At any time that the number of shares of Common Stock issued (A) upon conversion of the 5% Preferred Stock and (B) in lieu of dividend payments on the 5% Preferred Stock, shall equal 574,281 (a "Common Stock Redemption Event"), the Corporation shall (x) redeem, at a price determined in accordance with Subsection G(1) of this Section 6, all of the outstanding 5% Preferred Stock in accordance with the provisions of Subsection G(2) or (y) call a special meeting of its shareholders for the purpose of approving the transactions contemplated by the Securities Purchase Agreement, including the issuance of the 5% Preferred Stock on the terms set forth therein, together with any other approvals that shall be required so as to cause the transactions contemplated by the Securities Purchase Agreement to remain in compliance with the Rules and Regulations of The Nasdaq Stock Market (including Rule 4320 of Nasdaq's Non-Qualitative Designation Criteria in connection with conversions of 5% Preferred Stock; such approvals -6- are referred to herein as the "Required Approvals"). The Corporation shall determine within five (5) business days following the receipt of a Notice of Conversion which of such actions it shall take, and shall promptly furnish notice to each of the holders of 5% Preferred Stock as to such determination, including, if applicable, a notice of redemption. In no event shall the Corporation issue shares of Common Stock upon conversion of, or in lieu of interest payments on, the 5% Preferred Stock, after the occurrence of a Common Stock Redemption Event until the Required Approvals, if any, are obtained. (c) If the Corporation elects to call a special meeting of its shareholders pursuant to Subsection H(1)(b) of this Section 6 to obtain the Required Approvals, the Corporation shall use its best efforts to obtain such Required Approvals within one hundred twenty (120) days of the Initial Closing Date (such one hundred twenty (120) day period is referred to herein as an "Approval Period"). If the Corporation does not obtain the Required Approvals within the Approval Period and the Corporation receives a Notice of Conversion after the termination of the Approval Period, the Corporation must redeem, in accordance with this Subsection H of this Section 6, any shares of 5% Preferred Stock outstanding after the Corporation has issued in excess of 574,281 shares of Common Stock in connection with conversions of the 5% Preferred Stock. (d) If the Corporation elects, pursuant to this Subsection H, to redeem the 5% Preferred Stock on the occurrence of a Common Stock Redemption Event, it shall redeem such 5% Preferred Stock at the price determined in accordance with Subsection G(1) of this Section 6. If the Corporation shall have elected, pursuant to this Subsection H(1), to obtain the Required Approvals but shall not have done so by the later of the occurrence of the Common Stock Redemption Event or the expiration of the Approval Period, it shall furnish a redemption notice to the Purchasers within three (3) business days after the expiration of the Approval Period. (2) The 5% Preferred Stock Conversion Rights shall be exercised as follows: (a) The Corporation will permit each holder of 5% Preferred Stock to exercise its right to convert the 5% Preferred Stock by faxing an executed and completed notice of conversion (the "Notice of Conversion") to the Corporation, and delivering within three (3) business days thereafter, the original Notice of Conversion (and the certificates representing the related shares of 5% Preferred Stock) to the Corporation by hand delivery or by express courier, duly endorsed. Each date on which a Notice of Conversion is faxed to and received in accordance with the provisions hereof shall be deemed a "5% Preferred Stock Conversion Date." The Corporation will transmit the certificates representing the Common Stock issuable upon conversion of the 5% Preferred Stock (together with certificates representing the related shares -7- of 5% Preferred Stock not so converted and, if applicable, a check representing any fraction of a share not converted) to such holder via express courier as soon as practicable, but in all events no later than the later to occur of (the "Delivery Date") (i) three (3) business days after the 5% Preferred Stock Conversion Date, or (ii) three (3) business days after receipt by the Corporation of the original Notice of Conversion (and the certificates representing the related shares of 5% Preferred Stock). For purposes of this Section 6, such conversion of the 5% Preferred Stock shall be deemed to have been made immediately prior to the close of business on the 5% Preferred Stock Conversion Date. (b) In lieu of delivering physical certificates representing the Common Stock issuable upon the conversion of the 5% Preferred Stock, provided that the Corporation's transfer agent is participating in the Depository Trust Corporation ("DTC") Fast Automated Securities Transfer program, on the written request of a holder of 5% Preferred Stock who shall have previously instructed such holder's prime broker to confirm such request to the Corporation's transfer agent, the Corporation shall use commercially reasonable efforts to cause its transfer agent to electronically transmit such Common Stock to such holder by crediting the account of the holder's prime broker with DTC through its Deposit Withdrawal Agent Commission system no later than the applicable Delivery Date. (c) The Corporation will at all times have authorized and reserved for the purpose of issuance a sufficient number of shares of Common Stock to provide for the conversion of the 5% Preferred Stock. The Corporation will use its best efforts at all times to maintain a number of shares of Common Stock so reserved for issuance that is no less than one and one-half (1.5) times the number that is then actually issuable upon the conversion of the 5% Preferred Stock, the exercise of the Warrants issued pursuant to the Securities Purchase Agreement and the maximum number of shares of Additional Common Stock (as defined in the Securities Purchase Agreement) which may be issued in accordance with the Securities Purchase Agreement. Before taking any action which would cause an adjustment reducing the Conversion Price below the established par value of the shares of Common Stock issuable upon conversion of the 5% Preferred Stock, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock at such adjusted Conversion Price. (d) All shares of 5% Preferred Stock, which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding, and all rights with respect to such shares, including the rights, if any, to receive dividends, notices and to vote, shall immediately cease and terminate on the 5% Preferred Stock Conversion Date, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor. Any shares of 5% Preferred Stock -8- so converted shall be retired and canceled and shall not be reissued, and the Corporation may from time to time take such appropriate action as may be necessary to reduce the number of shares of authorized 5% Preferred Stock accordingly. (3) In the event of a liquidation of the Corporation, the 5% Preferred Stock Conversion Rights shall terminate at the close of business on the first full day preceding the date fixed for the payment of any amounts distributable on liquidation to the holders of the 5% Preferred Stock. (4) If the conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act of 1933, as amended, the conversion may, at the option of any holder tendering 5% Preferred Stock for conversion, be conditioned upon the closing with the underwriter of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of the 5% Preferred Stock shall not be deemed to have converted such 5% Preferred Stock until immediately prior to the closing of the sale of securities. (5) At no time shall any holder of the 5% Preferred Stock convert such amount of 5% Preferred Stock as shall result in such Purchaser's ownership, after such conversion, exceeding 9.9% of the Corporation's outstanding Common Stock. (6) No fractional shares of Common Stock shall be issued upon conversion of the Preferred Stock. In lieu of fractional shares, the Corporation shall pay cash equal to such fraction multiplied by the then effective and applicable Conversion Price. (7) The Corporation will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Subsection H by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Subsection H and in the taking of all such action as may be necessary or appropriate in order to protect the 5% Preferred Stock Conversion Rights of the holders of the 5% Preferred Stock against impairment. (8) In the event (a) that the Corporation declares a dividend (or any other distribution) on its Common Stock payable in Common Stock or other securities of the Corporation, (b) that the Corporation subdivides or combines its outstanding shares of Common Stock, (c) of any reclassification of the Common Stock of the Corporation (other than a subdivision or combination of its outstanding shares of Common Stock or a stock dividend or stock distribution thereon), (d) of any consolidation or merger of the Corporation into or with another corporation, (e) of the sale of all or substantially all of the assets of the Corporation, or (f) of the involuntary or voluntary dissolution, liquidation or winding up of the Corporation, then the Corporation shall cause to be filed at its principal office or at the office of the transfer agent of the Preferred Stock, and -9- shall cause to be mailed to each holder of the Preferred Stock at their last address as shown on the records of the Corporation or such transfer agent, at least ten (10) days prior to the record date specified in (i) below or twenty (20) days before the date specified in (ii) below, a notice stating (i) the record date of such dividend, distribution, subdivision or combination, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, subdivision or combination are to be determined, or (ii) the date on which such reclassification, consolidation, merger, sale, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, dissolution or winding up. I. Sinking Fund. There shall be no sinking fund for the payment of dividends, or liquidation preferences on the 5% Preferred Stock or the redemption of any shares thereof. J. Amendment. This Section 6 constitutes an agreement between the Corporation and the holders of the 5% Preferred Stock. The Corporation shall not amend this Section 6 or alter or repeal the preferences, rights, powers or other terms of the 5% Preferred Stock so as to affect adversely the 5% Preferred Stock, without the written consent or affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the then outstanding shares of 5% Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class. -10- EX-23.1 3 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Registration Statement on Form S-3 (Registration Statement File No. 333-3282-D) of our report dated February 27, 1998 (except with respect to the matter discussed in Note 12 as to which the date is March 12, 1998), included in Online System Services, Inc. Form 10-KSB for the year ended December 31, 1997 and to all references to our Firm included in this Registration Statement. /s/ Arthur Andersen LLP Denver, Colorado, June 22, 1998. -----END PRIVACY-ENHANCED MESSAGE-----