-----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, G0cjbuk0PllMT2loFi5z3+WRBz91pTwTBCOdBCXZWOVsvXYBjppabDxBLi9ytHEQ uhPWAMF6v4f+NTdnoc9nNA== 0001045969-98-000902.txt : 19981228 0001045969-98-000902.hdr.sgml : 19981228 ACCESSION NUMBER: 0001045969-98-000902 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19981222 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: S-3 SEC ACT: SEC FILE NUMBER: 333-69477 FILM NUMBER: 98773873 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 S-3 1 FORM S-3 REGISTRATION STATEMENT As filed with the Securities & Exchange Commission on December 22, 1998 Registration No. ________________ ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _________________________ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 _________________________ ONLINE SYSTEM SERVICES, INC. (Exact name of issuer as specified in its charter) Colorado 84-1293864 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 1800 GLENARM PLACE, SUITE 700 DENVER, COLORADO 80202 (303) 296-9200 (Address and telephone number of principal executive offices) _________________________ R. Steven Adams Online System Services, Inc. 1800 Glenarm Place, Suite 700 Denver, Colorado 80202 (303) 296-9200 (Name, address and telephone number of agent for service) Copy to: Lindley S. Branson Gray, Plant, Mooty, Mooty & Bennett, P.A. 33 South Sixth Street 3400 City Center Minneapolis, Minnesota 55402 (612) 343-2800 _________________________ Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. /X/ If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of earlier effective registration statement for same offering. / / ___________________ If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for same offering. / / _______________________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / CALCULATION OF REGISTRATION FEE
Title of securities Amount to be Proposed maximum Proposed maximum aggregate Amount of to be registered registered offering price (1) offering price (1) registration fee - ----------------------------------------------------------------------------------------------------------------------- Common Stock, no par 24,000 $ 12.00 $ 288,000 $ 84.96 value (2) Common Stock, no par 58,240 $ 12.00 $ 698,880 $ 206.17 value (3) Common Stock, no par 369,000 $ 12.00 $ 4,428,000 $1,306.26 value (4) Common Stock, no par 250,000 $ 12.00 $ 3,000,000 $ 885.00 value (5 Common Stock, no par 293,500 $ 12.00 $ 3,522,000 $1,038.99 value (6) Total 994,740 $ 12.00 $11,936,880 $3,521.38
_______________________________ (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) of Regulation C as of the close of the market on December 16, 1998. (2) Common stock issued by OSS in connection with consulting services rendered to OSS. (3) Common stock issued by OSS upon conversion of OSS' issued and outstanding 10% Preferred Stock. (4) Common stock issuable by OSS upon conversion of OSS' issued and outstanding 10% Preferred Stock. An indeterminate number of additional shares of common stock are registered hereunder that may be issued by reason of any stock split, stock dividend or similar transaction involving the common stock, in order to prevent dilution, in accordance with Rule 416 under the Securities Act of 1933, as amended. (5) Common stock issuable by OSS upon conversion of OSS' issued and outstanding Series A Preferred Stock. An indeterminate number of additional shares of common stock are registered hereunder that may be issued by reason of any stock split, stock dividend or similar transaction involving the common stock, in order to prevent dilution, in accordance with Rule 416 under the Securities Act of 1933, as amended. (6) Common stock issuable by OSS upon exercise of issued and outstanding transferable warrants of OSS. An indeterminate number of additional shares of common stock are registered hereunder in accordance with Rule 416 under the Securities Act of 1933, as amended, that may be issued as provided in such warrants in the event that the provisions against dilution in such warrants become operative. _______________________________ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer of sale is not permitted. SUBJECT TO COMPLETION, DATED DECEMBER 22, 1998 PROSPECTUS ONLINE SYSTEM SERVICES, INC. This is a public offering of a minimum of 861,923 and a maximum of 994,740 shares of common stock of Online System Services, Inc. The selling shareholders identified in this prospectus are offering all of the shares to be sold. OSS will not receive any of the proceeds from the offer and sale of the shares, however certain shares offered by this prospectus are issuable upon the exercise of issued and outstanding transferable warrants of OSS. If these warrants are excerised in full and the exercise price is paid in cash rather than by a surrender of a portion of the warrants being exercised (a cashless exercise), OSS will receive proceeds of $3,234,900. The shares to be sold by the selling shareholders consist of 78,240 issued and outstanding shares of common stock and shares of common stock issuable to them upon: - Their conversion of OSS' 10% Preferred Stock; - Their conversion of OSS' Series A Preferred Stock; - Their exercise of issued and outstanding transferable warrants of OSS exercisable at a price per share of $15.00; - Their exercise of issued and outstanding transferable warrants of OSS exercisable at a price per share of $16.33; or - Their exercise of issued and outstanding transferable warrants of OSS exercisable at a price per share of $5.71. The Nasdaq SmallCap Market lists the common stock under the symbol "WEBB". INVESTING IN THE COMMON STOCK INCLUDES CERTAIN RISKS. YOU SHOULD NOT PURCHASE THE COMMON STOCK UNLESS YOU CAN AFFORD TO LOSE YOUR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 3 OF THIS PROSPECTUS. The shares may be offered and sold at various times by the selling shareholders identified in this prospectus pursuant to rules promulgated by the Securities and Exchange Commission. The selling shareholders will offer and sell the shares at market prices prevailing at the time of sale or at negotiated prices and may sell the shares to or through brokers or dealers. Because the selling shareholders will offer and sell the shares at various times, OSS has not included in this prospectus information about the price to the public of the shares or the proceeds to the selling shareholders. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OR PASSED ON THE ADEQUACY OF THE DISCLOSURES IN THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this prospectus is ___________________, 1998. THE COMPANY Online System Services, Inc. develops, markets and supports products and services that enable individuals to create and manage their own Internet Web presence, create public or private online communities and manager their own interactions. Our i2u foundation software provides users with the ability to create their own home pages using simple, on-screen templates, as well as integrated online communications, commerce and publishing tools. We have targeted the following market opportunities: - i2u Community - Customized community and communication portals or start pages for broadband (high bandwidth or high data transmission capabilities) operators who provide Internet access. - i2u Enterprise - Internet and Extranet services for businesses, associations and government institutions. - i2u Education - Classroom applications for elementary and secondary schools, including parent/teacher communications, virtual campuses for colleges and universities and online classrooms for corporate training. - i2u Financial Services - Online banking services for banks, credit unions and other financial institutions. Our integrated i2u software permits the generation of Internet Web site content by individual users, Internet service providers ("ISPs"), local merchant and others. Personal user home pages, enhanced business Web pages, business directories, community events, online discussion groups and forums and programming guides can all be developed and updated by users. The i2u software includes personal communication tools which facilitate user interaction and community "groupware" which enables any group to create a public or private community for personal interaction and information exchange. In order to gain market share and to create a foundation for future content revenues, we have developed a suite of products, marketed under the i2u brand, which provides broadband operators with our proprietary software, as well as the equipment, training, systems and services required for the broadband operator to become fully operational Internet service provider. These products and services are provided at minimal or no initial cost to the operator in in exchange for which we share in the revenues from Internet advertising and commerce and, if the operator utilizes our access products and services, Internet access. We have utilized the i2u foundation software to develop an online product designed for elementary and secondary schools which facilitates communications and information exchange among teachers, administrators, parents and students. We have also developed "RE/MAX Mainstreet," a system designed to be RE/MAX International, Inc.'s primary communcation tool linking its real estate agents, management and approved suppliers worldwide and a state-of-the-art system for providing online banking services for Rockwell Federal Credit Union. As part of our product enhancement efforts, we have agreed to acquire Durand Communications, Inc. ("DCI"), a developer and marketer of Internet "community" building tools and services which allow users to set up their own password-protected virtual communities. DCI's CommunityWare product is being integrated into the i2u suite of products and services. DCI has provided the information regarding DCI included in this prospectus. See "Recent Developments--DCI Acquisition." Our strategies to achieve our growth objective include: - Gaining early market share by offering the i2u Community products and services to broadband operators at minimal or no initial cost in exchange for a larger share of the revenues from Internet commerce and access; - Continuing to expand the i2u suite of products and services; - Leveraging the i2u platform software to develop products for the development of online communities for specific industries and markets; - Aggregating subscribers of multiple online communities to develop unique channels of distribution for Internet products, advertising and services; and - Acquisitions; and - Developing strategic alliances. OSS was incorporated under the laws of the State of Colorado on March 22, 1994. Our executive offices are located at 1800 Glenarm Place, Suite 700, Denver, Colorado 80202, telephone number (303) 296-9200. 2 RISK FACTORS The common stock offered by this prospectus is highly speculative and involves a high degree of risk. Before you purchase any common stock you should carefully read this entire prospectus, and you should consider the following risks and speculative factors. You should purchase common stock only if you can afford the loss of your entire investment in the common stock.. You should also be aware that certain statements set forth below are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Please refer to the "Special Note Regarding Forward-Looking Statements" on page 11 of this prospectus for more information. RISKS RELATED TO BUSINESS OF OSS LIMITED OPERATING HISTORY; ACCUMULATED LOSSES. OSS was founded in March 1994, commenced sales in February 1995 and was in the development stage through December 31, 1995. DCI was founded in 1993. Accordingly, we have only a limited operating history upon which you can base your evaluation of our prospects, DCI and us. In conducting your evaluation, you should consider our prospects, including the prospects of DCI, in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets such as the Internet market. These risks include our ability to respond to competitive developments, our ability to continue to attract, retain and motivate qualified persons, and our ability to continue to upgrade and commercialize our products and services. There is no assurance that we will be successful in addressing these and other risks. Economic and market conditions over which we have no control may also significantly affect our business. We have incurred net losses since inception totaling $13,158,897 through September 30, 1998. DCI has incurred net losses since its formation totaling $8,061,004 through September 30, 1998. ADDITIONAL ANTICIPATED LOSSES. We currently intend to increase our capital expenditures and operating expenses in order to expand the functionality and performance of our i2u products and services, support additional subscribers of our ISP customers in future markets, and market and provide our products and services. In addition, we adopted a new pricing structure in the second quarter of 1998 which will provide our i2u Community products and services to broadband operators, including the equipment required for the operator to provide high- speed Internet access to its subscribers, at little or no initial charge to the operator in return for a percentage of the operator's future Internet access and e-commerce transaction fees. This new pricing structure will increase our costs and lower our revenues at the time that we sell our i2u products and services to broadband operators. As a result of our increased capital expenditures and operating expenses and our new pricing structure, we expect to incur additional substantial operating and net losses for the balance of fiscal 1998 and for one or more fiscal years thereafter. Furthermore, if we complete the DCI acquisition, we will incur additional losses for the fiscal year in which the acquisition occurs (currently anticipated to be in the first quarter of fiscal 1999). These losses will occur because accounting rules require us to recognize as a loss in the fiscal period in which the acquisition is consummated that portion of the purchase price for DCI which we allocate to in-process research and development. We expect to allocate approximately $500,000 to in-process research and development. In addition, if the DCI acquisition is completed, we will record goodwill and other intangible assets estimated to be approximately $12.5 million which we will amortize over their estimated useful life of three years. There can be no assurance that the acquisition of DCI will ever make a positive contribution to our results of operations. The final determination of the value of consideration issued by OSS and the liabilities assumed will be made at the effective time of the DCI Merger. Accordingly, the determination of the total purchase price, liabilities assumed and the allocations may change significantly from the amounts reflected above. If we do not complete the DCI Merger, it is likely that we would have to write-off the note receivable of $805,320 at September 30, 1998, which would increase our losses. INCREASED NEED FOR WORKING CAPITAL; ABILITY TO CONTINUE AS GOING CONCERN. We believe that our present cash and cash equivalents and working capital will be adequate to sustain operations only through the balance of fiscal 1998. In addition, we expect the acquisition of DCI to increase our monthly working capital needs by approximately $130,000 for at least the next six months. We estimate that we will need to raise at least $8 million through equity, debt or other external financing to fund proposed operations for fiscal 1999 and to pay DCI indebtedness which would be assumed as part of the DCI Merger. Our estimate of our working capital needs may change due to factors some of which are outside of our control. As of the date of this prospectus, we have entered into a letter of intent for the issuance of convertible preferred stock which would raise approximately $4,5000,000 of additional net capital. However, there is no assurance that we will be able to raise funds in amounts required or upon acceptable terms. If we cannot raise funds when needed, we may be required to curtail or scale back our operations. These actions could have a material 3 adverse effect on our business, financial condition, or results of operations. In its report accompanying the audited financial statements for the years ended December 31, 1997 and 1996, our auditor, Arthur Andersen LLP, expressed substantial doubt about our ability to continue as a going concern. UNCERTAINTY OF FUTURE PROFITABILITY. Our ability to become profitable in the future depends on the success of our i2u products and services in generating revenues. This success will depend upon, among other things, the willingness of subscribers of our broadband customers to pay the installation costs of Internet service and monthly Internet access fees, both of which will be set by our broadband customers. Furthermore, since we expect a significant portion of our future revenues to be based on advertising and e-commerce transactions conducted through our i2u products, this success will also depend upon the extent to which consumers and businesses use our i2u products and conduct e-commerce transactions and advertising utilizing our products. Our pricing model assumes that our broadband customers will share with us a percentage of their revenues generated by installation and Internet access fees (if we provide the access capability) and a percentage of their revenues generated by advertising and e-commerce conducted through our i2u products. Because of the new and evolving nature of the Internet, we cannot predict whether our pricing model will prove to be viable, whether demand for our products and services will materialize at the prices we expect to be charged, or whether current or future pricing levels will be sustainable. Our ability to generate future sales will be dependent on a number of factors, many of which are beyond our control, including, among others, the success of broadband operators in marketing Internet services to subscribers in their local areas, the extent that users utilize our i2u products and conduct online e-commerce transactions and the prices that the broadband operators set for Internet services. Because of the foregoing factors, among others, we are unable to forecast our revenues with any degree of accuracy. We may never become or remain profitable. CABLE SYSTEM OPERATORS AFFILIATION WITH NATIONAL PROVIDERS. @Home Corporation and RoadRunner (the "National Providers") offer high-speed Internet access and related services to cable system operators. The National Providers historically have focused their activities on larger markets because they generally require cable system systems with two-way high speed data transmission to fully implement their high-speed Internet access programs. Approximately 70% of all cable system operators are currently affiliated with one of the National Providers and this percentage could increase as a result of consolidations within the cable industry. The terms of the agreements between the National Providers and their affiliated cable operators prevent affiliated cable operators from working with any person other than the National Providers to provide high-speed Internet access. Although we have designed our i2u products and services to be complementary to that of the National Providers, we have no assurance from the National Providers that they will permit their affiliated cable companies from working with us to provide high-speed Internet access in markets in which the National Providers are not currently providing high speed Internet access. If the National Providers prohibit us from providing high-speed Internet access to these affiliated cable system providers, we would be able to provide the high-speed Internet access portion of our i2u product and service offering to only those broadband operators who are not affiliated with the National Providers. This would significantly reduce the size of the domestic market for our Internet access products and services. We do not believe that the affiliation agreements between the affiliated cable system operators and the National Providers limit our ability to partner with the affiliated cable system operators to provide the local content portion of our i2u Community product and services. NEW AND UNCERTAIN MARKETS. The market for Internet products and services has only recently developed. Since this market is relatively new and because current and future competitors are likely to introduce competing Internet products and services, and because both DCI and we have only limited market experience for our respective products and services, we cannot predict the rate at which the market for our products and services or for DCI's products and services will grow or at which new or increased competition will result in market saturation. If the Internet markets or the markets for our products and services or DCI's products and services fail to grow, grow more slowly than we anticipate or become saturated with competitors, our business, including the businesses of DCI if the DCI Merger is completed, operating results and financial condition will be materially adversely affected. DEPENDENCE ON BROADBAND OPERATORS. Certain of our services are dependent on the quality of the cable system infrastructure. Cable system operators have announced and have begun to implement major infrastructure upgrades in order to increase the capacity of their networks and to deploy two- way capability. These upgrades have placed a significant strain on the financial, managerial, operating and other resources of cable system operators, most of which are already significantly leveraged. Further, cable system operators must periodically renew their franchises with city, county, or state governments and, as a condition of obtaining such renewal, may have to meet 4 certain conditions imposed by the issuing jurisdiction. These conditions may have the effect of causing the cable system operator to delay such upgrades. Although we provide Internet access services to cable system operators irrespective of their two-way capabilities, to the extent we provide Internet access services over cable systems to the home with a telephone line return path for data from the home, our services may not provide the high speed, quality of experience, and availability of certain applications, such as video conferencing, necessary to attract and retain subscribers to our Internet services. In addition, cable system operators are primarily concerned with increasing television programming capacity to compete with other modes of multichannel entertainment delivery systems such as DBS and may, therefore, choose to roll-out set-top boxes that are incompatible with and do not support high-speed Internet access services, rather than to upgrade their network infrastructures as described above. The failure of cable system operators to complete these upgrades in a timely and satisfactory manner, or at all, would adversely affect the market for our products and services. We expect our contracts with cable system operators for our i2u Community products and services to have terms of up to five years. There can be no assurance that we will be able to renew any such contracts. Moreover, even if cable system operators renew these contracts, there can be no assurance that such renewals will be on terms satisfactory to the Company. Because users of our i2u Community products and services generally are expected to subscribe through a broadband operator, the broadband operator (and not us) will substantially control the customer relationship with the users. Therefore, in addition to our business being subject to general economic and market conditions and factors relating to ISPs and online services specifically, the success and future growth of our business may also be subject to economic and other factors affecting broadband operators. PRODUCT DEVELOPMENT; TECHNOLOGICAL CHANGE. Our future success will depend upon our ability to develop new products and services that meet changing customer requirements. The markets for our, and DCI's, products and services are characterized by rapidly changing technology, evolving industry standards, emerging competition and frequent new product and service introductions. We may not be able to successfully identify new product and service opportunities or develop and bring new products and services to market in a timely manner. Even if we are able to successfully identify, develop and introduce new products and services there is no assurance that a market for these products will materialize. Furthermore, products and services or technologies developed by others may render ours, and DCI's, products, services, and technologies noncompetitive or obsolete. GENERAL RISKS OF BUSINESS. We have formulated our business plans and strategies based on the rapidly increasing size of the Internet markets, our anticipated participation in those markets, and the estimated sales cycle, price and acceptance of our products and services. Although these assumptions are based on our best estimates, there is no assurance that our assumptions will prove to be correct. We have not commissioned or obtained any independent marketing studies, either with respect to our current business, or the business, products and technologies of DCI, nor are any such studies planned. Any future success that we might enjoy will depend upon many factors including some beyond our control or that we cannot predict at this time. SIGNIFICANT CONCENTRATION OF CUSTOMERS. Our customer base is highly concentrated among a limited number of customers, seven as of November 30, 1998, primarily due to the fact that the cable television and telecommunications industries in the United States are dominated by a limited number of large companies and to the relatively short time that we have been offering our current products and services. Except for geographically contiguous systems, our customers do not experience significant economies of scale by purchasing additional systems from us. There is no assurance that we will be able to attract or retain major customers. The loss of, or reduction in demand for products or related services from, any of our major customers could have a material adverse effect on our business, operating results, cashflows and financial condition. INTENSE COMPETITION. The market for Internet products and services is highly competitive, and we expect this competition to intensify in the future. Many nationally known companies and regional and local companies across the country are involved in Internet applications and the number of competitors is growing. We also compete with broadband companies who are developing their own Internet access and content and with the internal departments of prospective customers who are retaining Internet-related activities in-house. Even if a prospective customer chooses to outsource its Internet-related activities, that customer may choose to outsource these activities to a company other than us. 5 DCI's and our current and prospective competitors include many companies whose financial, technical, marketing and other resources are substantially greater than ours. Increased competition could result in significant price competition, which in turn could result in significant reductions in the average selling price of our products and services. In addition, increased competition could cause us to increase our spending on marketing, sales and product development. There is no assurance that we will be able to offset the effects of any such price reductions or increases in spending through an increase in the number of our customers, higher sales from enhanced services, cost reductions or otherwise. Therefore, any of these events could have a materially adverse effect on our financial condition and operating results. There is no assurance that we will have the financial resources, technical expertise or marketing, sales and support capabilities to compete successfully. LIMITED AVAILABILITY OF PROPRIETARY PROTECTION. We do not believe that our current products or services, or the products or services of DCI, are patentable. We rely on a combination of copyright, trade secret and trademark laws, and nondisclosure and other contractual provisions to protect our proprietary rights. Policing unauthorized use of proprietary systems and products is difficult and, while we are unable to determine the extent to which piracy of our software exists, we expect software piracy to be a persistent problem. In addition, the laws of some foreign countries do not protect software to the same extent as do the laws of the United States. There is no assurance that the steps we take to protect our proprietary rights will be adequate to prevent the imitation or unauthorized use of our proprietary rights. Even if the steps we take to protect our proprietary rights prove to be adequate, our competitors may develop products or technologies that are both non-infringing and substantially equivalent or superior to our products or technologies. LENGTH OF SALES CYCLE. The decision to enter the Internet services provisioning business is often an enterprise-wide decision by prospective customers and may require us to engage in lengthy sales cycles. Our pursuit of sales leads typically involves an analysis of our prospective customer's needs, preparation of a written proposal, one or more presentations and contract negotiations. We often provide significant education to prospective customers regarding the use and benefits of Internet technologies and products. While our sales cycle varies from customer to customer, it typically has ranged from one to six months for i2u projects. Our sales cycle may also be subject to a prospective customer's budgetary constraints and internal acceptance reviews, over which we have little or no control. A significant portion of our revenues are expected to come from Internet access fees paid by subscribers of our broadband operator customers, advertising revenues and in connection with e-commerce transactions conducted using our products. We expect that it may take broadband operators several months or more to market and sell high-speed Internet access to their subscribers, to establish a significant enough user base to attract advertisers and for users to conduct significant e-commerce transactions. For these reasons, we do not expect to realize significant revenues, if at all, from these activities until a significant time after we have licensed our i2u products and services. POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. As a result of our limited operating history and the recent increased focus on our i2u products and services, we do not have historical financial data for a sufficient number of periods on which to base planned operating expenses. Therefore, our expense levels are based in part on our expectations as to future sales and to a large extent are fixed. We typically operate with little backlog and the sales cycles for our products and services may vary significantly. As a result, our quarterly sales and operating results generally depend on the volume and timing of and the ability to close customer contracts within the quarter, which are difficult to forecast. We may be unable to adjust spending in a timely manner to compensate for any unexpected sales shortfalls. If we were unable to so adjust, any significant shortfall of demand for our products and services in relation to our expectations would have an immediate adverse effect on our business, operating results and financial condition. Further, we currently intend to increase our capital expenditures and operating expenses in order to fund product development and increase sales and marketing efforts. To the extent that such expenses precede or are not subsequently followed by increased sales, our business, operating results and financial condition will be materially adversely affected. DEPENDENCE ON KEY PERSONNEL; ABSENCE OF EMPLOYMENT AND NONCOMPETITION AGREEMENTS. We are highly dependent on the technical and management skills of our key employees, including in particular R. Steven Adams, our founder, President and Chief Executive Officer. The loss of Mr. Adams' services could have a material adverse effect on our business and operating results. We have not entered into employment agreements with Mr. Adams, or any of our other officers or employees. We do not maintain key person insurance for Mr. Adams or any other member of management. We generally enter into written nondisclosure and nonsolicitation agreements with our officers and employees which restrict the use and disclosure of proprietary information and the solicitation of 6 customers for the purpose of selling competing products or services. Thus, if any of these officers or key employees left OSS, they could compete with us, so long as they did not solicit our customers. Any such competition could have a material adverse effect on our business. Our future success also depends in part on our ability to identify, hire and retain additional personnel, including key product development, sales, marketing, financial and executive personnel. Competition for such personnel is intense and there is no assurance that we can identify or hire additional qualified personnel. In addition, the success of the DCI Merger is highly dependent on the technical and management skills of Andre Durand, the founder, President and Chief Executive Officer of DCI. The loss of Mr. Durand's services could have a material adverse affect on the value of the DCI Merger. The DCI Merger is contingent on Mr. Durand entering into a three-year non-compete agreement with OSS. MANAGEMENT OF EXPECTED GROWTH. We expect to experience significant growth in the number of our employees, the scope of our operating and financial systems, and the geographic area of our operations, including the expansion of our international operations. In addition, as we expand our i2u products and services, we will need to hire additional employees who will be located at many widely separated offices, including international offices. Our ability to successfully manage any such growth will require us to continue to implement and improve our operational, financial and management information systems. In addition, this growth will result in new and increased responsibilities for existing management personnel and will require us to hire and train new management personnel. There can be no assurance that our management or other resources will be sufficient to manage any future growth in our business or that we will be able to implement in whole or in part our growth strategy and any failure to do so could have a material adverse effect on our operating results and financial condition. SECURITY RISKS. Our software and equipment may be vulnerable to computer viruses or similar disruptive problems caused by our customers or other Internet users. Computer viruses or problems caused by third parties could lead to interruptions, delays or cessation in service to our customers. In addition, while our i2u software integrates software designed to provide a secure environment for e-commerce, these safeguards may prove to be inadequate. We have information technology insurance which provides limited coverage for losses caused by computer viruses, however, certain losses resulting from misuse of software or equipment by third parties or losses from computer viruses which exceed the liability limits under such insurance may not be protected. Although we attempt to limit our liability to customers for these types of risks through contractual provisions, there is no assurance that these limitations will be enforceable. DEPENDENCE ON THE INTERNET. The success of our business depends in large part upon a robust industry and infrastructure for providing Internet access and carrying Internet traffic and upon the widespread acceptance and use of electronic commerce over the Internet. Because global commerce and online exchange of information on the Internet and other similar open wide area networks are new and evolving, it is difficult to predict with any assurance the extent to which the Internet will prove to be a significant commercial marketplace. If the Internet does not become a significant commercial marketplace, our business, operating results and financial condition could be materially impaired. RISKS ASSOCIATED WITH INTERNATIONAL SALES. We have and are currently pursuing marketing opportunities in international markets. International sales are subject to a variety of risks, including difficulties in establishing and managing international distribution channels, obtaining export licensing, servicing and supporting overseas products and in translating the products' graphical user interfaces into foreign languages. International operations are subject to difficulties in collecting accounts receivable, staffing and managing personnel and enforcing intellectual property rights. Other factors that can also adversely affect international operations include fluctuations in the value of foreign currencies and currency exchange rates, changes in import/export duties and quotas, introduction of tariff or non-tariff barriers and regulatory, economic or political changes in international markets. GOVERNMENT REGULATION. We are not currently subject to direct regulation by any government agency, other than regulations applicable to businesses generally, and there are currently few laws or regulations directly applicable to access to or commerce on the Internet. However, due to the increasing popularity and use of the Internet, a number of legislative and regulatory proposals are under consideration by federal, state, local and foreign governmental organizations, and it is possible that a number of laws or regulations may be adopted with respect to the Internet relating to such issues as user privacy, user screening to prevent inappropriate uses of the Internet by, for example, minors or convicted criminals, taxation, infringement, pricing, content regulation, quality of products 7 and services and intellectual property ownership and infringement. The adoption of any such laws or regulations may decrease the growth in the use of the Internet, which could in turn decrease the demand for our products and services, increase our cost of doing business, or otherwise have a material adverse effect on our business, results of operations and financial condition. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, copyright, trademark, trade secret, obscenity, libel and personal privacy is uncertain and developing. Our business, results of operations and financial condition could be materially adversely effected by any new legislation or regulation, or application or interpretation of existing laws to the Internet. YEAR 2000. The Year 2000 issue involves the potential for system and processing failures of date-related data resulting from computer-controlled systems using two digits rather than four to define the applicable year. For example, computer programs that contain time-sensitive software may recognize a date using two digits of "00" as the year 1900 rather than the year 2000. This could result in system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar ordinary business activities. We believe that our internal software and hardware systems will function properly with respect to dates in the year 2000 and thereafter and we have completed our internal IT and non-IT assessment. We expect to incur no significant costs in the future for Year 2000 problems. Nonetheless, there is no assurance in this regard until such systems are operational in the Year 2000. We are in the process of contacting all of our significant suppliers to determine the extent to which our systems are vulnerable to those third parties' failure to make their own systems Year 2000 compliant. We expect to have completed this review by the second quarter of fiscal 1999. In the event any of our suppliers or vendors prove not to be Year 2000 compliant, we believe that we could find a replacement vendor or supplier which is Year 2000 compliant without significant delay or expense. However, if substantially all of our suppliers and vendors prove not to be Year 2000 compliant and if we experience difficulties in finding replacement vendors, then, as a result, our business could be materially adversely affected. The failure to correct material Year 2000 problems by our suppliers and vendors could result in an interruption in, or a failure of, certain of our normal business activities or operations. Such failures could materially and adversely affect our results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting from the uncertainty of the Year 2000 readiness of third-party suppliers and vendors and of our customers, we are unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on our results of operations, liquidity or financial condition. LIMITATION OF DIRECTORS' LIABILITY. Our Articles of Incorporation provide, as permitted by Colorado law, that our directors shall have no personal liability for certain breaches of their fiduciary duties to us. In addition, our Bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by Colorado law. These provisions may reduce the likelihood of derivative litigation against directors and may discourage shareholders from bringing a lawsuit against directors for a breach of their duty. RISKS RELATED TO THE OFFERING PENDING ACQUISITION OF DCI; POSSIBLE DILUTION TO OSS SHAREHOLDERS CAUSED BY THE ACQUISITION. On March 19, 1998, we executed an Agreement and Plan of Merger pursuant to which we agreed to acquire DCI. We have filed a Proxy Statement/Prospectus with the Securities and Exchange Commission relating to this acquisition, and we expect that the acquisition will be completed in the first quarter of fiscal 1999. The acquisition is subject to, among other things, approval by our shareholders and the shareholders of DCI. In the event that the DCI acquisition is not completed as proposed, DCI has agreed to license its CommunityWare product to us on at least as favorable terms as it licenses such product to others. As of the date of this prospectus, we have loaned DCI approximately $1,288,000 to maintain its operations pending completion of the acquisition and have paid DCI, by reducing the balance of the note receivable, approximately $490,000 for services rendered in connection with the integration of CommunityWare with our i2u products and services. If the DCI acquisition is not completed, DCI would not have the ability to repay our advances without obtaining significant additional working capital through the sale of its securities. There is no assurance that DCI would be able to raise working capital in the amounts required. If the DCI acquisition is consummated, it will result in an increase in our outstanding shares of common stock by 955,649 (approximately 23%). On a pro forma basis, we estimate that the issuance of such shares would have resulted in an increase to our net book value per share as of September 30, 1998 from $0.76 (actual) to $2.83 (pro forma) and $2.82 (pro forma adjusted to reflect the subsequent conversions of 10% Preferred Stock and 5% Preferred Stock and the subsequent issuance of Series A Preferred Stock). In addition to issuing the shares of common stock, we will reserve approximately 240,000 shares of our common stock for issuance upon exercise of outstanding options and warrants 8 of OSS that will be issued in connection with the acquisition, and we will reserve approximately 40,000 shares of our common stock for issuance upon conversion of convertible securities of DCI that will be assumed by OSS in connection with the DCI Merger. There is no assurance that our results of operations will improve enough, if at all, as a result of the DCI acquisition, to offset possible future dilution which could occur to our shareholders as a result of the DCI acquisition if our operations achieve profitability. POSSIBLE VOLATILITY OF STOCK PRICES; PENNY STOCK RULES. The over-the- counter markets for securities such as our common stock historically have experienced extreme price and volume fluctuations during certain periods. These broad market fluctuations and other factors, such as new product developments and trends in our industry and the investment markets generally, as well as economic conditions and quarterly variations in our results of operations, may adversely affect the market price of our shares. Although our shares are listed on The Nasdaq SmallCap Market ("Nasdaq"), there can be no assurance that they will remain eligible to be included on Nasdaq. If our common stock was no longer eligible for quotation on Nasdaq, it could become subject to rules adopted by the Securities and Exchange Commission regulating broker-dealer practices in connection with transactions in "penny stocks." If the common stock became subject to the penny stock rules, many brokers may be unwilling to engage in transactions in the common stock because of the added regulation, thereby making it more difficult for purchasers of our common stock to dispose of their shares. RIGHTS TO ACQUIRE SHARES; POTENTIAL SUBSTANTIAL DILUTION. As of November 30, 1998, we had issued the following warrants and options to acquire shares of common stock: - Options and warrants to purchase 1,651,614 shares of common stock upon exercise of such options and warrants, exercisable at prices ranging from $0.50 to $8.50 per share, with a weighted average exercise price of approximately $5.65 per share. - Warrants issued in connection with our initial public offering on May 23, 1996 (the "IPO Warrants") to purchase 634,150 shares upon exercise of the IPO Warrants at an exercise price of $9.00 per share. - Options issued to EBI Securities Corporation, the representative of the underwriters involved in such initial public offering (the "Representative's Option"), to purchase 106,700 shares upon exercise of the Representative's Option at a purchase price of $8.10 per share. - the Representative's Option to purchase 106,700 IPO Warrants issuable upon exercise of the Representative's Option at a purchase price of $.001 per IPO Warrant. These IPO Warrants entitle the holder thereof to purchase up to 53,350 shares upon exercise of such IPO Warrants at an exercise price of $9.00 per share. - Warrants issued in connection with the issuance of the 10% Preferred Stock to purchase 53,500 shares of common stock upon exercise of such warrants, exercisable at $15.00 per share. - Warrants issued in connection with the issuance of the 5% Preferred Stock to purchase 100,000 shares of common stock upon exercise of such warrants, exercisable at $16.33 per share. - Warrants issued in connection with the issuance of the Series A Preferred Stock to purchase 140,000 shares of common stock upon exercise of such warrants, exercisable at $5.71 per share. In addition to these warrants and options, we have reserved an indeterminate number of shares of common stock for issuance upon conversion of outstanding shares of our 10% and Series A Preferred Stock, we will issue 955,649 shares of our common stock upon the completion of the DCI Merger, we will reserve approximately 240,000 shares for issuance upon exercise of options and warrants to be issued in connection with the DCI acquisition, and we will reserve approximately 40,000 shares of our common stock for issuance upon conversion of convertible securities of DCI that will be assumed by OSS in connection with the DCI Merger. The 10% Preferred Stock is convertible into shares of common stock at the lesser of $10 or 80% of the market value (as defined) of the common stock at the time of the conversion of such 10% Preferred Stock. The Series A Preferred Stock is convertible into shares of common stock at the lesser of $5.71 or 80% of the market value (as defined) of the common stock at the time of the conversion of such Series A Preferred Stock. Based on the market value for the common stock as of November 30, 1998, the 10% Preferred Stock is convertible into approximately 367,228 shares of common stock and the Series A Preferred Stock is convertible into approximately 339,137 shares of common stock. The number of shares of common stock issuable upon conversion of the 10% Preferred Stock and the Series A Preferred Stock could increase significantly 9 in the event that the market value for the common stock decreases in the future. During the terms of the outstanding options, warrants and convertible securities, the holders thereof will have the opportunity to profit from an increase in the market price of the Common Stock with resulting dilution to the holders of shares who purchased shares for a price higher than the respective exercise or conversion price. The existence of such stock options, warrants and convertible securities may adversely affect the terms on which we can obtain additional financing, and you should expect the holders of such options or warrants to exercise or convert those securities at a time when we, in all likelihood, would be able to obtain additional capital by offering securities on terms more favorable to us than those provided by the exercise or conversion of such options or warrants. SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of common stock in the public market, or even the potential for such sales, could have an adverse effect on the market price for shares of our common stock, and could impair the ability of purchasers of our common stock recoup their investment or make a profit. Furthermore, such sales could affect our ability to raise capital through the sale of equity securities. As of November 30, 1998 approximately 1,130,000 of our currently outstanding shares of common stock are "restricted shares." Restricted shares and shares of the common stock owned by our affiliates (officers, directors and holders of 10% of our outstanding common stock) may be publicly sold only by complying with Rule 144 under the Securities Act unless further registered under the Securities Act, or some other exemption from further registration thereunder is available. While the shares of the common stock to be issued to the shareholders of DCI in connection with the acquisition of DCI will be subject to certain contractual limitations on the transfer of such shares prior to September 30, 1999, such shares or a portion thereof could be sold prior to September 30, 1999. ABILITY TO ISSUE COMMON STOCK AND PREFERRED STOCK; ANTI-TAKEOVER DEVICES. Our Articles of Incorporation authorize our Board of Directors to issue up to 20,000,000 shares of common stock and 5,000,000 shares of preferred stock in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by our shareholders. Preferred stock authorized by the Board of Directors may include voting rights, preferences as to dividends and liquidation, conversion and redemptive rights and sinking fund provisions. As of November 30, 1998, our Board of Directors has authorized the issuance of up to (i) 500,000 shares of 10% Preferred Stock (the "10% Preferred Stock"), of which 245,000 shares were outstanding, (ii) 3,000 shares of 5% Preferred Stock, of which no shares were outstanding, and (iii) 1,400 shares of Series A Preferred Stock, of which 1,400 shares were outstanding. Although our Board of Directors has no present plans to issue any other shares of preferred stock, if the Board of Directors authorizes the issuance of preferred stock in the future, such authorization could affect the rights of the holders of common stock, thereby reducing the value of the common stock, and could make it more difficult for a third party to acquire OSS, even if a majority of the holders of common stock approved of such acquisition. AFFECT OF ISSUANCE OF 10%, 5% AND SERIES A PREFERRED STOCK ON NET LOSS. Based on current accounting standards, we estimate that we will be required to record a non-operating expense of approximately $4,100,000 for the fiscal year ending December 31, 1998 as a result of the issuance of the 10%, 5% and Series A Preferred Stock. While these charges will not affect our operating loss or working capital during such period, they are expected to result in an increase of approximately $4,100,000 in the Company's net loss available to our holders of common stock for the fiscal year ending December 31, 1998. NO DIVIDENDS. We have never paid dividends on our common stock and do not intend to pay any dividends on our common stock in the foreseeable future. Any decision by us to pay dividends will depend upon our profitability at the time, cash available therefor, and other factors. We anticipate that we will devote profits, if any, to our future operations. Except as otherwise required by law, we are required to pay a quarterly cumulative noncompounded dividend on the 10% Preferred Stock of 10% per annum based on the stated value of $10.00 per share of 10% Preferred Stock, and we are required to pay all accrued but undeclared dividends on the Series A Preferred Stock on the earlier of (1) the redemption or conversion of the Series A Preferred Stock, or (2) the liquidation of the Company. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements made in this prospectus and the documents incorporated by reference in this prospectus under the captions "The Company", "Risk Factors," "Recent Developments" and elsewhere in this prospectus constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 10 (the "Reform Act"). These statements are subject to the safe harbor provisions of the Reform Act. Forward-looking statements may be identified by the use of the terminology such as "may," "will," "expect," "anticipate," "intend," "believe," "estimate," "should," or "continue" or the negatives thereof or other variations thereon or comparable terminology. To the extent that this prospectus contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of OSS or DCI, you should be aware that OSS's and DCI's actual financial condition, operating results and business performance may differ materially from that projected or estimated by OSS or DCI in the forward- looking statements. OSS and DCI have attempted to identify, in context, certain of the factors that they currently believe may cause actual future experience and results to differ from their current expectations. These differences may be caused by a variety of factors, including but not limited to adverse economic conditions, intense competition, including entry of new competitors, ability to obtain sufficient financing to support OSS' and DCI's operations, progress in research and development activities, variations in costs that are beyond OSS' and DCI's control, changes in capital expenditure budgets for cable companies, adverse federal, state and local government regulation, inadequate capital, unexpected costs, lower sales and net income (or higher net losses) than forecasted, price increases for equipment, inability to raise prices, failure to obtain new customers, the possible fluctuation and volatility of OSS' and DCI's operating results and financial condition, inability to carry out marketing and sales plans, loss of key executives, and other specific risks that may be alluded to in this prospectus. USE OF PROCEEDS We will not receive any proceeds from the sale of the shares offered by this prospectus, however, certain shares offered by this prospectus are issuable only upon the exercise of issued and outstanding transferable warrants of OSS. If these warrants are exercised in full and the exercise price is paid in cash rather than by a surrender of a portion of the warrants being exercised (a cashless exercise), we will receive proceeds of $3,234,9000. We will use such proceeds, if any, for general working capital purposes. RECENT DEVELOPMENTS DCI ACQUISITION On March 19, 1998 we executed an Agreement and Plan of Merger (the "DCI Merger Agreement") pursuant to which we agreed to acquire Durand Communications, Inc., a California corporation ("DCI"), via a merger of our wholly owned subsidiary, Durand Acquisition Corporation, with DCI (the "DCI Merger"). As consideration for the DCI Merger, we will issue 955,649 shares of our common stock in exchange for 100% of the outstanding shares of common stock, no par value, of DCI. In connection with the DCI Merger, we will also issue options and warrants for approximately 240,000 shares of our common stock at exercise prices ranging from $4.31 to $20.33 in replacement of similar securities of DCI. We expect DCI to have liabilities of approximately $1,200,000 (including approximatley $381,000 of convertible securities which will be converted into similar convertible securities of OSS) at the time of the DCI Merger, which will become the liabilities of the consolidated entities upon consummation of the DCI Merger. We will reserve approximately 40,000 shares of our common stock to be issued upon the conversion of these convertible securities. Under the rules of The Nasdaq SmallCap Market ("Nasdaq") our issuance of our common stock as consideration for the DCI Merger requires the approval of our shareholders. Approval by our shareholders is a condition precedent to our obligation to consummate the DCI Merger. If our issuance of shares of common stock is not approved by our shareholders, it is unlikely that we will consummate the DCI Merger. We anticipate that the meeting at which our shareholders will consider the issuance of such common stock will occur in the first quarter of 1999. We anticipate that the DCI Merger, for federal income tax purposes, will be treated as a reorganization within the meaning of Section 368 of the Internal Revenue Code (the "Code") and that each of OSS, DCI and Durand Acquisition Corporation will be a party to the reorganization within the meaning of Section 368(b) of the Code. Based on the facts, representations, warranties and agreements set forth in the DCI Merger Agreement, we believe that the DCI Merger will so qualify. However, we have not requested a ruling from the Internal Revenue Service (the "IRS") with respect to these matters. Therefore, the IRS may determine that the DCI Merger does not qualify to be treated as a reorganization within the meaning of Section 368 of the Code. A significant element of OSS' strategy to achieve its growth objective is to seek acquisitions that add immediate revenue, provide product or technology enhancements in one or more of our targeted markets or provide an existing customer base to increase advertising or e-commerce opportunities. Our acquisition of DCI will provide us with DCI's technology, including both completed technology and technology in development and product development expertise. 11 Our product development strategy is based upon our belief that the Web is evolving from an information access and delivery tool to a system that supports communication and community interactivity. We believe that DCI's CommunityWare technology, which enables users to organize themselves on the Internet in a matter of minutes, and to thereafter manage and expand their own public and private online community to facilitate and promote communications, information sharing and commerce among the users that comprise the various constituent communities, is particularly well suited for providing the communications component for OSS' i2u software. Since the execution of the DCI Merger Agreement, representatives of DCI and OSS have worked together to incorporate the CommunityWare technology into our i2u software. We recently introduced a version of the i2u product which incorporates elements of the CommunityWare technology. Following the DCI Merger, we intend to integrate DCI's product development efforts with our own. In addition, we expect to fully integrate DCI's products with our i2u products and to market them as part of our product offerings and not on a stand-alone basis. We believe that the primary value of DCI to OSS is (i) DCI's proprietary technology, particularly DCI's CommunityWare technology, (ii) DCI's software development capabilities which our management believes is important to our ability to continue to develop state-of-the-art proprietary software products required to maintain long-term relationships with our customers, and (iii) the ability the DCI acquisition will give us to greatly reduce the time it will take us to introduce new proprietary software products. Our management believes DCI's technology can be quickly integrated with our i2u products to expand the breadth and functionality of its product offerings. Andre Durand, Chief Executive Officer of DCI, has been elected Senior Vice President-Product Development of OSS and will be responsible for our product development efforts. A condition to the DCI Merger is that Mr. Durand enter into a three-year noncompete agreement with OSS. We intend to continue to employ most of DCI's product development personnel following the DCI Merger. We also believe that DCI's Electronic University Network ("EUN") business, which offers accredited online courses for colleges, universities and corporations, represents a valuable business opportunity. We expect to continue to develop this business both as a separate product offering and as an adjunct to our product offerings for broadband operators. We did not seek an opinion from an independent financial advisor as to the value of the DCI transaction, as management and the Board of Directors determined that management of OSS was best able to determine the value of the acquisition since its value was primarily based on the capabilities and prospects for DCI's technology, the compatibility of DCI's and OSS' technologies and the ability to quickly integrate the two technologies in order to significantly reduce OSS' time to develop and introduce new products and to increase the value of OSS' product offerings. In connection with the negotiations with DCI, we also considered the fact that DCI had sold shares of its common stock at prices, based on the conversion ratio of DCI common stock into OSS common stock in connection with the DCI Merger, from $8.11 to $18.94 per share since December 31, 1996. Based on these factors, the OSS Board of Directors determined that the proposed purchase price for DCI was reasonable and fair to OSS and its shareholders. The acquisition of DCI will increase the outstanding number of shares of our common stock by 955,649 shares (approximately 23%) (excluding shares issuable upon the exercise of options and warrants or the conversion of convertible securities issued in connection with the DCI Merger), will increase our liabilities, on a consolidated basis, by approximately $1,200,000 and is expected to increase our operating net loss by approximately $130,000 per month for at least the next six months. The acquisition of DCI will also increase our working capital requirements. Although we have entered into a letter of intent pursuant to which we would obtain approximately $4,500,000 of additional net capital, there is no assurance that we will be successful in obtaining additional working capital or, if successful, that the cost of such capital will be acceptable. The DCI Merger Agreement contemplates that we will acquire 100% of the outstanding common stock of DCI. Based on the average closing price of our common stock for the two days before and the two days after March 19, 1998, the day that the transaction was announced, the total purchase price is estimated to be approximately $13,100,000, consisting of (i) 955,649 shares of our common stock to be issued to the stockholders of DCI, (ii) approximately 240,000 shares of our common stock to be reserved for issuance upon the exercise of options and warrants of DCI to be exchanged for similar securities of OSS; and (iii) approximately $400,000 of expenses to be incurred. In addition, DCI will have approximately $1,200,000 of liabilities (including approximately $381,000 of convertible securities which will be converted into similar convertible securities of OSS) at the time of the DCI Merger, which will become the liabilities of the consolidated entities upon consummation of the DCI Merger. We will reserve approximately 40,000 shares of our common stock to be issued upon the conversion of these convertible securities. 12 The DCI Merger will be accounted for under the purchase method of accounting, with the purchase price allocated to the fair value of assets acquired. A significant portion of such amount and liabilities assumed on a consolidated basis has been identified as intangible assets, including approximately $500,000 of research and development in process. The portion of the purchase price and liabilities assumed on a consolidated basis which is allocated to in-process research and development will be recognized as expense in the period the DCI Merger is consummated (currently expected to be the first quarter of fiscal 1999). DCI completed the acquisition of CompuLearning Systems, d/b/a Electronic University Network ("EUN") during January 1998. Based on financial information provided by DCI and EUN, the combined revenues for DCI and EUN for the year ended December 31, 1997 totaled $740,739 and their combined loss for the same period equaled ($2,867,973). For the nine months ended September 30, 1998, revenues for DCI were $545,353, including $290,251 of services provided to OSS. In addition, DCI's accumulated deficit at September 30, 1998 was $(8,061,004) and DCI's shareholders' deficit at September 30, 1998 was $(1,219,356). We estimate that, on a pro forma basis, the acquisition of DCI would have resulted in a decrease to the net book value of our shares of common stock as of September 30, 1998 from $0.76 (actual) to $2.83 (pro forma) and $2.82 (pro forma adjusted to reflect the subsequent conversions of 10% Preferred Stock and 5% Preferred Stock and the subsequent issuance of Series A Preferred Stock). The final determination of the value of consideration issued by OSS and the liabilities assumed will be made at the effective time of the DCI Merger. Accordingly, the determination of the total purchase price, liabilities assumed and the allocations may change significantly from the amounts stated in this prospectus. SELLING SHAREHOLDERS The following table sets forth, as of November 30, 1998, the name of each of the Selling Shareholders, certain beneficial ownership information with respect to each of the Selling Shareholders, and the number and percentage of securities offered by this prospectus that may be sold from time to time by the Selling Shareholders pursuant to this prospectus. Unless otherwise indicated, the number of shares of common stock set forth in the following table that is being offered by the Selling Shareholders who will receive their shares of common stock upon the conversion of the 10% Preferred Stock or the conversion of the Series A Preferred Stock represents an estimate of the number of shares of common stock that such Selling Shareholder will offer. The actual number of shares of our common stock that we may issue to such Selling Shareholders upon conversion of the 10% Preferred Stock or the Series A Preferred Stock is indeterminate, is subject to adjustment, and could be materially less or more than such estimated number depending on factors that we cannot predict at this time, including, among other factors, the future market price of our common stock. The actual number of shares of common stock offered by this prospectus, and included in the Registration Statement of which this prospectus is a part, includes such additional number of shares of common stock that we may be required to issue upon conversion of the 10% Preferred Stock or the Series A Preferred Stock by reason of the floating rate conversion price mechanism or the other adjustment mechanisms described in this prospectus, or by reason of any stock split, stock dividend or similar transaction involving our common stock, in order to prevent dilution, in accordance with Rule 416 under the Securities Act of 1933, as amended. There is no assurance that the Selling Shareholders will sell the shares offered by this prospectus.
--------------------------------------------------------------------------------------------------------------------------- Percentage of Shares of Common Shares of Common Common Stock Stock Owned Stock Owned Owned Beneficially Name of Selling Beneficially Before Shares of Common Beneficially After Before Offering/After Shareholder Offering Stock Offered Hereby Offering Offering (1) --------------------------------------------------------------------------------------------------------------------------- William R. Cullen 34,000 (2) 24,000 10,000 * Arrow Investors LLC 50,000 (3) (4) 50,000 0 (4) * West End Capital LLC 50,000 (5) (6) 50,000 0 (6) * Archer Investors LLC _______ (7) (8) _______ 0 (8) *
13
Susan M. Duncan 19,485 (9)(10) 16,985 _______ (10) * Susan M. Duncan Irrevocable 38,171 (11)(12) 33,971 _______ (12) Gift Trust William D. Brennick, DDS PC _______ (9) 16,985 _______ * Profit Sharing Plan Lee E. Schlessman _______ (13)(14) 135,886 _______ (14) Lee E. Schlessman, as power of _______ (9)(15) 16,985 _______ (15) * attorney for Sandra Garnett (24) Lee E. Schlessman, as power of _______ (9)(16) 16,985 _______ (16) * attorney for Cheryl Bennett Lee E. Schlessman, as power of _______ (9)(17) 16,985 _______ (17) * attorney for Gary Schlessman The Schlessman Family _______ (9)(18) 16,985 _______ (18) * Foundation Southwest Contracting, Inc. _______ (9) 16,985 _______ * Cal J. and Amanda Rae Rickel _______ (9) 16,985 _______ * Bushrod Burns Hanifen Imhoff, 81,585 (9)(19) 16,985 _______ * Inc. Custodian IRA Stephen P. Clifford _______ (20) 25,797 _______ * Charles E. Wynot, DMD _______ (21) 31,321 _______ * Robert H. Stange _______ (22) 8,492 _______ * Larry B. and Deanna D. Fulton _______ (22) 8,492 _______ * C. Wayne and Sheila Clayton _______ (9) 16,985 _______ * Mercer Brian W. and Rachel T. Brazell _______ (22) 8,492 _______ * Carl M. Williams Revocable _______ (9) 16,985 _______ * Trust Schield Management Cormpany 10,475 (23) 8,385 _______ * I. Joseph Shyne Trust 6,247 (24) 5,622 _______ * Arab Commerce Bank Ltd. 19,271 (25) 16,771 _______ * Dwayne E. and Sarah H. Thomas _______ (23) 8,385 _______ *
- ---------------------- * Less than 1% of shares outstanding. (1) In calculating percentage ownership, all shares of common stock which the Selling Shareholder has the right to acquire within 60 days from the date of this Prospectus upon the exercise of options, warrants, or convertible securities are deemed to be outstanding for the purpose of calculating the percentage of common stock owned by the Selling Shareholder. 14 (2) Includes options for the purchase of 10,000 shares, but excludes options for the purchase 120,000 shares that are not exercisable during the next 60 days. (3) Represents 50,000 shares issuable upon the exercise of a warrant to purchase shares at a per share exercise price of $16.33. (4) Excludes shares of common stock beneficially owned by its affiliates, West End Capital LLC and Archer Investors LLC. (5) Represents 50,000 shares issuable upon the exercise of a warrant to purchase shares at a per share exercise price of $16.33. (6) Excludes shares of common stock beneficially owned by its affiliates, Arrow Investors LLC and Archer Investors LLC. (7) Represents shares issuable (after taking into account the terms of the Series A Preferred Stock which provide that at no time shall Archer Investors LLC, together with its affiliates, among whom are West End Capital LLC and Arrow Investors LLC, convert the Series A Preferred Stock to result in Archer Investors LLC, together with its affiliates, beneficially owning, after such conversion, a number of shares exceeding 9.9% of OSS' then outstanding common stock) upon the conversion of the Series A Preferred Stock if such conversion occurred as of the close of business on November 30, 1998 plus the 140,000 shares issuable to Archer Investors LLC upon the exercise of a warrant to purchase shares at a per share exercise price of $5.71. If the limitation on beneficial ownership described above was not taken into account, the number of shares issuable upon the conversion of the Series A Preferred Stock held by Archer Investors LLC if such conversion occurred as of the close of business on November 30, 1998 plus the 140,000 shares issuable upon the exercise of the warrant would be __________ shares. Upon the actual conversion of the Series A Preferred Stock, the number of shares into which the Series A Preferred Stock is convertible may be more or less than __________ shares, but in no event will be more than __________ shares or less than 245,183 shares. Pursuant to the terms of the Series A Preferred Stock, on November 30, 1998 the conversion price was approximately $_____. (8) Excludes shares of common stock beneficially owned by its affiliates, Arrow Investors LLC and West End Capital LLC. (9) Includes 14,985 shares issuable upon the conversion of shares of 10% Preferred Stock, including accrued but unpaid dividends thereon, if such conversion occurred as of the close of business on November 30, 1998 plus 2,000 shares issuable upon the exercise of a warrant to purchase shares at a per share exercise price of $15.00. Upon the actual conversion of the 10% Preferred Stock, the number of shares into which the 10% Preferred Stock is convertible may be more or less than 14,985 shares, but in no event will be less than 10,000 shares. Pursuant to the terms of the 10% Preferred Stock, on November 30, 1998 the conversion price was approximately $7.16. (10) Excludes shares of common stock beneficially owned by the Susan M. Duncan Irrevocable Gift Trust. (11) Includes 29,971 shares issuable upon the conversion of shares 10% Preferred Stock, including accrued but unpaid dividends thereon, if such conversion occurred as of the close of business on November 30, 1998 plus 4,000 shares issuable upon the exercise of a warrant to purchase shares of common stock at a per share exercise price of $15.00. Upon the actual conversion of the 10% Preferred Stock, the number of shares into which the 10% Preferred Stock is convertible may be more or less than 29,971 shares, but in no event will be less than 20,000 shares. Pursuant to the terms of the 10% Preferred Stock, on November 30, 1998 the conversion price was approximately $7.16. (12) Excludes shares of common stock beneficially owned by Susan M. Duncan. (13) Includes 119,886 shares issuable upon the conversion of shares of 10% Preferred Stock, including accrued but unpaid dividends thereon, if such conversion occurred as of the close of business on November 30, 1998 plus 16,000 shares of common stock issuable to the Selling Shareholder upon the exercise of a warrant to purchase shares of common stock at a per share exercise price of $15.00. Upon the actual conversion of the 10% Preferred Stock, the number of shares into which the 10% Preferred Stock is convertible may be more or less than 119,886 shares, but in no event will be less than 80,000 shares. Pursuant to the terms of the 10% Preferred Stock, on November 30, 1998 the conversion price was approximately $7.16. (14) Excludes shares of common stock beneficially owned by (1) Lee E. Schlessman as power of attorney for Sandra Garnett, (2) Lee E. Schlessman as power of attorney for Cheryl Bennett, (3) Lee E. Schlessman as power of attorney for Gary Schlessman, or (4) The Schlessman Family Foundation. (15) Excludes shares of common stock beneficially owned by (1) Lee E. Schlessman, (2) Lee E. Schlessman as power of attorney for Cheryl Bennett, (3) Lee E. Schlessman as power of attorney for Gary Schlessman, or (4) The Schlessman Family Foundation. 15 (16) Excludes shares of common stock beneficially owned by (1) Lee E. Schlessman, (2) Lee E. Schlessman as power of attorney for Sandra Garnett, (3) Lee E. Schlessman as power of attorney for Gary Schlessman, or (4) The Schlessman Family Foundation. (17) Excludes shares of common stock beneficially owned by (1) Lee E. Schlessman, (2) Lee E. Schlessman as power of attorney for Sandra Garnett, (3) Lee E. Schlessman as power of attorney for Cheryl Bennett, or (4) The Schlessman Family Foundation. (18) Excludes shares of common stock beneficially owned by (1) Lee E. Schlessman, (2) Lee E. Schlessman as power of attorney for Sandra Garnett, (3) Lee E. Schlessman as power of attorney for Cheryl Bennett, or (4) Lee E. Schlessman as power of attorney for Gary Schlessman. (19) Includes shares of common stock beneficially owned by Bushrod Burns and by BushDoll Family Ltd. Partnership. (20) Includes 23,797 shares issued upon conversion of shares of 10% Preferred Stock, including accrued but unpaid dividends thereon, on November 10, 1998 at a per share conversion price of $4.49 plus 2,000 shares of common stock issuable to the Selling Shareholder upon the exercise of a warrant to purchase shares of common stock at a per share exercise price of $15.00. (21) Includes 29,321 shares issued upon conversion of shares of 10% Preferred Stock, including accrued but unpaid dividends thereon, on November 4, 1998 at a per share conversion price of $3.64 plus 2,000 shares of common stock issuable to the Selling Shareholder upon the exercise of a warrant to purchase shares of common stock at a per share exercise price of $15.00. (22) Includes 7,492 shares issuable upon the conversion of shares of 10% Preferred Stock, including accrued but unpaid dividends thereon, if such conversion occurred as of the close of business on November 30, 1998 plus 1,000 shares issuable to the Selling Shareholder upon the exercise of a warrant to purchase shares of common stock at a per share exercise price of $15.00. Upon the actual conversion of the 10% Preferred Stock, the number of shares of common stock into which the 10% Preferred Stock is convertible may be more or less than 7,492 shares, but in no event will be less than 5,000 shares. Pursuant to the terms of the 10% Preferred Stock, on November 30, 1998 the conversion price was approximately $7.16. (23) Includes 7,385 shares issuable upon the conversion of shares of 10% Preferred Stock, including accrued but unpaid dividends thereon, if such conversion occurred as of the close of business on November 30, 1998 plus 1,000 shares issuable to the Selling Shareholder upon the exercise of a warrant to purchase shares of common stock at a per share exercise price of $15.00. Upon the actual conversion of the 10% Preferred Stock, the number of shares of common stock into which the 10% Preferred Stock is convertible may be more or less than 7,385 shares, but in no event will be less than 5,000 shares. Pursuant to the terms of the 10% Preferred Stock, on November 30, 1998 the conversion price was approximately $7.16. (24) Includes 5,122 shares issued upon conversion of shares of 10% Preferred Stock, including accrued but unpaid dividends thereon, on November 11, 1998 at a per share conversion price of $5.14 plus 500 shares of common stock issuable to the Selling Shareholder upon the exercise of a warrant to purchase shares of common stock at a per share exercise price of $15.00. (25) Includes 14,771 shares issuable upon the conversion of shares of 10% Preferred Stock, including accrued but unpaid dividends thereon, if such conversion occurred as of the close of business on November 30, 1998 plus 2,000 shares issuable to the Selling Shareholder upon the exercise of a warrant to purchase shares of common stock at a per share exercise price of $15.00. Upon the actual conversion of the 10% Preferred Stock, the number of shares of common stock into which the 10% Preferred Stock is convertible may be more or less than 14,771 shares, but in no event will be less than 10,000 shares. Pursuant to the terms of the 10% Preferred Stock, on November 30, 1998 the conversion price was approximately $7.16. PLAN OF DISTRIBUTION We have been advised that the shares offered by this Prospectus may be sold from time to time by the Selling Shareholders or by pledgees, donees, transferees or other successors in interest. Such sales may be made in the Nasdaq SmallCap Market or such other over-the-counter market or otherwise at prices and at terms then prevailing or at prices related to the then current market price or in negotiated transactions. Such shares may be sold by one or more of the following: - A block trade in which the broker or dealer so engaged will attempt to sell shares as agent but may position and resell a portion of the block as principal to facilitate the transaction. - Purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this prospectus. - Ordinary brokerage transactions and transactions in which the broker solicits purchasers. 16 - In privately negotiated transactions not involving a broker or dealer. In effecting sales, brokers or dealers engaged to sell the shares may arrange for other brokers or dealers to participate. Brokers or dealers engaged to sell the shares will receive compensation in the form of commissions or discounts in amounts to be negotiated immediately prior to each sale. Such brokers or dealers and any other participating brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, as amended, in connection with such sales. OSS will receive no proceeds from any resales of the shares offered by this prospectus, and we anticipate that the brokers or dealers, if any, participating in the sales of such shares will receive the usual and customary selling commissions. To comply with the securities laws of certain states, if applicable, the shares will be sold therein only through brokers or dealers. In addition, in certain states, the shares may not be sold unless they have been registered or qualified for sale in such states or an exemption from registration or qualification is available and is complied with. DESCRIPTION OF SECURITIES GENERAL Our Articles of Incorporation authorize our Board of Directors to issue 25,000,000 shares of capital stock, including 20,000,000 shares of common stock, no par value, and 5,000,000 shares of preferred stock, with such par value and such rights, preferences and privileges as are determined by the Board of Directors. COMMON STOCK As of November 30, 1998, 4,225,088 shares of our common stock were outstanding. Holders of common stock are entitled to dividends when, as and if declared by the Board of Directors out of funds available therefor, subject to loan agreement limitations and priority as to dividends for preferred stock that may be outstanding. Holders of common stock are entitled to cast one vote for each share held at all stockholder meetings for all purposes, including the election of directors. The holders of more than 50% of the voting power of the common stock issued and outstanding and entitled to vote, present in person or by proxy, (together with any preferred stock issued and outstanding and entitled to vote, present in person or by proxy) constitute a quorum at all meetings of our shareholders. The vote of the holders of a majority of common stock present at such a meeting (together with any preferred stock present and entitled to vote at such meeting) will decide any question brought before such meeting, except when Colorado law, our Articles of Incorporation, or our Bylaws require a greater vote and except when Colorado law requires a vote of any preferred stock issued and outstanding, voting as a separate class, to approve a question brought before such meeting. If we liquidate or dissolve, the holders of each outstanding share of common stock will be entitled to share equally in our assets legally available for distribution to such shareholder after payment of all liabilities and after distributions to holders of preferred stock legally entitled to such distributions. Holders of common stock do not have any preemptive, subscription or redemption rights. Holders of common stock do not have cumulative voting for the election of directors. All outstanding shares of common stock are fully paid and nonassessable and the shares of common stock offered by this prospectus will be, upon issuance, fully paid and nonassessable. The holders of the common stock do not have any registration rights with respect to the common stock. 10% PREFERRED STOCK As of November 30, 1998, 245,000 shares of our 10% Preferred Stock were outstanding. The following is a summary of the rights, privileges and preferences of the 10% Preferred Stock. This summary is qualified in its entirety by reference to the terms of the 10% Preferred Stock incorporated by reference as an exhibit to the registration statement of which this prospectus is a part. VOTING. Each share of 10% Preferred Stock entitles the holder to one vote per share. The holders of the common stock and the 10% Preferred Stock vote as a single class on all matters on which our shareholders vote, except where otherwise required by law. The holders of the 10% Preferred Stock do not have cumulative voting for the election of directors. 17 DIVIDENDS. The cumulative noncompounded dividend on the 10% Preferred Stock is 10% per annum based on the stated value of $10.00 per share, payable quarterly as permitted by law, or upon the redemption or conversion of the 10% Preferred Stock into common stock. We may not declare or pay any dividends on the common stock unless we first declare and pay all unpaid dividends on the 10% Preferred Stock. REDEMPTION AND CONVERSION. We may redeem the 10% Preferred Stock at any time for $10.00 per share. Each share of the outstanding 10% Preferred Stock is convertible, at the election of the holder thereof, into the number of shares of our common stock 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 our common stock for the five trading days immediately preceding the election by the holder thereof (as calculated, the "Average Per Share Closing Bid Price"). If we elect to redeem the 10% Preferred Stock, then we must give not more than 60 days and not less than 30 days notice to the holders of the 10% Preferred Stock of our intent to redeem the 10% Preferred Stock. This notice must provide the holders of the 10% Preferred Stock the option to have their 10% Preferred Stock either (1) redeemed by us or (2) converted into shares of our common stock pursuant to the formula set forth in (i) and (ii) above except that for the purposes of calculating the conversion rate the Average Per Share Closing Bid Price shall be defined as the average per share closing bid price of our common stock for the five trading days immediately preceding that date on which we first give such notice to the holders of the 10% Preferred Stock. At any time while any shares of the 10% Preferred Stock are outstanding, we may not incur any obligations (other than trade payables and other short-term indebtedness issued in the ordinary course of business) that are senior to the 10% Preferred Stock in any respect, including liquidation. Upon any redemption or conversion of the 10% Preferred Stock, we will have the option to pay the accrued but unpaid cumulative dividends 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 we first give notice of such redemption 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 our common stock for the five trading days immediately preceding the election to convert by the holder of the 10% Preferred Stock. PREEMPTIVE RIGHTS. The holders of the 10% Preferred Stock do not have preemptive rights to subscribe for any additional shares of any class of our capital stock or for any issue of bonds, notes or other securities convertible into any class of our capital stock. LIQUIDATION PREFERENCE. If we liquidate, dissolve or wind-up our business, whether voluntary or otherwise, after we pay our debts and other liabilities, the holders of the 10% Preferred Stock will be entitled to receive from our remaining net assets, before any distribution to the holders of our common stock, the amount of $10.00 per share of 10% Preferred Stock in cash plus payment of all accrued but unpaid cumulative dividends. Holders of the 10% Preferred Stock will not be entitled to receive any other payments if we liquidate, dissolve or wind-up our business. SERIES A PREFERRED STOCK As of November 30, 1998, 1,400 shares of our Series A Preferred Stock were outstanding. The following is a summary of the rights, privileges and preferences of the Series A Preferred Stock. This summary is qualified in its entirety by reference to the terms of the Series A Preferred Stock incorporated by reference as an exhibit to the Registration Statement of which the prospectus is a part. VOTING. Each share of Series A Preferred Stock entitles the holder to cast the number of votes equal to the number of whole shares of common stock into which the Series A Preferred Stock held by such holder are convertible immediately after the close of business on the record date fixed for meeting at which the vote is to be taken. The holders of the Series A Preferred Stock do not have cumulative voting for the election of directors. DIVIDENDS. The cumulative noncompounded dividend on the Series A Preferred Stock is 5% per annum based on the stated value of $1,000 per share, payable as permitted by law, at our option, in cash or in common stock upon the earlier of (1) the redemption or conversion of the Series A Preferred Stock or (2) the liquidation of OSS. We may not declare and pay any dividends on the common stock unless all we first declare and pay all unpaid dividends on the Series A Preferred Stock. Dividends on the Series A Preferred Stock are equal in preference to any dividends declared on the 10% Preferred Stock. 18 REDEMPTION AND CONVERSION. We may redeem the Series A Preferred Stock, in whole or in part, at any time on or prior to February 7, 1999 for a price per share equal to $1,000 plus any accrued but unpaid dividends. The redemption price per share will increase to $1,150 plus any accrued but unpaid dividends if the registration statement to be filed with the Securities and Exchange Commission to register the shares of common stock issuable upon the conversion of the Series A Preferred Stock and the shares of common stock issuable upon the exercise of certain warrants issued in connection with the issuance of the Series A Preferred Stock has not been declared effective and remains effective on the date that we give notice of redemption of the Series A Preferred Stock. Each share of the outstanding Series A Preferred Stock is convertible, subject to the limitation described below, at any time at the election of the holder thereof, into the number of shares of common stock equal to $1,000 divided by the lower of (1) $5.71 or (2) 80% of the average per share closing bid price of the common stock for any five consecutive trading days during the twenty trading days immediately preceding the date on which the holder thereof elects to convert such Series A Preferred Stock (the "Conversion Price"). If we elect to redeem the Series A Preferred Stock, we must give at least thirty days notice to the holders of the Series A Preferred Stock of our intent to redeem the Series A Preferred Stock. During this thirty day notice period, the holders, the holders of the Series A Preferred Stock are entitled to convert their shares of Series A Preferred Stock into common stock at the Conversion Price applicable on the day such holder elects to convert such Series A Preferred Stock. After such thirty day period, the holders of the Series A Preferred Stock may not thereafter convert the Series A Preferred Stock into shares of common stock. Upon any conversion of the Series A Preferred Stock we have the option to pay the accrued but unpaid cumulative dividend on the Series A Preferred Stock either (1) in cash or (2) by issuing additional shares of common stock calculated by adding the amount of the accrued but unpaid dividend into the $1,000 stated value set forth in the formula above. PREEMPTIVE RIGHTS. The holders of the Series A Preferred Stock have no preemptive rights to subscribe for any additional shares of any class of our capital stock or for any issue of bonds, notes or other securities convertible into any class of our capital stock. LIQUIDATION PREFERENCE. If we liquidate, dissolve or wind-up our business, whether voluntary or otherwise, after we pay our debts and other liabilities, the holders of the Series A Preferred Stock will be entitled to receive from our remaining net assets, before any distribution to the holders of our common stock, the amount of $1,000 per share of Series A Preferred Stock in cash plus payment of all accrued but unpaid dividends. The liquidation preference on the Series A Preferred Stock is equal in preference to the liquidation preference on the 10% Preferred Stock. Thereafter, holders of the Series A Preferred Stock shall be entitled to share in any distributions made to the holders of our common stock as if each share of Series A Preferred Stock was converted (pursuant to the formula set forth above) into the number of shares of common stock into which it is convertible immediately prior to the close of business on the business day fixed for such distribution. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any document we file with the SEC at the SEC's public reference room located at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's public reference rooms located at it's regional offices in New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0300 (1-800-732-0300) for further information on the operation of public reference rooms. You can also obtain copies of this material from the SEC's Internet web site located at http://www.sec.gov. The SEC allows us to "incorporate by reference" the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be a part of this prospectus, and information that we file later with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below and any future filings we will make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 (file no. 0-28462): (a) Our Annual Report on Form 10-KSB, as amended, for the year ended December 31, 1997. 19 (b) Our Quarterly Reports on Form 10-QSB for the quarters ended March 31, 1998, June, 30, 1998 and September 30, 1998. (c) The description of our common stock contained in our Registration Statement on Form 8-A, as amended, filed with the SEC on May 22, 1996. You may request a copy of these filings, at no cost, by writing or telephoning us at the following address and telephone number: Shareholder Services Attn: Kim Castillo Online System Services, Inc. 1800 Glenarm Place Suite 700 Denver, Colorado 80202 (303) 296-9200 This prospectus is part of a registration statement we filed with the SEC. You should rely only on the information or representations provided in this prospectus. We have authorized no one to provide you with different information. The Selling Shareholders will not make an offer of these shares in any state where the offer is not permitted. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front page of this prospectus. LEGAL MATTERS Our legal counsel, Gray, Plant, Mooty, Mooty & Bennett, P.A., Minneapolis, Minnesota, will issue an opinion about the legality of the shares registered by this prospectus. EXPERTS The financial statements incorporated by reference in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports. You should refer to such report, which includes an explanatory paragraph that discusses substantial doubt about our ability to continue as a going concern. INDEMNIFICATION Our Articles of Incorporation provide that we shall indemnify, to the full extent permitted by Colorado law, any of our directors, officers, employees or agents who are made, or threatened to be made, a party to a proceeding by reason of the fact that such person is or was one of our directors, officers, employees or agents against judgments, penalties, fines, settlements and reasonable expenses incurred by the person in connection with the proceeding if certain standards are met. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to our directors, officers and controlling persons pursuant to these provisions, or otherwise, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. Our Articles of Incorporation also limit the liability of our directors to the fullest extent permitted by the Colorado law. Specifically, our Articles of Incorporation provide that our directors will not be personally liable for monetary damages for breach of fiduciary duty as directors, except for (i) any breach of the duty of loyalty to OSS or its shareholders, (ii) acts or omissions not in good faith or that involved intentional misconduct or a knowing violation of law, (iii) dividends or other distributions of corporate assets that are in contravention of certain statutory 20 or contractual restrictions, (iv) violations of certain laws, or (v) any transaction from which the director derives an improper personal benefit. Liability under federal securities law is not limited by our Articles of Incorporation. 21 ================================================================================ 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 ---- The Company.......................................................... 2 Risk Factors......................................................... 3 Special Note Regarding Forward-Looking Statements.................... 11 Use of Proceeds...................................................... 11 Recent Developments.................................................. 11 Selling Shareholders................................................. 13 Plan of Distribution................................................. 17 Description of Securities............................................ 17 Where You Can Find More Information.................................. 20 Legal Matters........................................................ 20 Experts.............................................................. 20 Indemnification...................................................... 21 ================================================================================ ================================================================================ ONLINE SYSTEM SERVICES, INC. _______________ PROSPECTUS _______________ _____________, 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 Form S-3 Registration Statement. All of the amounts shown are estimates, except for the Securities and Exchange Commission registration fee and the Nasdaq listing fee. All of such expenses will be paid by the Company. Securities and Exchange Commission fee $ 3,521.38 Accounting fees and expenses $ 1,500.00 Legal fees and expenses $ 5,000.00 Printing, Mailing $ 1,000.00 Transfer Agent fees $ 500.00 Miscellaneous $ 478.62 ---------- TOTAL $12,000.00 ========== 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 fact that such person is or was a director, officer, employee or agent of the Company against judgments, penalties, fines, settlements and reasonable expenses incurred by the person in connection with the proceeding if certain standards are met. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. The Company's Articles of Incorporation limit the liability of its directors to the fullest extent permitted by Colorado law. Specifically, the Articles of Incorporation provide that directors of the Company will not be personally liable for monetary damages for breach of fiduciary duty as directors, except for (i) any breach of the duty of loyalty to the Company or its shareholders, (ii) acts or omissions not in good faith or that involved intentional misconduct or a knowing violation of law, (iii) dividends or other distributions of corporate assets that are in contravention of certain statutory or contractual restrictions, (iv) violations of certain laws, or (v) any transaction from which the director derives an improper personal benefit. Liability under federal securities law is not limited by the Articles. ITEM 16. EXHIBITS 3.1 Articles of Incorporation, as amended, of the Company* 3.2 Bylaws of the Company (1) 4.1 Specimen form of the Company's Common Stock certificate (2) 4.2 Form of Warrant 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 4.4 Form of Warrant issued to holders of 10% Preferred Stock (3) 4.5 Form of Warrant issued in connection with issuance of 5% Preferred Stock* 4.6 Form of Warrant issued to holders of Series A Preferred Stock* 5.1 Opinion of Counsel* 23.1 Consent of Arthur Andersen LLP* - ------------ * Filed herewith II-1 (1) Filed with the initial Registration Statement on Form SB-2, filed April 5, 1996, Commission File No. 333-3282-D. (2) Filed with Amendment No. 1 to the Registration Statement on Form SB-2, filed May 3,1996, Commission File No. 333-3282-D. (3) Filed with Form 10-KSB for the year ended December 31, 1997, Commisssion File No. 0-28462. ITEM 17. UNDERTAKINGS A. The undersigned registrant hereby undertakes: (1) to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to: (a) include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, (b) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or together, represent a fundamental change in the information in the registration statement, and (c) to include any additional or changed material information on the plan of distribution; (2) to treat, for determining liability under the Securities Act of 1933, each such post-effective amendment as a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (3) to remove from registration by means of a post-effective amendment any of the securities being registered that remain unsold at the termination of the offering. B. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the registrant as discussed above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Denver, State of Colorado, on December 21, 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 Thomas S. Plunkett, and each of them, his/her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him/her and in his/her name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full powers and authority to do and perform each and every act and things requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that said attorneys-in- fact and agents or their or his/her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below on the ___ day of December, 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 and Chief Financial Officer) /s/ Stuart J. Lucko - ----------------------------- Stuart J. Lucko (Controller) /s/ Paul H. Spieker - ----------------------------- Paul H. Spieker (Director) /s/ Robert J. Lewis - ----------------------------- Robert J. Lewis (Director) /s/ Richard C. Jennewine - ----------------------------- Richard C. Jennewine (Director) /s/ William R. Cullen - ----------------------------- William R. Cullen (Director) II-3 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 4.4 Form of Warrant issued to holders of 10% Preferred Stock (3) 4.5 Form of Warrant issued in connection with issuance of 5% Preferred Stock* 4.6 Form of Warrant issued to holders of Series A Preferred Stock* 5.1 Opinion of Counsel* 23.1 Consent of Arthur Andersen LLP* - ------------ * Filed herewith (1) Filed with the initial Registration Statement on Form SB-2, filed April 5, 1996, Commission File No. 333-3282-D. (2) Filed with Amendment No. 1 to the Registration Statement on Form SB-2, filed May 3,1996, Commission File No. 333-3282-D. (3) Filed with Form 10-KSB for the year ended December 31, 1997, Commission File No. 0-28462. EX-3.1 2 ARTICLES OF INCORPORATION EXHIBIT 3.1 ARTICLES OF INCORPORATION ------------------------- OF -- ONLINE SYSTEM SERVICES, INC. ---------------------------- The undersigned incorporator, being a natural person of the age of eighteen years or more hereby establishes a corporation pursuant to the statutes of the State of Colorado and adopts the following Articles of Incorporation: ARTICLE I --------- NAME ---- The name of the corporation shall be Online System Services, Inc. ARTICLE II ---------- PERIOD OF DURATION ------------------ This Corporation shall exist in perpetuity, from and after the date of filing these Articles of Incorporation with the Secretary of State of the State of Colorado unless dissolved according to law. ARTICLE III ----------- PURPOSES -------- The purpose for which this corporation is organized is to engage in any lawful act or activity for which corporations may be organized under the laws of the State of Colorado. In furtherance of the foregoing purposes, the Corporation shall have and may exercise all of the rights, powers and privileges now or hereafter conferred upon corporations organized under the laws of the State of Colorado. In addition, it may do `everything necessary, suitable or proper for the accomplishment of any of its corporate purposes. ARTICLE IV ---------- CAPITAL ------- 1. Authorized Shares. The aggregate number of shares which this corporation shall have authority to issue is 10,000 shares, all of one class, Common Stock, having no par value. 2. Restrictions. The Corporation shall have the right to impose restrictions on the transfer of shares of the Corporation. 3. Dividends. The Board of Directors may from time to time distribute to shareholders in partial liquidation, or out of stated capital or capital surplus of the Corporation, a portion of its assets, in cash or property, subject to the limitations contained within the statutes of the State of Colorado. 4. Distribution in Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, and after paying or adequately providing for the payment of all its obligations, the remainder of the assets of the Corporation shall be distributed, either in cash or in kind, pro rata to the holders of the Common Stock. ARTICLE V --------- VOTING BY SHAREHOLDERS ---------------------- 1. Voting Rights; No Cumulative Voting. Each outstanding share of Common Stock is entitled to the vote and each fractional share of Common Stock is entitled to a corresponding fractional vote on each matter submitted to a vote of shareholders. Cumulative voting shall not be allowed in the election of directors of the Corporation and every shareholder entitled to vote at such election shall have the right to vote the number of shares owned by him for as many persons as there are directors to be elected, and for whose election he has a right to vote. 2. Denial of Preemptive Rights. No shareholder of the Corporation, whether now or hereafter authorized, shall have any preemptive or similar right to acquire any additional unissued or treasury shares of stock or securities of any class or rights, warrants or options to purchase stock or scrip or securities in any kind, including shares or securities convertible into shares or carrying stock purchase warrants or privileges. 3. Majority Vote. A quorum for the purpose of stockholder meetings will consist of a majority of the shares issued and outstanding and entitled to vote at the meeting. When a quorum is present, and when the statute requires a vote of two- thirds of the shares entitled to vote to take action, the affirmative vote of a majority of the shares issued and outstanding and entitled to vote on the subject matter shall be the act of the stockholders. 2 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 3 (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, 4 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. 5 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. 6 ARTICLE XI ---------- REGISTERED OFFICE AND REGISTERED AGENT -------------------------------------- The address of the initial registered office of the Corporation is 1800 Glenarm Place, Suite 700, Denver, Colorado 80202 and the name of the initial registered agent at such address is R. Steven Adams. Either the registered office or the registered agent may be changed in the manner permitted by law. ARTICLE XII ----------- INCORPORATOR ------------ The name and address of the incorporator is as follows: NAME MAILING ADDRESS - ---- --------------- Kim P. Castillo 1800 Glenarm Place, Suite 700 Denver, Colorado 80202 IN WITNESS WHEREOF, the above-named incorporator has signed these Articles of Incorporation this 22nd day of March 1994. /s/ Kim P. Castillo -------------------------------------- Kim P. Castillo STATE OF COLORADO ) ss. COUNTY OF DENVER ) I, the undersigned, a Notary Public, hereby certify that on the 22nd day of March 1994, personally appeared before me, Kim P. Castillo, who being by me first duly sworn, severally declared that she is the person who signed the foregoing document as incorporator, and the statements therein contained are true. WITNESS my hand and official seal [SEAL] /s/ Colleen K. Overocker -------------------------------------- Notary Public My Commission Expires: May 17, 1995 ------------- 7 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 8 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 9 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 10 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. 11 (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 12 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. 13 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 14 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 15 profits, surplus or other funds legally available for the payment of dividends, and shall be cumulative so that if such dividends on the 5% Preferred Stock shall not have been paid, or declared and set apart for payment, the deficiency shall be fully paid or declared and set apart for payment before any dividend shall be paid or declared or set apart for any Common Stock or other class or series of capital stock ranking junior to the 5% Preferred Stock (such stock being collectively referred to herein as the "Junior Stock") and before any purchase or acquisition of any Junior Stock is made by the Corporation, except the repurchase of Junior Stock from employees of the Corporation upon termination of employment. At the earlier of: (1) the redemption or conversion of the 5% Preferred Stock or (2) the liquidation of the Corporation, any accrued but undeclared dividends shall be paid to the holders of record of outstanding shares of the 5% Preferred Stock in accordance with the provisions of this Section 6. No accumulation of dividends on the 5% Preferred Stock shall bear interest. B. Liquidation, Dissolution or Winding Up. (1) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of the 5% Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, after and subject to the payment in full of all amounts required to be distributed to the holders of any Senior Preferred Stock ranking on liquidation prior and in preference to the Preferred Stock, but before any payment shall be made to the holders of Junior Stock by reason of their ownership thereof, an amount equal to $1,000 per share of 5% Preferred Stock (the "Liquidation Preference") plus any accrued but unpaid dividends (whether or not declared). The rights of the holders of 5% Preferred Stock and 10% Preferred Stock to receive any such distributions shall be equal in preference and priority. If upon any such liquidation, dissolution or winding up of the Corporation the remaining assets of the Corporation available for distribution to its shareholders shall be insufficient to pay the holders of shares of the 5% Preferred Stock the full amount to which they shall be entitled, the holders of shares of the 5% Preferred Stock shall share ratably in any distribution of the remaining assets and funds of the Corporation in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. (2) After the payment of all preferential amounts required to be paid to the holders of the 5% Preferred Stock and the 10% Preferred Stock upon the dissolution, liquidation, or winding up of the Corporation, all of the remaining assets and funds of the Corporation available for distribution to its shareholders shall be distributed ratably among the holders of the 5% Preferred Stock and the Junior Stock, with each share of 5% Preferred Stock being deemed, for such purpose, to be equal to the number of shares of Common Stock, including fractions of a share, into which such share of 5% Preferred Stock is convertible immediately prior to the close of business on the business day fixed for such distribution. C. Voting. (1) Each holder of outstanding shares of 5% Preferred Stock shall be entitled, at each meeting of shareholders of the Corporation (and with respect to written consents of shareholders in lieu of meetings) with respect to any and all matters presented to the shareholders of the Corporation for their action or consideration, to the 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 16 establishing any other series of preferred stock, holders of 5% Preferred Stock shall vote together with the holders Common Stock as a single class. (2) The holders of the 5% Preferred Stock shall not be entitled to any rights of cumulative voting with respect to their shares. D. Preemptive Rights. No holder of Preferred Stock shall have any preemptive or similar right to acquire any additional unissued or treasury shares of stock or securities of any class or rights, warrants or options to purchase stock or scrip or securities in any kind, including shares or securities convertible into shares or carrying stock purchase warrants or privileges. E. Other Securities. Subject to any limitations contained in these Articles of Incorporation, the Board of Directors of the Corporation reserves the right to establish additional classes and/or series of capital stock of the Corporation and to designate the preferences, limitations and relative rights of any such classes and/or series; provided, however, that no such class and/or series may have preferences, limitations and relative rights which are superior to or senior to the preferences, limitations and relative rights granted to the holders of the 5% Preferred Stock. F. Capital Reorganization. If the Corporation shall at any time hereafter subdivide or combine its outstanding shares of Common Stock, declare a dividend payable in Common Stock, or in case of any capital reorganization or reclassification of the shares of Common Stock of the Corporation, the number of shares of the 5% Preferred Stock and the stated value of the 5% Preferred Stock shall be adjusted appropriately to allow the holders of the 5% Preferred Stock, as nearly as reasonably possible, to maintain (i) the aggregate stated value of the 5% Preferred Stock and (ii) their pro rata interest in the Corporation and in the Common Stock upon conversion of the 5% Preferred Stock, that each holder had prior to any such subdivision, combination, stock dividend, reorganization or reclassification. G. Optional Redemption (1) At any time within the 120 days following the Initial Closing Date, the Corporation may, at its option, redeem all or any portion of the shares of 5% Preferred Stock then outstanding upon not less than ten (10) days' notice at a redemption price per share equal to (A) the quotient of (i) the Liquidation Preference per share of 5% Preferred Stock plus all accrued but unpaid dividends on such shares of 5% Preferred Stock and (ii) the Conversion Price as if the 5% Preferred Stock has been converted on the 5% Preferred Stock Redemption Date (as hereinafter defined) multiplied by (B) the average Closing Bid Price (as hereinafter defined) of shares of Common Stock for the five (5) trading days immediately preceding the 5% Preferred Stock Redemption Date. Notwithstanding the foregoing, a redemption shall not occur pursuant to this Subsection G(1) with respect to any 5% Preferred Stock for which a holder has previously submitted a Notice of Conversion pursuant to Subsection H of this Section 6. For purposes of this Section 6, the term "Closing Bid Price" means, for any security as of any date, the closing bid price on the principal securities exchange or trading market where the Common Stock is listed or traded as reported by Bloomberg, L.P. ("Bloomberg") or, if applicable, the closing bid price of the Common Stock in the over-the- counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price is reported for the Common Stock by Bloomberg, then the average of the bid 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 17 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 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 18 connection with conversions of 5% Preferred Stock; such approvals are referred to herein as the "Required Approvals"). The Corporation shall determine within five (5) business days following the receipt of a Notice of Conversion which of such actions it shall take, and shall promptly furnish notice to each of the holders of 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 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. 19 (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 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. 20 (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 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 (662/3%) 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. 21 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 in accordance with Section 7-110-103 of the Colorado Business Corporation Act, the amendment set forth below was duly adopted by the shareholders of the Corporation on July 30, 1998. The undersigned further certifies that the number of votes cast for the amendment by each voting group entitled to vote separately on the amendment was sufficient for approval by that voting group. ARTICLE IV, Section 1 of the Articles of Incorporation of the Corporation is amended and replaced in its entirety to read as follows: 1. Authorized Shares. The aggregate number of shares that the Corporation has authority to issue is 25,000,000. The shares are classified in two classes, consisting of 20,000,000 shares of Common Stock, no par value, and 5,000,000 shares of Preferred Stock, with such par value as the Board of Directors of the Corporation may designate. The Board of Directors of the Corporation is authorized to establish one or more series of Preferred Stock, setting forth the designation of each such series, and fixing the preferences, limitations and relative rights of each such series of Preferred Stock. IN WITNESS WHEREOF, the undersigned has executed these Articles of Amendment this 19th day of August, 1998. /s/ Thomas S. Plunkett ----------------------- Thomas S. Plunkett Chief Financial Officer 22 ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION OF ONLINE SYSTEM SERVICES, INC. The undersigned, Thomas S. Plunkett, Chief Financial Officer of Online System Services, Inc., a Colorado corporation (the "Corporation"), DOES HEREBY CERTIFY that pursuant to actions taken by the Board of Directors on November 9, 1998 in accordance with Sections 7-106-101, 7-106-102 and 7-110-102 of the Colorado Business Corporation Act, the following amendment was duly adopted by the Board of Directors without shareholder approval as permitted by Section 7- 106-102(4) of the Colorado Business Corporation Act: ARTICLE IV of the Articles of Incorporation of the Corporation, as amended, is further amended by adding a new Section 7, the text of which is set forth on Exhibit A attached hereto. IN WITNESS WHEREOF, the undersigned has executed these Articles of Amendment this 10th day of November, 1998. /s/ Thomas S. Plunkett ----------------------- Thomas S. Plunkett Chief Financial Officer 23 EXHIBIT A 7. Designation of Preferred Stock. The Corporation shall establish and reserve for issuance from its 5,000,000 authorized shares of Preferred Stock a class of convertible preferred stock consisting of 1,400 shares to be designated as the Series A Preferred Stock (the "Series A Preferred Stock"). The Series A Preferred Stock shall have a stated value of the Liquidation Preference (as hereinafter defined). Except as otherwise expressly stated in this Section 7, all shares of the Series A Preferred Stock shall be identical to the shares of 5% Preferred Stock and 10% Preferred Stock, and the holders of Series A Preferred Stock shall be entitled to the same preferences, limitations and relative rights as the holders of 5% Preferred Stock and 10% Preferred Stock. A. Dividends. (1) Holders of the Series A Preferred Stock shall be entitled to receive, out of funds legally available therefor, dividends at a rate equal to 5% (the "Dividend Rate") of the Liquidation Preference per share per annum (subject to appropriate adjustments in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares), and no more, payable in accordance with the provisions of this Section 7. (2) At the election of the Corporation, each dividend on Series A Preferred Stock shall be paid either in shares of Common Stock or in cash on the Delivery Date (as defined in Subsection H(2)(a) of this Section 7) with respect to any shares of Series A Preferred Stock which are the subject of a Notice of Conversion (as defined in Subsection H(2) of this Section 7). Dividends paid in shares of Common Stock shall be paid (based on an assumed value of $1,000 per share) in full shares only, with a cash payment equal to the value of any fractional shares. Each dividend paid in cash shall be mailed to the holders of record of the Series A Preferred Stock as their names and addresses appear on the share register of the Corporation or at the office of the transfer agent on the corresponding dividend payment date. Holders of Series A Preferred Stock will receive written notification from the Corporation or the transfer agent if a dividend is paid in kind, which notification will specify the number of shares of Common Stock paid as a dividend and the recipient's aggregate holdings of Common Stock as of that dividend payment date and after giving effect to the dividend. All holders of shares of Common Stock issued as dividends shall be entitled to all of the rights and benefits relating to shares of Common Stock as set forth in the Corporation's Articles of Incorporation, as amended, and By-laws. (3) Holders of the Series A Preferred Stock shall be entitled to payment of any dividends in preference and priority to any payment of any cash dividend on Common Stock or any other class or series of capital stock of the Corporation other than any other class or series of stock ranking senior ("Senior Preferred Stock") to the Series A Preferred Stock in respect of dividends, when and as declared by the Board of Directors of the Corporation. The rights of the holders of Series A Preferred Stock, 5% Preferred Stock and 10% Preferred Stock to receive any dividends shall be equal in preference and priority. Dividends on the Series A Preferred Stock shall accrue with respect to each share of the Series A Preferred Stock from the date on which such share is issued and outstanding and thereafter shall be deemed to accrue from day to day whether or not earned or declared and whether or not there exists profits, surplus or other funds legally available for the payment of dividends, and shall be cumulative so that if such dividends on the Series A Preferred Stock shall not have been paid, or declared and set apart for payment, the deficiency shall be fully paid or declared and set apart for payment before any dividend shall be paid or declared or set apart for any Common Stock or other class or series of capital stock ranking junior to the Series A Preferred Stock (such stock 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 24 the earlier of: (1) the redemption or conversion of the Series A Preferred Stock or (2) the liquidation of the Corporation, any accrued but undeclared dividends shall be paid to the holders of record of outstanding shares of the Series A Preferred Stock in accordance with the provisions of this Section 7. No accumulation of dividends on the Series A Preferred Stock shall bear interest. B. Liquidation, Dissolution or Winding Up. (1) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of the Series A Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, after and subject to the payment in full of all amounts required to be distributed to the holders of any Senior Preferred Stock ranking on liquidation prior and in preference to the Preferred Stock, but before any payment shall be made to the holders of Junior Stock by reason of their ownership thereof, an amount equal to $1,000 per share of Series A Preferred Stock (the "Liquidation Preference") plus any accrued but unpaid dividends (whether or not declared). The rights of the holders of Series A Preferred Stock, 5% Preferred Stock and 10% Preferred Stock to receive any such distributions shall be equal in preference and priority. If upon any such liquidation, dissolution or winding up of the Corporation the remaining assets of the Corporation available for distribution to its shareholders shall be insufficient to pay the holders of shares of the Series A Preferred Stock the full amount to which they shall be entitled, the holders of shares of the Series A Preferred Stock shall share ratably in any distribution of the remaining assets and funds of the Corporation in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. (2) After the payment of all preferential amounts required to be paid to the holders of the Series A Preferred Stock, 5% Preferred Stock and the 10% Preferred Stock upon the dissolution, liquidation, or winding up of the Corporation, all of the remaining assets and funds of the Corporation available for distribution to its shareholders shall be distributed ratably among the holders of the Series A Preferred Stock, 5% Preferred Stock and the Junior Stock, with each share of Series A Preferred Stock being deemed, for such purpose, to be equal to the number of shares of Common Stock, including fractions of a share, into which such share of Series A Preferred Stock and 5% Preferred Stock are convertible immediately prior to the close of business on the business day fixed for such distribution. C. Voting. (1) Each holder of outstanding shares of Series A Preferred Stock shall be entitled, at each meeting of shareholders of the Corporation (and with respect to written consents of shareholders in lieu of meetings) with respect to any and all matters presented to the shareholders of the Corporation for their action or consideration, to the number of votes equal to the number of whole shares of Common Stock into which the shares of Series A Preferred Stock held by such holder are convertible (as adjusted from time to time pursuant to Subsection H hereof) immediately after the close of business on the record date fixed for such meeting or the effective date of such written consent. Except as provided by law, by the provisions of Section J below, or by the provisions establishing any other series of preferred stock, holders of Series A Preferred Stock shall vote together with the holders Common Stock as a single class. (2) The holders of the Series A Preferred Stock shall not be entitled to any rights of cumulative voting with respect to their shares. D. Preemptive Rights. No holder of Preferred Stock shall have any preemptive or similar right to acquire any additional unissued or treasury shares of stock or securities of any 25 class or rights, warrants or options to purchase stock or scrip or securities in any kind, including shares or securities convertible into shares or carrying stock purchase warrants or privileges. E. Other Securities. Subject to any limitations contained in these Articles of Incorporation, the Board of Directors of the Corporation reserves the right to establish additional classes and/or series of capital stock of the Corporation and to designate the preferences, limitations and relative rights of any such classes and/or series; provided, however, that no such class and/or series may have preferences, limitations and relative rights which are superior to or senior to the preferences, limitations and relative rights granted to the holders of the Series A Preferred Stock. F. Capital Reorganization. If the Corporation shall at any time hereafter subdivide or combine its outstanding shares of Common Stock, declare a dividend payable in Common Stock, or in case of any capital reorganization or reclassification of the shares of Common Stock of the Corporation, the number of shares of the Series A Preferred Stock and the stated value of the Series A Preferred Stock shall be adjusted appropriately to allow the holders of the Series A Preferred Stock, as nearly as reasonably possible, to maintain (i) the aggregate stated value of the Series A Preferred Stock and (ii) their pro rata interest in the Corporation and in the Common Stock upon conversion of the Series A Preferred Stock, that each holder had prior to any such subdivision, combination, stock dividend, reorganization or reclassification. G. Optional Redemption (1) At any time within the 90 days following November 9, 1998, the Corporation may, at its option, redeem all or any portion of the shares of Series A Preferred Stock then outstanding upon not less than thirty (30) days' written notice at a redemption price per share equal to the Liquidation Preference of the Series A Preferred Stock plus any accrued but unpaid dividends (whether or not declared); provided, that if at the time of the notice of any such redemption, the Registration Statement to be filed by the Corporation pursuant to Section 2(a) of that certain Registration Rights Agreement dated November 9, 1998, between the Corporation and Archer Investors LLC has not been declared effective by the Securities and Exchange Commission and remains effective until the Series A Preferred Stock Redemption Date, the redemption price per share shall be equal to 115% of the Liquidation Preference of the Series A Preferred Stock plus any accrued but unpaid dividends (whether or not declared). Notwithstanding the foregoing, a redemption shall not occur pursuant to this Subsection G(1) with respect to any Series A Preferred Stock for which a holder has previously submitted a Notice of Conversion pursuant to Subsection H of this Section 7. For purposes of these Articles of Amendment, the term "Closing Bid Price" means, for any security as of any date, the closing bid price on the principal securities exchange or trading market where the Common Stock is listed or traded as reported by Bloomberg, L.P. ("Bloomberg") or, if applicable, the closing bid price of the Common Stock in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price is reported for the Common Stock by Bloomberg, then the average of the bid prices of any market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price of the Common Stock can not be calculated on such date on any of the foregoing bases, the Closing Bid Price of the Common Stock on such date shall be the fair market value as mutually determined by the Corporation and the holders of a majority of the outstanding shares of Series A Preferred Stock being converted for which the calculation of the Closing Bid Price is required in order to determine the Conversion Price of such shares. "Trading day" shall mean any day on which the Corporation's Common Stock is traded for any period on the principal securities exchange or other securities market on which the Common Stock is then being traded. (2) Upon receipt of a notice given pursuant to Subsection G(1), each holder of Series A Preferred Stock shall have thirty days to decide whether to accept its ratable portion (based on its holdings of Series A Preferred Stock as compared to the 26 aggregate number of shares of Series A Preferred Stock then outstanding) of such offer by tendering such holder's shares to the Corporation for redemption, at an address to be set forth in such notice, at any time prior to 5:00 p.m. New York time on the 30th day following the mailing of such notice (the "Series A Preferred Stock Redemption Date") or to convert all or a portion of the Series A Preferred Stock. Notwithstanding the foregoing, nothing herein shall limit the rights of the holders of the Series A Preferred Stock to convert the Series A Preferred Stock in whole or in part, prior to the Series A Preferred Stock Redemption Date. Within three (3) business days after the Series A Preferred Stock Redemption Date, the Corporation shall remit the applicable redemption price, calculated pursuant to Subsection G(1) of this Section 7, by wire transfer to each holder of the Series A Preferred Stock to the most recent address of each holder as set forth on the records of the Corporation or its transfer agent. (3) Any shares of Series A Preferred Stock redeemed pursuant to this Subsection G or otherwise acquired by the Corporation in any manner whatsoever shall be canceled and shall not under any circumstances be reissued. The Corporation may from time to time take such appropriate corporate action as may be necessary to reduce accordingly the number of authorized shares of the Corporation's capital stock. H. Conversion. (1) Subject to Subsection G(2) of this Section 7, the holders of the Series A Preferred Stock shall have conversion rights as follows (the "Series A Preferred Stock Conversion Rights"): (a) Each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time and from time to time, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $1,000, plus the amount of any accrued and unpaid dividends the Corporation elects to pay in Common Stock, by the Conversion Price in effect at the time of conversion. The Conversion Price at which shares of Common Stock shall be deliverable upon conversion of Series A Preferred Stock without the payment of additional consideration by the holder thereof (the "Conversion Price") shall be the lower of (i) 105% of the average Closing Bid Price of the shares of Common Stock for the five (5) trading days between November 2 through November 6 ($5.71) or (ii) 80% of the average Closing Bid Price of the shares of Common Stock for any five (5) consecutive trading days during the twenty (20) consecutive trading days immediately preceding the Series A Preferred Stock Conversion Date (as hereinafter defined). (b) At any time that the number of shares of Common Stock issued (A) upon conversion of the Series A Preferred Stock and (B) in lieu of dividend payments on the Series A Preferred Stock, shall equal 630,000 (a "Common Stock Redemption Event"), the Corporation shall (x) redeem, at a price determined in accordance with Subsection G(1) of this Section 7, all of the outstanding Series A Preferred Stock in accordance with the provisions of Subsection G(2) or (y) call a special meeting of its shareholders for the purpose of approving the transactions contemplated by the Securities Purchase Agreement, including the issuance of the Series A Preferred Stock on the terms set forth therein, together with any other approvals that shall be required so as to cause the transactions contemplated by the Securities Purchase Agreement to remain in compliance with the Rules and Regulations of The Nasdaq Stock Market (including Rule 4320 of Nasdaq's Non- Qualitative Designation Criteria in connection with conversions of Series A Preferred Stock; such approvals are referred to herein as the "Required Approvals"). The Corporation shall determine within five (5) business days following the receipt of a Notice of Conversion which of such actions it shall take, and shall promptly furnish notice 27 to each of the holders of Series A Preferred Stock as to such determination, including, if applicable, a notice of redemption. In no event shall the Corporation issue shares of Common Stock upon conversion of, or in lieu of interest payments on, the Series A Preferred Stock, after the occurrence of a Common Stock Redemption Event until the Required Approvals, if any, are obtained. (c) If the Corporation elects to call a special meeting of its shareholders pursuant to Subsection H(1)(b) of this Section 7 to obtain the Required Approvals, the Corporation shall use its best efforts to obtain such Required Approvals within thirty (30) days of the Common Stock Redemption Event (such thirty (30) day period is referred to herein as an "Approval Period"). If the Corporation does not obtain the Required Approvals within the Approval Period and the Corporation receives a Notice of Conversion after the termination of the Approval Period, the Corporation must redeem, in accordance with this Subsection H of this Section 7, any shares of Series A Preferred Stock outstanding after the Corporation has issued in excess of 630,000 shares of Common Stock in connection with conversions of the Series A Preferred Stock. (d) If the Corporation elects, pursuant to this Subsection H, to redeem the Series A Preferred Stock on the occurrence of a Common Stock Redemption Event, it shall redeem such Series A Preferred Stock at the price determined in accordance with Subsection G(1) of this Section 7. If the Corporation shall have elected, pursuant to this Subsection H(1), to obtain the Required Approvals but shall not have done so by the later of the occurrence of the Common Stock Redemption Event or the expiration of the Approval Period, it shall furnish a redemption notice to the Purchasers within three (3) business days after the expiration of the Approval Period. (2) The Series A Preferred Stock Conversion Rights shall be exercised as follows: (a) The Corporation will permit each holder of Series A Preferred Stock to exercise its right to convert the Series A Preferred Stock by faxing an executed and completed notice of conversion (the "Notice of Conversion") to the Corporation, and delivering within three (3) business days thereafter, the original Notice of Conversion (and the certificates representing the related shares of Series A Preferred Stock) to the Corporation by hand delivery or by express courier, duly endorsed. Each date on which a Notice of Conversion is faxed to and received in accordance with the provisions hereof shall be deemed a "Series A Preferred Stock Conversion Date." The Corporation will transmit the certificates representing the Common Stock issuable upon conversion of the Series A Preferred Stock (together with certificates representing the related shares of Series A Preferred Stock not so converted and, if applicable, a check representing any fraction of a share not converted) to such holder via express courier as soon as practicable, but in all events no later than the later to occur of (the "Delivery Date") (i) three (3) business days after the Series A Preferred Stock Conversion Date, or (ii) three (3) business days after receipt by the Corporation of the original Notice of Conversion (and the certificates representing the related shares of Series A Preferred Stock). For purposes of this Section 7, such conversion of the Series A Preferred Stock shall be deemed to have been made immediately prior to the close of business on the Series A Preferred Stock Conversion Date. (b) In lieu of delivering physical certificates representing the Common Stock issuable upon the conversion of the Series A Preferred Stock, provided that the Corporation's transfer agent is participating in the Depository 28 Trust Corporation ("DTC") Fast Automated Securities Transfer program, on the written request of a holder of Series A Preferred Stock who shall have previously instructed such holder's prime broker to confirm such request to the Corporation's transfer agent, the Corporation shall use commercially reasonable efforts to cause its transfer agent to electronically transmit such Common Stock to such holder by crediting the account of the holder's prime broker with DTC through its Deposit Withdrawal Agent Commission system no later than the applicable Delivery Date. (c) The Corporation will at all times have authorized and reserved for the purpose of issuance a sufficient number of shares of Common Stock to provide for the conversion of the Series A Preferred Stock. The Corporation will use its best efforts at all times to maintain a number of shares of Common Stock so reserved for issuance that is no less than one and one-half (1.5) times the number that is then actually issuable upon the conversion of the Series A Preferred Stock and the exercise of the Warrants issued pursuant to that certain Securities Purchase Agreement (the "Securities Purchase Agreement") dates as of November 9, 1998, between the Corporation and the purchasers named therein. Before taking any action which would cause an adjustment reducing the Conversion Price below the established par value of the shares of Common Stock issuable upon conversion of the Series A Preferred Stock, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock at such adjusted Conversion Price. (d) All shares of Series A Preferred Stock, which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding, and all rights with respect to such shares, including the rights, if any, to receive dividends, notices and to vote, shall immediately cease and terminate on the Series A Preferred Stock Conversion Date, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor. Any shares of Series A Preferred Stock so converted shall be retired and canceled and shall not be reissued, and the Corporation may from time to time take such appropriate action as may be necessary to reduce the number of shares of authorized Series A Preferred Stock accordingly. (3) In the event of a liquidation of the Corporation, the Series A Preferred Stock Conversion Rights shall terminate at the close of business on the first full day preceding the date fixed for the payment of any amounts distributable on liquidation to the holders of the Series A Preferred Stock. (4) If the conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act of 1933, as amended, the conversion may, at the option of any holder tendering Series A Preferred Stock for conversion, be conditioned upon the closing with the underwriter of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of the Series A Preferred Stock shall not be deemed to have converted such Series A Preferred Stock until immediately prior to the closing of the sale of securities. (5) At no time shall any holder (including any of its affiliates) of the Series A Preferred Stock convert such amount of Series A Preferred Stock as shall result in such Purchaser's (together with its affiliate's) ownership, after such conversion, exceeding 9.9% of the Corporation's outstanding Common Stock. 29 (6) No fractional shares of Common Stock shall be issued upon conversion of the Preferred Stock. In lieu of fractional shares, the Corporation shall pay cash equal to such fraction multiplied by the then effective and applicable Conversion Price. (7) The Corporation will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Subsection H by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Subsection H and in the taking of all such action as may be necessary or appropriate in order to protect the Series A Preferred Stock Conversion Rights of the holders of the Series A Preferred Stock against impairment. (8) In the event (a) that the Corporation declares a dividend (or any other distribution) on its Common Stock payable in Common Stock or other securities of the Corporation, (b) that the Corporation subdivides or combines its outstanding shares of Common Stock, (c) of any reclassification of the Common Stock of the Corporation (other than a subdivision or combination of its outstanding shares of Common Stock or a stock dividend or stock distribution thereon), (d) of any consolidation or merger of the Corporation into or with another corporation, (e) of the sale of all or substantially all of the assets of the Corporation, or (f) of the involuntary or voluntary dissolution, liquidation or winding up of the Corporation, then the Corporation shall cause to be filed at its principal office or at the office of the transfer agent of the Preferred Stock, and shall cause to be mailed to each holder of the Preferred Stock at their last address as shown on the records of the Corporation or such transfer agent, at least ten (10) days prior to the record date specified in (i) below or twenty (20) days before the date specified in (ii) below, a notice stating (i) the record date of such dividend, distribution, subdivision or combination, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, subdivision or combination are to be determined, or (ii) the date on which such reclassification, consolidation, merger, sale, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, dissolution or winding up. I. Sinking Fund. There shall be no sinking fund for the payment of dividends, or liquidation preferences on the Series A Preferred Stock or the redemption of any shares thereof. J. Amendment. This Section 7 constitutes an agreement between the Corporation and the holders of the Series A Preferred Stock. The Corporation shall not amend this Section 7 or alter or repeal the preferences, rights, powers or other terms of the Series A Preferred Stock so as to affect adversely the Series A Preferred Stock, without the written consent or affirmative vote of the holders of at least sixty-six and two- thirds percent (662/3%) of the then outstanding shares of Series A Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class. 30 EX-4.5 3 WARRANT TO PURCHASE COMMON STOCK EXHIBIT 4.5 THE `WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE II SECURITIES ACT OF 1933, AS AMENDED (THE "ACT", AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY OF THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. ONLINE SYSTEM SERVICES, INC. WARRANT TO PURCHASE COMMON STOCK THE TRANSFERABILITY OF THIS WARRANT IS RESTRICTED AS PROVIDED IN SECTION 2. Void after May 21, 2001 Right to Purchase 50,000 Shares of Common Stock (subject to adjustment) No. 1 PREAMBLE Online System Services, Inc. ("OSSI" or the "Company"), a Colorado corporation, hereby certifies that, for value received, ___________________, whose address is ______________________, or its registered assigns (hereinafter, the "Registered Holder"), is entitled, subject to the terms set forth below, to purchase from the Company at any time or .from time to time before 5: 00 P.M. New York time, on May 21, 2001 (such time, the "Expiration Time"), 50,000 of the Company's fully paid and nonassessable shares of common stock, no par value (the "Common Stock"), of the Company, at the purchase price per share (the "Purchase Price") of $16.33 (115% of the average closing bid price for five (5) trading days prior to the Closing Date) (the "Initial Purchase Price"). The number and character of such Common Stock and the Purchase Price are subject to adjustment as provided herein. This Warrant is one of the Warrants to Purchase Common Stock (the "Warrants"), evidencing the right to purchase Common Stock of the Company, issued pursuant to a Securities Purchase Agreement (the "Securities Purchase Agreement"), dated May 21, 1998, between the Company and the Purchasers identified therein. The Securities Purchase Agreement contains certain additional terms that are binding upon the Company and each Registered Holder of the Warrants. A copy of the Securities Purchase Agreement may be obtained by any Registered Holder of the Warrants from the Company upon written request. Capitalized terms used but not -defined herein shall have the meanings set forth in the Securities Purchase Agreement. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" includes any corporation which shall succeed to or assume the obligations of the Company hereunder. (b) The term "Common Stock" includes all shares of any class or classes (however designated) of the Company, authorized on or after the date hereof, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the holders of which shall ordinarily be entitled to vote for the election of directors of the Company (even though the right so to vote has been suspended by the happening of a contingency). (c) The term "Other Securities" refers to any class of shares (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holders of the Warrants at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrants, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 6 or otherwise. (d) The term "Shares" means the Common Stock issued or issuable upon exercise of the Warrants. 1. REGISTRATION RIGHTS. The rights of the holders of Warrants to register Warrants or Shares shall be as stated in the Registration Rights Agreement of even date herewith. 2. RESTRICTED STOCK. 2.1. If, at the time of any transfer or exchange (other than a transfer or exchange not involving a change in the beneficial ownership of such Warrant or Shares) of a Warrant or Shares, such Warrant or Shares shall not be registered under the Securities Act, the Company's obligation to transfer such Warrant or Shares shall be subject to the provisions of Section 5 of the Securities Purchase Agreement. 3. EXERCISE OF WARRANT. 3.1. EXERCISE IN FULL. The holder of this Warrant may exercise it in full prior to the Expiration Time by surrendering this Warrant, with the form of Election to Purchase at the end hereof duly executed by such holder, to the Company in the manner set forth in Section 5 of the Securities Purchase Agreement. The surrendered Warrant shall be accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of Shares of Common Stock called for on the face of this Warrant (without giving effect to any adjustment therein) by the Initial Purchase Price. 3.2. PARTIAL EXERCISE. This Warrant may be exercised in part by surrender of this Warrant in the manner provided in Subsection 3.1, except that the exercise price shall be calculated by multiplying (a) the number of shares of Common Stock as shall be designated by he holder in the subscription at the end hereof by (b).the Initial Purchase Price. On any such partial exercise, subject to the provisions of Section 2 hereof, the Company, at its expense will forthwith issue and deliver to or upon the order of the Registered Holder hereof a new Warrant or Warrants of like tenor, in the name of the Registered Holder hereof or as such Registered Holder may request, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock (without giving effect to any adjustment therein) equal to the number of such shares called for on the face of this Warrant minus the number of such shares designated by the Registered Holder in the applicable Election to Purchase. 3.3. COMPANY ACKNOWLEDGMENT. The Company will, at the time of the exercise, exchange or transfer of this Warrant, upon the request of the Registered Holder hereof, acknowledge in writing its continuing obligation to afford to such Registered Holder or transferee any rights (including, without limitation, any right to registration of the Company's shares of Common Stock) to which such Registered Holder or transferee shall continue to be entitled after such exercise, exchange or transfer in accordance with the provisions of this Warrant, provided that if the Registered Holder of this Warrant shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such Registered Holder or transferee any such rights. 4. DELIVERY OF SHARE CERTIFICATES UPON EXERCISE. Following the exercise of this Warrant in full or in part, within the time periods and in the manner provided by Section 5(b) of the Securities Purchase Agreement, the Company, at its expense (including the payment by it of any applicable issue taxes), will cause to be issued in the name of and delivered to the Registered Holder hereof, or as such Registered Holder (upon payment by such Registered Holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock to which such Registered Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such Registered Holder would otherwise be entitled, cash equal to such fraction multiplied by the then current market value of one full share of Common Stock (as computed in accordance with Subsection 5.1(d) hereof). 5. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES OF COMMON STOCK. 5.1. The Purchase Price hereof shall be subject to adjustment from time to time as follows: (a) In case the Company shall (i) pay a dividend on its shares of Common Stock in Common Stock, (ii) subdivide its outstanding shares of Common Stock or (iii) combine its-outstanding shares of Common Stock into a smaller number of shares, then, in such an event, the Purchase Price in effect immediately prior thereto shall be adjusted proportionately so that the adjusted Purchase Price will bear the same relation to the Purchase Price in effect immediately prior to any such event as the total number of shares of Common Stock outstanding immediately prior any such event shall bear to the total number of shares of Common Stock outstanding immediately after to such event. An adjustment made pursuant to this Section 5.1(a) shall, (i) become effective retroactively immediately after the record date in the case of a dividend and shall (ii) become effective immediately-after the effective date in the case of a subdivision or combination. The Purchase Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein. (b) In case the Company shall distribute to all holders of its shares of Common Stock, Other Securities, evidences of its indebtedness or assets (excluding cash dividends or distributions) or purchase rights, options or warrants to subscribe for or purchase Other Securities, then in each such case, the Purchase Price in effect thereafter shall be determined by multiplying the Purchase Price in effect immediately prior thereto by a fraction, of which the numerator shall be the total number of outstanding shares of Common Stock multiplied by the current market price per share of Common Stock (as determined in accordance with the provisions of subdivision (c) below) on the record date mentioned below, less the fair market value as determined by the Board of Directors (whose determination shall be conclusive) of the Other Securities, assets or evidences of indebtedness so distributed or of such rights or warrants, and of which the denominator shall be the total number 2f outstanding shares of Common Stock multiplied by such current market price per share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective retroactively immediately after the record date for the determination of shareholders entitled to receive such distribution. (c) For the purpose of any computation under subdivision (b) above, the current market price per share of Common Stock shall be deemed to be the closing price of the Company's shares of Common Stock on the date that the computation is made. (d) No adjustment of the Purchase Price shall be made if the amount of such adjustment shall be less than $.02 per share, but in such case, any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment, which, together with any adjustment so carried forward, shall amount to not less than $.02 per share. In case the Company shall at any time issue shares of Common Stock by way of dividend on any class of stock of the Company or subdivide or combine the outstanding shares of Common Stock, said amount of $.02 per share (as theretofore increased or decreased, if the same amount shall have been adjusted in accordance with the provisions of this subparagraph) shall forthwith be proportionately increased in the case of a combination or decreased in the case of such a subdivision or stock dividend so as to appropriately reflect the same. 5.2. Upon each adjustment of the Purchase Price pursuant to subdivisions (a) and (b) of Section 5.1, the number of shares of Common Stock purchasable upon exercise of this Warrant-shall be adjusted to the number of shares of Common Stock, calculated to the nearest one hundredth of a share, obtained by multiplying the number of shares of Common Stock purchasable immediately prior to such adjustment upon the exercise of this Warrant Certificate by the Purchase Price in effect prior to such adjustment and dividing the product so obtained by the new Purchase Price. 5.3. In the event of any capital reorganization of the Company, or of any reclassification of the shares of Common Stock, this Warrant shall be exercisable after such capital reorganization or reclassification upon the terms and conditions specified in this Warrant, for the number of shares of stock or other securities which the shares of Common Stock issuable (at the time of such capital reorganization or reclassification) upon exercise of this Warrant would have been entitled to receive upon such capital reorganization or reclassification if such exercise had taken place immediately prior to such action. The subdivision or combination of shares of Common Stock at any time outstanding into a greater or lesser number of shares of Common Stock shall not be deemed to be a reclassification of the shares of Common Stock of the Company for the purposes of this Subsection 5.3. 5.4. Whenever the Purchase Price is adjusted as herein provided, the Company shall compute the adjusted Purchase Price in accordance with Subsection 5.1 and shall prepare a certificate signed by its Chief Financial Officer and any other executive officer setting forth the adjusted Purchase Price, and showing in reasonable detail the method of such adjustment and the fact requiring the adjustment and upon which such calculation is based and such certificate shall forthwith be forwarded to the Registered Holder. 5.5. The form of this Warrant need not be changed because of any change in the Purchase Price pursuant to this Section 5 and any Warrant issued after such change may state the same Purchase Price and the same number of shares of Common Stock as are stated in this Warrant as initially issued. 6. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC. 6.1. MERGER, ETC. In case at any time or from time to time after the date of issuance of this Warrant, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company within three (3) years from the date of such transfer (any such transaction being hereinafter sometimes referred to as a "Reorganization"), then, in each such case, the Registered Holder of this Warrant, upon the exercise hereof as provided in Section 3 at any time after the consummation or effective date of such Reorganization (the "Effective Date"), shall receive, in lieu of the shares of Common Stock issuable on such exercise prior to such consummation or such Effective Date, the stock and other securities and property (including cash) to which such Registered Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such Registered Holder had so exercised this Warrant, immediately prior thereto (all subject to further adjustment thereafter as provided in Section 5). The Company shall not effect a transaction of the type described in clause (b) or (c) above unless upon or prior to the consummation thereof, the Company's successor corporation, or if the Company shall be the "surviving company in any such Reorganization but is not the issuer of the shares of stock, securities or other property to be delivered to the holders of the Company's outstanding shares of Common Stock at the effective time thereof, then such issuer, shall assume in writing the obligation hereunder to deliver to the Registered Holder of this Warrant such shares of stock, securities, cash or other property as such holder shall be entitled to purchase in accordance with the provisions hereof 6.2. DISSOLUTION. Except as otherwise expressly provided in Subsection 6.1, in the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock and other securities and property (including cash, where applicable) receivable by the holders of the Warrants after the effective date of such dissolution pursuant to this Section 6 to a bank or trust company having its principal office in New York City, as trustee for the holder or holders of the Warrants. 6.3. CONTINUATION OF TERMS. Except as otherwise expressly provided in Subsection 6.1, upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 6, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant. 7. NO DILUTION OR IMPAIRMENT. The Company will not, by amendment of its Certificate of Incorporation or By-laws, 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 of the Warrants, but will at all times in ..good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holders of the Warrants, as specified herein and in the Securities Purchase Agreement, against dilution (to the extent specifically provided herein) or other impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of stock receivable on the exercise of the Warrants above the amount payable therefor on such exercise, and (b) will not effect a subdivision or split up of shares or similar transaction with respect to any class of the Common Stock without effecting an equivalent transaction with respect to all other classes of Common Stock. 8. ACCOUNTANT'S CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment or readjustment in the Common Stock issuable on the exercise of the Warrants, the Company. At its expense, will promptly cause the independent certified public accountants of the Company to compute such adjustment or readjustment in accordance with the terms of the Warrants and prepared certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price in effect and number and type of Shares for which the Warrants were exercisable immediately prior to such issue or sale and as each is adjusted and readjusted on account thereof The Company will forthwith .mail a copy of each such certificate to each holder of a Warrant, and will, on the written request at any time of any holder of a Warrant, furnish to such holder a like certificate setting forth the Purchase Price and the number and type of Shares at the time in effect and showing how it was calculated. 9. NOTICE OF RECORD DATE. In case of (a) any taking by the Company of a record of the holders of any class of its securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or any voluntary or involuntary dissolution, liquidation or winding up of the Company, or (c) events shall have occurred resulting in the voluntary or involuntary dissolution, liquidation or winding up of the Company then and in each such event the Company will mail or cause to be mailed to each holder of a Warrant a notice specifying (i) the date on which any record is to be taken for the purpose of any such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their Common Stock (or Other Securities) for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding up, and (iii) the amount and character of any stock or other securities, or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall be mailed at least thirty (30) days prior to the date specified in such notice on which any such action is to be taken. 10. EXCHANGE OF WARRANTS. On surrender for exchange of any Warrant, properly endorsed, to the Company, the Company, at its expense, will issue and deliver to or (subject to Section 2) on the order of the holder thereof a new Warrant or Warrants of like tenor, in the name of such holder or as such holder (on payment by such holder or any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 11. REPLACEMENT OF WARRANTS. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction of any Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Company, at its expense, will execute and deliver, in lieu thereof, a new Warrant of like tenor. 12. WARRANT AGENT. The Company may, by written notice to each holder of a Warrant, appoint an agent having an office in New York, New York, for the purpose of issuing shares of Common Stock on the exercise of the Warrants pursuant to Section 3, exchanging Warrants pursuant to Section 10, and replacing Warrants pursuant to Section 11, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 13. REMEDIES. The Company stipulates that the remedies at law of the holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 14. NEGOTIABILITY, ETC. This Warrant is issued upon the following terms, to all of which each Registered Holder or owner hereof by the taking hereof consents and agrees: (a) subject to the terms of Section 4 of the Securities Purchase Agreement, title to this Warrant may be transferred by endorsement (by the Registered Holder hereof executing the form of assignment at the end hereof) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery; (b) any person in possession of this Warrant properly endorsed is authorized to represent himself as absolute owner hereof and is empowered to transfer absolute title hereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of each such bona fide purchaser, and each such bona fide purchaser shall acquire absolute title hereto and to all rights represented hereby; and (c) until this Warrant is transferred on the books of the Company, the Company may treat the Registered Holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 15. NOTICES. All notices and other communications from the Company to the Registered Holder of this Warrant shall be given in writing (unless otherwise specified herein) and shall be effective upon personal delivery, via facsimile (upon receipt of confirmation of error-free transmission) or two business days following deposit of such notice with an internationally recognized courier service, with postage prepaid and addressed, to such address as may have been furnished to the Company in writing by such Registered Holder or, until any such Registered Holder-furnishes to the Company an address, then to, and at the address of, the last Registered Holder of this Warrant who has so furnished an address to the Company. 16. MISCELLANEOUS. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant is being delivered in the State of New York and, except for provisions with respect to internal corporate matters of the Company which shall be governed by the corporate laws of the State of Colorado, shall be construed and enforced in accordance with and governed by the laws of the State of New York, without regard to principles of conflict of laws. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof All nouns and pronouns used herein shall be deemed to refer to the masculine, feminine or neuter, as the identity of the person or persons to whom reference is made herein may require. 17. EXPIRATION. The right to exercise this Warrant shall expire at 5:00 p.m., New York time, on May 21, 2001. IN WITNESS WHEREOF, the undersigned has executed this Warrant as of May 21, 1998. ONLINE SYSTEM SERVICES, INC. By: ------------------------------ Name: Title: Attest: By: ------------------------------ Name: Title: ANNEX A FORM OF ELECTION TO PURCHASE The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant, to purchase ____________ shares of Common Stock and herewith tenders in payment for such securities a certified or official bank check payable in New York Clearing House Funds to the order of ONLINE SYSTEM SERVICES, INC., in the amount of $__________, all in accordance with the terms hereof The undersigned requests that a certificate for such shares of Common Stock be registered in the name of _____________, whose address is ______________________________________________ and that such Certificate be delivered to whose address is _______________________________________. Dated: Name: ------------------------------------- Signature: ---------------------------------- (Signature must conform in all respects to the name of the Registered Holder, as specified on the face of the Warrant.) --------------------------------------------- (Insert Social Security or Other Identifying Number of Holder) ANNEX B FORM OF ASSIGNMENT- (TO BE EXECUTED BY THE REGISTERED HOLDER IF SUCH HOLDER DESIRES TO TRANSFER THE WARRANT.) FOR VALUE RECEIVED, ___________ hereby sells, assigns and transfers unto - --------------------------------------------- (Please print name and address of transferee) this Warrant, together with all right, title and interest therein, and does so hereby irrevocably constitute and appoint _______________________ Attorney, to transfer the within Warrant on the books of the within-named Company, with full power of substitution. Dated: Name: ------------------------------------- Signature: ---------------------------------- (Signature must conform in all respects to the name of the Registered Holder, as specified on the face of the Warrant.) --------------------------------------------- (Insert Social Security or Other Identifying Number of Holder) EX-4.6 4 WARRANT TO PURCHASE COMMON STOCK EXHIBIT 4.6 THE `WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE II SECURITIES ACT OF 1933, AS AMENDED (THE "ACT", AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY OF THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. ONLINE SYSTEM SERVICES, INC. WARRANT TO PURCHASE COMMON STOCK THE TRANSFERABILITY OF THIS WARRANT IS RESTRICTED AS PROVIDED IN SECTION 2. Void after November 9, 2003 Right to Purchase 140,000 Shares of Common Stock (subject to adjustment) No. 1 PREAMBLE Online System Services, Inc. ("OSSI" or the "Company"), a Colorado corporation, hereby certifies that, for value received, Archer Investors LLC whose address is One Word Trade Center, Suite 4563, New York, New York 10048, or its registered assigns (hereinafter, the "Registered Holder"), is entitled, subject to the terms set forth below, to purchase from the Company at any time or .from time to time before 5: 00 P.M. New York time, on November 9, 2003 (such time, the "Expiration Time"), 140,000 of the Company's fully paid and nonassessable shares of common stock, no par value (the "Common Stock"), of the Company, at the purchase price per share (the "Purchase Price") of $5.71. The number and character of such Common Stock and the Purchase Price are subject to adjustment as provided herein. This Warrant is one of the Warrants to Purchase Common Stock (the "Warrants"), evidencing the right to purchase Common Stock of the Company, issued pursuant to a Securities Purchase Agreement (the "Securities Purchase Agreement"), dated November 9, 1998, between the Company and the Purchasers identified therein. The Securities Purchase Agreement contains certain additional terms that are binding upon the Company and each Registered Holder of the Warrants. A copy of the Securities Purchase Agreement may be obtained by any Registered Holder of the Warrants from the Company upon written request. Capitalized terms used but not -defined herein shall have the meanings set forth in the Securities Purchase Agreement. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" includes any corporation which shall succeed to or assume the obligations of the Company hereunder. (b) The term "Common Stock" includes all shares of any class or classes (however designated) of the Company, authorized on or after the date hereof, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the holders of which shall ordinarily be entitled to vote for the election of directors of the Company (even though the right so to vote has been suspended by the happening of a contingency). (c) The term "Other Securities" refers to any class of shares (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holders of the Warrants at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrants, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 6 or otherwise. (d) The term "Shares" means the Common Stock issued or issuable upon exercise of the Warrants. 1. REGISTRATION RIGHTS. The rights of the holders of Warrants to register Warrants or Shares shall be as stated in the Registration Rights Agreement of even date herewith. 2. RESTRICTED STOCK. 2.1. If, at the time of any transfer or exchange (other than a transfer or exchange not involving a change in the beneficial ownership of such Warrant or Shares) of a Warrant or Shares, such Warrant or Shares shall not be registered under the Securities Act, the Company's obligation to transfer such Warrant or Shares shall be subject to the provisions of Section 5 of the Securities Purchase Agreement. 3. EXERCISE OF WARRANT. 3.1. EXERCISE IN FULL. The holder of this Warrant may exercise it in full prior to the Expiration Time by surrendering this Warrant, with the form of Election to Purchase at the end hereof duly executed by such holder, to the Company in the manner set forth in Section 5 of the Securities Purchase Agreement. The surrendered Warrant shall be accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of Shares of Common Stock called for on the face of this Warrant (without giving effect to any adjustment therein) by the Initial Purchase Price. 3.2. PARTIAL EXERCISE. This Warrant may be exercised in part by surrender of this Warrant in the manner provided in Subsection 3.1, except that the exercise price shall be calculated by multiplying (a) the number of shares of Common Stock as shall be designated by he holder in the subscription at the end hereof by (b).the Initial Purchase Price. On any such partial exercise, subject to the provisions of Section 2 hereof, the Company, at its expense will forthwith issue and deliver to or upon the order of the Registered Holder hereof a new Warrant or Warrants of like tenor, in the name of the Registered Holder hereof or as such Registered Holder may request, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock (without giving effect to any adjustment therein) equal to the number of such shares called for on the face of this Warrant minus the number of such shares designated by the Registered Holder in the applicable Election to Purchase. 3.3. COMPANY ACKNOWLEDGMENT. The Company will, at the time of the exercise, exchange or transfer of this Warrant, upon the request of the Registered Holder hereof, acknowledge in writing its continuing obligation to afford to such Registered Holder or transferee any rights (including, without limitation, any right to registration of the Company's shares of Common Stock) to which such Registered Holder or transferee shall continue to be entitled after such exercise, exchange or transfer in accordance with the provisions of this Warrant, provided that if the Registered Holder of this Warrant shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such Registered Holder or transferee any such rights. 4. DELIVERY OF SHARE CERTIFICATES UPON EXERCISE. Following the exercise of this Warrant in full or in part, within the time periods and in the manner provided by Section 5(b) of the Securities Purchase Agreement, the Company, at its expense (including the payment by it of any applicable issue taxes), will cause to be issued in the name of and delivered to the Registered Holder hereof, or as such Registered Holder (upon payment by such Registered Holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock to which such Registered Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such Registered Holder would otherwise be entitled, cash equal to such fraction multiplied by the then current market value of one full share of Common Stock (as computed in accordance with Subsection 5.1(d) hereof). 5. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES OF COMMON STOCK. 5.1. The Purchase Price hereof shall be subject to adjustment from time to time as follows: (a) In case the Company shall (i) pay a dividend on its shares of Common Stock in Common Stock, (ii) subdivide its outstanding shares of Common Stock or (iii) combine its-outstanding shares of Common Stock into a smaller number of shares, then, in such an event, the Purchase Price in effect immediately prior thereto shall be adjusted proportionately so that the adjusted Purchase Price will bear the same relation to the Purchase Price in effect immediately prior to any such event as the total number of shares of Common Stock outstanding immediately prior any such event shall bear to the total number of shares of Common Stock outstanding immediately after to such event. An adjustment made pursuant to this Section 5.1(a) shall, (i) become effective retroactively immediately after the record date in the case of a dividend and shall (ii) become effective immediately-after the effective date in the case of a subdivision or combination. The Purchase Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein. (b) In case the Company shall distribute to all holders of its shares of Common Stock, Other Securities, evidences of its indebtedness or assets (excluding cash dividends or distributions) or purchase rights, options or warrants to subscribe for or purchase Other Securities, then in each such case, the Purchase Price in effect thereafter shall be determined by multiplying the Purchase Price in effect immediately prior thereto by a fraction, of which the numerator shall be the total number of outstanding shares of Common Stock multiplied by the current market price per share of Common Stock (as determined in accordance with the provisions of subdivision (c) below) on the record date mentioned below, less the fair market value as determined by the Board of Directors (whose determination shall be conclusive) of the Other Securities, assets or evidences of indebtedness so distributed or of such rights or warrants, and of which the denominator shall be the total number 2f outstanding shares of Common Stock multiplied by such current market price per share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective retroactively immediately after the record date for the determination of shareholders entitled to receive such distribution. (c) For the purpose of any computation under subdivision (b) above, the current market price per share of Common Stock shall be deemed to be the closing price of the Company's shares of Common Stock on the date that the computation is made. (d) No adjustment of the Purchase Price shall be made if the amount of such adjustment shall be less than $.02 per share, but in such case, any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment, which, together with any adjustment so carried forward, shall amount to not less than $.02 per share. In case the Company shall at any time issue shares of Common Stock by way of dividend on any class of stock of the Company or subdivide or combine the outstanding shares of Common Stock, said amount of $.02 per share (as theretofore increased or decreased, if the same amount shall have been adjusted in accordance with the provisions of this subparagraph) shall forthwith be proportionately increased in the case of a combination or decreased in the case of such a subdivision or stock dividend so as to appropriately reflect the same. 5.2. Upon each adjustment of the Purchase Price pursuant to subdivisions (a) and (b) of Section 5.1, the number of shares of Common Stock purchasable upon exercise of this Warrant-shall be adjusted to the number of shares of Common Stock, calculated to the nearest one hundredth of a share, obtained by multiplying the number of shares of Common Stock purchasable immediately prior to such adjustment upon the exercise of this Warrant Certificate by the Purchase Price in effect prior to such adjustment and dividing the product so obtained by the new Purchase Price. 5.3. In the event of any capital reorganization of the Company, or of any reclassification of the shares of Common Stock, this Warrant shall be exercisable after such capital reorganization or reclassification upon the terms and conditions specified in this Warrant, for the number of shares of stock or other securities which the shares of Common Stock issuable (at the time of such capital reorganization or reclassification) upon exercise of this Warrant would have been entitled to receive upon such capital reorganization or reclassification if such exercise had taken place immediately prior to such action. The subdivision or combination of shares of Common Stock at any time outstanding into a greater or lesser number of shares of Common Stock shall not be deemed to be a reclassification of the shares of Common Stock of the Company for the purposes of this Subsection 5.3. 5.4. Whenever the Purchase Price is adjusted as herein provided, the Company shall compute the adjusted Purchase Price in accordance with Subsection 5.1 and shall prepare a certificate signed by its Chief Financial Officer and any other executive officer setting forth the adjusted Purchase Price, and showing in reasonable detail the method of such adjustment and the fact requiring the adjustment and upon which such calculation is based and such certificate shall forthwith be forwarded to the Registered Holder. 5.5. The form of this Warrant need not be changed because of any change in the Purchase Price pursuant to this Section 5 and any Warrant issued after such change may state the same Purchase Price and the same number of shares of Common Stock as are stated in this Warrant as initially issued. 6. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC. 6.1. MERGER, ETC. In case at any time or from time to time after the date of issuance of this Warrant, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company within three (3) years from the date of such transfer (any such transaction being hereinafter sometimes referred to as a "Reorganization"), then, in each such case, the Registered Holder of this Warrant, upon the exercise hereof as provided in Section 3 at any time after the consummation or effective date of such Reorganization (the "Effective Date"), shall receive, in lieu of the shares of Common Stock issuable on such exercise prior to such consummation or such Effective Date, the stock and other securities and property (including cash) to which such Registered Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such Registered Holder had so exercised this Warrant, immediately prior thereto (all subject to further adjustment thereafter as provided in Section 5). The Company shall not effect a transaction of the type described in clause (b) or (c) above unless upon or prior to the consummation thereof, the Company's successor corporation, or if the Company shall be the "surviving company in any such Reorganization but is not the issuer of the shares of stock, securities or other property to be delivered to the holders of the Company's outstanding shares of Common Stock at the effective time thereof, then such issuer, shall assume in writing the obligation hereunder to deliver to the Registered Holder of this Warrant such shares of stock, securities, cash or other property as such holder shall be entitled to purchase in accordance with the provisions hereof 6.2. DISSOLUTION. Except as otherwise expressly provided in Subsection 6.1, in the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock and other securities and property (including cash, where applicable) receivable by the holders of the Warrants after the effective date of such dissolution pursuant to this Section 6 to a bank or trust company having its principal office in New York City, as trustee for the holder or holders of the Warrants. 6.3. CONTINUATION OF TERMS. Except as otherwise expressly provided in Subsection 6.1, upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 6, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant. 7. NO DILUTION OR IMPAIRMENT. The Company will not, by amendment of its Certificate of Incorporation or By-laws, 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 of the Warrants, but will at all times in ..good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holders of the Warrants, as specified herein and in the Securities Purchase Agreement, against dilution (to the extent specifically provided herein) or other impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of stock receivable on the exercise of the Warrants above the amount payable therefor on such exercise, and (b) will not effect a subdivision or split up of shares or similar transaction with respect to any class of the Common Stock without effecting an equivalent transaction with respect to all other classes of Common Stock. 8. ACCOUNTANT'S CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment or readjustment in the Common Stock issuable on the exercise of the Warrants, the Company. At its expense, will promptly cause the independent certified public accountants of the Company to compute such adjustment or readjustment in accordance with the terms of the Warrants and prepared certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price in effect and number and type of Shares for which the Warrants were exercisable immediately prior to such issue or sale and as each is adjusted and readjusted on account thereof The Company will forthwith .mail a copy of each such certificate to each holder of a Warrant, and will, on the written request at any time of any holder of a Warrant, furnish to such holder a like certificate setting forth the Purchase Price and the number and type of Shares at the time in effect and showing how it was calculated. 9. NOTICE OF RECORD DATE. In case of (a) any taking by the Company of a record of the holders of any class of its securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or any voluntary or involuntary dissolution, liquidation or winding up of the Company, or (c) events shall have occurred resulting in the voluntary or involuntary dissolution, liquidation or winding up of the Company then and in each such event the Company will mail or cause to be mailed to each holder of a Warrant a notice specifying (i) the date on which any record is to be taken for the purpose of any such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their Common Stock (or Other Securities) for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding up, and (iii) the amount and character of any stock or other securities, or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall be mailed at least thirty (30) days prior to the date specified in such notice on which any such action is to be taken. 10. EXCHANGE OF WARRANTS. On surrender for exchange of any Warrant, properly endorsed, to the Company, the Company, at its expense, will issue and deliver to or (subject to Section 2) on the order of the holder thereof a new Warrant or Warrants of like tenor, in the name of such holder or as such holder (on payment by such holder or any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 11. REPLACEMENT OF WARRANTS. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction of any Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Company, at its expense, will execute and deliver, in lieu thereof, a new Warrant of like tenor. 12. WARRANT AGENT. The Company may, by written notice to each holder of a Warrant, appoint an agent having an office in New York, New York, for the purpose of issuing shares of Common Stock on the exercise of the Warrants pursuant to Section 3, exchanging Warrants pursuant to Section 10, and replacing Warrants pursuant to Section 11, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 13. REMEDIES. The Company stipulates that the remedies at law of the holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 14. NEGOTIABILITY, ETC. This Warrant is issued upon the following terms, to all of which each Registered Holder or owner hereof by the taking hereof consents and agrees: (a) subject to the terms of Section 4 of the Securities Purchase Agreement, title to this Warrant may be transferred by endorsement (by the Registered Holder hereof executing the form of assignment at the end hereof) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery; (b) any person in possession of this Warrant properly endorsed is authorized to represent himself as absolute owner hereof and is empowered to transfer absolute title hereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of each such bona fide purchaser, and each such bona fide purchaser shall acquire absolute title hereto and to all rights represented hereby; and (c) until this Warrant is transferred on the books of the Company, the Company may treat the Registered Holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 15. NOTICES. All notices and other communications from the Company to the Registered Holder of this Warrant shall be given in writing (unless otherwise specified herein) and shall be effective upon personal delivery, via facsimile (upon receipt of confirmation of error-free transmission) or two business days following deposit of such notice with an internationally recognized courier service, with postage prepaid and addressed, to such address as may have been furnished to the Company in writing by such Registered Holder or, until any such Registered Holder-furnishes to the Company an address, then to, and at the address of, the last Registered Holder of this Warrant who has so furnished an address to the Company. 16. MISCELLANEOUS. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant is being delivered in the State of New York and, except for provisions with respect to internal corporate matters of the Company which shall be governed by the corporate laws of the State of Colorado, shall be construed and enforced in accordance with and governed by the laws of the State of New York, without regard to principles of conflict of laws. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof All nouns and pronouns used herein shall be deemed to refer to the masculine, feminine or neuter, as the identity of the person or persons to whom reference is made herein may require. 17. EXPIRATION. The right to exercise this Warrant shall expire at 5:00 p.m., New York time, on November 9, 2003. IN WITNESS WHEREOF, the undersigned has executed this Warrant as of November 9, 1998. ONLINE SYSTEM SERVICES, INC. By: -------------------------------- Name: Title: Attest: By: ------------------------------- Name: Title: ANNEX A FORM OF ELECTION TO PURCHASE The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant, to purchase ____________ shares of Common Stock and herewith tenders in payment for such securities a certified or official bank check payable in New York Clearing House Funds to the order of ONLINE SYSTEM SERVICES, INC., in the amount of $__________, all in accordance with the terms hereof The undersigned requests that a certificate for such shares of Common Stock be registered in the name of _____________, whose address is _________________________________________ and that such Certificate be delivered to whose address is_____________________________________. Dated: Name: ------------------------------------- Signature: ---------------------------------- (Signature must conform in all respects to the name of the Registered Holder, as specified on the face of the Warrant.) --------------------------------------------- (Insert Social Security or Other Identifying Number of Holder) ANNEX B FORM OF ASSIGNMENT- (TO BE EXECUTED BY THE REGISTERED HOLDER IF SUCH HOLDER DESIRES TO TRANSFER THE WARRANT.) FOR VALUE RECEIVED, ___________ hereby sells, assigns and transfers unto - --------------------------------------------- (Please print name and address of transferee) this Warrant, together with all right, title and interest therein, and does so hereby irrevocably constitute and appoint _______________________ Attorney, to transfer the within Warrant on the books of the within-named Company, with full power of substitution. Dated: Name: ------------------------------------- Signature: ---------------------------------- (Signature must conform in all respects to the name of the Registered Holder, as specified on the face of the Warrant.) --------------------------------------------- (Insert Social Security or Other Identifying Number of Holder) EX-5.1 5 OPINION OF GRAY, PLANT, MOOTY, MOOTY & BENNETT, P.A. EXHIBIT 5.1 [LETTERHEAD OF GRAY, PLANT, MOOTY, MOOTY & BENNETT, P.A.] LINDLEY S. BRANSON 612 343-2827 December 22, 1998 Online System Services, Inc. 1800 Glenarm Place Suite 800 Denver, CO 80202 RE: Form S-3 Registration Statement Ladies/Gentlemen: This opinion is furnished in connection with the registration, pursuant to the Securities Act of 1933, as amended, of 78,240 issued and outstanding shares of common stock, no par value (the "Outstanding Shares"), of Online System Services, Inc. (the "Company" or "OSS") to be sold from time to time by various selling shareholders for their own account and up to 1,665,260 shares of common stock, no par value (the "Issuable Shares"), of OSS issuable upon (i) conversion of the Company's 10% Preferred Stock (the "10% Preferred Stock"), (ii) conversion of the Company's Series A Preferred Stock (the "Series A Preferred Stock"), and (iii) exercise of outstanding transferable warrants of OSS which may sold from time to time by various selling shareholders for their own account. We have acted as counsel to the Company in connection with the preparation of the Form S-3 Registration Statement (the "Registration Statement"). We have examined the Articles of Incorporation, as amended, the Bylaws of the Company, such records of proceedings of the Company as we deemed material and such other certificates, records and documents as we considered necessary for the purposes of this opinion. Based on the foregoing, we are of the opinion that (a) the Outstanding Shares are legally issued, fully paid and non-assessable securities of the Company and (b) the Issuable Shares (up to a maximum of 1,665,260 shares) will be, when issued, legally issued, fully paid and non-assessable securities of the Company. We understand that this opinion is to be issued in connection with the Registration Statement. We consent to a filing of a copy of this opinion with the Registration Statement. Very truly yours, GRAY, PLANT, MOOTY, MOOTY & BENNETT, P.A. By /s/ Lindley S. Branson ------------------------------ Lindley S. Branson EX-23.1 6 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 Consent of Independent Auditors As independent public accountants, we hereby consent to the incorporation by reference in this Registration Statement on Form S-3, to be filed December 22, 1998, of our report dated February 27, 1998 (except with respect to the matter discussed in Note 12 as to which the date is March 12, 1998), included in Online System Services, Inc. Form 10-KSB for the year ended December 31, 1997 and to all references to our Firm included in the Registration Statement. /s/ Arthur Andersen LLP Denver, Colorado December 22, 1998 -----END PRIVACY-ENHANCED MESSAGE-----