<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 31, 1998
REGISTRATION NO. 333-59527
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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PRE-EFFECTIVE
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
INTERNET AMERICA, INC.
(Name of small business issuer in its charter)
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<S> <C> <C>
TEXAS 7372 86-0778979
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
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<S> <C>
MICHAEL T. MAPLES
ONE DALLAS CENTRE ONE DALLAS CENTRE
350 N. ST. PAUL, SUITE 3000 350 N. ST. PAUL, SUITE 3000
DALLAS, TEXAS 75201 DALLAS, TEXAS 75201
(214) 861-2500 (214) 861-2500
(Address and telephone of registrant's (Name, address and telephone number of agent
principal executive offices) for service)
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Copies of communications to:
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<S> <C>
RICHARD F. DAHLSON JOHN B. MCKNIGHT
JACKSON WALKER L.L.P. LOCKE PURNELL RAIN HARRELL
901 MAIN STREET, SUITE 6000 (A PROFESSIONAL CORPORATION)
DALLAS, TEXAS 75202-3797 2200 ROSS AVENUE, SUITE 2200
TELEPHONE: (214) 953-6000 DALLAS, TEXAS 75201
TELECOPIER: (214) 953-5822 TELEPHONE: (214) 740-8000
TELECOPIER: (214) 740-8800
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional Common Stock for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
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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 the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 28, 1998
2,300,000 SHARES
Internet America Logo
COMMON STOCK
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Of the 2,300,000 shares of Common Stock offered hereby, 1,700,000 shares are
being sold by the Company and 600,000 shares are being sold by the Selling
Shareholders. The Company will not receive any of the proceeds from the sale of
shares by the Selling Shareholders. See "Principal and Selling Shareholders."
Prior to this offering (the "Offering"), there has been no public market for the
Common Stock. It is currently estimated that the initial public offering price
will be between $9.00 and $11.00 per share of Common Stock. See "Underwriting"
for a discussion of the factors considered in determining the initial public
offering price. The Company has applied to have the Common Stock approved for
quotation on the Nasdaq National Market under the symbol "GEEK."
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 7.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
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<S> <C> <C> <C> <C>
Per Share................. $ $ $ $
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Total(3).................. $ $ $ $
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(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(2) Before deducting estimated expenses of this Offering of $450,000 payable by
the Company.
(3) The Selling Shareholders have granted to the Underwriters a 30-day option to
purchase up to an aggregate of 345,000 additional shares of Common Stock,
solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public will be $ , the total Underwriting
Discount will be $ and the total Proceeds to Selling Shareholders
will be $ . See "Underwriting."
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The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order in
whole or in part. Delivery of such shares will be made through the offices of
Hoak Breedlove Wesneski & Co., Dallas, Texas, or its agent on or about
, 1998.
HOAK BREEDLOVE WESNESKI & CO. FERRIS, BAKER WATTS
INCORPORATED
The date of this Prospectus is , 1998.
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[GRAPHICS]
- Inside front cover will contain a color map of Texas, designating the
counties and cities with populations greater than 50,000 and highlighting
the locations of the Company's POPs. Under the map will be the following
text: Internet America has dial-up customers in almost half of the 254
counties in Texas. The Company's strategy for growth involves building a
critical mass of customers in a given market to take advantage of
marketing, network and operating efficiencies.
- Inside back cover will contain screen shots of television and billboard
advertising and the following text: Internet America combines
direct-response television commercials with billboards to attract new
customers and position itself as "The Best Route Along the Information
Highway."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING THE ENTRY OF STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
Internet America(R), 1-800-BE-A-GEEK(R), Airnews.net, Airmail.net,
Airweb.net and their respective logos are trademarks, trade names and service
marks of the Company. This Prospectus also includes trademarks, trade names and
service marks of companies other than the Company, which are the property of
their respective owners.
2
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements, including Notes thereto, appearing
elsewhere in this Prospectus. Except as otherwise indicated, the information
contained in this Prospectus assumes (i) a 2.25-for-1.00 stock split of the
Common Stock effected in the form of a dividend on July 13, 1998, (ii) the
automatic conversion of all outstanding shares of the Company's preferred stock
into shares of Common Stock on a 2.25-for-1.00 basis 30 days after the
completion of the Offering, (iii) an initial public offering price of $10.00 per
share, the mid-point of the range on the cover of this Prospectus and (iv) the
Underwriters' over-allotment option is not exercised. See "Description of
Securities -- Preferred Stock" and "Underwriting." Except where the context
otherwise requires, all references to the "Company" or "Internet America"
include Internet America, Inc., a Texas corporation, and its predecessor.
References to fiscal years by date refer to the fiscal year ended June 30 of
that year. This Prospectus contains certain forward-looking statements that
involve risks and uncertainties. In addition to the other information in this
Prospectus, prospective investors should carefully consider the information set
forth under the heading "Risk Factors." The "Glossary of Technical Terms"
appearing elsewhere in this Prospectus contains definitions of certain technical
terms used herein.
THE COMPANY
Internet America is a leading Internet service provider ("ISP") in the
southwestern United States. The Company provides a wide array of Internet
services tailored to meet the needs of individual and business customers,
including customers with little or no online experience. With approximately
50,000 customers, primarily in the North Texas area, the Company believes that
it has achieved one of the highest user densities per point of presence ("POP")
of any ISP in the United States. This user density has enabled the Company to
realize substantial marketing, network and operating efficiencies, which have
resulted in net profit margins in recent periods that are substantially higher
than those of the publicly traded ISPs. The Company realized a net profit margin
for the year ended June 30, 1998 of 9.5%, with net profit margins for the
quarters within fiscal 1998 of 13.0% for the first quarter, 8.5% for the second
quarter, 8.6% for the third quarter, and 8.2% for the fourth quarter.
As part of its user density business model, the Company uses television
advertising as its primary marketing tool. The Company's experience is that
television, reinforced with billboard advertising, is substantially more
effective and efficient than radio, print or direct mail in rapidly building a
customer base and creating brand awareness. Through its 1-800-BE-A-GEEK(R)
television campaigns, which emphasize the speed and quality of the Company's
Internet services and its commitment to customer care, the Company has succeeded
in building the brand awareness of Internet America in its existing markets.
This brand awareness, combined with the Company's deep penetration of the North
Texas market, has also resulted in a substantial number of customer referrals.
Internet America's most popular service package includes unlimited dial-up
Internet access for $19.95 a month. The Company also offers value-added services
for additional fees, including multiple e-mail boxes, personalized e-mail
addresses and personal Web sites. The Company's Airnews.net provides access to
Internet America's news services for customers of other Internet services and on
a wholesale basis to other businesses and ISPs. The Company also provides
business customers with a full range of services, including dedicated high-speed
access, Web hosting, server co-location and domain name registration and
hosting. Although the Company's customers are primarily individuals, these
business services represent approximately 10% of the Company's fiscal 1998 total
revenue.
Outstanding service and customer care are crucial to customer acquisition
and retention in the ISP industry. The Company's goal of 100% customer
satisfaction begins with providing superior systems and network performance, and
emphasizes high quality customer service and technical support. The Company's
customer care department is available to customers 24-hours-a-day,
7-days-a-week, and is structured to provide effective, friendly support to each
customer, whether a novice or an experienced Internet user.
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The Company's systems and network infrastructure, which can be expanded
rapidly to accommodate customer growth, is designed to provide fast, highly
reliable performance. The Company's primary operations center and largest POP is
located in Dallas. Additional physical POPs, incorporating modems, terminal
servers and routers are located in four other Texas cities. To expand its
geographic coverage and upgrade to new technology, the Company has also
implemented a "Virtual POP" architecture with various telecommunications
providers. Through its Virtual POP architecture, the Company can provide local
access services without deploying physical infrastructure. The benefits of this
architecture include substantially reduced capital expenditures, lower operating
costs and reduced exposure to technological obsolescence. At June 30, 1998,
approximately 50% of the Company's customers were serviced by Virtual POPs.
Unlike many other ISPs, the Company believes that at the current stage of
the ISP industry's development, the highest priority should be to rapidly build
profitable market share, not to deploy a large network infrastructure with a
substantial number of underutilized POPs. Therefore, the Company's growth
strategy is focused on (i) acquiring additional customers in its existing
markets and (ii) deploying its user density business model in other selected
markets. The aim of the user density business model is to quickly build in a
given market a "critical mass" of customers that will support profitable
operations.
Elements of the Company's growth strategy include:
Aggressive Use of Advertising to Rapidly Acquire a Critical Mass of
Customers and Build the Internet America Brand. The Company intensively
uses two of the more effective and efficient advertising
media -- television and outdoor billboard displays -- to acquire customers
quickly and build brand awareness.
Strategic and Add-On Acquisitions. The Company intends to pursue
strategic acquisitions that will jump-start its entry into new markets, as
well as add-on acquisitions in its existing markets that it believes will
be accretive to earnings. The Company completed a strategic acquisition in
fiscal 1997 and an add-on acquisition in fiscal 1998, but is not currently
negotiating any acquisitions. The completed acquisitions were purchases of
customer bases and did not constitute business combinations requiring
financial statements of the acquirees to be included herein.
Cost-Effective Development of Network Infrastructure. In deploying
physical infrastructure, the Company will continue to apply its disciplined
approach, which is premised upon the achievement of substantial economies
of scope and scale. The Virtual POP architecture enables the Company to
serve existing markets more efficiently and enter certain new markets more
quickly.
Development of Value-Added Revenue Streams. In addition to growing
value-added revenue streams from its existing services, such as dedicated
high-speed access, news access and Web hosting, the Company continues to
evaluate and develop other value-added service opportunities, such as xDSL
connectivity. The Company believes that a user dense, regionally focused
customer base provides an excellent platform for the introduction of new
value-added services that can take advantage of brand awareness and
economies of scope and scale, potentially including Internet telephony.
Maintenance of a First-Rate Customer Care Operation. The Company's
sophisticated, high quality customer care operation is designed to assist
both novice and experienced Internet users, to ensure that every customer's
Internet experience is efficient, productive and enjoyable. The Company
believes that this operation is a substantial competitive advantage.
The Company was formed in 1994 and reincorporated in Texas in 1995. The
Company's principal executive office is located at One Dallas Centre, 350 N. St.
Paul, Suite 3000, Dallas, Texas 75201, and its telephone number at that office
is (214) 861-2500. The Company's World Wide Web home page is at
http://www.airmail.net. Information contained in the Company's Web site does not
constitute, and shall not be deemed to constitute, part of this Prospectus.
4
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THE OFFERING
Common Stock offered by the
Company.......................... 1,700,000 shares
Common Stock offered by the
Selling Shareholders............. 600,000 shares
Common Stock to be outstanding
after the Offering(1)............ 6,285,957 shares
Estimated net proceeds to the
Company(2)..................... $15.4 million
Use of proceeds.................. The Company intends to use the net proceeds
of the Offering as follows: (i)
approximately $6.0 million to fund
potential acquisitions of unaffiliated
persons or entities, (ii) approximately
$5.0 million to fund increased marketing
expenses and incremental capital equipment
and infrastructure expenditures related to
the Company's anticipated growth, (iii)
approximately $2.7 million to repay certain
indebtedness, of which approximately $2.2
million is debt owed to affiliates; and
(iv) the remaining amount for general
corporate purposes.
Proposed Nasdaq National Market
symbol........................... GEEK
SUMMARY FINANCIAL AND OPERATING DATA
(In thousands, except per share and customer data)
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YEAR ENDED JUNE 30,
-----------------------------
1996 1997 1998
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<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue............................................. $ 3,777 $ 9,471 $10,643
Total operating expenses.................................. 7,129 12,814 9,042
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Income (loss) from operations............................. (3,352) (3,343) 1,601
Interest expense.......................................... 77 481 571
Income tax expense........................................ -- -- 24
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Net income (loss)......................................... $(3,429) $(3,824) $ 1,006
======= ======= =======
Net income (loss) per share(3):
Basic..................................................... $ (1.15) $ (1.12) $ 0.28
Diluted................................................... $ (1.15) $ (1.12) $ 0.21
Weighted average shares(3):
Basic..................................................... 2,981 3,418 3,532
Diluted................................................... 2,981 3,418 4,783
OTHER DATA:
Approximate number of customers at end of period.......... 27,900 39,900 48,600
EBITDA(4)................................................. $(2,804) $(1,725) $ 3,075
EBITDA margin(4).......................................... (74.2)% (18.2)% 28.9%
Cash flow provided (used) by:
Operating activities................................... $ 390 $(1,430) $ 1,797
Investing activities................................... (2,981) (1,513) (407)
Financing activities................................... 2,615 2,864 (826)
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See notes on following page
5
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THREE MONTHS ENDED
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SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1997 1997 1998 1998
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QUARTERLY STATEMENT OF OPERATIONS DATA:
Total revenue.................................. $2,412 $2,534 $2,810 $2,887
Total operating expenses....................... 1,957 2,159 2,397 2,529
------ ------ ------ ------
Income (loss) from operations.................. $ 455 $ 375 $ 413 $ 358
====== ====== ====== ======
Net income (loss).............................. $ 320 $ 220 $ 248 $ 242
====== ====== ====== ======
OTHER QUARTERLY DATA:
Approximate number of customers at end of
period...................................... 39,800 44,600 47,600 48,600
EBITDA(4)...................................... $ 818 $ 738 $ 802 $ 717
EBITDA margin(4)............................... 33.9% 29.1% 28.5% 24.8%
</TABLE>
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<CAPTION>
JUNE 30, 1998
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ACTUAL AS ADJUSTED(5)
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BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 565 $13,250
Working capital (deficit)................................. (5,962) 9,398
Total assets.............................................. 3,150 15,835
Long-term debt, net of current portion.................... 31 31
Total shareholders' equity (deficit)...................... (3,767) 11,593
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(1) Includes 33,750 shares of Common Stock subject to a warrant granted on March
31, 1996 to M.J. Capital Partners, L.P. (the "Warrant") at an exercise price
of $1.67 per share that the warrant holder has indicated it intends to
exercise contemporaneously with the Offering, and assumes the automatic
conversion of all outstanding shares of the Company's preferred stock into
shares of Common Stock on a 2.25-for-1.00 basis 30 days after completion of
the Offering. Excludes as of June 30, 1998 (i) 225,000 shares of Common
Stock reserved for issuance under the 1996 Incentive Stock Option Plan (the
"1996 Option Plan"), of which options to purchase 61,756 shares were
outstanding at a weighted average exercise price of $1.67 per share, (ii)
400,000 shares of Common Stock reserved for issuance under the 1998
Nonqualified Stock Option Plan (the "1998 Option Plan"), of which no options
were outstanding and (iii) 1,184,657 shares of Common Stock issuable upon
exercise of other outstanding options at a weighted average exercise price
of $1.55 per share. See "Management -- 1996 Incentive Stock Option Plan,"
"-- Nonqualified Stock Options Issued to Officers and Directors," and
"-- 1998 Nonqualified Stock Option Plan."
(2) After deducting the underwriting discount and other estimated expenses of
the Offering.
(3) See Notes 1 and 11 of Notes to Financial Statements for information
concerning the calculation of basic and diluted net income (loss) per share.
(4) EBITDA (earnings before interest, taxes, depreciation and amortization)
consists of total revenue less connectivity and operations expense, sales
and marketing expense, general and administrative expense and impairment of
equipment expense. EBITDA is provided because it is a measure commonly used
by investors to analyze and compare companies on the basis of operating
performance. EBITDA is presented to enhance an understanding of the
Company's operating results and is not intended to represent cash flows or
results of operations in accordance with generally accepted accounting
principles ("GAAP") for the periods indicated. EBITDA is not a measurement
under GAAP and is not necessarily comparable with similarly titled measures
for other companies. EBITDA margin represents EBITDA as a percentage of
total revenue.
(5) Adjusted to give effect to the sale of 1,700,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$10.00 per share (the mid-point of the range set forth on the cover of this
Prospectus), after deducting the underwriting discount and estimated
expenses of the Offering payable by the Company, the application of the net
proceeds therefrom, the exercise of the Warrant and the conversion of all of
the outstanding shares of preferred stock to Common Stock. See "Use of
Proceeds" and "Capitalization."
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RISK FACTORS
The shares offered hereby involve a high degree of risk. The factors set
forth below, along with the other information contained herein, should be
considered carefully in evaluating an investment in the shares of Common Stock
offered hereby. Further, this Prospectus contains certain forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, goals, objectives, expectations and intentions. The cautionary
statements made in this Prospectus apply to all related forward-looking
statements wherever they appear in this Prospectus. Prospective investors in the
shares of Common Stock offered hereby are cautioned that, while the
forward-looking statements reflect the Company's good faith beliefs, they are
not guarantees of future performance, and involve known and unknown risks and
uncertainties. In addition, the Company's actual results could differ materially
from those discussed herein. Some of the factors that could cause or contribute
to such differences include those discussed below, as well as those discussed
elsewhere in this Prospectus.
LIMITED OPERATING HISTORY; OPERATING LOSSES
The Company was incorporated in December 1994 and commenced offering
Internet access in January 1995. Accordingly, the Company has only a limited
operating history upon which an evaluation of its prospects can be made. Such
prospects must be considered in light of the substantial risks, expenses and
difficulties encountered by new entrants into the Internet services industry.
Moreover, the Company's current management, a number of whom joined the Company
as recently as the first and second quarters of 1997, is relatively new.
Although the Company had net profits for each of its last three fiscal quarters,
the Company had net losses in every preceding quarter since it commenced
operations. As of June 30, 1998, the Company had an accumulated deficit of
approximately $6.6 million. The Company's ability to maintain profitability and
positive cash flow is dependent upon a number of factors, including the
Company's ability to increase revenues while reducing costs per subscriber and
achieving economies of scale. There can be no assurance that the Company will be
successful in increasing or maintaining revenues or achieving or sustaining
economies of scale or positive cash flow in the future, and any such failure
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "-- Factors Affecting Operating
Results; Potential Fluctuations in Quarterly Results," "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview" and
"-- Selected Quarterly Results of Operations," "Business -- Competition" and
"Management -- Executive Officers and Directors."
FACTORS AFFECTING OPERATING RESULTS; POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's future success depends on a number of factors, many of which
are beyond the Company's control. These factors include the rates of and costs
associated with new customer acquisition, customer retention, capital
expenditures and other costs relating to the expansion of operations, the timing
of new product and service announcements, changes in the Company's pricing
policies and those of its competitors, market acceptance of new and enhanced
versions of the Company's services, changes in operating expenses, changes in
the Company's strategy, personnel changes, the introduction of alternative
technologies, the effect of potential acquisitions, increased competition in the
Company's current and prospective markets and other general economic factors.
The Company's operating results, cash flows and liquidity may fluctuate
significantly in the future. The Company's revenues depend on its ability to
attract and retain subscribers. Internet America's monthly customers, who
account for a majority of the Company's revenues, have the option of
discontinuing their service at the end of any given month for any reason. The
percentage of customers discontinuing service on a monthly or other basis is
immaterial. The Company's expense levels are based, in part, on its expectations
as to future revenues. Moreover, the Company's operations often require up-front
expenses, but result in trailing revenues. To the extent that revenues are below
expectations, the Company may be unable or unwilling to reduce expenses
proportionately, and operating results, cash flow and liquidity are likely to be
adversely affected. In addition, the Company has in recent periods experienced
increasing customer utilization rates, which increases the Company's expenses.
To remain competitive from a pricing standpoint, the Company may not be able to
increase customer fees to match these increasing expenses and therefore could
experience
7
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deteriorating profit margins or losses. Due to these and other factors, in some
future quarter the Company's operating results and/or growth rate may be below
the expectations of analysts, management and investors, which could materially
adversely affect the value of the Common Stock.
RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS
The market for Internet access is characterized by rapidly changing
technology, evolving industry standards, changes in customer needs and frequent
new service introductions. The Company's future success will depend, in part, on
its ability to use leading technologies effectively, to continue to develop its
technical expertise and to enhance its existing services and develop new
services to meet changing customer needs on a timely and cost-effective basis.
There can be no assurance that the Company will be successful in using new
technologies effectively, developing new services or enhancing existing services
on a timely basis or that such new technologies or enhancements will achieve
market acceptance. The Company believes that its ability to compete successfully
is also dependent upon the continued compatibility and interoperability of its
services with products and architectures offered by various vendors. Although
the Company intends to support emerging standards in the market for Internet
services, there can be no assurance that industry standards will be established
or, if they become established, that the Company will be able to conform to
these new standards in a timely fashion and maintain a competitive position in
the market. In addition, there can be no assurance that services or technologies
developed by others will not render the Company's services or technology
uncompetitive or obsolete.
The Company is also at risk to fundamental changes in the way Internet
access is delivered. Currently, Internet services are accessed primarily by
computers connected by telephone lines. There are currently available or under
development a number of alternative methods for users to access the Internet,
including cable television modems, high speed dedicated access, screen based
telephones, satellite technologies, wireless telecommunications technologies and
other consumer electronic devices. The methods have the ability to transmit data
at substantially faster speeds than the modems the Company currently uses. As
the Internet becomes more accessible through these alternative methods, or as
customer requirements change the way Internet access is provided, the Company
will face additional competitive pressures and will have to develop or use new
technology or modify its existing technology, either internally or through
arrangements with third parties, to accommodate these changes. See
"Competition." Adjusting to such technological advances may require substantial
time and expense, and there can be no assurance that the Company will succeed in
addressing these competitive pressures or adapting its business to alternative
access methods.
DEPENDENCE ON NETWORK INFRASTRUCTURE; CAPACITY; RISK OF SYSTEM FAILURE
The future success of the Company's business will depend to a large extent
on the capacity, reliability and security of its network infrastructure. The
Company will be required to expand and adapt its network infrastructure as the
number of customers and the amount and type of information they wish to transfer
increase. Such expansion and adaptation of the Company's network infrastructure
will require substantial financial, operational and management resources. In
order to address anticipated growth in its existing markets, the Company
believes that it will require up to $500,000 for capital expenditures on network
infrastructure during the next twelve months and expects the source of these
funds to be drawn from the proceeds of the Offering. However, there can be no
assurance that the Company will be able to expand or adapt its network
infrastructure to meet additional demand or changing customer requirements on a
timely basis and at a commercially reasonable cost, or at all. See "Use of
Proceeds."
Capacity constraints have occurred and may occur in the future, both at the
level of particular POPs (affecting only customers attempting to use the
particular POP) and in connection with system wide services (such as e-mail and
newsgroup services). From time to time, the Company has experienced delayed
delivery from suppliers of new telephone lines, modems, terminal servers and
other equipment. If delays of this nature are severe, all incoming modem lines
may become full during peak times, resulting in busy signals for customers who
are trying to connect to the Internet through the Company. Further, if the
Company does not maintain sufficient bandwidth capacity in its network
connections, customers will perceive a general slowdown of all services on the
Internet. Similar problems can occur if the Company is unable to expand the
capacity of
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its information servers (for e-mail, news and the World Wide Web) fast enough to
keep up with demand from an expanding subscriber base with increasing
utilization rates. If the capacity of such servers is exceeded, customers will
experience delays when trying to use a particular service. As the majority of
the Company's
information traffic flows through the Dallas POP, a capacity constraint,
supplier delay or other slowdown at the Dallas POP or operations infrastructure
would affect a majority of the Company's customers and operations. Any of these
events could cause customers to terminate use of the Company's services.
Accordingly, while the Company's objective is to maintain excess capacity, any
failure of the Company to expand or enhance its network infrastructure on a
timely basis or to adapt it to an expanding subscriber base, changing customer
requirements or evolving industry standards could materially adversely affect
the Company's business, financial condition and results of operations.
The Company's operations and services are dependent on the extent to which
the equipment of the Company is protected against damage from fire, earthquakes,
power loss, telecommunications failures and similar events. A significant
portion of the Company's equipment, including critical equipment dedicated to
its Internet access services, is located at a single facility in Dallas, Texas.
Despite precautions taken by the Company, the occurrence of a natural disaster
or other unanticipated problems at the Company's headquarters, network hub or a
POP could cause interruptions in the services provided by the Company. The
Company does not currently maintain fully redundant or back-up Internet
services, backbone facilities or other computing and telecommunications
facilities. See "Business -- Systems Infrastructure." Any accident, incident or
system failure that causes interruptions in the Company's operations could have
a material adverse effect on the Company's ability to provide Internet services
to its customers and, in turn, on the Company's business, financial condition
and results of operations. See "-- Dependence on Telecommunications Carriers and
Other Suppliers" and "-- Security Risks."
The Company's billing and management information systems are also dependent
on the extent to which the computer equipment and attendant software of the
Company is protected against damage, malfunction or other loss. The Company
bills the majority of its customers by automatic charges to customers' credit
cards or bank accounts each month in advance, while some customers are invoiced.
Any damage to or system failure of the Company's billing and management
information systems could have a material adverse effect on the Company's
business, financial condition and results of operations. See "-- Security
Risks."
DEPENDENCE ON TELECOMMUNICATIONS CARRIERS AND OTHER SUPPLIERS
The Company relies on local telephone companies and other companies to
provide data communications capacity via local telecommunications lines and
leased long-distance lines, usually through contracts effective for terms of one
to three years. The Company has experienced and is subject to disruptions or
capacity constraints in these telecommunications services and may have no means
of replacing these services, on a timely basis or at all, in the event of such
disruption or capacity constraints. The Company has in the past temporarily lost
service in a market area, although these problems are usually cured within 24
hours. In addition, local phone service is sometimes available only from the
local monopoly telephone company in each of the markets served by the Company.
In addition, the Company provides Internet access exclusively through
Virtual POPs in some markets. See "Business -- Infrastructure." The inability or
unwillingness of any third-party to provide POP access to the Company's
customers or the Company's inability to secure alternative POP arrangements upon
partial or complete termination of a third-party network provider agreement or
other loss of access to such POPs could significantly limit the Company's
ability to provide Internet access to its customers and could limit the
Company's ability to expand in new markets, which could, in turn, have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that, if access to one or more
Virtual POPs is lost, any alternative arrangements will be available or, if
available, that such arrangements will be on terms acceptable to the Company.
The Company does not currently have any plans or commitments with respect to
such alternative POP arrangements. Moreover, while the third-party providers are
contractually obligated to provide commercially reliable service to the
Company's customers with a significant assurance of accessibility to the
Internet, there can be no assurance that such services or Internet
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access will meet the Company's requirements, which could materially adversely
affect the Company's business, financial condition and results of operations.
The Company's operations and services are dependent on the extent to which
the equipment of its third-party network providers (over which the Company has
no control) is protected against damage from fire, earthquakes, power loss,
telecommunications failures and similar events. Any accident, incident, system
failure or discontinuance of operations involving a third-party network that
causes interruptions in the Company's operations could have a material adverse
effect on the Company's ability to provide Internet services to its customers
and, in turn, on the Company's business, financial condition and results of
operations. In addition, failure of the Company's telecommunications providers
to provide the required data communications capacity as a result of a natural
disaster, operational disruption or for any other reason could cause
interruptions in the services provided by the Company.
The Company is dependent on certain third-party suppliers of hardware
components. Expansion of network infrastructure by the Company and others is
placing, and will continue to place, a significant demand on the Company's
suppliers, some of which have limited resources and production capacity. Failure
of the Company's suppliers to adjust to meet such increasing demand may prevent
them from continuing to supply components and products in the quantities, at the
quality levels and at the times required by the Company, or at all. The
Company's inability to develop alternative sources of supply, if required, could
result in delays and increased costs in expanding the Company's network
infrastructure, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's telecommunications carriers and suppliers also sell, lease or
make available products and services to the Company's competitors and may be, or
in the future may become, competitors of the Company themselves. There can be no
assurance that the Company's telecommunications carriers and suppliers will not
enter into exclusive arrangements with the Company's competitors or stop
selling, leasing or making available their products or services to the Company
at commercially reasonable prices, or at all. See "-- Competition."
RISKS ASSOCIATED WITH GROWTH STRATEGY AND ACQUISITIONS
Although the Company has tested each component of its growth strategy in
its existing markets, the Company has not attempted to introduce its user
density business model to other markets. There can be no assurance that the
Company will be successful in implementing its growth strategy, and any failure
could have a material adverse effect on the Company's business, financial
condition and results of operations. One component of its growth strategy, the
strategic acquisition of businesses and subscriber accounts, involves certain
risks, including, among others, the following: the difficulty of assimilating
the acquired operations and personnel; the potential disruption of the Company's
ongoing business; the possible inability of management to maximize the financial
and strategic position of the Company by the successful incorporation of
acquired technology and rights into the Company's service offerings and to
maintain uniform standards, controls, procedures and policies; the risks of
entering markets in which the Company has little or no direct prior experience;
and the potential impairment of relationships with employees and customers as a
result of changes in management. There can be no assurance that the Company will
be successful in overcoming these risks or any other problems encountered in
connection with future transactions. In addition, any such transaction could
materially adversely affect the Company's operating results due to dilutive
issuances of equity securities, the incurrence of additional debt and the
amortization of expenses related to goodwill and other intangible assets, if
any.
COMPETITION
The market for the provision of Internet access to individuals and small
businesses is extremely competitive and highly fragmented. There are no
substantial barriers to entry, and the Company expects that competition will
continue to intensify. The Company believes that the primary competitive factors
determining success in this market are a reputation for reliability and service,
effective customer support, pricing, creative marketing, easy-to-use software
and geographic coverage. Other important factors include the timing of
introductions of new services and industry and general economic trends. There
can be no assurance that the
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Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, financial condition and results of
operations.
The Company's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, marketing and other resources than the Company. The Company currently
competes or expects to compete with the following types of Internet services
providers: (i) national commercial providers, such as Verio, Inc., Mindspring
Enterprises, Inc. and EarthLink Network, Inc.; (ii) numerous regional and local
commercial providers, which vary widely in quality, service offerings and
pricing, such as Websight Services, Inc. and PDQ Net, Inc.; (iii) established
online commercial information service providers, such as America Online, Inc.;
(iv) computer hardware and software and other technology companies, such as
International Business Machines Corporation, Microsoft Corp. and Gateway, Inc.;
(v) national telecommunications providers, such as AT&T Corp. ("AT&T"), MCI
Communications Corporation ("MCI"), WorldCom, Inc., Sprint Corporation
("Sprint") and WindStar Communications, Inc.; (vi) regional telecommunications
providers, such as SBC Communications and IXC Communications; (vii) cable
operators, such as Tele-Communications, Inc., Time Warner, Inc., TCA Cable, Inc.
and Marcus Cable, Inc.; (viii) wireless communications companies; (ix) satellite
companies; and (x) nonprofit or educational Internet access providers. The
Company believes that new competitors, including large computer hardware and
software, media and telecommunications companies, will continue to enter the
Internet services market, resulting in even greater competition for the Company.
In particular, the Company expects to face increased competition in the future
from companies that provide connections to consumers' homes, including local and
long distance telephone companies, cable companies, electric utility companies
and wireless communications companies. Technologies have been developed that
enable cable television operators to offer Internet access through their cable
facilities at significantly faster rates than existing modem speeds. Such
companies include Internet access in their basic bundle of services or offer
such access for a nominal additional charge, and could prevent the Company from
delivering Internet access through the wire and cable connections that such
companies own. In addition, as consumer awareness of the Internet grows,
existing competitors are likely to further increase their emphasis on Internet
access services, resulting in even greater competition for the Company. Any such
developments could materially adversely affect the Company's business, financial
condition and results of operations. See "Business -- Competition."
As a result of increased competition in the industry, the Company expects
to encounter significant pricing pressure. Reductions in rates charged by the
Company's competitors could require the Company to reduce prices charged to its
customers, which could cause a decrease in total revenues and revenue per
customer and reduce the likelihood of the Company maintaining positive cash flow
or profitability in the future. Any such reductions in prices could materially
adversely affect the Company's business, financial condition and results of
operations. In addition, telecommunications companies may be able to offer
customers reduced communications costs in connection with their Internet access
services, reducing the overall cost of such services and significantly
increasing price pressures on the Company. Competition could also result in
increased selling and marketing expenses, related customer acquisition costs and
customer attrition, all of which could materially adversely affect the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will be able to offset the effects of any such
increased costs or reductions in the Company's prices through an increase in the
number of its customers, higher revenues from enhanced services, cost reductions
or otherwise, or that the Company will have the resources to continue to compete
successfully.
DEPENDENCE ON AND ABILITY TO ATTRACT KEY PERSONNEL
The Company's success depends upon the continued efforts of its senior
management team and its technical, marketing and sales personnel. Such employees
may voluntarily terminate their employment with the Company at any time, as the
Company has no employment agreements with any of its employees. The Company's
success also depends on its ability to attract and retain additional highly
qualified management, technical, marketing and sales personnel. The process of
hiring employees with the combination of skills and attributes required to carry
out the Company's strategy is extremely competitive and time-consuming. There
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can be no assurance that the Company will be able to retain or integrate
existing personnel or identify and hire additional qualified personnel. The loss
of the services of key personnel, or the inability to attract additional
qualified personnel, could materially adversely affect the Company's business,
financial condition and results of operations.
SECURITY RISKS
Despite the implementation of security measures, the Company's network
infrastructure may be vulnerable to computer viruses, hacking or similar
disruptive problems caused by customers, customers of other ISPs, other
connected Internet sites, the interconnecting networks and the various telephone
networks. Computer viruses or problems caused by third parties could lead to
interruptions, delays or cessation in service to the Company's customers.
Inappropriate use of the Internet by third parties could also potentially
jeopardize the security of confidential information stored in the computer
systems of the Company or its customers, which may cause losses to the Company
or its customers or deter certain persons from subscribing to the Company's
services. Such inappropriate use of the Internet includes attempting to gain
unauthorized access to information or systems, which is commonly known as
"cracking" or "hacking." Although the Company intends to continue to implement
security measures, such measures have been circumvented in the past, and there
can be no assurance that measures implemented by the Company will not be
circumvented in the future. Alleviating problems caused by computer viruses or
other inappropriate uses or security breaches may require interruptions, delays
or cessation in service to the Company's customers, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company expects that its customers will
increasingly use the Internet for commercial transactions in the future. Any
network malfunction or security breach could cause these transactions to be
delayed, not completed at all or completed with compromised security. There can
be no assurance that customers or others will not assert claims of liability
against the Company as a result of any such failure. Further, until more
comprehensive security technologies are developed, the security and privacy
concerns of existing and potential customers may inhibit the growth of the
Internet service industry in general and Internet America's customer base and
revenues in particular.
MANAGEMENT AND RISKS OF GROWTH
The rapid execution necessary for the Company to fully exploit the market
for its services requires an effective planning and management process. The
Company's growth has in the past placed, and may in the future place, a
significant strain on the Company's managerial, operational and financial
resources. In order to effectively manage its operations, the Company will be
required to continue to implement and improve its operational, financial and
management information systems and to identify, attract, train, integrate and
retain qualified personnel. These demands will require the addition of new
management personnel and the development of additional expertise by existing
management. In particular, the successful integration of acquired businesses or
assets and the implementation of an expansion strategy will require close
monitoring of quality of service (particularly through Virtual POPs) and, to the
extent management deems necessary, identification and acquisition of physical
sites, acquisition and installation of necessary equipment and
telecommunications facilities, implementation of marketing efforts in new as
well as existing markets, employment of qualified personnel to provide technical
and marketing support for such sites and continued expansion of the Company's
managerial, operational and financial resources to support such development. The
demands on the Company's customer service and technical support resources will
grow as the Company's customer base expands. There can be no assurance that the
Company's customer service and technical support or other resources will be
sufficient to manage any future growth in the Company's business or that the
Company will be able to implement its expansion program in whole or in part.
NEW AND UNCERTAIN MARKET; UNCERTAIN ACCEPTANCE OF THE INTERNET AS A MEDIUM OF
COMMERCE AND COMMUNICATION
The market for Internet access and related products is in an early stage of
growth. The Company's success will depend upon the continuing development and
expansion of the Internet and the market for
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Internet access. Critical issues concerning commercial and personal use of the
Internet (including practice standards and protocol, security, reliability,
cost, ease of use, access and quality of service) remain uncertain and may
affect the growth of Internet use. See "-- Potential Liability." The acceptance
of the Internet for commerce and communications, particularly by those
individuals and enterprises that have historically relied upon alternative means
of commerce and communication, generally requires that such users accept a new
way of conducting business and exchanging information, that industry
participants continue to provide new and compelling content and applications and
that the Internet provide a reliable and secure computer platform. It is
difficult to predict with any assurance the rate at which the market will grow,
if at all, or at which new or increased competition will result in market
saturation. The novelty of the market for Internet services may also adversely
affect the Company's ability to retain new customers, as customers unfamiliar
with the Internet may be more likely to discontinue the Company's services after
an initial trial period than other customers. If demand for Internet services
fails to continue to grow, grows more slowly than anticipated or becomes
saturated with competitors, the Company's business, operating results and
financial condition will be materially adversely affected. Conversely, to the
extent that the Internet continues to experience significant growth in the
number of users and level of use, there can be no assurance that the Internet
infrastructure will be able to support the demands placed on it by such growth.
POTENTIAL LIABILITY
The Company has limited control over its customers' online practices and
the information passed through and stored on its systems by its customers. The
law relating to the liability of Internet access providers and online services
companies for incorrect use of the Internet and information carried on or
disseminated through their networks is unsettled. On June 22, 1998, the United
States Supreme Court declined to review a Fourth Circuit Court of Appeals
decision in which a negligence action was brought against an ISP for allegedly
delaying the removal of defamatory messages posted by an Internet user, refusing
to post retractions of those messages and failing to screen for similar postings
thereafter. The Fourth Circuit Court of Appeals affirmed the lower court's
decision that the Communications Decency Act of 1996 bars the claims against the
ISP. Although no such claims or lawsuits have been asserted against the Company
to date, there can be no assurance that such claims will not be asserted in the
future, or if asserted, will not be successful. As the law in this area
develops, the potential imposition of liability upon the Company for information
carried on and disseminated through its network could require the Company to
implement measures to reduce its exposure to such liability, which may require
the expenditure of substantial resources or the discontinuation of certain
service offerings. Any costs that are incurred as a result of contesting any
such asserted claims or the consequent imposition of liability could materially
adversely affect the Company's business, financial condition and results of
operations.
In addition, the Communications Decency Act of 1996 imposes fines on any
entity that: (i) by means of a telecommunications device, knowingly sends
indecent or obscene material to a minor; (ii) by means of an interactive
computer service sends or displays indecent material to a minor; or (iii)
permits any telecommunications facility under such entity's control to be used
for the purposes detailed above. The standard for determining whether an entity
acted knowingly has not yet been established. Certain defenses to liability
under the statute are available but may not apply. Although the Company does not
actively monitor the content of its customers' Internet transmissions, there can
be no assurance that the Company would not be considered to have knowledge of
such content. Although no such claims or lawsuits have been asserted against the
Company to date, there can be no assurance that if the Company were prosecuted
that any defenses to liability would be applicable.
PROPRIETARY RIGHTS; INFRINGEMENT CLAIMS
The Company's success depends in part upon its technology. The Company
relies upon a combination of copyright, trademark and trade secret laws, and
contractual restrictions to establish and protect its proprietary technology.
There can be no assurance that the steps taken by the Company will be adequate
to prevent misappropriation of its technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technology.
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The Company has obtained permission and, in certain cases, licenses from
each manufacturer of software that the Company bundles in its front-end software
product for customers. Although the Company does not believe that the software
or the trademarks it uses infringe on the proprietary rights of any third
parties, and no such claims or lawsuits have been asserted against the Company
to date, there can be no assurance that third parties will not assert such
claims against the Company in the future or that such claims will not be
successful. The Company could incur substantial costs and diversion of
management resources with respect to the defense of any claims relating to
proprietary rights, which could materially adversely affect the Company's
business, financial condition and results of operations. In the event a claim
relating to the proprietary technology or information is asserted against the
Company, the Company may seek licenses to such intellectual property. There can
be no assurance, however, that licenses could be extended or obtained on
commercially reasonable terms, if at all, or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain the necessary
licenses or other rights could materially adversely affect the Company's
business, financial condition and results of operations. See
"Business -- Proprietary Rights."
THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations, causing disruptions of
operations, including, among others, a temporary inability to process
transactions, send invoices or engage in similar normal business activities. The
Company does not believe that the Year 2000 issue will have a material effect on
its network, computer systems or operations, however, it will continue to assess
the potential impact of the Year 2000 issue. Any failure of the Company to
become Year 2000 compliant on a timely basis could have a material adverse
effect on the Company's business, financial condition and results of operations,
including, without limitation, a complete failure or degradation of the
performance of the Company's network or other systems. To the extent that the
Company relies on external vendors and network providers with Year 2000
exposure, any failure by such third-party providers to resolve any Year 2000
issues on a timely basis or in a manner that is compatible with the Company's
systems could have a material adverse effect on the Company. Most of the
Company's critical third-party providers have made representations to the effect
that they are, or will be, Year 2000 compliant. The Company, however, has not
undertaken an in-depth evaluation of such providers in relation to the Year 2000
issue, and furthermore the Company has no control over whether its third-party
providers are, or will be, Year 2000 compliant. Any failure on the part of such
third-party providers to become Year 2000 compliant on a timely basis or in a
manner that is compatible with the Company's systems could have a material
adverse effect on the Company. In the event the Company encounters Year 2000
problems, it would expect to take all necessary measures to address such
problems.
GOVERNMENT REGULATION
The Company provides Internet access, in part, through transmissions over
public telephone lines. These transmissions are governed by regulatory policies
establishing charges and terms for communications. The Company, as an Internet
access provider, is not currently subject to direct regulation by the Federal
Communications Commission (the "FCC") or any other agency, other than
regulations applicable to businesses generally. In a report to Congress adopted
on April 10, 1998, the FCC reaffirmed that Internet access providers should be
classified as unregulated "information service providers" rather than regulated
"telecommunications providers" under the terms of the 1996 Telecommunications
Act. The consequence of this finding is that the Company is not subject to
regulations applicable to telephone companies and similar carriers merely
because the Company provides its services via telecommunications networks. The
Company also is not required to contribute to the universal service fund, which
subsidizes phone service for rural and low income consumers and supports
Internet access among schools and libraries. The FCC action may also discourage
states from regulating Internet access providers as telecommunications carriers
or imposing similar subsidy obligations.
Nevertheless, Internet-related regulatory policies are continuing to
develop, and it is possible that the Company could be exposed to regulation in
the future. For example, in the same report to Congress, the FCC
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stated its intention to consider whether to regulate voice and fax telephony
services provided over the Internet as "telecommunications" even though Internet
access itself would not be regulated. The FCC is also considering whether such
Internet-based telephone services should be subject to the universal service
support obligations discussed above, or should pay carrier access charges on the
same basis as traditional telecommunications companies. Access charges are
assessed by local telephone companies to long distance companies for the use of
the local telephone network to originate and terminate long distance calls,
generally on a per-minute basis. Access charges have been a matter of continuing
dispute, with long distance companies complaining that the rates are
substantially in excess of cost and local telephone companies arguing that
access rates are justified to subsidize lower local rates for end users and
other purposes. Both local and long distance companies, however, contend that
Internet-based telephony should be subject to these charges. The Company
currently does not offer telephony, and so is not directly affected by these
developments, however, should the Company offer telephony in the future, it may
be affected by these issues. Additionally, the Company cannot predict whether
these debates will cause the FCC to reconsider its current policy of not
regulating Internet access providers.
In a notice of proposed rulemaking adopted on August 6, 1998, the FCC
proposed that if an incumbent LEC established a separate affiliate to pursue the
deployment of advanced telecommunications services such as xDSL and that
affiliate interconnected with the LEC's network on the same terms and conditions
as the LEC's competitors did, then the affiliate would not be subject to the
unbundling requirement that applied to the LEC. If the FCC ultimately adopted
this proposal or similar proposals, the Company's access to xDSL and other
high-speed data transmission methods could be curtailed. Such curtailment could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Due to the increasing popularity and use of the Internet, it is possible
that additional federal, state or other laws and regulations may be adopted with
respect to the Internet, covering issues such as content, privacy, pricing,
encryption standards, consumer protection, electronic commerce, taxation,
copyright infringement and other intellectual property issues. See "-- Potential
Liability." The Company cannot predict the impact, if any, that any future
regulatory changes or development may have on its business, financial condition
and results of operations. Changes in the regulatory environment relating to the
Internet access industry, including regulatory changes that directly or
indirectly affect telecommunication costs or increase the likelihood or scope of
competition from regional telephone companies or others, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
NEED FOR ADDITIONAL CAPITAL
Although the Company believes that the net proceeds of the Offering will be
sufficient to enable the Company to implement its business strategies for at
least the next twelve months, there can be no assurance that the net proceeds
will be sufficient for such purposes, either in the near term or thereafter.
Additionally, the Company may have insufficient capital to respond to
unanticipated technological developments or competitive pressures or to take
advantage of unanticipated opportunities, such as special marketing
opportunities, the development of new services or larger than anticipated
acquisitions of complementary businesses or assets. As a result, the Company may
need to raise additional funds through equity or debt financings. There can be
no assurance that such additional financings will be available on terms
acceptable to the Company or at all. Further, any such financings may be upon
terms that are dilutive or potentially dilutive to the Company's shareholders.
If alternative sources of financing are required, but are insufficient or
unavailable, the Company will be required to modify its growth and operating
plans in accordance with the extent of available funding, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition -- Liquidity and Capital Resources."
CONTROL OF COMPANY
After completion of the Offering, the Company's officers, directors and 10%
shareholders will beneficially own, directly or indirectly, approximately 48.8%
of the outstanding voting stock of the Company, (assuming the exercise of all
derivative securities currently outstanding, such persons would beneficially
own, directly or
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indirectly, approximately 44.7% of the outstanding voting stock of the Company).
As a result, these shareholders, acting together, would be able to exercise
control over substantially all matters requiring approval by the shareholders of
the Company, including the election of directors and certain change-of-control
transactions. See also "-- Anti-Takeover Matters."
ABSENCE OF A PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained. The initial public offering price of the Common Stock will be
determined through negotiations among the Company, the Selling Shareholders and
the Underwriters and may not be indicative of the market price for the Common
Stock after the Offering. See "Underwriting" for a discussion of the factors to
be considered in determining the initial public offering price.
STOCK PRICE VOLATILITY
The trading price of the Common Stock may be subject to wide fluctuations
in response to factors such as actual or anticipated variations in the Company's
operating results; announcements of technological innovations by the Company or
its competitors; new services or contracts; developments with respect to
patents, copyrights or proprietary rights; changes in recommendations or
financial estimates by securities analysts; conditions and trends in the
Internet services and technology industries; adoption of new accounting
standards affecting the Company's industry; general market conditions and other
factors. Further, the stock market has experienced in recent months and may
continue in the future to experience extreme price and volume fluctuations that
particularly affect the market prices of equity securities of Internet services
and technology companies and that often are unrelated or disproportionate to the
operating performance of such companies. The trading prices of many Internet
services and technology companies' stocks have recently been at or near
historical highs and reflect price to earnings ratios that are substantially
above historical levels. There can be no assurance that these trading price to
earnings ratios will be sustained. These broad market price fluctuations, as
well as general economic, political and market conditions, may adversely affect
the market price of the Company's Common Stock. In the past, following periods
of volatility in the market price of a company's stock, securities class action
litigation has often been instituted against the issuing company. There can be
no assurance that such litigation will not occur in the future with respect to
the Company. Such litigation could result in substantial costs and would at a
minimum divert management's attention and resources, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Any adverse determination in such litigation could also subject the
Company to significant liabilities.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have an aggregate of
6,285,957 shares of Common Stock outstanding. Of these shares, all of the shares
sold in the Offering will be freely transferable without restriction or
limitation under the Securities Act of 1933, as amended (the "Securities Act"),
except for any shares purchased by "affiliates" of the Company, as such term is
defined in Rule 144 under the Securities Act. The remaining 3,985,957 shares
constitute "restricted securities" within the meaning of Rule 144. Of these
"restricted securities," 1,886,333 shares have been held for the required
one-year period and will be freely tradable upon completion of the Offering,
subject to the 180-day lock-up period described below and subject to the 90-day
information requirement of Rule 144 for shares held by affiliates or for less
than the required two-year period. The holders of 1,660,769 outstanding shares
have certain rights to have shares registered under the Securities Act pursuant
to the terms of agreements between such holders and the Company. See
"Description of Securities -- Registration Rights." Of those 1,660,769 shares,
769,149 shares are freely tradeable upon completion of the Offering, subject to
the 180-day lock-up period described below and subject to the 90-day information
requirement of Rule 144 for shares held by affiliates or for less than the
required two-year period. The Company, and its executive officers, directors and
certain shareholders (including all those with registration rights) who will
hold, collectively, 3,066,017 outstanding shares of Common Stock after the
Offering, have agreed not to offer or sell any shares of Common Stock for a
period of 180 days
16
<PAGE> 18
following the date of this Prospectus without the prior written consent of Hoak
Breedlove Wesneski & Co., except under limited circumstances. If this 180-day
lock-up period is waived by Hoak Breedlove Wesneski & Co., then 2,459,284 of the
3,066,017 shares would be freely tradeable subject to the 90-day information
requirement of Rule 144 for shares held by affiliates or for less than the
required two-year period. The Company intends to file a Registration Statement
on Form S-8 to register 800,000 shares of Common Stock, which is the aggregate
of all shares reserved for issuance pursuant to the 1996 Option Plan and 1998
Option Plan and shares underlying certain nonqualified options granted to
officers and directors. Accordingly, shares issued upon exercise of such options
will be freely tradeable by holders who are not affiliates of the Company and,
subject to volume and other limitations of Rule 144, by holders who are
affiliates of the Company. Sales of substantial amounts of shares of Common
Stock in the public market after the Offering, or the perception that such sales
could occur, may adversely affect the market price of the Common Stock. See
"Shares Eligible for Future Sale."
ANTI-TAKEOVER MATTERS
The Company's Articles of Incorporation, as amended (the "Articles"), and
Bylaws, as amended ("Bylaws"), contain provisions that may have the effect of
delaying, deterring or preventing a potential takeover of the Company that
shareholders purchasing shares in the Offering may consider to be in their best
interests. The Articles and Bylaws prevent shareholders from calling a special
meeting of shareholders, prevent shareholders from amending the Bylaws and
prohibit shareholder action by written consent. The Articles also authorize only
the Board of Directors to fill vacancies, including newly-created directorships,
and state that directors of the Company may be removed only for cause and only
by the affirmative vote of holders of at least two-thirds of the outstanding
shares of the voting stock, voting together as a single class. Article XIII of
the Texas Business Corporation Act, which is applicable to the Company, contains
provisions that restrict certain business combinations with interested
shareholders, which may have the effect of inhibiting a non-negotiated merger or
other business combination involving the Company. See "Description of
Securities -- Texas Anti-Takeover Law and Certain Provisions."
IMMEDIATE AND SUBSTANTIAL DILUTION
Investors purchasing shares of Common Stock in this Offering will incur
immediate and substantial dilution in net tangible book value of the Common
Stock of $8.23 per share on a pro forma basis assuming an initial public
offering price of $10.00 per share. If all currently exercisable derivative
securities are exercised, investors will incur total dilution in net tangible
book value of the Common Stock of $8.25 per share on a pro forma basis assuming
an initial public offering price of $10.00 per share. See "Dilution."
17
<PAGE> 19
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,700,000 shares of Common
Stock offered hereby by the Company at an assumed initial public offering price
of $10.00 per share are estimated to be approximately $15.4 million, after
deducting the underwriting discount and estimated offering expenses payable by
the Company. The Company will not receive any of the proceeds from the sale of
shares of Common Stock by the Selling Shareholders.
The principal purposes of the Offering are to increase the Company's equity
capital, to create a public market for the Common Stock, to facilitate the
future access by the Company to public equity markets, to facilitate
acquisitions funded through the issuance of Common Stock, to provide liquidity
for certain of the Company's existing shareholders and to provide increased
visibility of the Company in the marketplace.
The Company anticipates that the net proceeds of the Offering will be
applied as follows, subject to the qualifications set forth further below:
<TABLE>
<CAPTION>
APPROXIMATE
USE OF PROCEEDS DOLLAR AMOUNT PERCENT
--------------- ------------- -------
<S> <C> <C>
Possible acquisitions of complementary businesses or
expansion in existing and new markets..................... $ 6,000,000 39.0%
Marketing expenses and capital equipment and infrastructure
expenditures related to anticipated growth................ 5,000,000 32.5
Repayment of indebtedness(1)................................ 2,700,000 17.5
General corporate purposes(2)............................... 1,700,000 11.0
----------- ----
Total............................................. $15,400,000 100%
=========== ====
</TABLE>
- ---------------
(1) Specifically the following: (a) indebtedness owing to Jack T. Smith, a
director of the Company, in the aggregate approximate amount of $307,000,
and indebtedness owing to Carl Westcott, a principal shareholder of the
Company, in the aggregate approximate amount of $1.7 million (collectively,
the "Affiliate Debt"); (b) indebtedness owing to a commercial bank in the
aggregate approximate amount of $225,000 (the "Bank Debt"); (c) indebtedness
owing to Webstar, Inc. in connection with the acquisition of subscribers in
the aggregate approximate amount of $352,000 (the "Webstar Debt"); and (d)
indebtedness owing to M.J. Capital Partners, L.P. in connection with a loan
for general working capital in the aggregate approximate amount of $80,000
(the "MJ Debt"). The Affiliate Debt and Bank Debt both accrue interest at
the prime rate. The Webstar Debt accrues interest at 14% per year, and the
MJ Debt accrues interest at 16.5% per year. The Affiliate Debt and the Bank
Debt mature two days after the Company receives the proceeds of this
Offering, while the Webstar Debt matures on June 30, 1999 and the MJ Debt
matures on January 1, 1999. The Bank Debt is secured by the personal
guaranty of William O. Hunt, a director of the Company, and the pledge of
all assets of the Company. See "Certain Transactions" and Notes 4, 5 and 6
of Notes to Financial Statements.
(2) Such funds could be used for a variety of general corporate purposes,
including, without limitation, further marketing efforts and infrastructure
improvements.
The Company continues to evaluate potential acquisitions, and to identify
and have preliminary discussions with potential acquisition candidates, although
there are, as of the date of this Prospectus, no agreements, arrangements or
understandings between the Company and any party relating thereto.
18
<PAGE> 20
Pending the above uses of proceeds, the Company intends to invest the net
proceeds of this Offering in short-term bank deposits or investment-grade
securities. The foregoing represents the Company's current intentions with
respect to the allocation of the proceeds of this Offering based upon its
present plans and business conditions. However, changed business conditions and
various other factors could result in the application of the proceeds of this
Offering in a manner other than as described in this Prospectus.
DIVIDEND POLICY
To date, the Company has neither declared nor paid any dividends on its
Common Stock nor does the Company anticipate that dividends will be declared or
paid in the foreseeable future. Rather, the Company intends to retain any
earnings to finance the growth and development of its business. Any payment of
cash dividends on its Common Stock in the future will be dependent, among other
things, upon the Company's earnings, financial condition, capital requirements
and other factors which the Board of Directors deems relevant.
19
<PAGE> 21
CAPITALIZATION
The following table sets forth at June 30, 1998, the short term debt and
capitalization of the Company: (i) on a historical basis and (ii) as adjusted to
reflect the sale of shares of Common Stock offered hereby at an assumed initial
public offering price of $10.00 per share and the application of the estimated
net proceeds therefrom, the automatic conversion of all outstanding shares of
preferred stock into shares of Common Stock on a 2.25-for-1.00 basis, which will
occur 30 days after completion of the Offering, the exercise of the Warrant and
repayment of substantially all current indebtedness contemporaneously with the
Offering and the cancellation of Common Stock in treasury. See "Use of Proceeds"
and "Description of Securities -- Preferred Stock." This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Company's Financial Statements and Notes thereto
and other financial and operating data included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Short-term debt (notes payable, shareholder loan, line of
credit and current portion of capital lease obligations
and long-term debt)....................................... $ 3,008 $ 333
------- -------
Long-term debt (capital lease obligations).................. $ 31 $ 31
Shareholders' equity (deficit):
Preferred Stock, $0.01 par value; 5,000,000 shares
authorized
Series A Preferred Stock, $0.01 par value; 400,000
shares authorized; 379,672 shares issued and
outstanding; no shares issued and outstanding, as
adjusted.............................................. 4 --
Series B Preferred Stock, $0.01 par value; 300,000
shares authorized; 73,667 shares issued and
outstanding; no shares issued and outstanding, as
adjusted.............................................. 1 --
Common Stock, $0.01 par value; 40,000,000 shares
authorized; 3,532,205 shares issued and outstanding;
6,285,957 shares issued and outstanding, as
adjusted(1)(2)......................................... 35 63
Additional paid-in capital................................ 2,816 18,153
Accumulated deficit....................................... (6,623) (6,623)
------- -------
Total shareholders' equity (deficit).............. (3,767) 11,593
------- -------
Total capitalization.............................. $(3,736) $11,624
======= =======
</TABLE>
- ---------------
(1) Excludes (i) 225,000 shares reserved for issuance under the 1996 Option
Plan, of which options to purchase 61,756 shares were outstanding at a
weighted average exercise price of $1.67 per share, (ii) 400,000 shares
reserved for issuance under the 1998 Option Plan, of which no options were
outstanding and (iii) 1,184,657 shares of Common Stock issuable upon
exercise of other outstanding options at a weighted average exercise price
of $1.55 per share. See "Management -- 1996 Incentive Stock Option Plan,"
"-- Nonqualified Stock Options Issued to Officers and Directors" and
"-- 1998 Nonqualified Stock Option Plan."
(2) Reflects the amendment of the Company's Articles of Incorporation in July
1998 to increase the authorized Common Stock from 15,000,000 shares to
40,000,000 shares.
20
<PAGE> 22
DILUTION
The deficit in net tangible book value of the Common Stock as of June 30,
1998 was approximately $4.2 million, or $.92 per share, on a pro forma basis
after giving effect to conversion of all outstanding shares of preferred stock
into shares of Common Stock and exercise of the Warrant. Dilution is determined
by subtracting net tangible book value per share after the Offering from the
amount of cash paid by investors for the shares of Common Stock. Net tangible
book value per share represents the book value of the Company's total tangible
assets less total liabilities, divided by the number of outstanding shares of
Common Stock. After giving effect to the sale of the 1,700,000 shares of Common
Stock offered by the Company hereby (at an assumed initial public offering price
of $10.00 per share), and after deducting the underwriting discount and
estimated expenses of the Offering payable by the Company and the application of
the net proceeds therefrom, and assuming no other changes in the net tangible
book value after June 30, 1998, the Company's pro forma net tangible book value
as adjusted at June 30, 1998 would have been approximately $11.1 million, or
$1.77 per share. This represents an immediate increase in net tangible book
value of $2.69 per share to existing shareholders and an immediate decrease in
net tangible book value to new investors of $8.23 per share. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $10.00
Deficit in pro forma net tangible book value per share at
June 30, 1998.......................................... $(0.92)
Increase per share attributable to new investors.......... 2.69
------
Pro forma net tangible book value per share after this
Offering.................................................. 1.77
------
Dilution per share to new investors......................... $ 8.23
======
Percentage dilution......................................... 82.3%
======
</TABLE>
The following table sets forth on a pro forma basis the differences between
the existing shareholders and the investors in this Offering with respect to the
total consideration paid or payable and the average price per share paid or
payable:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION(1)
------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders(2)(3)..... 4,585,957 73.0% $ 2,634,776 13.4% $ 0.57
New Investors(2)................ 1,700,000 27.0% 17,000,000 86.6% 10.00
--------- ----- ----------- -----
Total................. 6,285,957 100.0% $19,634,776 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) These amounts reflect total consideration paid by shareholders and do not
reflect net amounts received by the Company.
(2) Sales by the Selling Shareholders in the Offering will reduce the number of
shares held by existing shareholders to 3,985,957 shares, or 63.4% of the
total shares of Common Stock outstanding after the Offering, and will
increase the number of shares held by new investors to 2,300,000 shares, or
36.6% of the total shares of Common Stock outstanding after the Offering. If
the Underwriters' over-allotment option is exercised in full, the number of
shares held by existing shareholders will further decrease to 3,640,957
shares, or 57.9% of the total shares of Common Stock outstanding after the
Offering, and the number of shares held by new investors will further
increase to 2,645,000 shares, or 42.1% of the total shares of Common Stock
outstanding after the Offering. See "Principal and Selling Shareholders."
(3) Assumes the exercise of the Warrant and conversion of all outstanding shares
of preferred stock into shares of Common Stock.
The foregoing computations assume no exercise of outstanding stock options.
Options to purchase 61,756 shares of Common Stock were outstanding under the
1996 Option Plan at a weighted average exercise price of $1.67 per share as of
June 30, 1998. Additional options to purchase 1,184,657 shares of Common Stock
were outstanding as of June 30, 1998 at a weighted average exercise price of
$1.55 per share. If all currently exercisable options are exercised, investors
purchasing shares in the Offering will incur total dilution of $8.25 per share
of Common Stock on a pro forma basis assuming an initial public offering price
of $10.00 per share. See "Management -- 1996 Incentive Stock Option Plan,"
"-- Nonqualified Stock Options Issued to Officers and Directors" and "-- 1998
Nonqualified Stock Option Plan."
21
<PAGE> 23
SELECTED FINANCIAL AND OPERATING DATA
The following selected historical financial data for the years ended and as
of June 30, 1997 and 1998 have been derived from the Company's financial
statements included elsewhere herein and audited by Deloitte & Touche LLP,
independent auditors as set forth in their report thereon also included herein.
The selected historical financial data of the Company for the year ended June
30, 1996 is derived from the Company's audited financial statements not included
herein. The following selected financial data should be read in conjunction
with, and is qualified in its entirety by, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Financial Statements
and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND
CUSTOMER DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue
Access................................................. $ 3,052 $ 8,177 $ 9,566
Business services...................................... 411 1,045 1,036
Other.................................................. 314 249 41
------- ------- -------
Total revenue..................................... 3,777 9,471 10,643
Operating expenses
Connectivity and operations............................ 2,187 6,185 4,509
Sales and marketing.................................... 1,597 1,912 1,140
General and administrative............................. 2,797 2,748 1,919
Depreciation and amortization.......................... 548 1,618 1,474
Impairment of equipment................................ -- 351 --
------- ------- -------
Total operating expenses.......................... 7,129 12,814 9,042
------- ------- -------
Income (loss) from operations............................... (3,352) (3,343) 1,601
Interest expense............................................ 77 481 571
Income tax expense.......................................... -- -- 24
------- ------- -------
Net income (loss)........................................... $(3,429) $(3,824) $ 1,006
======= ======= =======
Earnings (loss) per share(1):
Basic..................................................... $ (1.15) $ (1.12) $ 0.28
Diluted................................................... $ (1.15) $ (1.12) $ 0.21
Weighted average shares(1):
Basic..................................................... 2,981 3,418 3,532
Diluted................................................... 2,981 3,418 4,783
OTHER DATA:
Approximate number of customers at end of period.......... 27,900 39,900 48,600
EBITDA(2)................................................. $(2,804) $(1,725) $ 3,075
EBITDA margin(2).......................................... (74.2)% (18.2)% 28.9%
Cash flow provided (used) by:
Operating activities................................... $ 390 $(1,430) $ 1,797
Investing activities................................... (2,981) (1,513) (407)
Financing activities................................... 2,615 2,864 (826)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash...................................................... $ 79 $ -- $ 565
Working capital (deficit)................................. (3,462) (6,834) (5,962)
Total assets.............................................. 3,127 3,114 3,150
Long-term debt, net of current portion.................... 373 684 31
Total shareholders' equity (deficit)...................... (1,063) (4,681) (3,767)
</TABLE>
See notes on following page
22
<PAGE> 24
- ---------------
(1) See Notes 1 and 11 of Notes to Financial Statements for information
concerning the calculation of basic and diluted net income (loss) per share.
(2) EBITDA (earnings before interest, taxes, depreciation and amortization)
consists of revenue less connectivity and operating expense, sales and
marketing expense, general and administrative expense and impairment of
equipment expense. EBITDA is provided because it is a measure commonly used
by investors to analyze and compare companies on the basis of operating
performance. EBITDA is presented to enhance an understanding of the
Company's operating results and is not intended to represent cash flows or
results of operations in accordance with GAAP for the periods indicated.
EBITDA is not a measurement under GAAP and is not necessarily comparable
with similarly titled measures for other companies. EBITDA margin represents
EBITDA as a percentage of total revenue.
(3) Adjusted to give effect to the sale of 1,700,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$10.00 per share (the mid-point of the range set forth on the cover of this
Prospectus), after deducting the underwriting discount and estimated
offering expenses payable by the Company, the application of the net
proceeds therefrom, the exercise of the Warrant and the conversion of all of
the outstanding shares of preferred stock to Common Stock. See "Use of
Proceeds" and "Capitalization."
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed in the forward-looking statements as a result of certain
factors including those set forth under "Risk Factors" and elsewhere in this
Prospectus. The following discussion and analysis should be read in conjunction
with "Selected Financial and Operating Data" and the Financial Statements and
Notes thereto appearing elsewhere in this Prospectus.
OVERVIEW
Internet America is a leading ISP in the southwestern United States with
approximately 50,000 customers, primarily in the North Texas area. From
inception through fiscal 1997, the Company incurred substantial operating losses
while building its infrastructure and rapidly increasing market share. In
response to these losses, the Company moved to reorganize its management and
operations personnel and implement a comprehensive cost control program. At the
end of the third quarter of fiscal 1997, the Company's Board of Directors
accepted the resignation of the President and Chief Executive Officer of the
Company. The Company's new Chief Executive Officer continued the reorganization
of the Company.
The primary elements of the cost control program involved: (i) selective
reduction in customer care, administrative and marketing personnel (reducing
Company personnel from 220 to 80); (ii) elimination of ineffective marketing
programs and (iii) improved cost efficiencies in the Company's network
infrastructure. As a result of the implementation of the Company's cost control
program, management was able to apply positive cash flow to the orderly
reduction of a substantial amount of past due trade payables, thus allowing the
Company to thereafter direct available cash to marketing efforts. By the end of
the first quarter of fiscal 1998, the Company had completed its reorganization
and implementation of the cost control program, and the Company achieved
sustained profitability for the first time.
The reorganization and cost controls implemented by management were
carefully designed not to compromise quality of customer service or customer
care. In fact, in several key ways, management believes that the changes
improved the Company's overall level of service quality, principally through
reorganization of the Company's customer care operations, improved browser
software and enhanced network performance. The Company's customer base remained
stable from the third quarter of fiscal 1997, when the changes began, through
the second quarter of fiscal 1998, after the changes were substantially
implemented, even though the Company had suspended virtually all advertising
during this period. The Company has continued to apply its disciplined approach
to strict cost controls, proven marketing tools and network operating
efficiencies.
Management believes that the Company's experience in implementing and
maintaining the above changes validated important elements of its user density
business model, and also believes that this model can be effectively applied in
other markets. The Company's user density business model focuses on the rapid
development of a profitable base of customers in selected markets. Upon entry
into a new market, the Company will make a strategic acquisition and/or engage
in substantial direct response marketing to quickly gain a critical mass of
customers. The early phases of entering new markets will involve substantial
initial expenditures on advertising, customer care and other operating needs.
The Company believes that it will be able to control its infrastructure costs
upon entry into new markets through use of its Virtual POP architecture or other
scalable technologies that will enable it to more closely match the capacity
needs of its customers with actual sales in those markets. The initial expenses
associated with entering new markets will offset the positive EBITDA achieved in
established markets. The Company believes that this offset effect will decrease
as its new markets mature and the Company realizes the marketing, network and
operating efficiencies created by user density in those markets. The Company
expects that the overall significance of the offset effect will diminish as the
Company's customer base and revenues increase. Through application of its user
density business model in selected new markets, the Company believes it will be
able to achieve economies of scope and scale similar to those achieved in the
Company's existing markets.
24
<PAGE> 26
The Company's access revenues are derived primarily from individual dial-up
Internet access, whether analog or ISDN, and revenues derived from value-added
services. Airnews.net as a subscription service also contributes to access
revenues. Both types of access revenues are principally derived from monthly
subscription fees and are therefore primarily determined by the number of
customers. The Company derives business services revenues primarily from
dedicated connectivity, bulk dial-up access and Web services. Business services
revenues are also generated from the sale of Airnews.net to other ISPs on a
wholesale basis. While monthly subscriptions are an important component of
business services revenues, these revenues fluctuate because of the wide range
of setup fees associated with different business services and the mix thereof in
any given period. Other revenues are derived from advertising fees and other
miscellaneous sources.
A brief description of each element of the Company's operating expenses
follows:
Connectivity and operations expenses consist primarily of the setup
costs for new customers, telecommunication costs and wages of network
operations and customer support personnel. Setup expenses include one-time
license fees for the right to bundle other software into the Company's
software, cost of diskettes and other media, manuals, packaging and
delivery costs. The Company does not defer customer setup expenses, but
expenses such items as incurred. Telecommunications costs include (i) the
costs of providing local telephone lines into each POP (or fees for Virtual
POP connectivity), (ii) leased lines connecting each POP to the Company's
internal network and (iii) connectivity from the internal network to the
Internet.
Sales and marketing expenses consist primarily of creative, media and
production costs, as well as call center employee wages. These expenses
include the cost of the Company's television and billboard advertising
campaigns, as well as other advertising. The Company does not defer any
advertising costs, but expenses such items as incurred.
General and administrative expenses consist primarily of accounting
and administrative personnel wages, professional services, rent and
non-Internet related telephone costs.
Depreciation is computed using the straight line method over the
estimated useful life of the assets. The Company's data communications
equipment, computers, data server and office equipment are depreciated over
a three-year life. The Company depreciates its furniture, fixtures and
leasehold improvements over a five-year life. The acquisition of customer
accounts is amortized over three years. Management anticipates that further
expansion using the Virtual POP technology will cause depreciation as a
percentage of revenue to decrease, with a corresponding increase in
connectivity and operations expenses, as network equipment that would have
been purchased by the Company will now be provided by selected
telecommunications providers.
25
<PAGE> 27
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's Statement of Operations as a percentage of total revenue.
Operating results for any period are not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Revenue:
Access.................................................... 80.8% 86.3% 89.9%
Business services......................................... 10.9 11.1 9.7
Other..................................................... 8.3 2.6 0.4
----- ----- -----
Total revenue..................................... 100% 100% 100%
----- ----- -----
Operating Expenses:
Connectivity and operations............................... 57.9 65.3 42.4
Sales and marketing....................................... 42.3 20.2 10.7
General and administrative................................ 74.1 29.0 18.0
Depreciation and amortization............................. 14.5 17.1 13.8
Impairment of equipment................................... -- 3.7 --
----- ----- -----
Total operating expenses.......................... 188.8 135.3 84.9
----- ----- -----
Income (loss) from operations............................... (88.8) (35.3) 15.1
Interest income (expense), net.............................. (2.0) (5.1) (5.4)
Income tax expense.......................................... -- -- (0.2)
----- ----- -----
Net income (loss)........................................... (90.8)% (40.4)% 9.5%
===== ===== =====
</TABLE>
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997
Total Revenue. Total revenue increased by $1.2 million, or 12.4%, to $10.6
million for fiscal 1998 from $9.5 million for fiscal 1997. Access revenue
increased by $1.4 million, or 17.0%, to $9.6 million for fiscal 1998 from $8.2
million for fiscal 1997. The increase in access revenue is primarily
attributable to increased subscription fees derived from an increased number of
dial-up access customers which totaled 48,600 at June 30, 1998, as compared to
39,900 at June 30, 1997. Business services revenue declined by $9,000, or 1.0%,
to $1,036,000 for fiscal 1998 from $1,045,000 for fiscal 1997. Other revenue
decreased by $208,000, or 83.4%, to $41,000 for fiscal 1998 from $249,000 for
fiscal 1997. The decrease in other revenue is primarily attributable to the
termination of a contract to provide customer care services to another ISP and
the termination of charges for browser software provided to customers.
Connectivity and operations. Connectivity and operations expenses decreased
by $1.7 million, or 27.1%, to $4.5 million for fiscal 1998 from $6.2 million for
fiscal 1997. The majority of the reduction in these expenses is associated with
the cost control program which commenced in the fourth quarter of fiscal 1997,
including (i) a decrease in wages of approximately $1.4 million resulting from
reduced staffing, (ii) a decrease in software costs of $169,000 and (iii) a
decrease in Internet and telephone connectivity costs of $118,000 due to
improved cost efficiencies in the Company's network infrastructure.
Sales and marketing. Sales and marketing expenses decreased by $772,000, or
40.4%, to $1.1 million for fiscal 1998 from $1.9 million for fiscal 1997. For
fiscal 1998, the Company suspended virtually all advertising until a new
television advertising campaign began in January 1998. For fiscal 1998,
marketing payroll and consulting fees declined by $558,000, or 57.3%, and
advertising and promotional costs declined by $202,000, or 21.5%.
General and administrative. General and administrative expenses decreased
by $828,000, or 30.1%, to $1.9 million for fiscal 1998 from $2.7 million for the
same period in the prior year. The decrease in general and
26
<PAGE> 28
administrative expenses was primarily due to decreased staffing, and decreases
in telephone expenses, professional services and equipment leases in connection
with the Company's cost control program.
Depreciation and amortization. Depreciation and amortization decreased by
$144,000, or 8.9%, to $1.5 million for fiscal 1998 from $1.6 million for fiscal
1997.
Interest expense. Interest expense increased by $90,000, or 18.7%, to
$571,000 for fiscal 1998 from $481,000 for fiscal 1997. This increase in
interest expense relates primarily to interest on certain indebtedness accruing
at a default rate of 18%. See "Certain Transactions."
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
Total Revenue. Total revenue increased by $5.7 million, or 151%, to $9.5
million for fiscal 1997 from $3.8 million for fiscal 1996. Access revenue
increased by $5.1 million, or 168%, to $8.2 million for fiscal 1997 from $3.1
million for fiscal 1996. The increase in access revenue is primarily
attributable to increased subscription fees derived from an increased number of
dial-up access customers, which totaled 39,900 at June 30, 1997 as compared to
27,900 at June 30, 1996. During fiscal 1997, the Company introduced its
Airnews.net service, which resulted in an increase in access revenue of
approximately $141,000. Business services revenue increased by $634,000, or
154%, to approximately $1.0 million in fiscal 1997 from $411,000 in fiscal 1996.
In fiscal 1997 business services revenue increased as a result of the addition
of new business customers and price increases. Other revenue decreased by
$65,000, or 20.7%, to $249,000 in fiscal 1997 from $314,000 in fiscal 1996. The
decrease in other revenue is primarily attributable to a decline in fees charged
under a contract to provide customer services to another ISP.
Connectivity and operations. Connectivity and operations expenses increased
by $4.0 million, or 183%, to approximately $6.2 million in fiscal 1997 from $2.2
million in fiscal 1996. These expenses increased as a result of increased
customer support wages and increased connectivity expenses related to the
increase in the number of customers and excessive staffing during fiscal 1997
prior to the Company's reorganization and implementation of its cost control
program.
Sales and marketing. Sales and marketing expenses increased by $315,000, or
19.7%, to $1.9 million for fiscal 1997 from $1.6 million for fiscal 1996. This
increase was primarily a result of increased staffing in sales and marketing and
the cost of providing promotional kits to customers.
General and administrative. General and administrative expenses of $2.7
million remained relatively constant from fiscal 1996 to fiscal 1997.
Depreciation and amortization. Depreciation and amortization expenses
increased by $1.1 million, or 195%, to $1.6 million in fiscal 1997 from $548,000
in fiscal 1996 as the Company's fixed assets continued to grow with subscriber
growth. In fiscal 1997, the Company also recognized amortization expenses
related to the acquisition of an ISP located in San Angelo, Texas.
Impairment of equipment. Operating expenses for fiscal 1997 include an
impairment loss recognized for certain modem and telecommunication equipment.
Due to the emergence of a new standard in modem speeds, management deemed these
assets to be fully impaired by the fourth quarter of fiscal 1997, and the
Company recognized an impairment loss of $351,000.
Interest expense. Interest expense increased by $404,000, or 528%, to
$481,000 for fiscal 1997 from $77,000 in fiscal 1996. The increase was due to
the issuance of promissory notes in fiscal 1997 to shareholders for working
capital and notes issued in connection with the acquisition of an ISP located in
San Angelo, Texas. See "Certain Transactions."
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<PAGE> 29
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain quarterly financial information of
the Company for each quarter of fiscal 1997 and 1998. The information has been
derived from the quarterly financial statements of the Company which are
unaudited but which, in the opinion of management, have been prepared on the
same basis as the audited Financial Statements and Notes thereto included herein
and include all adjustments (consisting only of normal recurring items)
necessary for a fair presentation of the financial results for such periods.
This information should be read in conjunction with the Company's Financial
Statements and Notes thereto and the other financial and operating information
appearing elsewhere in this Prospectus. The operating results for any quarter
are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
FISCAL 1997 FISCAL 1998
------------------------------------------ -----------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30 DEC. 31, MAR. 31, JUNE 30,
1996 1996 1997 1997 1997 1997 1998 1998
--------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Revenue:
Access.......................... $ 1,762 $ 2,185 $2,098 $2,132 $2,150 $2,242 $2,566 $2,608
Business services............... 194 304 299 248 259 289 229 259
Other........................... 93 85 31 40 3 3 15 20
------- ------- ------ ------ ------ ------ ------ ------
Total revenue............. 2,049 2,574 2,428 2,420 2,412 2,534 2,810 2,887
------- ------- ------ ------ ------ ------ ------ ------
Operating expenses:
Connectivity and operations..... 1,696 1,796 1,555 1,138 1,108 1,151 1,112 1,138
Sales and marketing............. 909 648 233 122 86 199 388 467
General and administrative...... 733 848 648 519 400 446 508 565
Depreciation and amortization... 351 430 426 411 363 363 389 359
Impairment of equipment......... -- -- -- 351 -- -- -- --
------- ------- ------ ------ ------ ------ ------ ------
Total operating
expenses................ 3,689 3,722 2,862 2,541 1,957 2,159 2,397 2,529
------- ------- ------ ------ ------ ------ ------ ------
Income (loss) from operations..... (1,640) (1,148) (434) (121) 455 375 413 358
Interest income (expense), net.... (47) (121) (136) (177) (135) (155) (165) (116)
------- ------- ------ ------ ------ ------ ------ ------
Income tax expense................ -- -- -- -- (6) (6) (6) (6)
Net income (loss)................. $(1,687) $(1,269) $ (570) $ (298) $ 314 $ 214 $ 242 $ 236
======= ======= ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
FISCAL 1997 FISCAL 1998
------------------------------------------ -----------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30 DEC. 31, MAR. 31, JUNE 30,
1996 1996 1997 1997 1997 1997 1998 1998
--------- -------- -------- -------- -------- -------- -------- --------
(AS A PERCENTAGE OF TOTAL REVENUE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Revenue:
Access.......................... 86.0% 84.9% 86.4% 88.1% 89.1% 88.5% 91.3% 90.3%
Business services............... 9.5 11.8 12.3 10.2 10.8 11.4 8.2 9.0
Other........................... 4.5 3.3 1.3 1.7 0.1 0.1 0.5 0.7
------- ------- ------- ------- ------- ------ ------ ------
Total revenue............. 100% 100% 100% 100% 100% 100% 100% 100%
------- ------- ------- ------- ------- ------ ------ ------
Operating expenses:
Connectivity and operations..... 82.8 69.8 64.0 47.0 45.9 45.4 39.6 39.4
Sales and marketing............. 44.4 25.2 9.6 5.0 3.6 7.9 13.8 16.2
General and administrative...... 35.8 32.9 26.7 21.4 16.7 17.6 18.1 19.6
Depreciation and amortization... 17.1 16.7 17.5 17.0 15.0 14.3 13.8 12.4
Impairment of equipment......... -- -- -- 14.5 -- -- -- --
------- ------- ------- ------- ------- ------ ------ ------
Total operating
expenses................ 180.1 144.6 117.8 104.9 81.2 85.2 85.3 87.6
------- ------- ------- ------- ------- ------ ------ ------
Income (loss) from operations..... (80.1) (44.6) (17.8) (4.9) 18.8 14.8 14.7 12.4
Interest income (expense), net.... (2.3) (4.7) (5.6) (7.3) (5.6) (6.1) (5.9) (4.0)
Income tax expense................ -- -- -- -- (0.2) (0.2) (0.2) (0.2)
------- ------- ------- ------- ------- ------ ------ ------
Net income (loss)................. (82.4)% (49.3)% (23.4)% (12.2)% 13.0% 8.5% 8.6% 8.2%
======= ======= ======= ======= ======= ====== ====== ======
</TABLE>
28
<PAGE> 30
From the last quarter of fiscal 1997 through the first quarter of fiscal
1998, the Company was in the process of reorganizing its management and
operations personnel and implementing a comprehensive cost control program. See
"-- Overview."
The Company's business is not subject to any significant seasonal
influences. Sales during the third fiscal quarter of a given year, however, have
historically been slightly higher due to new users who get personal computers
during the holiday season of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital and liquidity needs have historically
consisted of funds required for (i) customer care and sales personnel, (ii)
marketing expenditures and (iii) telecommunication costs incurred in connecting
customers to the Internet. These outflows have been funded through a combination
of cash generated from existing operations, shareholder loans and other credit
facilities from various third parties.
Cash used in operating activities of $1.4 million during fiscal year 1997
was primarily attributable to marketing expenditures, the building of the
customer care operations and the expansion of the Company's network
infrastructure, partially offset by increases in deferred revenue. For the year
ended June 30, 1998, cash provided by operations was $1.8 million, which
resulted largely from cost controls implemented just prior to and during this
period. See "-- Overview."
Cash used in investing activities during fiscal 1997 was $1.5 million, and
was primarily related to the purchase of customers from a regional ISP in San
Angelo, Texas and purchases of property and equipment. Cash used in investing
activities for the year ended June 30, 1998 was $407,000, and was primarily
related to the acquisition of an ISP's customer base located in the Dallas-Fort
Worth area and purchases of property and equipment.
During fiscal 1997, cash provided by financing activities was $2.9 million,
which consisted primarily of $2.0 million of Affiliate Debt, $225,000 of Bank
Debt and $106,000 of MJ Debt. During fiscal 1998, cash used in financing
activities was $826,000, which consisted primarily of $420,000 of payments under
capital leases and $314,000 of payments on long term debt. The Company intends
to repay the Affiliate Debt, the Bank Debt and the MJ Debt with the net proceeds
of this Offering. See "Use of the Proceeds" and "Certain Transactions."
Following the Offering, the Company intends to seek a new line of credit.
The Company expects to spend approximately $6.0 million for possible
acquisitions of complementary businesses, approximately $5.0 million to fund the
growth strategy in new and existing markets, primarily for marketing expenses
and incremental capital equipment and infrastructure expenditures, and, as
indicated above, approximately $2.7 million to repay substantially all current
indebtedness. See "Use of Proceeds." The Company believes that the net proceeds
of the Offering, together with existing cash resources, cash flows from
operations and any financing obtained through a new line of credit, will be
sufficient to fund the Company's operations for at least the next twelve months.
After such period, depending on its financial condition and results of
operations, the Company may require additional equity or debt financing. There
can be no assurance that additional financing will be available when required.
YEAR 2000 COMPLIANCE
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. The Company does not believe
that the Year 2000 issue will have a material effect on its internal network,
computer systems or operations. However, it will continue to assess the
potential impact of the Year 2000 issue. Any failure of the Company to become
Year 2000 compliant on a timely basis could have a material adverse effect on
the Company's business, financial condition and results of operations,
including, without limitation, a complete failure or degradation of the
performance of the Company's network or other systems. To the extent that the
Company relies on external vendors and network providers with Year 2000
exposure, any failure by such third-party providers to resolve any Year 2000
issues on a timely basis or in a manner that is compatible with the Company's
systems could have a material adverse effect on the Company. Most of the
Company's critical third-party providers have made representations to the effect
that they are, or
29
<PAGE> 31
will be, Year 2000 compliant. The Company, however, has not undertaken an
in-depth evaluation of such providers in relation to the Year 2000 issue, and
furthermore the Company has no control over whether its third-party providers
are Year 2000 compliant. Any failure on the part of such third-party providers
are, or will be, Year 2000 compliant on a timely basis or in a manner that is
compatible with the Company's systems could have a material adverse effect on
the Company, including, without limitation, a complete failure or degradation of
the performance of the Company's network or other systems. In the event the
Company encounters significant Year 2000 problems, it would expect to take all
necessary measures to address such problems. See "Risk Factors -- Year 2000
Compliance."
CHANGE IN INDEPENDENT AUDITORS
On June 1, 1998, the Company's Board of Directors made the decision to
replace Farmer, Fuqua, Hunt & Munselle, P.C., Accountants and Consultants
("FFHM"), with Deloitte & Touche LLP as its independent auditor. The report of
FFHM on the financial statements of the Company as of and for the fiscal year
ended June 30, 1997 contained no adverse opinion or disclaimer of opinion and
was not qualified or modified as to uncertainty, audit scope or accounting
principles. In connection with FFHM's audit for the fiscal year ended June 30,
1997, there were no disagreements with FFHM on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which, if not resolved to the satisfaction of FFHM, would have caused
it to make reference thereto in its report on the Company's financial statements
for such year. During the same period, the Company did not consult Deloitte &
Touche LLP regarding the application of accounting principles to a specified
transaction or the type of audit opinion that might be rendered on the Company's
financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 129, "Disclosure of
Information about Capital Structure," which establishes standards for disclosing
information about an entity's capital structure and is effective for financial
statements for periods ending after December 15, 1997. In June 1997, the FASB
issued SFAS No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income and its components
in the financial statements for fiscal years beginning after December 15, 1997.
The FASB also issued, in June 1997, SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
public companies disclose information about operating segments, products and
services, geographic areas and major customers. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997. The Company
has determined that the impact on its financial statements of adopting SFAS Nos.
129, 130 and 131 is not material. In June 1998, the FASB issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for fiscal quarters endings after June 15, 1999. The Company does not
expect the adoption of SFAS No. 133 to have a material impact on its financial
statements.
30
<PAGE> 32
BUSINESS
GENERAL
Internet America is a leading ISP in the southwestern United States. The
Company provides a wide array of Internet services tailored to meet the needs of
individual and business customers, including customers with little or no online
experience. With approximately 50,000 customers, primarily in the North Texas
area, the Company believes that it has achieved one of the highest user
densities per POP of any ISP in the United States. This user density has enabled
the Company to realize substantial marketing, network and operating
efficiencies, which have resulted in profit margins in recent periods that are
substantially higher than those of the publicly traded ISPs.
INDUSTRY OVERVIEW
Internet access and related value-added services ("Internet services")
represent one of the fastest growing segments of the telecommunications services
marketplace. According to industry estimates, the number of Internet users in
the United States who access the World Wide Web reached approximately 29.2
million in 1997 and is projected to grow to approximately 72.1 million by the
year 2000. In addition, total ISP revenues in the United States are projected to
grow from $4.6 billion in 1997 to $18.3 billion in 2000. Declining prices in the
PC market, continuing improvements in Internet connectivity, advancements in
Internet navigation technology, and the proliferation of services, applications,
information and other content on the Internet have attracted a rapidly growing
number of users.
Numerous companies have moved to enter the Internet services market, such
as (i) telecommunications services providers, including national and regional
interexchange carriers, incumbent local exchange carriers ("LECs") and
competitive LECs, (ii) online commercial information service providers, (iii)
computer hardware and software providers, (iv) cable television operators and
(v) national, regional and local companies that focus primarily on providing
Internet services. These companies pursue a wide variety of business strategies.
For example, cable television operators, who are not required to grant third
party ISPs access to their local networks, are deploying high-speed cable modems
among their subscribers. Incumbent and competitive LECs, which generally provide
third party ISPs access to their local networks, are deploying high-speed data
transmission technologies such as xDSL to support the provision of Internet
services.
There are more than 4,000 national, regional and local ISPs. Some of these
ISPs have chosen to focus on business customers, others on individual customers.
Most national ISPs have made a major investment in network infrastructure in
anticipation of future high subscriber growth. As a result, the average national
ISP has been experiencing an extended period of losses as it works to build a
profitable base of customers in each of the many markets it serves. In addition
to these losses, national ISPs are exposed to a high level of technological
obsolescence risk as Internet access technology continues to evolve. At the
other end of the spectrum, many regional and local ISPs, which have a much lower
investment in network infrastructure, lack the marketing skills and resources to
build a critical mass of customers.
STRATEGY
Unlike many other ISPs, the Company believes that at the current stage of
the ISP industry's development, the highest priority should be to rapidly build
profitable market share, not to deploy a large network infrastructure with a
substantial number of underutilized owned or leased POPs. Therefore, the
Company's growth strategy is focused on (i) acquiring additional customers in
its existing markets and (ii) deploying its user density business model in other
selected markets. The aim of the user density business model is to quickly build
in a given market a critical mass of customers that will support profitable
operations.
Elements of the Company's growth strategy include:
Aggressive Use of Advertising to Rapidly Acquire a Critical Mass of
Customers and Build the Internet America Brand. The Company extensively
uses two of the more effective and efficient advertising
media -- television and outdoor billboard displays -- to highlight its
high-speed, quality
31
<PAGE> 33
services and strong customer care. The Company believes these media are
particularly effective in quickly acquiring customers, particularly new
Internet users, and building brand awareness. The Company is currently
preparing aggressive advertising campaigns for new target markets. See
"-- Marketing and Sales."
Strategic and Add-On Acquisitions. Because of the fragmented nature of
the ISP industry and the difficulty that many ISPs have encountered in
growing to a size where they can realize economies of scale and achieve
profitability, the Company expects to be able to make a significant number
of acquisitions in new and existing markets. The Company is currently
investigating strategic acquisition opportunities that would jump-start the
Company's entry into new markets, enabling the Company to more quickly
achieve the critical mass necessary to support profitable operations. The
Company also continues to evaluate add-on acquisitions in existing markets
that it believes would be accretive to earnings. The Company has already
made add-on acquisitions, successfully transitioning two smaller ISPs'
customers to the Internet America infrastructure and brand while
eliminating duplicative facilities and operations.
Cost-Effective Development of Network Infrastructure. The Company
seeks to ensure that its deployment of physical infrastructure,
particularly POPs, is accompanied with the rapid development of a
substantial customer base. Through this disciplined approach, the Company
has been able to achieve economies of scope and scale more quickly than
most other ISPs. The Virtual POP architecture that the Company is now
deploying with the participation of various telecommunications providers
enables the Company to enter new markets more quickly with a smaller
commitment of long-term capital resources, lower operating costs and less
exposure to technological obsolescence. See "-- Network Infrastructure."
Development of Value-Added Revenue Streams. The Company provides a
number of value-added services, such as dedicated high-speed access, news
access, Web hosting and server co-location. The Company continues to
evaluate and develop potential new value-added services, seeking to
leverage its current sales, marketing and network capabilities to create
additional revenue opportunities. These revenue streams may arise from
technological changes, such as the introduction of high-speed xDSL
connectivity technology, or other factors. The Company believes that a user
dense, regionally focused customer base provides an excellent platform for
the introduction of new value-added services that can take advantage of
brand awareness and economies of scope and scale, potentially including
Internet telephony and video and audio programming distribution.
Maintenance of a First-Rate Customer Care Operation. The Company's
sophisticated, high-quality customer care operation is designed to make
every customer's Internet experience efficient, productive and enjoyable,
whether that customer is a novice or an experienced Internet user. The
Company believes that this operation is a substantial competitive
advantage. See "-- Customer Care."
SERVICES
The Company offers Internet services tailored to meet the needs of both its
individual and business customers. The Company's primary service offering is
dial-up Internet access and value-added services for its individual customers.
The Company's business customers take advantage of dedicated high speed Internet
access, Web hosting and other services. The Company's services are offered in
various prices and packages so that customers may customize their subscription
with services that meet their particular requirements.
The majority of the Company's customers have month-to-month subscriptions.
The Company offers a 30-day money-back satisfaction guarantee for new customers.
Customers can subscribe by calling the 1-800-BE-A-GEEK phone number, e-mailing
the Company or enrolling through the Company's Web site. The majority of
customers are billed through automatic charges to their credit cards or bank
account, although some customers are invoiced. The Company offers discounts
ranging from 10% to 20% on most of its services for customers who prepay.
Internet Access. The Company's primary service is a dial-up Internet access
package, which includes unlimited Internet access and various Internet
applications such as World Wide Web, e-mail, Internet relay chat ("IRC"), file
transfer protocol ("FTP") and Usenet news access. The package costs $19.95 per
month
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<PAGE> 34
plus a $29.95 activation fee. Value-added services available for an additional
fee include multiple e-mail mailboxes, personalized e-mail addresses and
personal Web sites. The Company also offers individual dedicated analog
connections for $79 a month plus a $79 setup fee.
Airnews.net. The Company's Airnews.net, provides access to Internet
America's news services for customers of other Internet services and on a
wholesale basis to other businesses or ISPs. The service has approximately 3,800
customers in 35 countries and provides access to millions of articles. The
service is included in the Company's dial-up access package and costs $10 per
month for other retail customers.
High Speed Connectivity. In addition to offering dial-up and dedicated
analog access, the Company also offers its business customers dedicated ISDN
access and full T-1 connectivity, which can service hundreds of users at once.
Internet America offers numerous services related to a customer's T-1
connection, including hardware configuration and local loop installation. In
addition, the Company provides 24-hour network monitoring to alert customers of
any circuit trouble. T-1 connections have a setup fee of $995 and monthly fees
ranging from $470 to $1295, depending on the type of services purchased. Fees
for dedicated ISDN access are $540 for setup and $300 to $400 per month
depending on the speed of the circuit.
Web Services. The Company offers Web hosting through its Airweb.net service
for businesses and other organizations that wish to create their own World Wide
Web sites without maintaining their own Web servers and high-speed Internet
connections. With this "virtual Web server" service, Web hosting customers can
use their own domain names in their World Wide Web addresses. Web hosting
customers are responsible for building their own Web sites and then uploading
the pages to an Internet America Web server. The Company's Web hosting service
features state-of-the-art Web servers for high speed and reliability, a high-
quality connection to the Internet, specialized customer support and advanced
services features, such as secure transactions and site usage reports. The
Company currently offers various price plans for Web hosting customers beginning
at $20 per month. Internet America had approximately 270 Web hosting customers
as of June 30, 1998.
The Company offers Web server co-location services at its headquarters in
Dallas for customers who want to maintain their own Web servers in Internet
America's state-of-the-art data telecommunications environment and receive a
high-speed, full-time connection to the Internet. Internet America's co-location
services include 24-hour security monitoring, uninterruptible power (battery and
generator), climate control and after-hours access for the customer. The Company
also offers domain name registration and hosting to protect the use of the name
of a customers's Web site address.
CUSTOMER CARE
The Company's goal of 100% customer satisfaction begins with providing
superior systems and network performance. The Company focuses on scalability,
reliability and speed in the technical design and maintenance of its systems.
See "-- Systems Infrastructure." In addition to the provision of superior
systems and network performance, the Company emphasizes high quality customer
care and technical support. The Company strives to retain its customers by
prioritizing fast response to customer problems. Individuals accessing the
Internet have many different hardware configurations and varying levels of
computer sophistication. Consequently, Internet America's customer care
department must be able to efficiently and effectively address (i) problems
affecting a variety of hardware systems, (ii) start-up or other basic problems
of new customers or new Internet users and (iii) more technical issues that
sophisticated users may encounter. Internet America is committed to providing
the best technical support in the industry, especially for new users, while
maintaining the ability to resolve the most difficult problems that a
sophisticated user may present.
The Company's customer care department includes approximately one-half of
all employees, or approximately 48 employees as of June 30, 1998. Customer care
is available to subscribers 24-hours-a-day, 7-days-a-week. The department is
organized in three-tiers designed to respond to varying types of support needs.
The three tiers are staffed with knowledgeable and experienced support
technicians able to diagnose customer problems and prescribe corrective
measures. Each call is routed to the appropriate tier of the department for
response. Internet America's customer care department answers approximately
5,000 calls per week. The average "hold" time is less than 45 seconds, and
approximately 65% of all calls are resolved within
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<PAGE> 35
four minutes of the caller's initial contact with the technician. In addition to
diagnosing and resolving customers' technical problems, Internet America's
customer care department answers customer account questions, responds to
software requests and provides configuration information.
Customers can access customer support services through a local telephone
number or e-mail. The Company maintains on its Web site a comprehensive
description of its customer care services, as well as troubleshooting tips and
configuration information. Additionally, the Company offers to its customers
free educational classes, which are held weekly at the Company's Dallas
location. Customers can also obtain recorded system and network status reports
at any time and review extensive system and network performance via the World
Wide Web.
MARKETING
The Company's marketing approach is designed to further its user density
business model, which focuses on rapid penetration of a given market to acquire
a critical mass of customers to support profitable operations. The Company's
approach combines direct response with brand building advertising. Unlike most
other ISPs, the Company makes extensive use of television and outdoor billboard
displays, rather than print, radio or direct mail.
The Company continually evaluates the effectiveness of its marketing
methods, primarily by analyzing sales statistics such as call volumes, sales
volumes, media mix and incentive offer response, so that it can refine its
marketing campaign. The Company also uses input from focus groups and other
customer contacts to determine what marketing methods and incentives will be
most effective.
The Company reinforces the customer's purchase decision and stimulates
referral business by sending the customer a welcome letter with the start-up
package. The Company also sends all customers quarterly e-mail newsletters
containing information and updates on the Company services, as well as reminders
about the Company's referral incentive programs.
Since the Company's inception, its marketing message has evolved
substantially. Its early television campaigns were directed at early technology
adopters, who wanted to join the Internet power users on the World Wide Web. The
Company's current advertising campaign focuses on young, middle and upper income
families that are seeking the "best route" to the information highway and access
to the Web's increasingly diverse information, entertainment, educational,
product and service resources.
Once the Company's advertising has saturated a given market and the Company
has acquired a critical mass of customers, it begins to reap the benefits of
word of mouth communication about the quality and reliability of its services.
Such communication not only results in a significant number of referrals, but
also reinforces brand awareness of Internet America. At this point, the
Company's advertising expense per acquired customer drops significantly.
The Company's integrated marketing and sales approach includes the
following elements:
Direct Response Television Advertising. The Company believes that
television is the most effective and efficient way of reaching potential
customers, particularly first-time Internet users whose numbers are growing
as personal computers continue to penetrate the home and business markets.
Through a sophisticated and intensive broadcast and cable television
advertising campaign that emphasizes the quality and reliability of the
Company's Internet services and its responsiveness to customer needs and
problems, the Company is able to elicit a strong response from potential
customers, who are asked to contact the Company through a telephone call to
1-800-BE-A-GEEK. Television advertising also helps to reinforce brand
awareness of Internet America.
Outdoor Advertising and Other Media. Billboard campaigns are used by
the Company to establish and reinforce brand awareness of Internet America.
The Company uses other media to reach customers or potential customers only
under special circumstances. For example, the Company has used alternative
print media to reach Internet "power users."
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Value-Added Resellers (VARs). The Company recently initiated a VAR
program that enables smaller personal computer retailers to sell the
Company's start-up package. The Company waives its usual activation fee so
the ultimate cost to the consumer is the same. Initial results from the
program are promising.
The Company has made preparations to begin intensive advertising campaigns
in other markets in the southwestern United States. The Company believes that
its approach to marketing and sales can be successfully introduced into those
markets without major revision.
INFRASTRUCTURE
The Company's current network provides customers with local dial-up access
in all the major metropolitan areas of Texas, as well as several smaller
communities. The Company's systems and network infrastructure are designed to
provide customers with reliability and speed. Reliability is primarily achieved
through redundancy in mission critical systems that minimizes the number of
single points of failure. Speed is achieved through clustered systems, diverse
network architecture, multi-peered Internet backbone connections and aggressive
load balancing.
Network Infrastructure. The Company's primary internal network consists of
Fiber Distributed Data Interface networks that incorporate FDDI Full Duplex
Technology, coupled with a Dual Redundant Digital GIGASwitch. This internal
backbone solution is superior in its ability to handle sustained high-speed
traffic, resilience to failure and redundancy. The internal backbone's level of
redundancy substantially reduces potential data loss and avoids congestion
common with other backbone architectures. The technology incorporated into the
GIGASwitch is capable of operating under extreme loads and is fault-tolerant.
This design and backbone network system is similar to that deployed at most of
the more advanced Internet switching centers worldwide.
The Company's network system incorporates safety features to separate
internal data from external sources, as well as provides a redundant network in
case of catastrophic network failure. The Company's facilities are powered by a
computer controlled uninterruptible power supply that provides company wide
battery backup, surge protection and power conditioning. An automatic onsite
diesel generator provides power for prolonged power outages.
The Company also maintains a Network Operations and Control Center ("NOCC")
with a full-time staff. This continually staffed facility is responsible for
monitoring the status of all networking facilities, components, applications and
equipment deployed throughout the Company's infrastructure. The NOCC is
responsible for all operational communications between the internal departments
of the Company as well as external providers of services to the Company. The
NOCC utilizes software which provides real-time monitoring of each component or
application and is responsible for notifications of quality of service problems
as well as failures. Sophisticated historical and statistical analysis software
used in the NOCC provides data to management about the quality of service the
Company's customers are experiencing, as well as information to help control
costs by purchasing additional bandwidth and services only when needed.
The Company maintains its applications on a variety of systems from a
number of vendors. The major applications, such as e-mail and news access
services, utilize a network of servers connected directly to the Company's FFDT
backbone. These systems are also connected, via another FFDT network, to the
Company's high-availability network file server. This direct connection
minimizes latency for customers accessing these applications. The Company
deploys PC style hardware in clusters for distributing the load of other
applications and providing fault-tolerance against application failure. These
distributed applications are housed on low cost, easily obtainable components
with minimal interdependency. Utilizing lower cost hardware has resulted in
significantly reduced operations expense and high reliability. The Company
expects to minimize its future use of high cost equipment by employing multiple
lower cost hardware components as it develops and applies new technologies.
Notwithstanding the attributes of the Company's network, it is subject to
malfunctions and other limitations, any of which could have a material adverse
effect on the Company's
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<PAGE> 37
business, financial condition and results of operations. See "Risk
Factors -- Dependence on Network Infrastructure; Capacity; Risk of System
Failure."
Physical POPs. The Company's physical POPs are located in leased space
containing inbound local telephone lines, modems and related communications
equipment. The Company serves the San Angelo, Denison, Corsicana and
Weatherford, Texas markets with these POPs. Traffic from these POPs is routed to
the Company's internal network over leased lines. The Company also maintains a
physical POP in Dallas, but is currently in the process of migrating these
customers in Dallas to the Virtual POP architecture. The Company's intent is to
transition these customers in these markets to the Virtual POP architecture as
soon as services, capacity and reliability are available at reasonable costs.
Virtual POPs. Historically, ISPs have invested heavily in inbound local
telephone lines, modems, related equipment and facilities. The Company, however,
is implementing a "Virtual POP" architecture, which allows the Company to
provide local access services without deploying physical infrastructure. The
benefits of this architecture include substantially reduced capital
expenditures, lower operating costs and reduced exposure to technological
obsolescence. In addition, when entering new markets, the Virtual POP
architecture allows the Company to more precisely match capacity needs to actual
sales in that market.
The Virtual POP architecture enables customers to dial a local phone number
and connect to a modem owned by and housed at a telecommunications provider. The
customer's data call is then routed across leased lines to the Company's
internal network. Currently, Internet America has deployed this Virtual POP
architecture with various telecommunications providers in Dallas, Ft. Worth,
Houston, Austin, San Antonio and Denton, Texas. At June 30, 1998, approximately
50% of the Company's customers were serviced by Virtual POPs.
Unlike simply leasing network capacity from a third-party provider, the
Virtual POP architecture allows the Company to maintain substantial control over
quality of service and capacity. Other regional ISPs commonly use leased network
capacity, which can result in their customers' Internet experiences being almost
entirely outside of the ISPs' control. In fact, utilizing a leased network may
cause the customer to compete with customers of other ISPs for access and
bandwidth. In contrast, the Company's Virtual POP architecture uses private
networks to carry customer data calls back to the Company's network and
application servers. In this manner, the Company maintains strict quality
control over its customers' Internet experiences, leading to higher levels of
customer satisfaction.
The Company's Virtual POP architecture and user density business model
position the Company to quickly take advantage of emerging high-speed
technologies such as xDSL, wireless and other Internet delivery methods.
Leveraging a dense customer base should enable the Company to economically offer
other emerging technologies, such as Internet telephony, particularly Voice Over
Internet Protocol ("VoIP"), video and audio distribution and other
high-bandwidth, low latency technologies.
Management Information Systems. The Company's MIS department uses a near
real-time customer database, billing and flow-through fulfillment system. This
system handles all customer contact and billing information for the Company's
dial-up access, Airnews.net and Airmail.net services. The system maintains
access controls for the authentication servers and various applications. The
system also creates customer invoices and automatically processes credit card
charges and automatic check handling. The Company is currently transitioning to
an integrated financial and information reporting system that will automate many
additional functions inside the Company and provide financial, marketing and
management reports.
TECHNOLOGY AND DEVELOPMENT
The Company continuously evaluates new technology and applications for
possible introduction. In particular, the Company is preparing to deploy a
high-speed connectivity technology, xDSL, in its established markets. xDSL uses
existing twisted copper pair wires running from a LEC's central office to a
customer's home or office to provide high-speed connectivity. Initially,
provisioning of xDSL service is expected to be difficult and time-consuming,
requiring close coordination between the provisioning LEC, the ISP and the ISP's
customer. The Company believes that because of its user density business model,
it is well positioned to
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<PAGE> 38
market and deploy xDSL. The Company expects that it will be able to spread the
personnel, hardware, marketing and other costs of such deployment over a
sufficiently large base of customers in a specific local market.
High-speed connectivity is essential to the commercially viable deployment
of new, value-added services such as Internet telephony, particularly VoIP,
video and audio programming distribution and other high-bandwidth, low-latency
applications. Again, the Company believes that its user density business model
is particularly well suited to the marketing and deployment of these services.
The Company continues to stay abreast of developments in these and other areas.
PROPRIETARY RIGHTS
General. Although the Company believes that its success is more dependent
upon its technical, marketing and customer service expertise than its
proprietary rights, the Company's success and ability to compete are dependent
in part upon its proprietary rights. The Company relies on a combination of
copyright, trademark and trade secret laws. "Internet America" and
"1-800-BE-A-GEEK" are registered service marks of Internet America. Service mark
applications are pending for the registration of "Airnews.net," "Airmail.net,"
"Airweb.net," their respective logos and the Internet America logo. There can be
no assurance that the steps taken by the Company will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technology. See "Risk Factors -- Proprietary Rights;
Infringement Claims."
Licenses. The Company has obtained authorization to use the products of
each manufacturer of software that the Company bundles in its front-end software
product for Windows and Macintosh subscribers. The particular applications
included in the Internet America start-up package have, when necessary, been
licensed. The Company currently intends to maintain or negotiate renewals of all
existing software licenses and authorizations as necessary. The Company may also
want or need to license other applications in the future. Other applications
included in the Internet America start-up package are shareware that the Company
has obtained permission to distribute or that are from the public domain and are
freely distributable.
COMPETITION
The market for the provision of Internet access to individuals is extremely
competitive and highly fragmented. There are no substantial barriers to entry,
and the Company expects that competition will continue to intensify. The Company
believes that the primary competitive factors determining success in this market
are a reputation for reliability and service, access speed, effective customer
support, pricing, creative marketing, easy-to-use software and geographic
coverage. Other important factors include the timing of introductions of new
products and services and industry and general economic trends. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors or that competitive pressures faced by the Company will
not materially adversely affect its business, financial condition and results of
operations.
The Company's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, marketing and other resources than the Company. The Company currently
competes or expects to compete with the following types of Internet access
providers: (i) national commercial providers, such as Verio, Inc., Mindspring
Enterprises, Inc. and EarthLink Network, Inc.; (ii) numerous regional and local
commercial providers which vary widely in quality, service offerings and pricing
such as Websight Services, Inc. and PDQ Net, Inc.; (iii) established online
commercial information service providers, such as America Online, Inc.; (iv)
computer hardware and software and other technology companies, such as
International Business Machines Corporation, Microsoft Corp. and Gateway, Inc.;
(v) national telecommunications providers, such as AT&T, MCI, WorldCom, Inc.,
Sprint and WindStar Communications, Inc.; (vi) regional telecommunications
providers, such as SBC Communications and IXC Communications; (vii) cable
operators, such as Tele-Communications, Inc., Time Warner, Inc., TCA Cable, Inc.
and Marcus Cable, Inc.; (viii) wireless communications companies; (ix) satellite
companies; and (x) nonprofit or educational Internet access providers.
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<PAGE> 39
The Company believes that new competitors, including large computer
hardware and software, media and telecommunications companies, will continue to
enter the Internet services market, resulting in even greater competition for
the Company. Telecommunications providers, such as MCI, AT&T and Sprint, have
also recently entered the Internet access market. In addition, as consumer
awareness of the Internet grows, existing competitors are likely to further
increase their emphasis on Internet access services, resulting in even greater
competition for the Company. The ability of these competitors or others to enter
into business combinations, strategic alliances or joint ventures or to bundle
services and products with Internet access could put the Company at a
significant competitive disadvantage.
Moreover, the Company expects to face competition in the future from
companies that provide connections to consumers' homes, including national and
regional telecommunications providers, cable companies, electric utility
companies and terrestrial and satellite wireless communications companies. For
example, technologies have been developed that enable cable television operators
to offer Internet access through their cable facilities at significantly faster
rates than existing analog modem speeds. Such companies include Internet access
in their basic bundle of services or offer such access for a nominal additional
charge, and could prevent the Company from delivering Internet access through
the wire and cable connections that such companies own. Any such developments
could materially adversely affect the Company's business, financial condition
and results of operations. See "Risk Factors -- Competition."
GOVERNMENT REGULATION
The Company provides Internet access, in part, through transmissions over
public telephone lines. These transmissions are governed by regulatory policies
establishing charges and terms for communications. The Company, as an Internet
access provider, is not currently subject to direct regulation by the Federal
Communications Commission (the "FCC") or any other agency, other than
regulations applicable to businesses generally. In a report to Congress adopted
on April 10, 1998, the FCC reaffirmed that Internet access providers should be
classified as unregulated "information service providers" rather than regulated
"telecommunications providers" under the terms of the 1996 Telecommunications
Act. The consequence of this finding is that the Company is not subject to
regulations applicable to telephone companies and similar carriers merely
because the Company provides its services via telecommunications networks. The
Company also is not required to contribute to the universal service fund, which
subsidizes phone service for rural and low income consumers and supports
Internet access among schools and libraries. The FCC action may also discourage
states from regulating Internet access providers as telecommunications carriers
or imposing similar subsidy obligations.
Nevertheless, Internet-related regulatory policies are continuing to
develop, and it is possible that the Company could be exposed to regulation in
the future. For example, in the same report to Congress, the FCC stated its
intention to consider whether to regulate voice and fax telephony services
provided over the Internet as "telecommunications" even though Internet access
itself would not be regulated. The FCC is also considering whether such
Internet-based telephone services should be subject to the universal service
support obligations discussed above, or should pay carrier access charges on the
same basis as traditional telecommunications companies. Access charges are
assessed by local telephone companies to long distance companies for the use of
the local telephone network to originate and terminate long distance calls,
generally on a per-minute basis. Access charges have been a matter of continuing
dispute, with long distance companies complaining that the rates are
substantially in excess of cost and local telephone companies arguing that
access rates are justified to subsidize lower local rates for end users and
other purposes. Both local and long distance companies, however, contend that
Internet-based telephony should be subject to these charges. The Company
currently does not offer telephony, and so is not directly affected by these
developments. However, should the Company offer telephony in the future, it may
be affected by these issues. Additionally, the Company cannot predict whether
these debates will cause the FCC to reconsider its current policy of not
regulating Internet access providers.
In a notice of proposed rulemaking adopted on August 6, 1998, the FCC
proposed that if an incumbent LEC established a separate affiliate to pursue the
deployment of advanced telecommunications services such as xDSL and that
affiliate interconnected with the LEC's network on the same terms and conditions
as the
38
<PAGE> 40
LEC's competitors did, then the affiliate would not be subject to the unbundling
requirement that applied to the LEC. If the FCC ultimately adopted this proposal
or similar proposals, the Company's access to xDSL and other high-speed data
technology could be curtailed. Such curtailment could have a material adverse
effect on the Company's business, financial condition and results of operations.
Due to the increasing popularity and use of the Internet, it is possible
that additional laws and regulations may be adopted with respect to the
Internet, covering issues such as content, privacy, pricing, encryption
standards, consumer protection, electronic commerce, taxation, copyright
infringement and other intellectual property issues. The Company cannot predict
the impact, if any, that any future regulatory changes or development may have
on its business, financial condition and results of operations. Changes in the
regulatory environment relating to the Internet access industry, including
regulatory changes that directly or indirectly affect telecommunication costs or
increase the likelihood or scope of competition from regional telephone
companies or others, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors -- Government Regulation."
PROPERTIES
Internet America's corporate office is located in downtown Dallas at One
Dallas Centre, 350 N. St. Paul, Suite 3000, where all executive, systems, sales
and technical support functions exist. The Company leases approximately 31,000
square feet under multiple leases that terminate November 1, 2001. Aggregate
monthly rental payments under such leases are approximately $33,000. The Company
also has leased small equipment room facilities for each of its other physical
POPs in Corsicana, Denison, Weatherford and San Angelo, Texas. The Company does
not own any real estate. The Company believes that all of its facilities are
adequately maintained and suitable for their present use.
EMPLOYEES
As of June 30, 1998, the Company had approximately 90 employees, which
includes 48 customer care employees. The Company anticipates that the
development of its business will require the hiring of additional employees.
None of the Company's current employees are represented by a labor organization,
and the Company's management considers its employee relations to be good. See
"Risk Factors -- Dependence on and Ability to Attract Key Personnel."
LEGAL PROCEEDINGS
The Company is not involved in any material pending legal proceeding.
39
<PAGE> 41
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The names, ages and positions of the executive officers and directors of
the Company, are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael T. Maples.................... 42 President, Chief Executive Officer and Director
Douglas L. Davis..................... 32 Executive Vice President and Chief Operating Officer
James T. Chaney...................... 43 Vice President, Chief Financial Officer, Secretary and
Treasurer
John James Stewart III............... 38 Vice President -- Customer Care
Douglas G. Sheldon................... 38 Vice President -- Marketing and Director
William O. Hunt(1)(2)................ 64 Chairman of the Board
Jack T. Smith(1)(2).................. 45 Director
Gary L. Corona(1)(2)................. 47 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Directors are elected to hold office until the next annual meeting of the
shareholders or until their successors are duly elected and qualified. Officers
serve at the discretion of the Board of Directors.
MICHAEL T. MAPLES has served as President and Chief Executive Officer of
the Company since March 1997 and has served as a director since April 1997. Mr.
Maples joined the Company in September 1996. Prior to joining the Company, Mr.
Maples was Vice President of Westcott Communications, Inc. ("Westcott
Communications"), a provider of educational, motivational and instructional
programming for various industries via satellite delivered television or
videotape. From 1988 to 1996 Mr. Maples was the General Manager of the
Automotive and Government Services business units of Westcott Communications.
DOUGLAS L. DAVIS has served as Executive Vice President and Chief Operating
Officer of the Company since July 1996, and served as Chief Technology Officer
of the Company from January to July 1996. Mr. Davis joined the Company as the
head of R&D in November 1995. From 1991 to October 1995 Mr. Davis was the
Director of Computer Operations for the School of Engineering and Applied
Science at Southern Methodist University, where he was in charge of developing
and supporting the school's technological infrastructure and also contributed to
and published several papers on Internet matters. From 1989 to 1991 Mr. Davis
was a software engineer for Dallas-based Logic Process, Inc., a company that
manufactures single and multi-processor Unix systems.
JAMES T. CHANEY joined the Company in December 1997 as Chief Financial
Officer, and has served as Vice President, Chief Financial Officer, Secretary
and Treasurer of the Company since February 1998. Prior to joining the Company,
Mr. Chaney was Tax Manager at Judd, Thomas, Smith & Co., CPA's, Dallas, Texas,
where he managed the tax department and performed tax and financial planning for
clients in the real estate and oil and gas industries. From 1990 to 1994, he was
self-employed as a Certified Public Accountant.
JOHN JAMES STEWART III has served as Vice President -- Customer Care since
May 1997. Mr. Stewart joined the Company in September 1995 as the Director of
Technical Support, and has also served as Director of Training and Customer
Retention Officer. From February 1993 until joining the Company, Mr. Stewart was
employed by Toys R Us. While at Toys R Us, he served as Assistant Store Director
and Department Manager.
DOUGLAS G. SHELDON has served the Company as Vice President -- Marketing
since September 1997 and as a director since June 1996. From 1986 through May
1996, Mr. Sheldon served in a managerial capacity with the combined companies of
the American Broadcasting Co., Capital Cities/ABC, Inc. and The Disney Company.
He has also served as a director of FuturDallas, Dallas Advertising League,
American Women in Radio and Television and President and director of D/FW Radio
Marketing Association.
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<PAGE> 42
WILLIAM O. HUNT has served as Chairman of the Board and a director of the
Company since May 1995. Mr. Hunt is currently Chairman of the Board and director
of Intellicall, Inc., a diversified telecommunications company providing
products and services to pay telephone networks on a worldwide basis. From
December 1992 to May 1998, Mr. Hunt served as Chief Executive Officer of
Intellicall, Inc. From August 1990 to March 1996, Mr. Hunt served as Chairman or
Vice Chairman of the Board and director of Hogan Systems, Inc., a designer of
integrated online application software products for financial institutions. He
is also a director of American Homestar Corporation, Dr. Pepper Bottling
Holdings, Inc. , The Allen Group, Inc., DSC Communications Corporation and
OpTel, Inc.
JACK T. SMITH has served as a director of the Company since November 1995.
Mr. Smith is currently the President and Chief Operating Officer of Jayhawk
Acceptance Corporation ("Jayhawk"), a specialized financial services company,
and has served as a director of Jayhawk since its inception. From June 1996 to
September 1997, Mr. Smith was employed as an independent business consultant.
From 1989 until its acquisition by Primedia, Inc., in June 1996, Mr. Smith was
President and Chief Operating Officer of Westcott Communications. He is also a
director of First Extended Service Corporation and FFG Insurance Company.
GARY L. CORONA has served as a director of the Company since May 1998. Mr.
Corona is currently the General Manager of the Automotive Division of Jayhawk.
From July 1996 to July 1997, Mr. Corona served as a business consultant for Carl
Westcott LLC. From July 1990 until its acquisition by Primedia, Inc., in June
1996, Mr. Corona was Vice President, New Business Development of Westcott
Communications. Mr. Corona is a director of First Extended Service Corporation
and FFG Insurance Company.
BOARD COMMITTEES
The Compensation Committee currently consists of Messrs. Hunt, Smith and
Corona. The Compensation Committee recommends compensation for all executive
officers and administers incentive compensation and benefit plans.
The Audit Committee currently consists of Messrs. Hunt, Smith and Corona.
The Audit Committee will meet periodically with management and the Company's
independent auditors and will review the results and scope of the audit and
other services provided by the Company's independent auditors, the Company's
accounting procedures and the adequacy of the Company's internal controls.
COMPENSATION OF DIRECTORS
Upon consummation of the Offering, directors who are not employees of the
Company ("Independent Directors") will receive an annual retainer upon election
to the Board of $6,000 (pro rata for existing Independent Directors for the
first partial year) and an additional $750 for each Board meeting attended. All
directors of the Company will be reimbursed for travel, lodging and other
out-of-pocket expenses in connection with their attendance at Board and
committee meetings. After consummation of the Offering, each Independent
Director, upon election to the Board of Directors will receive a non-qualified
option to purchase 22,500 shares of Common Stock (which will be immediately
exercisable), and following his initial term, if reelected, and every fourth
year thereafter, if reelected, such director will receive a non-qualified option
to purchase 20,000 shares of Common Stock (with such options vesting 25%
annually, commencing on the date of issuance and continuing on the first, second
and third anniversaries of the date of issuance, subject to such director's
continued reelection to the Board of Directors). Each Independent Director
holding office at the time of consummation of this Offering will receive such
options as if he had been initially elected as of such date. All options issued
after consummation of the Offering to Independent Directors will be issued
pursuant to the 1998 Option Plan. See "-- 1998 Nonqualified Stock Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has a Compensation Committee, which currently is
comprised of Messrs. Hunt, Smith and Corona. None of the executive officers of
the Company currently serves on the compensation committee of another entity or
any other committee of the board of directors of another entity performing
similar functions.
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<PAGE> 43
EXECUTIVE COMPENSATION
The following table sets forth the information regarding compensation (on
an annualized basis) for the Chief Executive Officer and the Company's other
most highly compensated executive officer for the period indicated. No other
executive officers of the Company were compensated over $100,000 in fiscal 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
----------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION OPTIONS
- --------------------------- ---- -------- ------------ ------------
<S> <C> <C> <C> <C>
Michael T. Maples,
Chief Executive Officer................. 1998 $108,333 -- 157,500(1)
Douglas L. Davis,
Chief Operating Officer................. 1998 110,000 -- --
</TABLE>
- ---------------
(1) Mr. Maples was granted an option to purchase 157,500 shares of Common Stock
at an exercise price of $1.67 per share on March 24, 1998.
The following table sets forth the information regarding option grants
during the last fiscal year for the Chief Executive Officer and the Company's
other executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE PRICE
NAME GRANTED FISCAL YEAR ($/SHARE) EXPIRATION DATE
- ---- ---------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Michael T. Maples............... 157,500 40% $1.67 March 24, 2008
Douglas L. Davis................ -- -- -- --
James T. Chaney................. 78,750 20% $1.67 March 24, 2008
John James Stewart, III......... 56,250 14% $1.67 March 24, 2008
Douglas G. Sheldon.............. 67,500 17% $1.67 March 24, 2008
</TABLE>
The following table sets forth the information regarding the Company's
aggregate option exercises in the last fiscal year and fiscal year-end option
values for the Chief Executive Officer and the Company's other executive
officers.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FY END(#) AT FY END($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael T. Maples......... -- -- 67,500 157,500 $562,275 $1,311,975
Douglas L. Davis.......... -- -- 112,500 -- 937,125 --
James T. Chaney........... -- -- -- 78,750 -- 655,988
John James Stewart, III... -- -- 743 59,202 6,189 493,153
Douglas G. Sheldon........ -- -- 22,500 67,500 187,425 562,275
</TABLE>
- ---------------
(1) The value of the options is based on the difference between the option
exercise price of $1.67 per share for all options and the initial public
offering price of the Common Stock (based on an assumed initial public
offering price of $10.00) multiplied by the number of shares of Common Stock
underlying the option. No public market existed for the Common Stock at the
fiscal year ended June 30, 1998.
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<PAGE> 44
1996 INCENTIVE STOCK OPTION PLAN
The Company's 1996 Incentive Stock Option Plan (the "1996 Option Plan") was
adopted by the Board of Directors and the Company's shareholders in December
1996. Pursuant to the 1996 Option Plan, the Company may grant incentive and
nonstatutory (nonqualified) stock options to key employees and directors of the
Company. A total of 225,000 shares of Common Stock have been reserved for
issuance under the 1996 Option Plan.
The Compensation Committee has the authority to select the employees and
directors of the Company to whom stock options are granted. Subject to the
limitations set forth in the 1996 Option Plan, the Compensation Committee has
the sole discretion and authority to determine from time to time the persons to
whom options shall be granted and the number of shares covered by each option,
to interpret the 1996 Option Plan, to establish vesting schedules, to specify
the type of consideration to be paid to the Company upon exercise and, subject
to certain restrictions, to specify other terms of the options.
The maximum term of options granted under the 1996 Option Plan is ten
years. The aggregate fair market value of the stock with respect to which
incentive stock options are first exercisable in any calendar year may not
exceed $100,000 per incidence. Options granted under the 1996 Option Plan are in
most cases nontransferable and generally expire within three months after the
termination of the optionee's services to the Company. In general, if an
optionee is disabled, dies or retires from his or her service to the Company,
such option may be exercised up to 12 months following such disability or death,
unless the Compensation Committee determines to allow a longer period for
exercise.
The exercise price of incentive stock options must be not less than the
fair market value of the Common Stock on the date of grant. The exercise price
of incentive stock options granted to any person who at the time of grant owns
stock possessing more than 10% of the total combined voting power of all classes
of stock must be at least 110% of the fair market value of such stock on the
date of grant, and the term of those options cannot exceed five years.
The Company currently has 61,756 options outstanding to its employees under
the 1996 Option Plan. These options are exercisable at $1.67 per share of Common
Stock. The exercise price of 38,619 of such options was adjusted from $3.33 per
share to $1.67 per share on March 24, 1998 by the Board of Directors.
NONQUALIFIED STOCK OPTIONS
Mr. Maples was granted an option to purchase 67,500 shares of Common Stock
at an exercise price of $3.33 per share on October 27, 1996. The exercise price
of this option was adjusted to $1.67 per share by the Board of Directors on
March 24, 1998. Additionally, on March 24, 1998, Mr. Maples was granted an
option to purchase 157,500 shares of Common Stock at an exercise price of $1.67
per share. Mr. Sheldon was granted an option to purchase 22,500 shares of Common
Stock at an exercise price of $3.33 per share (such exercise price was adjusted
to $1.67 per share on March 24, 1998) and an option to purchase 67,500 shares of
Common Stock at an exercise price of $1.67 per share, on June 27, 1996 and March
24, 1998, respectively. On April 5, 1996, Messrs. Hunt and Smith were each
granted an option to purchase 22,500 shares of Common Stock at an exercise price
of $1.67 per share. On December 15, 1995, Mr. Davis was granted an option to
purchase 112,500 shares of Common Stock at an exercise price of $1.67 per share.
Mr. Chaney was granted an option to purchase 78,750 shares of Common Stock at an
exercise price of $1.67 per share on March 24, 1998. Mr. Stewart was granted an
option to purchase 56,250 shares of Common Stock at an exercise price of $1.67
per share on March 24, 1998. All of the options granted to the Company's
directors and officers are nonqualified stock options.
Additionally, on October 27, 1996, 215,026 options were granted to certain
founders of the Company at an exercise price of $3.33 per share in connection
with such founders' pledge of their stock of the Company to guarantee the bridge
loan from First Computer Services Corporation ("First Computer"). The exercise
price of these options was adjusted to $1.67 per share by the Board of Directors
on March 24, 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Certain Transactions."
43
<PAGE> 45
The Company currently has 1,184,657 nonqualified options outstanding to
certain of its officers, employees and advisors. These options are exercisable
at prices ranging from $0.09 per share of Common Stock to $3.33 per share of
Common Stock.
1998 NONQUALIFIED STOCK OPTION PLAN
The Company's 1998 Nonqualified Stock Option Plan (the "1998 Option Plan")
was adopted by the Board of Directors and the Company's shareholders on July 13,
1998. The purpose of the 1998 Option Plan is to promote the growth and general
prosperity of the Company by permitting the Company to grant to its employees,
directors and advisors options to purchase Common Stock of the Company. Pursuant
to the 1998 Option Plan, the Company may grant nonstatutory (nonqualified) stock
options to employees, directors and advisors of the Company. A total of 400,000
shares of Common Stock have been reserved for issuance under the 1998 Option
Plan. In July 1998, Mr. Corona was issued an option to purchase 22,500 shares of
Common Stock at an exercise price of $8.00 per share pursuant to the 1998 Option
Plan.
The Compensation Committee has the authority to select the employees,
directors and advisors of the Company to whom stock options are granted. Subject
to the limitations set forth in the 1998 Option Plan, the Compensation Committee
has the sole discretion and authority to determine from time to time the persons
to whom options shall be granted and the number of shares covered by each
option, to interpret the 1998 Option Plan, to establish vesting schedules, to
specify the type of consideration to be paid to the Company upon exercise and,
subject to certain restrictions, to specify other terms of the options.
The maximum term of options granted under the 1998 Option Plan is ten
years. Options granted under the 1998 Option Plan are in most cases
nontransferable and generally expire within 30 days after the termination of the
optionee's services to the Company, except in cases when the optionee is
terminated "for cause" (as such term is defined therein). In such cases, the
option typically expires automatically on the date of termination. In general,
if an optionee is disabled or dies, such option may be exercised up to 12 months
following such disability or death, unless the Compensation Committee determines
to allow a longer period for exercise. In general, if an optionee retires from
his or her service to the Company, such option may be exercised up to three
months following such retirement, unless the Compensation Committee determines
to allow a longer period for exercise.
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<PAGE> 46
CERTAIN TRANSACTIONS
On September 25, 1996, the Company entered into a Securities Purchase
Agreement (the "Purchase Agreement") with First Computer, which is owned by Carl
Westcott, a principal shareholder of the Company. First Computer acted as a
nominee for Jack T. Smith, a director of the Company, Michael T. Maples, the
Chief Executive Officer and a director of the Company, and Carl Westcott. Under
the terms of the Purchase Agreement, in exchange for $2.0 million in cash, First
Computer purchased 544,149 shares of Common Stock and a promissory note from the
Company in favor of First Computer in the original principal amount of
$1,767,713 (the "First Computer Note"). The First Computer Note bore interest at
10% per annum, with a default rate of 18% per annum, and all principal and
interest were originally payable on September 25, 1997. The First Computer Note,
which was in default, was refinanced at prime rate in June 1998 as set forth
below. The First Computer Note was collateralized by the present and future
assets of the Company. The founding shareholders, Robert Maynard, John Nanni and
Tim Martin, pledged their stock in the Company to collateralize the First
Computer Note, and as consideration were granted vested stock options
exercisable at $3.33 per share (subsequently adjusted in March 1998 to $1.67 per
share) and equal to 10% of their stock holdings, or 89,926 options to Mr.
Maynard, 63,562 options to Mr. Nanni, and 61,538 options to Mr. Martin. Under
the Purchase Agreement, First Computer, as nominee for Messrs. Westcott, Maples
and Smith, was granted certain registration rights. See "Description of
Securities -- Registration Rights."
On January 31, 1997, the Company entered into a letter agreement (the
"First Extended Agreement") with First Extended, Inc. (successor in interest to
First Computer) ("First Extended") and William O. Hunt, a director of the
Company. First Extended acted as a nominee for Messrs. Smith, Maples and
Westcott. Under the terms of the First Extended Agreement, the Company made a
promissory note in the original principal amount of $650,000 in favor of First
Extended (the "First Extended Note"). The First Extended Note and First Extended
Agreement provided that the Company could borrow up to $650,000 from First
Extended. All advances under the First Extended Note and First Extended
Agreement were made at First Extended's discretion. The Company had borrowed a
total of $250,000 under the First Extended Note and First Extended Agreement.
The First Extended Note bore interest at 18% per annum, and all principal and
interest were originally payable on April 1, 1997. The First Extended Note,
which was in default, was refinanced at prime rate in June 1998 as set forth
below and was paid off on July 14, 1998.
Mr. Hunt has personally guaranteed payment under a promissory note made by
the Company in the original principal amount of $350,000 payable to NationsBank,
N.A. (the "NationsBank Note"). A total of $225,000 has been borrowed under the
NationsBank Note. The note bears interest at the bank's prime rate. The
NationsBank Note originally matured on July 15, 1997 but has been renewed
through December 15, 1998. A guarantee fee will accrue to Mr. Hunt at 18% minus
the bank's prime rate if the NationsBank Note is in default. The guarantee fee
and all principal are payable upon demand of the guarantor. All advances under
the NationsBank Note require the consent of the guarantor.
On March 24, 1998, Carl Westcott LLC, as nominee for Messrs. Westcott,
Maples, Smith, Corona and others, and Messrs. Hunt and Sheldon entered into a
Stock Purchase Agreement (the "1998 Purchase Agreement"), pursuant to which Carl
Westcott LLC, as nominee, and Messrs. Hunt and Sheldon purchased all of the
1,987,124 shares of Common Stock held by Messrs. Maynard, Nanni and Martin in
exchange for $883,166.
In June 1998, the Company refinanced the First Computer Note and the First
Extended Note pursuant to a Letter Agreement between the Company and Messrs.
Hunt, Smith and Westcott (the "Letter Agreement"). Pursuant to the Letter
Agreement, the Company made the following promissory notes: (i) Amended and
Restated Promissory Note payable to Mr. Smith in the principal amount of
$229,450, (ii) Amended and Restated Promissory Note payable to Mr. Smith in the
principal amount of $77,694, (iii) Amended and Restated Promissory Note payable
to Mr. Westcott in the principal amount of $1,538,263 and (iv) Amended and
Restated Promissory Note payable to Mr. Westcott in the principal amount of
$172,306 (collectively, the "Amended Notes"). All of the Amended Notes bear
interest per annum at the NationsBank of Texas, N.A. prime rate. Pursuant to the
Letter Agreement, the Company must make a monthly payment of $140,000, which
will be applied pro rata to the repayment of the Amended Notes and the
NationsBank Note. In the
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<PAGE> 47
event of default under any of the Amended Notes, the outstanding indebtedness of
such note is convertible into shares of Common Stock at the price of $0.44 per
share at the option of the noteholders. Under the Amended Notes and the Letter
Agreement, in the event of any offering of the Company's securities pursuant to
a registration statement declared effective by the Securities and Exchange
Commission or the sale or issuance of the Company's securities through which the
Company raises a minimum of $1.0 million, the Company must use all of the
proceeds of such offering, sale or issuance to pay off the Amended Notes and the
NationsBank Note until all such debt is extinguished. The Company intends to use
approximately $2.2 million of the net proceeds of this Offering to prepay the
Amended Notes and the NationsBank Note. Mr. Maples sold his interest in the
Amended Notes to Carl Westcott.
Chase Bank has made available a stand-by letter of credit in the original
principal amount of $150,000. Payment under this letter of credit has been
personally guaranteed by Mr. Hunt. Approximately $131,000 of this letter of
credit has been pledged as collateral under a three year capital lease.
Carl Westcott owns a significant interest in Jayhawk, First Extended
Service Corporation and FFG Insurance Company. Carl Westcott LLC and Westcott
Communications are current and former affiliates of Carl Westcott. The Company
has had no material business transactions with any of these entities.
FUTURE TRANSACTIONS
The Company has adopted a policy providing that all transactions between
the Company and related parties will be subject to approval by a majority of all
disinterested directors and must be on terms no less favorable than those that
could otherwise be obtained from unrelated third parties.
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<PAGE> 48
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information as of August 25, 1998,
regarding the beneficial ownership of Common Stock of (i) each person or group
known by the Company to beneficially own 5% or more of the outstanding shares of
Common Stock, (ii) each of the directors and the executive officers of the
Company, (iii) all executive officers and directors of the Company as a group
and (iv) each Selling Shareholder. The Company's officers, directors and certain
principal shareholders have agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock for a period of 180 days from
the date of this Prospectus without the prior written consent of Hoak Breedlove
Wesneski & Co. Unless otherwise noted, the persons named below have sole voting
and investment power with respect to the shares shown as beneficially owned by
them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING
NAME, ADDRESS AND OFFICE --------------------- SHARES ----------------------
OF BENEFICIAL OWNER(1) NUMBER PERCENT OFFERED(4) NUMBER(4) PERCENT(4)
------------------------ ---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Michael T. Maples(2).............. 242,404 6.7% -- 242,404 3.8%
Douglas L. Davis(2)............... 225,000 6.2% -- 225,000 3.5%
James T. Chaney................... -- -- -- -- --
John James Stewart III(2)......... 743 * -- 743 *
Douglas G. Sheldon(2)............. 315,002 8.6% -- 315,002 4.9%
William O. Hunt(2)(3)............. 1,432,490 39.0% 200,000(5) 1,232,490 19.2%
Jack T. Smith(2).................. 534,311 11.9% 60,000 474,311 7.8%
Gary L. Corona(2)................. 44,999 * -- 44,999 *
Carl Westcott..................... 1,141,811 32.3% 340,000 801,811 12.7%
All directors and executive
officers as a group (eight
persons)(2)..................... 2,794,949 73.5% 260,000 2,534,949 38.4%
</TABLE>
- ---------------
* Less than one percent.
(1) The address of each of the principal and Selling Shareholders is in care of
the Company, One Dallas Centre, 350 North St. Paul, Suite 3000, Dallas,
Texas 75201.
(2) Includes options to purchase 67,500, 112,500, 743, 22,500, 22,500, 22,500
and 22,500 shares of Common Stock granted to Messrs. Maples, Davis, Stewart,
Sheldon, Hunt, Smith, Corona and all directors and executive officers as a
group, respectively, that are exercisable within 60 days of August 25, 1998.
(3) Includes 497,301 shares of Common Stock owned by BCG Partnership, Ltd., a
limited partnership in which Mr. Hunt and his wife serve as general
partners, 329,304 shares of Common Stock owned by B&G Partnership, Ltd., a
limited partnership in which Mr. Hunt and his wife serve as general
partners, and 583,385 shares of Common Stock owned by the William O. Hunt
Retirement Trust, for which Mr. Hunt serves as trustee.
(4) Messrs. Hunt (through the William O. Hunt Retirement Trust), Smith and
Westcott have granted the Underwriters an over-allotment option, exercisable
not later than 30 days after the date of this Prospectus, to purchase
120,000, 25,000 and 200,000 shares of Common Stock, respectively, at the
initial public offering price set forth on the cover of this Prospectus,
less the underwriting discount. See "Underwriting."
(5) The Selling Shareholder is BCG Partnership, Ltd.
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<PAGE> 49
DESCRIPTION OF SECURITIES
GENERAL
The Company is a Texas corporation and its affairs are governed by the
Articles, Bylaws and the Texas Business Corporation Act (the "TBCA"). The
following description of the Company's capital stock is qualified in all
respects by the Articles and the Bylaws, which have been filed as exhibits to
the Registration Statement to which this Prospectus forms a part.
The authorized capital stock of the Company consists of 40,000,000 shares
of Common Stock, par value $0.01 per share, and 5,000,000 shares of preferred
stock, par value $0.01 per share (the "Preferred Stock").
COMMON STOCK
As of August 25, 1998, the Company had 35 holders of its Common Stock. The
holders of outstanding shares of Common Stock are entitled to receive dividends
out of assets legally available therefor at such times and in such amounts as
the Board of Directors may, from time to time, determine, subject to any
preferences which may be granted to the holders of Preferred Stock. Holders of
Common Stock do not have cumulative voting rights and are entitled to one vote
per share on all matters on which the holders of Common Stock are entitled to
vote. The Common Stock is not entitled to preemptive rights and is not subject
to redemption or conversion. Upon liquidation, dissolution or winding-up of the
Company, the assets (if any) legally available for distribution to shareholders
are distributable ratably among the holders of Common Stock after payment of all
debts and liabilities of the Company and the liquidation preference of any
outstanding class or series of Preferred Stock. All outstanding shares of Common
Stock are, and the shares of Common Stock to be issued pursuant to this Offering
will be, when issued and delivered, validly issued, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common Stock
will be subject to the preferential rights of any outstanding class or series of
Preferred Stock that the Company may issue in the future.
PREFERRED STOCK
The Board of Directors may, without further action of the shareholders of
the Company, issue shares of Preferred Stock in one or more series and fix or
alter the rights and preferences thereof, including the voting rights,
redemption provisions (including sinking fund provisions), dividend rights,
dividend rates, liquidation preferences, conversion rights and any other rights,
preferences, privileges and restrictions of any wholly unissued series of
Preferred Stock. The rights of holders of Common Stock will be subject to, and
may be adversely affected by, the rights of holders of any Preferred Stock.
On November 10, 1995, the Board of Directors issued a series of Preferred
Stock, which currently consists of 400,000 shares of Preferred Stock (such
amount may from time to time be increased or decreased by the Board of
Directors), designated as Series A Preferred Stock (the "Series A Preferred
Stock"). The Series A Preferred Stock, with respect to rights on liquidation,
winding up and dissolution, ranks senior to all classes and series of Common
Stock and may rank senior to other classes of Preferred Stock. The Series A
Preferred Stock has no specified dividend rate and the holders of Series A
Preferred Stock are entitled to receive the same dividends as the holders of the
Common Stock. The holders of Series A Preferred Stock are entitled to vote in
all matters as to which the holders of the Common Stock are entitled to vote (on
an "as converted" basis) in the same manner and with the same effect as such
holders of Common Stock, voting together with the holders of Common Stock and
Series A Preferred Stock as one class. Each share of Series A Preferred Stock is
convertible at any time into 2.25 shares of Common Stock and shall be
automatically converted, without further action on the part of the Company or
the holder thereof, into 2.25 fully paid and nonassessable shares of Common
Stock on the date 30 days after the successful completion of the Offering.
On May 15, 1996, the Board of Directors issued a series of Preferred Stock,
which currently consists of 300,000 shares of Preferred Stock (such amount may
from time to time be increased or decreased by the Board of Directors),
designated as Series B Preferred Stock (the "Series B Preferred Stock"). The
Series B Preferred Stock, with respect to rights on liquidation, winding up and
dissolution, ranks equally to the Series A Preferred Stock, ranks senior to all
classes and series of Common Stock and may rank senior to other classes
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<PAGE> 50
of Preferred Stock. The Series B Preferred Stock has no specified dividend rate
and the holders of Series B Preferred Stock are entitled to receive the same
dividends as the holders of the Common Stock. The holders of Series B Preferred
Stock are entitled to vote in all matters as to which the holders of the Common
Stock are entitled to vote, in the same manner and with the same effect as such
holders of Common Stock (on an "as converted" basis), voting together with the
holders of Common Stock, Series A Preferred Stock and Series B Preferred Stock
as one class. Each share of Series B Preferred Stock is convertible at any time
into 2.25 shares of Common Stock and shall be automatically converted, without
further action on the part of the Company or the holder thereof, into 2.25 fully
paid and nonassessable shares of Common Stock on the date 30 days after the
successful completion of the Offering.
As of August 25, 1998, the Company had 26 holders of its Series A Preferred
Stock and 3 holders of its Series B Preferred Stock.
REGISTRATION RIGHTS
Holders of 1,660,769 shares of Common Stock (the "Holders") have certain
rights to have such shares registered under the Securities Act pursuant to the
terms of agreements between such holders and the Company. Specifically, the
Holders have the one-time right to demand that the Company use its best efforts
to register all their shares of Common Stock. Additionally, if at any time the
Company proposes to register its securities under the Securities Act (other than
on a Form S-4 or Form S-8), the Company must notify the Holders of such proposed
offering, and, upon their request the Company must use its best efforts to
register all shares of Common Stock owned by the Holders. In such instances, the
Company is responsible for the expenses related to the registration of such
shares.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Articles of Incorporation of the Company provide that to the fullest
extent permitted by applicable law, a director of the Company will not be liable
to the Company or its shareholders for monetary damages for an act or omission
in the director's capacity as a director.
The TBCA permits the indemnification of directors, employees, officers and
agents of Texas corporations. The Company's Articles and Bylaws provide that the
Company shall indemnify any person to the fullest extent permitted by law. Under
the TBCA, an officer or director may be indemnified if he acted in good faith
and reasonably believed that his conduct (i) was in the best interests of the
Company and if he acted in his official capacity or (ii) was not opposed to the
best interests of the Company in all other cases. In addition, the indemnitee
may not have reasonable cause to believe that his conduct was unlawful in the
case of a criminal proceeding. In any case, the indemnitee may not have been
found liable to the Company for improperly receiving a personal benefit or for
willful or intentional misconduct in the performance of his duty to the Company.
The Company (i) must indemnify an officer or director for reasonable expenses if
he is successful, (ii) may indemnify an officer or director for such reasonable
expenses unless he was found liable for willful or intentional misconduct in the
performance of his duty to the Company and (iii) may advance reasonable defense
expenses if the officer or director undertakes to reimburse the Company if he is
later found not to satisfy the standard for indemnification expenses. Insofar as
indemnification for liabilities arising under the Securities 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 Securities Act and is, therefore,
unenforceable. This provision in the Articles does not eliminate the duty of
care, and in appropriate circumstances equitable remedies such as an injunction
or other forms of nonmonetary relief would remain available under Texas law.
This provision also does not affect a director's responsibilities under any
other laws, such as the federal securities laws or state or federal
environmental laws.
For a discussion of provisions of the underwriting agreement with regard to
indemnification of the Underwriters, see "Underwriting."
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<PAGE> 51
TRADING MARKET, TRANSFER AGENT AND REGISTRAR
The Company has applied to list the Common Stock on the Nasdaq National
Market under the symbol "GEEK." The Transfer Agent and Registrar for the Common
Stock is ChaseMellon Shareholder Services, L.L.C.
TEXAS ANTI-TAKEOVER LAW AND CERTAIN PROVISIONS
As a Texas corporation, the Company is subject to the provisions of the
Texas Business Combination Law ("TBCL") that became effective on September 1,
1997. In general, the TBCL prohibits a Texas "issuing public corporation" (such
as the Company) from engaging in a "business combination" with any shareholder
who is a beneficial owner of 20% or more of the corporation's outstanding stock
for a period of three years after such shareholder's acquisition of a 20%
ownership interest, unless: (i) the board of directors of the corporation
approves the transaction or the shareholder's acquisition of the shares prior to
the acquisition or (ii) two-thirds of the unaffiliated shareholders of the
corporation approve the transaction at a shareholders' meeting. The TBCL may
have the effect of inhibiting a non-negotiated merger or other business
combination involving the Company. The Company is subject to the terms of the
TBCL, unless its shareholders or directors take action electing not to be
governed by its terms (which action is not currently contemplated).
The Company's Articles and Bylaws prevent shareholders from calling a
special meeting of shareholders, prevent shareholders from amending the Bylaws
and prohibit shareholder action by written consent. The Bylaws also authorize
only the Board of Directors to fill vacancies, including newly-created
directorships and state that directors of the Company may be removed only for
cause and only by the affirmative vote of holders of at least a majority of the
outstanding shares of the voting stock, voting together as a single class.
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<PAGE> 52
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Upon completion of the Offering, the Company will have an aggregate of
6,285,957 shares of Common Stock outstanding. Of these shares, all of the shares
sold in the Offering will be freely transferable without restriction or
limitation under the Securities Act, except for any shares purchased by
"affiliates" (as such term is defined under the Securities Act) of the Company.
The remaining 3,985,957 shares constitute "restricted securities" within the
meaning of Rule 144, and the resale of such shares is restricted for one year
from the date they were acquired. Of these "restricted securities," 1,886,333
shares have been held for the required one-year period and will be freely
tradeable upon completion of the Offering, subject to the 180-day lock-up period
described below and subject to the 90-day information requirement of Rule 144
for shares held by affiliates or for less than the required two-year period. In
addition, the holders of 1,660,769 outstanding shares have certain rights to
have shares registered under the Securities Act pursuant to the terms of
agreements between such holders and the Company. See "Description of
Securities -- Registration Rights." Of those 1,660,769 shares, 769,149 shares
are freely tradeable upon completion of the Offering, subject to the 180-day
lock-up period described below and subject to the 90-day information requirement
of rule 144 for shares held by affiliates or for less than the required two-year
period.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned, for at
least one year, shares of Common Stock that have not been registered under the
Securities Act or that were acquired from an "affiliate" of the Company is
entitled to sell within any three-month period the number of shares of Common
Stock which does not exceed the greater of one percent of the number of then
outstanding shares or the average weekly reported trading volume during the four
calendar weeks preceding the sale. Sales under Rule 144 are also subject to
certain notice and manner of sale requirements and to the availability of
current public information about the Company and must be made in unsolicited
brokers' transactions or to a market maker. A person (or persons whose shares
are aggregated) who is not an "affiliate" of the Company under the Securities
Act during the three months preceding a sale and who has beneficially owned such
shares for at least two years is entitled to sell such shares under Rule 144
without regard to the volume, notice, information and manner of sale provisions
of such rule. Rule 144 does not require the same person to have held the
securities for the applicable periods.
The Company, its officers, directors and certain shareholders, who will
hold collectively 3,066,017 outstanding shares of Common Stock after the
Offering, have agreed not to offer or sell any shares of Common Stock for a
period of 180 days following the date of this Prospectus without the prior
written consent of Hoak Breedlove Wesneski & Co., subject to certain limited
exceptions. If this 180-day lock-up period is waived by Hoak Breedlove Wesneski
& Co., then 2,459,284 of the 3,066,017 shares would be freely tradeable subject
to the 90-day information requirement of Rule 144 for shares held by affiliates
or for less than the required two-year period.
After the Offering, the Company intends to file a Registration Statement on
Form S-8 to register 800,000 shares of Common Stock, which is the aggregate of
all shares reserved for issuance pursuant to the 1996 Option Plan and the 1998
Option Plan and shares underlying certain nonqualified options granted to
officers and directors. Accordingly, shares issued upon exercise of such options
will be freely tradeable by holders who are not affiliates of the Company and,
subject to the volume and other limitations of Rule 144, by holders who are
affiliates of the Company.
Prior to the Offering, there has been no market for the Common Stock. No
predictions can be made of the effect, if any, that market sales of shares of
Common Stock or the availability of such shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of significant amounts
of Common Stock could adversely affect the prevailing market price of the Common
Stock, as well as impair the ability of the Company to raise capital through the
issuance of additional equity securities. See "Risk Factors -- Shares Eligible
for Future Sale."
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<PAGE> 53
UNDERWRITING
The Underwriters named below, represented by Hoak Breedlove Wesneski & Co.
and Ferris, Baker Watts, Incorporated (the "Representatives"), have severally
agreed, subject to the terms and conditions contained in the underwriting
agreement (the "Underwriting Agreement"), by and between the Company and the
Underwriters, to purchase from the Company and the Selling Shareholders the
number of shares of Common Stock indicated below opposite their respective
names, at the initial public offering price less the underwriting discount set
forth on the cover page of this Prospectus. The Underwriting Agreement provides
that the obligations of the Underwriters are subject to certain conditions
precedent and that the Underwriters are committed to purchase all of the shares
of Common Stock if they purchase any.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Hoak Breedlove Wesneski & Co. ..............................
Ferris, Baker Watts, Incorporated...........................
---------
Total............................................. 2,300,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $ per share; and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After the initial distribution of
the Offering, the public offering price and other selling terms may be changed
by the Representatives. The Common Stock is offered subject to receipt and
acceptance by the Underwriters, and to certain other conditions, including the
right to reject orders in whole or in part.
The Selling Shareholders have granted an option to the Underwriters,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to a maximum of 345,000 additional shares of Common Stock, to cover
over-allotments, if any, at the same price per share as the initial shares to be
purchased by the Underwriters. To the extent that the Underwriters exercise this
option, the Underwriters will be committed, subject to certain conditions, to
purchase such additional shares in approximately the same proportion as set
forth in the above table. The Underwriters may purchase such shares only to
cover over-allotments made in connection with this Offering.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriter may be required to make in respect thereof.
The Company, its officers, directors and certain principal shareholders, as
well as the Selling Shareholders, have agreed not to offer, sell or otherwise
dispose of any shares of Common Stock, options to acquire shares of Common Stock
or any other securities convertible into shares of Common Stock for a period of
180 days from the date of this Prospectus without the prior written consent of
Hoak Breedlove Wesneski & Co., subject to certain limited exceptions.
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<PAGE> 54
The Representatives have informed the Company that the Underwriters do not
expect to make sales of Common Stock offered by this Prospectus to accounts over
which they exercise discretionary authority in excess of 5% of the shares of
Common Stock offered hereby.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiations between the Company, the Selling Shareholders and the
Representatives. Among the factors to be considered in determining the initial
public offering price are prevailing market and economic conditions, revenues
and earnings of the Company, market valuations of other companies engaged in
activities similar to the Company, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, the Company's management and other factors deemed relevant. The
estimated initial public offering price range set forth on the cover of this
prospectus is subject to change as a result of market conditions and other
factors.
Certain persons participating in this Offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the Offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
Offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq National Market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
Hoak Breedlove Wesneski & Co. was formed in 1996 by the combination of two
investment banks. The founders and senior professionals of Hoak Breedlove
Wesneski & Co. have substantial backgrounds in investment banking, principal
investing and corporate management. Hoak Breedlove Wesneski & Co. has served as
a co-manager of several other public offerings.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon the
Company by Jackson Walker L.L.P., Dallas, Texas. Richard F. Dahlson, a partner
of Jackson Walker L.L.P., beneficially owns 5,333 shares of Series A Preferred
Stock. Locke Purnell Rain Harrell (A Professional Corporation), Dallas, Texas,
is acting as counsel for the Underwriters in connection with certain legal
matters relating to the Offering.
EXPERTS
The Financial Statements as of June 30, 1997 and 1998 and for the years
then ended included in this Prospectus have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein, and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
53
<PAGE> 55
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (the "Registration
Statement"), pursuant to the Securities Act with respect to the Common Stock
offered by this Prospectus. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits thereto.
THE STATEMENTS CONTAINED IN THIS PROSPECTUS AS TO THE CONTENTS OF ANY CONTRACT
OR OTHER DOCUMENT IDENTIFIED AS EXHIBITS IN THIS PROSPECTUS ARE NOT NECESSARILY
COMPLETE, AND IN EACH INSTANCE, REFERENCE IS MADE TO A COPY OF SUCH CONTRACT OR
DOCUMENT FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT, EACH STATEMENT BEING
QUALIFIED IN ANY AND ALL RESPECTS BY SUCH REFERENCE. For further information
with respect to the Company and the Common Stock offered hereby, reference is
made to the Registration Statement and exhibits which may be inspected without
charge at the Commission's principal office at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, DC 20549.
Upon consummation of this Offering, the Company will become subject to the
reporting requirements of the Exchange Act and in accordance therewith will file
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities of the Commission at 450 Fifth Street, N.W.,
Washington, DC 20549 and at its New York Regional Office, Room 1300, 7 World
Trade Center, New York, New York 10048; and at its Chicago Regional Office,
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material may also be obtained from the
Public Reference Section of the Commission at prescribed rates. The Company's
Registration Statement as well as any reports to be filed under the Exchange Act
can also be obtained electronically after the Company has filed such documents
with the Commission through a variety of databases, including among others, the
Commission's Electronic Data Gathering, Analysis And Retrieval ("EDGAR")
program, Knight-Ridder Information, Inc., Federal Filings/ Dow Jones and
Lexis/Nexis. Additionally, the Commission maintains a Web site (at
http://www.sec.gov) that will contain such information regarding the Company.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements and such other reports as the Company
deems appropriate or as may be required by law.
54
<PAGE> 56
GLOSSARY OF TECHNICAL TERMS
ADSL Asymmetric Digital Subscriber Line. A new
technology that allows more data to be sent over
existing copper telephone lines (POTS). ADSL
supports data rates of from 1.5 to 9.0 Mbps when
receiving data (known as the downstream rate) and
from 16 to 640 Kbps when sending data (known as the
upstream rate). ADSL requires a special ADSL modem.
ANSI American National Standards Institute. Founded in
1918, ANSI is a voluntary organization composed of
over 1,300 members (including all the large
computer companies) that creates standards for the
computer industry. ANSI sets standards for a wide
range of technical areas, from electrical
specifications to programming languages to
communications protocols.
BACKBONE A high-speed network that connects smaller,
independent networks.
BANDWIDTH The number of bits of information that can move
over a communications medium in a given amount of
time.
BROADBAND A transmission facility that has a bandwidth
greater than a voice grade line of 3 kHz and which
may carry numerous voice, video and data channels
simultaneously.
CENTRAL OFFICE A switching unit in a telecommunications system
which provides service to the general public,
having the necessary equipment and operating
arrangements for terminating and interconnecting
customer lines and trunks or trunks only.
DOMAIN NAME Part of the official name of a computer on the
Internet.
DUAL REDUNDANT A device which contains a backup or spare part
which is automatically put into service when a
primary part fails.
ELECTRONIC MAIL OR
E-MAIL An application that allows a user to send or
receive messages to or from any other user with an
Internet address, commonly termed an e-mail
address.
FDDI Fiber Distributed Data Interface Network. A set of
ANSI protocols for sending digital data over fiber
optic cable. FDDI networks are token-passing
networks, and support data rates of up to 100 Mbps
(100 million bits) per second. FDDI networks are
typically used as backbones for wide-area network
extensions to FDDI, called FDDI-2, supports the
transmission of voice and video information as well
as data.
FFDT FDDI Full Duplex Technology. Another variation of
FDDI-2 that uses the same network infrastructure
but can potentially support data rates up to 200
Mbps.
FTP File Transfer Protocol. A protocol that allows file
transfer between a host and a remote computer.
GRAPHICAL USER
INTERFACE A means of communicating with a computer by
manipulating icons and windows rather than using
text commands.
INTERNET An open global network of interconnected
commercial, educational and governmental computer
networks that utilize a common communications
protocol, TCP/IP.
55
<PAGE> 57
INTERNET BACKBONE The Internet backbone consists of high-speed
networks that link the smaller, independent
networks of the Internet.
IRC Internet Relay Chat. A system that enables
individuals on the Internet to talk to each other
in real time (rather than after a delay, as with
e-mail messages).
ISDN Integrated Services Digital Network. A digital
network that combines voice and digital network
services through a single medium, making it
possible to offer subscribers digital data services
as well as voice connections.
ISP Internet Service Provider. A company that provides
access to the Internet. For a monthly fee, the
service provider gives you a software package,
username, password and access phone number.
Equipped with a computer and modem, you can then
connect to the Internet and browse the World Wide
Web and USENET, and send and receive e-mail.
LEC Local Exchange Carrier. A telecommunications
utility that has been granted either a certificate
of convenience and necessity or a certificate of
operating authority to provide local exchange
telephone service, basic local telecommunications
service, or switched access service within the
state. A local exchange carrier is also referred to
as a local exchange company.
LOCAL EXCHANGE TELEPHONE
SERVICE Telecommunications service provided within an
exchange to establish connections between customer
premises within the exchange, including connections
between a customer premises and a long distance
provider serving the exchange. The term includes
tone dialing, service connection charges, and
directory assistance services when offered in
connection with basic local telecommunications
service and interconnection with other service
providers. Local exchange telephone service may
also be referred to as local exchange service.
However, a competitive exchange service is not
local exchange telephone service. This fact, and
the definition of competitive exchange service,
shall be liberally construed to encourage a
competitive marketplace.
MODEM A piece of equipment that connects a computer to a
data transmission line (typically a telephone
line).
NEWSGROUP Same as forum, an on-line discussion group. On the
Internet, there are literally tens of thousands of
newsgroups covering every conceivable interest. To
view and post messages to a newsgroup, you need a
news reader, a program that runs on your computer
and connects you to a news server on the Internet.
ON-LINE SERVICES Commercial information services that offer a
computer user access through a modem to specific
menus of information, entertainment and
communications data. These services are generally
closed systems and many offer limited, if any,
Internet access.
POP Point of Presence. The Company defines a POP as a
local geographic point of presence where
subscribers can access the Company's services via a
local telephone call. To the Company's knowledge,
there is no industry-wide definition of an Internet
access POP, and other companies may define a POP
differently.
56
<PAGE> 58
ROUTER A device that receives and transmits data packets
between segments in a network or different
networks.
SDSL Symmetric Digital Subscriber Line. A new technology
that allows more data to be sent over existing
copper telephone lines (POTS). SDSL supports data
rates up to 3 Mbps. SDSL works by sending digital
pulses in the high-frequency area of telephone
wires. Since these high frequencies are not used by
normal voice communications, SDSL can operate
simultaneously with voice connections over the same
wires. SDSL requires a special SDSL modem. SDSL is
called symmetric because it supports the same data
rates for upstream and downstream traffic.
SERVER Software that allows a computer to offer a service
to another computer. Other computers contact the
server program by means of matching client
software. In addition, such term means the computer
on which server software runs.
T-1 A data communications line capable of transmission
speeds of 1.54 Mbps.
TERMINAL SERVER A specialized computer that supports multiple
communications connections.
USENET A worldwide bulletin board system that can be
accessed through the Internet or through many
online services. The USENET contains tens of
thousands of forums, called newsgroups, that cover
every imaginable interest group. It is used daily
by millions of people around the world.
VIRTUAL POP Modems without a geographically specific location
typically housed or co-located at central offices
inside of a LEC Network. Private networks connect
these facilities with the Company.
VoIP Voice Over Internet Protocol. A category of
hardware and software that enables people to use
the Internet as the transmission medium for voice
telephone calls or faxes.
WINDOWS A computer operating system developed by Microsoft
Corporation that provides a graphical user
interface and multitasking capabilities.
WORLD WIDE WEB A network of computer servers that uses a special
communications protocol to link different servers
throughout the Internet and permits communication
of graphics, video and sound.
xDSL An abbreviation that refers collectively to all
types of digital subscriber lines, the two main
categories being ADSL and SDSL. Two other types of
xDSL technologies are High-data-rate DSL ("HDSL")
and symmetric digital subscriber lines ("SDSL").
DSL technologies use sophisticated modulation
schemes to pack data onto copper wires. They are
sometimes referred to as last-mile technologies
because they are used only for connections from a
telephone switching station to a home or office,
not between switching stations. xDSL is similar to
ISDN inasmuch as both operate over existing copper
telephone lines (POTS) and both require the short
runs to a central telephone office (usually less
than 20,000 feet). However, xDSL offers much higher
speeds -- up to 32 Mbps for downstream traffic.
57
<PAGE> 59
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Financial Statements:
Balance Sheets............................................ F-3
Statements of Operations.................................. F-4
Statements of Shareholders' Equity (Deficit).............. F-5
Statements of Cash Flows.................................. F-6
Notes to Financial Statements............................. F-7
</TABLE>
F-1
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Internet America, Inc.
We have audited the accompanying balance sheets of Internet America, Inc.
(the "Company") as of June 30, 1997 and 1998, and the related statements of
operations, shareholders' equity (deficit) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at June 30, 1997 and 1998, and
the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
Dallas, Texas
August 12, 1998
F-2
<PAGE> 61
INTERNET AMERICA, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ -- $ 565,182
Accounts receivable, net of allowance for uncollectible
accounts of $126,707 and $198,155 in 1997 and 1998,
respectively........................................... 224,180 327,533
Prepaid expenses and other current assets................. 53,666 30,824
----------- -----------
Total current assets.............................. 277,846 923,539
PROPERTY AND EQUIPMENT -- Net............................... 2,510,623 1,625,022
OTHER ASSETS -- Net......................................... 325,678 601,298
----------- -----------
TOTAL............................................. $ 3,114,147 $ 3,149,859
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable.................................... $ 1,451,969 $ 882,246
Accrued liabilities....................................... 673,672 1,069,191
Current portion of capital lease obligations.............. 408,251 332,895
Current maturities of long-term debt...................... 419,468 431,898
Advances under line of credit............................. 243,000 225,000
Notes payable to shareholders............................. 2,017,713 2,017,713
Bank overdrafts........................................... 226,979 --
Deferred revenue.......................................... 1,670,392 1,926,979
----------- -----------
Total current liabilities......................... 7,111,444 6,885,922
CAPITAL LEASE OBLIGATIONS, net of current portion........... 375,851 31,192
LONG-TERM DEBT, net of current portion...................... 308,109 --
----------- -----------
Total liabilities................................. 7,795,404 6,917,114
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Series A convertible preferred stock, $.01 par value;
400,000 shares authorized, 379,672 issued and
outstanding in 1997 and 1998........................... 3,796 3,796
Series B convertible preferred stock, $.01 par value,
300,000 shares authorized, 73,667 issued and
outstanding in 1997 and 1998........................... 737 737
Common stock, $.01 par value; 40,000,000 shares
authorized, 3,560,330 and 3,532,205 issued in 1997 and
1998, respectively, and 3,532,205 outstanding in 1997
and 1998............................................... 35,603 35,322
Additional paid-in capital................................ 2,920,333 2,816,114
Common stock in treasury, 28,125 shares at cost in 1997... (12,500) --
Accumulated deficit....................................... (7,629,226) (6,623,224)
----------- -----------
Total shareholders' equity (deficit).............. (4,681,257) (3,767,255)
----------- -----------
TOTAL............................................. $ 3,114,147 $ 3,149,859
=========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE> 62
INTERNET AMERICA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
REVENUES:
Access.................................................... $ 8,177,300 $ 9,565,815
Business services......................................... 1,044,689 1,036,145
Other..................................................... 248,933 41,312
----------- -----------
Total............................................. 9,470,922 10,643,272
----------- -----------
OPERATING COSTS AND EXPENSES:
Connectivity and operations............................... 6,185,100 4,508,781
Sales and marketing....................................... 1,912,265 1,140,279
General and administrative................................ 2,747,225 1,919,325
Depreciation and amortization............................. 1,618,089 1,473,779
Impairment of equipment................................... 350,787 --
----------- -----------
Total............................................. 12,813,466 9,042,164
----------- -----------
INCOME (LOSS) FROM OPERATIONS............................... (3,342,544) 1,601,108
INTEREST EXPENSE 480,985 571,106
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES........................... (3,823,529) 1,030,002
INCOME TAX EXPENSE.......................................... -- 24,000
----------- -----------
NET INCOME (LOSS)........................................... $(3,823,529) $ 1,006,002
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE:
BASIC..................................................... $ (1.12) $ 0.28
=========== ===========
DILUTED................................................... $ (1.12) $ 0.21
=========== ===========
PRO FORMA (Unaudited)..................................... $ (0.86) $ 0.21
=========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 63
INTERNET AMERICA, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY STOCK
---------------- ------------------- PAID-IN ------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AMOUNT
------- ------ --------- ------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996........................ 453,339 $4,533 3,001,180 $30,012 $2,707,787 -- $ --
Issuance of common stock:
For cash..................................... -- -- 544,149 5,441 226,846 -- --
For services................................. -- -- 15,001 150 24,850 -- --
Deferred compensation for stock options issued
below deemed fair value...................... -- -- -- -- (39,150) -- --
Purchase of treasury stock at cost............ -- -- -- -- -- 28,125 (12,500)
Net loss...................................... -- -- -- -- -- -- --
------- ------ --------- ------- ---------- ------- --------
BALANCE, JUNE 30, 1997........................ 453,339 4,533 3,560,330 35,603 2,920,333 28,125 (12,500)
Purchase of stock options..................... -- -- -- -- (92,000) -- --
Cancellation of treasury stock................ -- -- (28,125) (281) (12,219) (28,125) 12,500
Net income.................................... -- -- -- -- -- -- --
------- ------ --------- ------- ---------- ------- --------
BALANCE, JUNE 30, 1998........................ 453,339 $4,533 3,532,205 $35,322 $2,816,114 -- $ --
======= ====== ========= ======= ========== ======= ========
<CAPTION>
TOTAL
SHAREHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIT)
----------- -------------
<S> <C> <C>
BALANCE, JUNE 30, 1996........................ $(3,805,697) $(1,063,365)
Issuance of common stock:
For cash..................................... -- 232,287
For services................................. -- 25,000
Deferred compensation for stock options issued
below deemed fair value...................... -- (39,150)
Purchase of treasury stock at cost............ -- (12,500)
Net loss...................................... (3,823,529) (3,823,529)
----------- -----------
BALANCE, JUNE 30, 1997........................ (7,629,226) (4,681,257)
Purchase of stock options..................... -- (92,000)
Cancellation of treasury stock................ -- --
Net income.................................... 1,006,002 1,006,002
----------- -----------
BALANCE, JUNE 30, 1998........................ $(6,623,224) $(3,767,255)
=========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 64
INTERNET AMERICA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................... $(3,823,529) $ 1,006,002
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 1,618,089 1,473,779
Loss on impairment..................................... 350,787 --
Provision for allowance for uncollectible accounts..... 57,661 63,448
Issuance of stock for services......................... 25,000 --
Deferred compensation.................................. (39,150) --
Changes in operating assets and liabilities:
Accounts receivable.................................. (114,796) (166,801)
Prepaid expenses and other current assets............ 55,715 22,842
Other assets......................................... (12,625) (44,841)
Accounts payable and accrued liabilities............. (545,877) (401,183)
Deferred revenue..................................... 998,715 (155,835)
----------- -----------
Net cash provided by (used in) operating
activities....................................... (1,430,010) 1,797,411
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment, net.................. (1,177,894) (356,535)
Purchase of subscribers................................... (356,670) (50,000)
Proceeds from sale of equipment........................... 21,500 --
----------- -----------
Net cash used in investing activities............. (1,513,064) (406,535)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 232,287 --
Purchase of treasury stock................................ (12,500) --
Purchase of stock options................................. -- (92,000)
Proceeds from sale and leaseback.......................... 422,302 --
Proceeds from issuance of long-term debt.................. 2,905,288 --
Principal payments of long-term debt...................... (361,666) (295,679)
Principal payments under capital lease obligations........ (358,119) (420,015)
Proceeds (payments) on line of credit..................... 93,000 (18,000)
Loan origination fees..................................... (56,289) --
----------- -----------
Net cash provided by (used in) financing
activities....................................... 2,864,303 (825,694)
----------- -----------
NET INCREASE (DECREASE) IN CASH............................. (78,771) 565,182
CASH, BEGINNING OF PERIOD................................... 78,771 --
----------- -----------
CASH, END OF PERIOD......................................... $ -- $ 565,182
=========== ===========
SUPPLEMENTAL INFORMATION:
Cash paid for interest.................................... $ 285,070 628,920
Equipment acquired under capital leases................... $ 816,235 $ --
Subscriber purchase assumption of service obligations..... $ -- $ 412,422
</TABLE>
See notes to financial statements.
F-6
<PAGE> 65
INTERNET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General -- Internet America, Inc. (the "Company") was incorporated in
Arizona on December 13, 1994, commenced operations on January 13, 1995 and
reincorporated on July 21, 1995 as a Texas corporation. The Company is a
provider of Internet access, serving both individual and corporate customers in
the North Texas area.
The Company has experienced cumulative operating losses, and its operations
are subject to certain risks and uncertainties including, among others, risks
associated with technology and regulatory trends, evolving industry standards,
dependence on its network infrastructure and suppliers, growth and acquisitions,
actual and prospective competition by entities with greater financial and other
resources, the development of the Internet market and need for additional
capital or refinancing of existing obligations. There can be no assurance that
the Company will be successful in sustaining profitability and positive cash
flow in the future.
Revenue Recognition -- Revenues are derived from monthly subscribers and
set-up charges are recognized as services are provided. The Company bills its
subscribers in advance for direct access to the Internet, but defers recognition
of these revenues until the service is provided.
Credit Risk -- The Company's accounts receivable potentially subjects the
Company to credit risk, as collateral is generally not required. The Company's
risk of loss is limited due to advance billings to customers for services, the
use of preapproved charges to customer credit cards, and the ability to
terminate access on delinquent accounts. The large number of customers
comprising the customer base mitigates the concentration of credit risk.
Financial Instruments -- The carrying amounts of cash, accounts receivable,
accounts payable and accrued liabilities approximate fair value because of the
short maturity of these instruments. The floating interest rate on the Company's
lines of credit reflects current market rates and, accordingly, their carrying
values approximate fair value. The fair values for other debt and lease
obligations, which have fixed interest rates, do not differ materially from
their carrying values.
Property and Equipment -- Property and equipment are recorded at cost.
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives of the assets, ranging from one to five years.
Equipment Under Capital Lease -- The Company leases certain of its data
communication and other equipment under agreements accounted for as capital
leases. The assets and liabilities under capital leases are recorded at the
lesser of the present value of aggregate future minimum lease payments,
including estimated bargain purchase options, or the fair value of the assets
under lease. Assets under capital lease are depreciated over the shorter of
their estimated useful lives or the related lease term.
Acquired Subscriber Base -- The Company capitalizes specific costs incurred
for the purchase of subscriber bases from other Internet Service Providers
("ISPs"). The subscriber acquisition costs include the actual fee paid to the
selling ISPs as well as the assumption of deferred service obligations and legal
expenses specifically related to the transactions. Amortization is provided
using the straight line method over three years commencing when the subscriber
base is received.
Long-Lived Assets -- On an annual basis, the Company reviews the values
assigned to long-lived assets, such as property and equipment to determine if
any impairments are other than temporary. Provisions for asset impairments are
based on discounted cash flow projections in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and such
assets are written down to their estimated fair values. Management believes that
the long-lived assets in the accompanying balance sheets are properly valued. An
impairment loss of $350,787 related to the write down of modem equipment was
recognized during the year ended June 30, 1997.
F-7
<PAGE> 66
INTERNET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock Based Compensation -- The Company continues to account for its
employee stock based compensation in accordance with the provisions of
Accounting Principles Board Opinion No. 25 ("APB No. 25") and provides pro forma
disclosures in the notes to the financial statements, as if the measurement
provisions of SFAS No. 123 "Accounting for Stock-Based Compensation," had been
adopted.
Advertising Expenses -- The Company accounts for advertising costs as
expenses in the period in which they are incurred. Advertising expenses for the
years ended June 30, 1997 and 1998 were $728,404 and $736,222, respectively.
Income Taxes -- Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the carrying amount
of existing assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to reverse.
Net Earnings Per Share -- Share and per share amounts have been adjusted
retroactively for the 2.25-to-1.00 stock split which was effected in July 1998.
Basic earnings per share is computed using the weighted average number of common
shares outstanding and excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share reflects the potential
dilution that could occur upon exercise or conversion of these instruments.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ significantly from these
estimates.
Recent Accounting Pronouncements -- In February 1997, the FASB issued SFAS
No. 129, "Disclosure of Information about Capital Structure," which establishes
standards for disclosing information about an entity's capital structure and is
effective for financial statements for periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income
and its components in the financial statements for fiscal years beginning after
December 15, 1997. The FASB also issued, in June 1997, SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes standards for the way public companies disclose information about
operating segments, products and services, geographic areas and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. The Company has determined that the impact on its financial
statements of adopting SFAS Nos. 129, 130 and 131 is not material. In June 1998,
the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities," which is effective for fiscal quarters ending after June 15, 1999.
The Company does not expect the adoption of SFAS No. 133 to have a material
impact on its financial statements.
Certain Reclassifications -- Certain reclassifications have been made to
prior period amounts to conform to the fiscal 1998 presentation.
F-8
<PAGE> 67
INTERNET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Data communications and office equipment.................. $ 3,327,224 $ 3,557,646
Leasehold improvements.................................... 453,937 450,360
Furniture and fixtures.................................... 255,787 255,787
Computer software......................................... 88,757 219,440
----------- -----------
4,125,705 4,483,233
Less accumulated depreciation and amortization............ (1,615,082) (2,858,211)
----------- -----------
$ 2,510,623 $ 1,625,022
=========== ===========
</TABLE>
Property under capital lease, primarily data communications equipment
included above, amounted to $1,084,809 at June 30, 1997 and 1998. Included in
accumulated depreciation and amortization are amounts related to property under
capital lease of $379,486 and $729,865 at June 30, 1997 and 1998, respectively.
Depreciation expense charged to operations was $1,485,782 and $1,242,138 for the
years ended June 30, 1997 and 1998, respectively, and included $300,312 and
$350,379, respectively, pertaining to property under capital lease.
3. OTHER ASSETS
Other assets consist of:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1997 1998
--------- ---------
<S> <C> <C>
Acquired subscriber base................................... $ 356,670 $ 819,092
Loan origination fees...................................... 61,289 20,353
Deposits................................................... 40,331 35,172
Deferred costs............................................. -- 50,000
--------- ---------
458,290 924,617
Less accumulated amortization.............................. (132,612) (323,319)
--------- ---------
$ 325,678 $ 601,298
========= =========
</TABLE>
In July 1996 the Company acquired approximately 900 subscribers of Webstar,
Inc. for approximately $357,000.
On November 26, 1997, the Company acquired approximately 4,600 subscribers
of WHY? Telecommunications, Inc. for a cash payment of $50,000 and the
assumption of deferred service obligations of approximately $412,000 and certain
contingent consideration. Management does not anticipate any additional
consideration to be paid related to this transaction.
4. LINE OF CREDIT AGREEMENTS
The Company may borrow up to $150,000 under a revolving credit agreement
that matures September 30, 1998. Borrowings under the agreement bear interest at
the bank's prime rate plus 2% (10.5% at June 30, 1997 and 1998) and are
collateralized by substantially all assets of the Company, and by the guarantees
of a director and shareholder. The outstanding borrowings at June 30, 1997 and
1998 were $18,000 and $0; respectively, with $131,291 committed to a standby
letter of credit securing a lease.
F-9
<PAGE> 68
INTERNET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Also, the Company may borrow, subject to the approval of a director of the
Company, up to $350,000 under a revolving credit agreement that matures December
15, 1998 or upon the effective date of a defined securities registration.
Borrowings under the agreement bear interest at the bank's prime rate (8.5% at
June 30, 1997 and 1998) and are guaranteed by a Director. The Director receives
guaranty fees, payable on demand, equal to 18% of the outstanding borrowings,
less interest paid to the bank. The outstanding borrowings at June 30, 1997 and
1998 were $225,000.
5. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1998
--------- ---------
<S> <C> <C>
Note payable to an unrelated third party, bearing interest
at 16.5%, payable in equal monthly installments of
$10,266, including interest, through January 1999. The
note is collateralized by substantially all of the assets
of the Company and contains, among other things, a
restriction on the payment of dividends on common stock.
In connection with this note, the Company issued
detachable warrants during March 1996 to purchase 33,750
shares of common stock at $1.67 per share. The fair value
of the warrants have not been reflected in the financial
statements as the amount was immaterial. The warrants are
exercisable from January 1, 1998 through December 31,
1999...................................................... $ 191,482 $ 79,773
Notes payable to vendors maturing through February 1998,
bearing interest at 6% to 18%............................. 183,970 --
Note payable in connection with acquisition of Webstar, Inc.
subscriber base, due June 30, 1999 or upon the effective
date of a defined securities registration, bearing
interest at 14%, payable monthly. Prior to the end of any
calendar quarter, the lender may demand a principal
payment of up to $50,000.................................. 352,125 352,125
--------- ---------
727,577 431,898
Less current portion........................................ (419,468) (431,898)
--------- ---------
$ 308,109 $ --
========= =========
</TABLE>
6. NOTES PAYABLE TO SHAREHOLDERS
During fiscal 1997, the Company entered into two loan agreements with
entities acting as nominees for current shareholders, with borrowings of
$1,767,713 and $250,000. The notes bear interest at 10% and 18% and were due
September 25, 1997 and April 1, 1997, respectively. The assets of the Company
collateralized the notes. On June 30, 1998, the loan agreements, which were in
default, were renewed at the prime rate (8.5% as of June 30 ,1998), with
borrowings due in monthly payments approximating $129,000 or upon the effective
date of a defined securities registration or sale. In the event of default, the
borrowings convert to common stock at the price of $0.44 per share at the option
of the noteholder.
F-10
<PAGE> 69
INTERNET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
The Company leases certain of its facilities under operating leases. Rental
expense under these leases was approximately $373,000 and $574,000 for the years
ended June 30, 1997 and 1998, respectively. At June 30, 1998, future minimum
lease payments on capital and operating leases were approximately as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
1999...................................................... $ 361,423 $ 563,756
2000...................................................... 55,082 522,337
2001...................................................... -- 441,572
--------- ----------
Total minimum lease payments.............................. 416,505 $1,527,665
==========
Less amounts representing interest........................ (52,418)
---------
Present value of minimum capitalized lease payments....... 364,087
---------
Less current portion...................................... (332,895)
---------
Long-term capitalized lease obligations $ 31,192
=========
</TABLE>
In August 1997, the Company entered into a network services agreement for
telecommunications services with a competitive local exchange carrier ("CLEC")
that commits the Company to the CLEC's services through December 31, 1998. The
Company is in the process of converting customers to this service and estimates
that the monthly recurring commitment will be approximately $50,000.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations and cash flows.
8. SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock -- The Company has authorized 40,000,000 shares of $0.01 par
value common stock. During the year ended June 30, 1997, the Company issued
544,149 shares of its common stock in exchange for cash of $232,287. The Company
also issued 15,001 shares of common stock in exchange for services provided by
one of the Company's employees. The shares issued were recorded at $25,000, the
value of the services provided.
During March 1998, three former shareholders of the Company sold 1,987,124
shares of common stock to an entity acting as nominee for current shareholders
in exchange for $883,166.
Preferred Stock -- The Company has authorized 5,000,000 shares of preferred
stock issuable in series. The Company has authorized 400,000 shares of $0.01 par
value Series A Preferred Stock. Each share of the Series A Preferred Stock is
convertible at any time into 2.25 shares of the Company's common stock and has
the same dividend rights as the common stock. Each share of the Series A
Preferred Stock will automatically be converted into 2.25 shares of the
Company's common stock 30 days following the successful completion of a public
offering of shares of common stock of the Company. In order for the shares to
convert, the gross proceeds from such public offering must exceed $5 million and
the per share price of the common stock must be at least $2.22 per share. In the
event of liquidation of the Company, whether voluntary or involuntary, the
holders of the Series A Preferred Stock then outstanding shall be entitled to be
paid out of the assets of the Company available for distribution to its
shareholders, an amount in cash equal to the purchase price for each share of
the Series A Preferred Stock outstanding, prior to any distributions to common
shareholders.
F-11
<PAGE> 70
INTERNET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has authorized 300,000 shares of $0.01 par value Series B
Preferred Stock. Each share of Series B Preferred Stock is convertible at any
time into 2.25 shares of the Company's common stock. The Series B Preferred
Stock automatically converts to common stock 30 days following the successful
completion of a public offering of shares of the Company's common stock. In
order for the shares to convert, the gross proceeds from the public offering
must be at least $5 million and the per share price of the common stock offered
must be at least $3.33 per share. In the event of liquidation of the Company,
whether voluntary or involuntary, the holders of Series B Preferred Stock are
entitled to receive an amount in cash equal to the purchase price for each share
of Series B Preferred Stock outstanding, prior to any distributions to common
shareholders. The liquidation preference payable to holders of Series A and
Series B Preferred Stock shall be made based on the aggregate purchase price for
the shares of the Series A Preferred Stock and Series B Preferred Stock,
respectively. The Series A and Series B Preferred Stock have no specific
dividend rate and the holders of each class of preferred stock are entitled to
receive the same dividends as holders of common stock.
The Company has agreed with the holders of Series A Preferred Stock that
the Company will not issue common stock, or securities convertible into or
exchangeable for shares of common stock, or any options, warrants or other
rights to acquire shares of common stock at a price per share less than $1.67.
However, as noted above, the Company issued common stock at a price of $0.44 per
share, with the express permission of the holders of Series A Preferred Stock.
Stock Option Plan -- The Company's 1996 Incentive Stock Option Plan (the
"1996 Option Plan") was adopted by the Board of Directors and the Company's
shareholders in December 1996. Pursuant to the 1996 Option Plan, the Company may
grant incentive and nonqualified stock options to key employees of the Company.
A total of 225,000 shares of common stock have been reserved for issuance under
the 1996 Option Plan.
The maximum term of options granted under the 1996 Option Plan is ten
years. The aggregate fair market value of the stock with respect to which
incentive stock options are first exercisable in any calendar year may not
exceed $100,000 per incidence. The exercise price of incentive stock options
must be equal or greater than the fair market value of common stock on the date
of grant. The exercise price of incentive stock options granted to any person
who at the time of grant owns stock possessing more than 10% of the total
combined voting power of all classes of stock must be at least 110% of the fair
market value of such stock on the date of grant, and the term of these options
cannot exceed five years. The Company currently has 61,756 options outstanding
to its employees under the 1996 Option Plan. These options are exercisable at
either $1.67 per share of common stock or $3.33 per share of common stock.
In October 1996, 67,500 stock options at an exercise price of $3.33 per
share were granted to an officer of the Company and 215,026 nonqualified stock
options at an exercise price of $3.33 per share were granted to certain founders
of the Company in connection with such founders' pledge of their stock of the
Company to guarantee a bridge loan. The Board of Directors adjusted the exercise
price of these options to $1.67 per share in March 1998.
In March 1998, 393,750 options to purchase shares of common were granted to
certain officers and employees of the Company at an exercise price of $1.67 per
share.
During May 1998, outstanding options to purchase 258,750 shares of common
stock with an exercise price of $0.09 per share were repurchased from former
employees for $0.36 per share.
The Company currently has 1,184,657 nonqualified options outstanding to
certain of its officers, employees and advisors. These options are exercisable
at prices ranging from $0.09 per share of common stock to $3.33 per share of
common stock.
F-12
<PAGE> 71
INTERNET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies APB No. 25 and related Interpretations in accounting
for its plans. The estimated fair value of each option grant was determined by
reference to recent private arm's length sales of common and preferred stock. In
cases where these were no arm's length transactions on or around the date of an
option grant, the value was determined by the Board of Directors. There was no
compensation cost charged against operations for the stock options during the
years ended June 30, 1997 and 1998, respectively.
Had compensation cost for the Company's stock options been determined based
on the fair value at the grant dates for awards consistent with the method of
SFAS No. 123, the Company's net income (loss) and income (loss) per share would
have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998
----------- ----------
<S> <C> <C>
Net income (loss)
As reported............................................... $(3,823,529) $1,006,002
Pro Forma................................................. (3,843,651) 991,540
Basic income (loss) per share
As reported............................................... $ (1.12) $ 0.28
Pro Forma................................................. (1.12) 0.28
Diluted income (loss) per share
As reported............................................... $ (1.12) $ 0.21
Pro Forma................................................. (1.12) 0.21
</TABLE>
A summary of the status of the Company's stock options as of June 30, 1998
and 1997, and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1997 1998
-------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 1,206,765.. $1.37 1,255,045 $1.85
Granted............................ 563,778 3.30 393,750 1.67
Exercised.......................... -- -- -- --
Forfeited.......................... (515,498) 2.30 (205,388) 2.43
Purchased.......................... -- -- (258,750) 0.09
--------- ---------
Outstanding at end of period......... 1,255,045 1.85 1,184,657 2.07
========= =========
Options exercisable at year end...... 997,526 1.62 728,473 1.55
========= =========
</TABLE>
The following table summarizes information about stock options outstanding
at June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -------------------------
NUMBER WEIGHTED-AVERAGE NUMBER NUMBER
RANGE OF OUTSTANDING REMAINING CONTRACTUAL EXERCISABLE EXERCISABLE
EXERCISE PRICES AT 6/30/98 LIFE AS OF 6/30/98 (YEARS) AT 6/30/97 AT 6/30/98
--------------- ----------- -------------------------- ----------- -----------
<S> <C> <C> <C> <C>
$0.09......................... 78,750 7.4 337,500 78,750
1.67......................... 1,083,407 8.9 366,251 627,224
3.33......................... 22,500 8.6 293,775 22,500
</TABLE>
All options granted during the years ended June 30, 1997 and 1998 were
granted above the market price. The weighted average grant date fair value of
options granted during the year ended June 30, 1997 and 1998 was $0. During
March 1998, the exercise price of a total of 343,645 options to purchase shares
of common stock was adjusted from $3.33 per share to $1.67 per share, of which
310,541 options were exercisable at
F-13
<PAGE> 72
INTERNET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
June 30, 1998. The adjustment of the exercise price of these options decreased
the weighted-average exercise price of the outstanding options as of June 30,
1998 by $0.40 per share.
9. INCOME TAXES
No provision for income taxes was recognized for the year ended June 30,
1997 as the Company incurred net operating losses for income tax purposes. A
current tax provision of $24,000 was recognized for the year ended June 30, 1998
related to federal corporate alternative minimum tax.
Deferred tax assets and liabilities as of June 30, 1997 and 1998, consist
of:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 2,005,000 $ 1,672,000
Stock options granted at a discount...................... 142,000 31,000
Deferred revenue......................................... 141,000 44,000
Impairment of equipment.................................. 119,000 74,000
Allowance for doubtful accounts.......................... 43,000 67,000
Depreciation and amortization............................ 67,000 234,000
Other.................................................... 55,000 44,000
----------- -----------
Total deferred tax assets........................ 2,572,000 2,166,000
Deferred tax liabilities................................... -- --
----------- -----------
Net deferred tax asset..................................... 2,572,000 2,166,000
Valuation allowance........................................ (2,572,000) (2,166,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The Company has provided a valuation allowance for net deferred tax assets,
as it is more likely than not that these assets will not be realized.
At June 30, 1998, the Company has net operating loss carryforwards of
approximately $5 million for income tax purposes. These net operating loss
carryforwards may be carried forward in varying amounts until 2012 and may be
limited in their use due to significant changes in the Company's ownership.
The differences between the Company's effective tax rate and the federal
statutory rate of 34% for the fiscal years ended June 30, 1997 and 1998 are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
-----------
1997 1998
---- ----
<S> <C> <C>
Income tax expense (benefit) at statutory rate.............. (34)% (34)%
State tax benefit, net of federal benefit................... (3)% (3)%
Valuation allowance......................................... 37% 37%
Alternative minimum tax..................................... 0% 2%
--- ---
Total income tax expense.......................... 0% 2%
=== ===
</TABLE>
10. EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) plan for the benefits of its
employees. Employees may contribute to the plan up to 15% of their salary,
pursuant to a salary reduction agreement, upon meeting age requirements. The
Company made no discretionary contributions to the Plan through June 30, 1998.
F-14
<PAGE> 73
INTERNET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. NET EARNINGS PER SHARE
A reconciliation of shares used in calculation of basic and diluted and
unaudited pro forma net earnings per share follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------
1997 1998
----------- ----------
<S> <C> <C>
Net income (loss)........................................... $(3,823,529) $1,006,002
=========== ==========
Net income (loss) per common share:
Basic..................................................... $ (1.12) $ 0.28
=========== ==========
Diluted................................................... $ (1.12) $ 0.21
=========== ==========
Pro forma (unaudited)..................................... $ (0.86) $ 0.21
=========== ==========
Reconciliation of weighted average shares:
Shares used in computing basic net income (loss) per
share.................................................. 3,417,808 3,532,205
Adjusted to reflect the assumed conversion of preferred
stock and certain option exercises..................... -- 1,251,098
----------- ----------
Shares used in computing diluted net income (loss) per
share.................................................. 3,417,808 4,783,292
----------- ----------
Adjusted to reflect assumed conversion of preferred
stock.................................................. 1,020,002
Shares used in computing unaudited pro forma net income
(loss) per share....................................... 4,437,810 4,783,292
=========== ==========
</TABLE>
Potentially dilutive securities have been excluded from the computation for
the year ended June 30, 1997 as their effect is antidilutive. Warrants and
certain options have been excluded for the year ended June 30, 1998 as their
exercise prices are equal to or exceed the estimated fair value of the common
shares during that period.
Had the Company been in a net income position, diluted earnings per share
would have included an additional 319,500 shares related to outstanding options
and warrants, (determined using the treasury stock method at the estimated
average fair value) and for 1,020,002 shares convertible preferred stock for the
year ended June 30, 1997.
During July 1998, the board of directors authorized the filing of a
registration statement with the Securities and Exchange Commission permitting
the Company to issue shares of its common stock in an initial public offering
early in fiscal 1999. Conversion of 453,339 shares of preferred stock to common
stock will automatically occur 30 days after completion of an offering and is
considered in the calculation of unaudited pro forma net income (loss) per
share.
12. SUBSEQUENT EVENTS (UNAUDITED)
During July 1998, the Company's Board of Directors authorized an initial
public offering of the Company's common stock, changed the number of authorized
shares of common stock to 40,000,000, approved and effected a 2.25-to-1.00 stock
split in the form of a dividend and adopted the 1998 Nonqualified Stock Option
Plan providing for the issuance of up to 400,000 stock options exercisable for
shares of common stock.
During July 1998, options to purchase 22,500 shares of common stock were
granted to a director of the Company under the 1998 Nonqualified Stock Option
Plan. Such options are immediately exercisable at $8.00 per share and expire in
10 years.
F-15
<PAGE> 74
- Inside back cover will contain photographs of the Company's television
and billboard advertisements.
<PAGE> 75
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDERS
OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY ANY OF THE COMMON STOCK OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use Of Proceeds....................... 18
Dividend Policy....................... 19
Capitalization........................ 20
Dilution.............................. 21
Selected Financial and Operating
Data................................ 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
Business.............................. 31
Management............................ 40
Certain Transactions.................. 45
Principal and Selling Shareholders.... 47
Description of Securities............. 48
Shares Eligible for Future Sale....... 51
Underwriting.......................... 52
Legal Matters......................... 53
Experts............................... 53
Available Information................. 54
Glossary of Technical Terms........... 55
Index to Financial Statements......... F-1
</TABLE>
------------------
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING) ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,300,000 SHARES
INTERNET AMERICA LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
HOAK BREEDLOVE WESNESKI & CO.
FERRIS, BAKER WATTS
INCORPORATED
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 76
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant has authority under Article 2.02-1 of the Texas Business
Corporation Act to indemnify its directors and officers to the extent provided
in such statute. The Registrant's Articles of Incorporation, as amended, provide
that the Registrant shall indemnify its executive officers and directors to the
fullest extent permitted by law either now or hereafter. The Registrant has also
entered into an agreement with each of its directors and certain of its officers
wherein it has agreed to indemnify each of them to the fullest extent permitted
by law.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought, nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
Pursuant to the Underwriting Agreement, the Underwriters have agreed to
indemnify the directors, officers and controlling persons of the Registrant
against certain civil liabilities that may be incurred in connection with this
Offering, including certain liabilities under the Securities Act.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses payable by the Registrant in
connection with the offering described in this registration statement (other
than the underwriting discount) will be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 8,583
NASD filing fee............................................. 3,410
Nasdaq listing fee.......................................... 33,215
Printing and engraving expenses............................. 100,000
Accounting fees and expenses................................ 100,000
Legal fees and expenses..................................... 125,000
Fees and expenses (including legal fees) for qualification
under state securities laws............................... 12,000
Registrar and Transfer Agent's fees and expenses............ 5,000
Miscellaneous............................................... 62,792
--------
Total............................................. $450,000
========
</TABLE>
All amounts except the Securities and Exchange Commission registration fee,
the NASD filing fee and the Nasdaq listing fee are estimated.
The Company is paying all of the expenses related to the sale of Common
Stock offered by the Company and the Selling Shareholders.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During July 1995, the Registrant issued 263,059 shares of Common Stock to a
director in exchange for $150,000 cash. The shares were issued to the director,
a sophisticated investor, in reliance on the exemption from registration under
section 4(2) of the Securities Act.
Also during July 1995, the Registrant issued 29,999 shares of Common Stock
to a founder of the Registrant in consideration for the extinguishment of
certain indebtedness of the Registrant in the amount of $50,000. The shares were
issued to the founder, a sophisticated investor, in reliance on the exemption
from registration under section 4(2) of the Securities Act.
During July 1995, the Registrant issued 263,059 shares of Common Stock to a
director at approximately $0.57 per share, for aggregate proceeds of $150,000
cash. During December 1995, the Registrant issued 4,500 shares of Common Stock
to the same director at $0.0004 per share, for aggregate proceeds of $20 cash.
The
II-1
<PAGE> 77
shares were issued to the director, a sophisticated investor, in reliance on the
exemption from registration under section 4(2) of the Securities Act.
From July to October 1996, the Company issued 575,822 shares of its Common
Stock to ten sophisticated investors at prices ranging from $0.57 to $1.67 per
share in separate transactions for aggregate proceeds of $671,135 cash. The
shares were issued in reliance on the exemption from registration under section
4(2) of the Securities Act.
In a private offering completed in February 1996 and exempt under
Regulation D, the Registrant sold 227,368 shares of Series A Preferred Stock, at
$3.75 per share, for aggregate proceeds of $852,630 cash. Additionally, 342,684
shares of Common Stock were converted into 152,304 shares of Series A Preferred
Stock. The shares were sold to a total of 27 institutional and individual
investors that qualify as "accredited investors" under the federal securities
laws. The Registrant did not engage any brokers to act as placement agents, and
the private offering was made on a best efforts basis. The shares sold by the
Registrant in the private offering were sold in reliance on the exemption from
registration under the Securities Act provided by Rule 506 of Regulation D
promulgated thereunder.
On March 31, 1996 the Registrant issued a warrant to M.J. Capital Partners,
L.P. as partial consideration for a loan in the amount of $375,000. There are
33,750 Shares of Common Stock underlying the warrant, at an exercise price of
$1.67 per share. The warrant was issued to M.J. Capital Partners, L.P., a
sophisticated investor, in reliance on the exemption from registration under
section 4(2) of the Securities Act.
During June 1996, the Registrant issued 1,125 shares of Common Stock in
exchange for services valued at $3,750 provided by an officer of the Registrant.
The shares were issued to the officer, a sophisticated investor, in reliance on
the exemption from registration under section 4(2) of the Securities Act.
In a private offering completed in June 1996 and exempt under Regulation D,
the Registrant sold 73,667 shares of Series B Preferred Stock at $7.50 per
share, for aggregate proceeds of $552,503 cash. The shares were sold to a total
of three institutional and individual investors that qualify as "accredited
investors" under the federal securities laws. The Registrant did not engage any
brokers to act as placement agents, and the private offering was made on a best
efforts basis. The shares sold by the Registrant in the private offering were
sold in reliance on the exemption from registration under the Securities Act
provided by Rule 506 of Regulation D promulgated thereunder.
On September 25, 1996, the Registrant entered into a Securities Purchase
Agreement with First Computer Services Corporation, pursuant to which the
Registrant issued 544,149 shares of Common Stock to First Computer Services
Corporation at a price equal to approximately $0.43 per share, for aggregate
proceeds of $233,984 cash. The shares were issued to First Computer Services
Corporation, a sophisticated investor, in reliance on the exemption from
registration under section 4(2) of the Securities Act.
During fiscal 1997, the Registrant also issued 15,001 shares of Common
Stock in exchange for services valued at $6,667 provided by one of the employees
of the Registrant. The shares were issued to the employee, a sophisticated
investor, in reliance on the exemption from registration under section 4(2) of
the Securities Act.
Pursuant to the Registrant's 1996 Incentive Stock Option Plan, as of March
31, 1998 the Registrant had 61,756 options at a weighted average exercise price
of $1.67 per share outstanding to its employees.
During December 1995, an officer of the Registrant was granted an option to
purchase 112,500 shares of Common Stock at an exercise price of $1.67 per share.
During fiscal 1996, options to purchase 45,000 shares of Common Stock were
granted to two directors of the Registrant at an exercise price of $1.67 per
share. Also in 1996, an option to purchase 22,500 shares of Common Stock was
granted to a director of the Registrant at an exercise price of $3.33 per share.
The Board of Directors adjusted the exercise price of this option to $1.67 per
share in March 1998. In addition to the above, in October 1996, an option to
purchase 67,500 shares of Common Stock at an exercise price of $3.33 per share
was granted to an officer of the Registrant. The Board of Directors adjusted the
exercise price of this option to $1.67 per share in March 1998. Additionally, in
II-2
<PAGE> 78
March 1998, 393,750 options to purchase shares of Common Stock were granted to
certain officers and employees of the Company at an exercise price of $1.67 per
share.
During October 1996, 215,026 nonqualified stock options were granted to
certain founders of the Registrant in connection with such founders' pledge of
their stock of the Registrant to guarantee a bridge loan. The Registrant had
1,381,651 nonqualified options outstanding as of March 31, 1998 to certain of
its officers, employees and advisors. These options are exercisable at prices
ranging from $0.09 per share of Common Stock to $3.33 per share of Common Stock.
In July 1998, 22,500 nonqualified stock options were granted to a director
at an exercise price of $8.00 per share of Common Stock.
On July 13, 1998, the Company's Board authorized a 2.25-for-1.00 stock
split of Common Stock effected in the form of a dividend. The stock split was
effected on July 13, 1998.
Unless otherwise indicated, the issuance of the securities described above
was effected without the involvement of an underwriter.
II-3
<PAGE> 79
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
1.1 -- Proposed form of Underwriting Agreement*
3.1 -- Internet America, Inc.'s Articles of Incorporation(3)
3.2 -- Internet America, Inc.'s Articles of Amendment to
Articles of Incorporation(3)
3.3 -- Internet America, Inc.'s Bylaws(3)
3.4 -- Internet America, Inc.'s Amendment to Bylaws(3)
3.5 -- Application for Certificate of Withdrawal of Internet
America, Inc.*
3.6 -- Articles of Merger merging Internet America, Inc., an
Arizona Corporation, with and into INTRNTUSA, INC., a
Texas corporation*
4.1 -- Specimen Common Stock certificate(3)
4.2 -- Certificate of Designation of the Series A Preferred
Stock of Internet America, Inc.*
4.3 -- Amended Certificate of Designation of the Series A
Preferred Stock of Internet America, Inc.*
4.4 -- Certificate of Designation of the Series B Preferred
Stock of Internet America, Inc.*
5.1 -- Opinion of Jackson Walker L.L.P.(1)
10.1 -- Securities Purchase Agreement, dated September 25, 1996,
by and among First Computer Services Corporation and
Internet America, Inc.(3)
10.2 -- Asset Purchase Agreement, dated July 31, 1996 by and
between Internet America, Inc. and Webstar, Inc.*
10.3 -- Asset Purchase Agreement, dated November 26, 1997 by and
between Internet America, Inc. and Why?
Telecommunications, Inc.*
10.4 -- Network Services Agreement, dated August 25, 1997 by and
between Internet America, Inc. and Golden Harbor of
Texas, Inc.*
11.1 -- Statement regarding computation of per share earnings(2)
16.1 -- Letter on change in certifying accountant.(3)
23.1 -- Consent of Jackson Walker L.L.P. (to be included in its
opinion to be filed as Exhibit 5.1)(1)
23.2 -- Consent of Deloitte & Touche LLP*
24.1 -- Reference is made to the Signatures section of this
Registration Statement for the Power of Attorney
contained therein
27.1 -- Financial Data Schedule*
</TABLE>
- ---------------
* Filed herewith
(1) To be filed by amendment.
(2) Statement omitted because not applicable or because the required
information is contained in the Financial Statements or Notes thereto.
(3) Previously filed
ITEM 28. 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:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information set forth in the Registration Statement;
II-4
<PAGE> 80
(iii) To include any additional or changed material information
with respect to the plan of distribution; and
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the Offering.
(b) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, 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 Securities 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 Securities Act and will be governed by the final
adjudication of such issue.
(d) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4) or
497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 81
SIGNATURES
In accordance with 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 of filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas, on August 28, 1998.
INTERNET AMERICA, INC.
By: /s/ MICHAEL T. MAPLES
----------------------------------
Michael T. Maples
(Principal Executive Officer)
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MICHAEL T. MAPLES Chief Executive Officer, President August 28, 1998
- ----------------------------------------------------- and Director (Principal
Michael T. Maples Executive Officer)
/s/ JAMES T. CHANEY Chief Financial Officer, Vice August 28, 1998
- ----------------------------------------------------- President, Secretary and
James T. Chaney Treasurer (Principal Financial
and Accounting Officer)
/s/ DOUGLAS G. SHELDON* Vice President -- Marketing, August 28, 1998
- ----------------------------------------------------- Director
Douglas G. Sheldon
/s/ WILLIAM O. HUNT* Chairman of the Board August 28, 1998
- -----------------------------------------------------
William O. Hunt
/s/ JACK T. SMITH* Director August 28, 1998
- -----------------------------------------------------
Jack T. Smith
/s/ GARY L. CORONA* Director August 28, 1998
- -----------------------------------------------------
Gary L. Corona
</TABLE>
- ---------------
* signed on behalf of such person by Michael T. Maples pursuant to a Power of
Attorney granted on July 21, 1998.
II-6
<PAGE> 82
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
1.1 -- Proposed form of Underwriting Agreement*
3.1 -- Internet America, Inc.'s Articles of Incorporation(3)
3.2 -- Internet America, Inc.'s Articles of Amendment to
Articles of Incorporation(3)
3.3 -- Internet America, Inc.'s Bylaws(3)
3.4 -- Internet America, Inc.'s Amendment to Bylaws(3)
3.5 -- Application for Certificate of Withdrawal of Internet
America, Inc.*
3.6 -- Articles of Merger merging Internet America, Inc., an
Arizona Corporation, with and into INTRNTUSA, INC., a
Texas corporation*
4.1 -- Specimen Common Stock certificate(3)
4.2 -- Certificate of Designation of the Series A Preferred
Stock of Internet America, Inc.*
4.3 -- Amended Certificate of Designation of the Series A
Preferred Stock of Internet America, Inc.*
4.4 -- Certificate of Designation of the Series B Preferred
Stock of Internet America, Inc.*
5.1 -- Opinion of Jackson Walker L.L.P.(1)
10.1 -- Securities Purchase Agreement, dated September 25, 1996,
by and among First Computer Services Corporation and
Internet America, Inc..(3)
10.2 -- Asset Purchase Agreement, dated July 31, 1996 by and
between Internet America, Inc. and Webstar, Inc.*
10.3 -- Asset Purchase Agreement, dated November 26, 1997 by and
between Internet America, Inc. and Why?
Telecommunications, Inc.*
10.4 -- Network Services Agreement, dated August 25, 1997 by and
between Internet America, Inc. and Golden Harbor of
Texas, Inc.*
11.1 -- Statement regarding computation of per share earnings(2)
16.1 -- Letter on change in certifying accountant.(3)
23.1 -- Consent of Jackson Walker L.L.P. (to be included in its
opinion to be filed as Exhibit 5.1)(1)
23.2 -- Consent of Deloitte & Touche LLP*
24.1 -- Reference is made to the Signatures section of this
Registration Statement for the Power of Attorney
contained therein
27.1 -- Financial Data Schedule*
</TABLE>
- ---------------
* Filed herewith
(1) To be filed by amendment.
(2) Statement omitted because not applicable or because the required
information is contained in the Financial Statements or Notes thereto.
(3) Previously filed
<PAGE> 1
EXHIBIT 1.1
2,300,000 Shares
Internet America, Inc.
Common Stock
UNDERWRITING AGREEMENT
, 1998
--------------------
HOAK BREEDLOVE WESNESKI & CO.
FERRIS, BAKER WATTS, INCORPORATED
As Representatives of the several Underwriters
c/o Hoak Breedlove Wesneski & Co.
One Galleria Tower
13355 Noel Road, Suite 1650
Dallas, Texas 75240
Dear Sirs:
SECTION 1. Introductory. Internet America, Inc., a Texas corporation
(the "Company"), proposes to issue and sell to the several underwriters named
in Schedule A (the "Underwriters") an aggregate of 1,700,000 shares of its
authorized but unissued Common Stock, $.01 par value per share (the "Common
Stock"), and the shareholders of the Company who are named in Schedule B
annexed hereto (the "Selling Shareholders") propose to sell 600,000 shares of
issued and outstanding Common Stock to the Underwriters. Said shares,
aggregating a total of 2,300,000 shares, are herein referred to as the "Firm
Common Shares." In addition, the Selling Shareholders propose to grant to the
Underwriters options to purchase up to 345,000 additional shares of Common
Stock (such 345,000 shares being referred to as the "Optional Common Shares"),
as provided in Section 5 hereof. The Firm Common Shares and, to the extent
such option is exercised, the Optional Common Shares, are hereinafter
collectively referred to as the "Common Shares." Hoak Breedlove Wesneski & Co.
and [Co-Manager] have agreed to act as representatives of the several
Underwriters (in such capacity, the "Representatives") in connection with the
offering and sale of the Common Shares.
You have advised the Company and the Selling Shareholders that the
Underwriters propose to make a public offering of the Common Shares on the
effective date of the registration statement hereinafter referred to, or as
soon thereafter as in their judgment is advisable.
The Underwriters, the Company and the Selling Shareholders hereby
confirm their respective agreements with respect to the purchase of the Common
Shares by the Underwriters as follows:
SECTION 2. Representations and Warranties of the Company. The
Company hereby represents and warrants to the Underwriters that:
(a) A registration statement on Form SB-2 (File No.
333-59527) with respect to the Common Shares has been prepared by the
Company in conformity with the requirements of the Securities Act of
1933, as amended (the "Act"), and the rules and regulations (the
"Rules and Regulations") of the Securities and Exchange Commission
(the "Commission") thereunder, and has been filed with the Commission.
The Company has met all of the eligibility requirements for the use of
a registration statement on Form SB-2. There have been delivered to
each Representative two signed copies of such registration statement
and amendments, together with two copies of each exhibit filed
therewith. Conformed copies of such registration statement and
amendments (but without exhibits) and of the related preliminary
prospectus have been delivered to each Representative in such
reasonable quantities as each of them has requested. The Company will
next file with the Commission one of the following: (i) prior to
effectiveness of such registration statement, a further amendment
thereto, including the form of final prospectus, or (ii) a final
<PAGE> 2
prospectus in accordance with Rules 430A and 424(b) of the Rules and
Regulations. As filed, such amendment and form of final prospectus,
or such final prospectus, shall include all Rule 430A Information (as
hereinafter defined) and, except to the extent that the
Representatives shall agree in writing to a modification, shall be in
all substantive respects in the form furnished to the Representatives
prior to the date and time that this Agreement was executed and
delivered by the parties hereto, or, to the extent not completed at
such date and time, shall contain only such specific additional
information and other changes (beyond that contained in the latest
Preliminary Prospectus) as the Company shall have previously advised
the Representatives would be included or made therein.
The term "Registration Statement" as used in this Agreement
shall mean such registration statement at the time such registration
statement becomes effective and, in the event any post-effective
amendment thereto becomes effective prior to the First Closing Date
(as hereinafter defined), shall also mean such registration statement
as so amended; provided, however, that such term shall also include
all Rule 430A Information deemed to be included in such registration
statement at the time such registration statement becomes effective as
provided by Rule 430A of the Rules and Regulations. Any registration
statement filed by the Company pursuant to Rule 462(b) under the
Securities Act is called the "Rule 462(b) Registration Statement", and
from and after the date and time of filing of the Rule 462(b)
Registration Statement, the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. The term "Preliminary
Prospectus" shall mean any preliminary prospectus referred to in the
preceding paragraph and any preliminary prospectus included in the
Registration Statement at the time it becomes effective that omits
Rule 430A Information. The term "Prospectus" as used in this
Agreement shall mean the prospectus relating to the Common Shares in
the form in which it is first filed with the Commission pursuant to
Rule 424(b) of the Rules and Regulations or, if no filing pursuant to
Rule 424(b) of the Rules and Regulations is required, shall mean the
form of final prospectus included in the Registration Statement at the
time such registration statement becomes effective. The term "Rule
430A Information" means information with respect to the Common Shares
and the offering thereof permitted to be omitted from the Registration
Statement when it becomes effective pursuant to Rule 430A of the Rules
and Regulations. All references in this Agreement to the Registration
Statement, the Rule 462(b) Registration Statement, a Preliminary
Prospectus, or the Prospectus, or any amendments or supplements to any
of the foregoing, shall refer to the copy thereof filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and
Retrieval System.
(b) To the knowledge of the Company, the Commission has not
issued any order preventing or suspending the use of any Preliminary
Prospectus. Each Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations
and, as of its date, has not included any untrue statement of a
material fact or omitted to state a material fact necessary to make
the statements therein, in the light of the circumstances under which
they were made, not misleading; and at the time the Registration
Statement becomes effective, and at all times subsequent thereto up to
and including each Closing Date hereinafter mentioned, the
Registration Statement and the Prospectus, and any amendments or
supplements thereto, will contain all material statements and
information required to be included therein by the Act and the Rules
and Regulations and will in all material respects conform to the
requirements of the Act and the Rules and Regulations, and neither the
Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, will include any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of
circumstances under which they were made; provided, however, no
representation or warranty contained in this subsection 2(b) shall be
applicable to information contained in any Preliminary Prospectus, the
Registration Statement, the Prospectus or any such amendment or
supplement in reliance upon and in conformity with written information
furnished to the Company by or on behalf of the Representatives or the
Selling Shareholders pursuant to Item 7 of Form SB-2 specifically for
use in the preparation thereof.
(c) The Company does not own or control, directly or
indirectly, any corporation, association or other entity. The Company
has been duly incorporated and is validly existing as a corporation in
good
-2-
<PAGE> 3
standing under the laws of the State of Texas, with full corporate
power and authority (corporate and other) to own and lease its
properties and conduct its business as described in the Prospectus;
the Company is in possession of and is operating in compliance with
all authorizations, licenses, permits, consents, certificates and
orders material to the conduct of its business, except where
noncompliance would not have a material adverse effect on the business
or financial condition of the Company; the Company is duly qualified
to do business and is in good standing as a foreign corporation in
each jurisdiction in which the ownership or leasing of properties or
the conduct of its business requires such qualification, except for
jurisdictions in which the failure to so qualify would not have a
material adverse effect upon the Company; and no proceeding has been
instituted in any such jurisdiction revoking, limiting or curtailing,
or seeking to revoke, limit or curtail, such power and authority or
qualification.
(d) The Company has an authorized and outstanding capital
stock as set forth under the heading "Capitalization" in the
Prospectus as of the date of the Prospectus; the issued and
outstanding shares of Common Stock have been duly authorized and
validly issued, will be fully paid and nonassessable, will have been
issued in compliance with all federal and state securities laws, will
have not been issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase securities, and
will conform to the description thereof contained under the heading
"Description of Securities" in the Prospectus. On the thirtieth day
following the First Closing Date all outstanding shares of the
Company's preferred stock (the "Preferred Stock") shall automatically
convert into 1,575,000 shares of Common Stock, without any further
action on the part of any party, and no party will have any legal
right, authority or ability to prevent or hinder such conversion in
any way. The holders of the Preferred Stock shall have no right,
whether accrued, due or payable, to receive anything of value with
respect to such preferred shares other than the aforementioned shares
of Common Stock and cash in lieu of fractional shares. Except as
disclosed in or contemplated by the Prospectus and the financial
statements of the Company, and the related notes thereto, included in
the Prospectus, the Company has no outstanding options to purchase, or
any preemptive rights or other rights to subscribe for or to purchase,
any securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such
options, rights, convertible securities or obligations. The
description of the Company's outstanding warrants, stock options, and
other stock plans or arrangements, and the options or other rights
granted and exercised thereunder, set forth in the Prospectus,
accurately and fairly presents in all material respects the
information required to be shown with respect to such warrants,
options, plans, arrangements, and rights.
(e) The Common Shares to be sold by the Company have been
duly authorized and, when issued, delivered and paid for in the manner
set forth in this Agreement, will be duly authorized, validly issued,
fully paid and nonassessable, and will conform to the description
thereof contained in the Prospectus; and when duly countersigned by
the Company's transfer agent and registrar, and delivered to the
Underwriters in accordance with the provisions of this Agreement, good
and valid title thereto will pass to the Underwriters free and clear
of any liens, claims, equities or other encumbrances of any kind or
character. No preemptive rights or other rights to subscribe for or
purchase exist with respect to the issuance and sale of the Common
Shares by the Company pursuant to this Agreement. There are no
persons with registration or other similar rights to have any equity
or debt securities registered for sale under the Registration
Statement or included in the offering contemplated by this Agreement
with respect to the Common Shares included in the Registration
Statement other than the Selling Shareholders and other persons whose
rights have been duly waived in writing.
(f) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated
hereby. This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding
obligation of the Company, enforceable against the Company in
accordance with its terms, except to the extent that (i) the validity
and binding effect and enforcement of this Agreement may be limited by
any applicable bankruptcy, reorganization, moratorium, or similar laws
of general application, (ii) the availability of equitable remedies
may be limited by principles of equity, whether considered in a
proceeding at law or in equity, and (iii) the terms thereof
(including, without limitation, indemnity) may be limited by
applicable securities laws and the policies
-3-
<PAGE> 4
embodied therein. The making and performance of this Agreement by the
Company and the consummation of the transactions herein contemplated
by the Company or the performance by the Company of the transactions
contemplated hereby does not: require any consent, approval,
authorization or order of or registration or filing with any court,
regulatory body, administrative agency or other governmental body,
agency or official (except such as may be required for the
registration of the Common Shares under the Act and compliance with
the securities or Blue Sky laws and the clearance of the public
offering of the Common Shares by the National Association of
Securities Dealers, Inc. (the "NASD")); or conflict with, or
constitute a breach of, or a default under, the Articles of
Incorporation or Bylaws of the Company; or conflict with or constitute
a breach of or a default under any agreement, indenture, lease or
other instrument to which the Company is a party or by which any of
its properties may be bound where such conflict or breach could have a
material adverse effect on the Company's financial condition or
results of operation, taken as a whole (except for such conflicts,
breaches or defaults for which waivers or consents have been
obtained); or violate any statute, law, regulation or filing or
judgment, injunction, order or decree applicable to the Company or any
of its properties; or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company
pursuant to the terms of any agreement or instrument to which the
Company is a party or by which it may be bound or to which any of the
property or assets of the Company is subject, except, in each case for
such conflicts, breaches, defaults, violations, or encumbrances that
would not singly or in the aggregate have a material adverse effect on
the ability of the Company to fulfill its obligations hereunder.
(g) Deloitte & Touche LLP ("Deloitte"), who have expressed
their opinion with respect to the financial statements filed with the
Commission as a part of the Registration Statement and included in the
Prospectus, are independent accountants as required by the Act and the
Rules and Regulations.
(h) Financial Statements; Financial Data and Statistical
Data.
(i) The audited financial statements and the related
notes thereto of the Company included in the Registration Statement
and the Prospectus (such financial statements being herein referred to
as the "Financial Statements") present fairly the financial condition
of the Company as of the respective dates of such Financial
Statements, and present fairly the results of operations and changes
in financial position of the Company covered by such Financial
Statements for the respective periods covered thereby. Such Financial
Statements and the related notes thereto have been prepared in
accordance with the generally accepted accounting principles applied
on a consistent basis, except as otherwise stated therein, and have
been certified by Deloitte, the Company's independent accountants.
(ii) The audited selected financial data for the
fiscal years ended June 30, 1996, 1997 and 1998 and the unaudited
quarterly financial data set forth in the Prospectus under the
captions "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Selected Quarterly Results of Operations"
and "Selected Financial and Operating Data" have been prepared in
accordance with generally accepted accounting principles (subject to
normal year-end adjustments) applied on a consistent basis and present
fairly the financial condition of the Company, as of such dates.
(iii) No financial statements, schedules or
financial data, other than as included in the Registration Statement,
are required to be included in the Registration Statement.
(iv) The financial and statistical data set forth in
the Prospectus under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Capitalization," "Dilution," "Selected
Financial and Operating Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Business,"
"Management," "Certain Transactions," "Principal and Selling
Shareholders" and "Shares Eligible for Future Sale" fairly present the
information set forth therein on the basis stated in the Registration
Statement.
-4-
<PAGE> 5
(i) The Company is not in violation or default of any
provision of its Articles of Incorporation; the Company is not in
violation or default of any provision of its Bylaws or in breach of or
default with respect to any provision of any judgment, decree or
order, or in breach of or default with respect to any provision of any
material agreement, mortgage, deed of trust, lease, loan agreement,
security agreement, license, indenture, permit or other instrument to
which it is a party or by which it or any of its properties is bound;
and there does not exist any state of facts which constitutes an event
of default on the part of the Company as defined in such documents or
which, with notice or lapse of time or both, would constitute such an
event of default, except for conflicts, breaches, defaults, violations
or encumbrances that would not have a material adverse effect on the
Company's financial condition or results of operations, taken as a
whole.
(j) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to
the Registration Statement by the Act or by the Rules and Regulations
which have not been described or filed as required. The contracts so
described in the Prospectus are in full force and effect on the date
hereof; and neither the Company, nor to the best of the Company's
knowledge any other party, is in breach of or default under any
material provision of any such contract which would have a material
adverse effect on the Company.
(k) There are no legal or governmental actions, suits or
proceedings pending or, to the best of the Company's knowledge,
threatened to which the Company is or may be a party or with respect
to which property owned or leased by the Company is or may be the
subject, or related to environmental, employment of aliens or
discrimination matters, which actions, suits or proceedings might,
individually or in the aggregate, prevent or adversely affect the
transactions contemplated by this Agreement or result in a material
adverse change in the condition (financial or otherwise), properties,
business, results of operations or prospects of the Company and no
labor disturbance by the employees of the Company exists or, to the
knowledge of the Company is imminent which might be expected to result
in a material adverse change in the condition (financial or
otherwise), properties, business, results of operations or prospects
of the Company. The Company is not a party to, or subject to the
provisions of, any material injunction, judgment, decree or order of
any court, regulatory body, administrative agency or other
governmental body.
(l) The Company has good and marketable title in fee simple
to all real property and good and marketable title to all personal
property owned by it in the financial statements hereinabove described
(or as reflected or described elsewhere in the Prospectus), subject to
no lien, mortgage, pledge, charge or encumbrance of any kind except
(i) those, if any, reflected in such financial statements (or
elsewhere in the Prospectus), or (ii) those which do not materially
adversely affect the use made and proposed to be made of such property
by the Company. The Company holds its leased properties under valid
and binding leases, with such exceptions as are not materially
significant in relation to the business of the Company. Except as
disclosed in the Prospectus, the Company owns or leases all such
properties as are necessary to its operations as now conducted.
(m) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as
described in or specifically contemplated by the Prospectus, (i) the
Company has not incurred any liabilities or obligations, direct,
indirect or contingent, or entered into any verbal or written
agreement or other transaction which is not in the ordinary course of
business and which reasonably could be expected to result in a
material reduction in the future earnings of the Company; (ii) the
Company has not sustained any material loss or interference with
respect to its business or properties from fire, flood, windstorm,
accident or other calamity, whether or not covered by insurance; (iii)
the Company has not paid or declared any dividends or other
distributions with respect to its capital stock, and the Company is
not in default in the payment of principal or interest on any
outstanding debt obligations; (iv) there has not been any change in
the capital stock of the Company (other than upon the sale of the
Common Shares hereunder) or indebtedness material to the Company; and
(v) there has not been any material adverse change in the condition
(financial or otherwise), business, properties or results of
operations of the Company.
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<PAGE> 6
(n) The Company has sufficient trademarks, trade names,
patent rights, mask works, copyrights, licenses, approvals and
governmental authorizations to conduct its business as now conducted;
the Company has no knowledge of any infringement by it of trademarks,
trade name rights, trade dress, patent rights, mask works, copyrights,
licenses, trade secret or other similar rights of others; and except
as disclosed in the Prospectus, the Company has no knowledge of any
infringement by others of the Company's trademarks, trade name rights,
trade dress, patent rights, mask works, copyrights, licenses, trade
secrets or other similar rights that would be material to the business
or financial condition of the Company; and there is no claim being
made against the Company regarding trademark, trade name, trade dress,
patent right, mask work, copyright, license, trade secret or other
infringement which could have a material adverse effect on the
condition (financial or otherwise), business, results of operations or
prospects of the Company.
(o) The Company has not been advised, and has no reason to
believe, that either it is not conducting business in compliance with
all applicable laws, rules and regulations of the jurisdictions in
which it is conducting business, including, without limitation, all
applicable local, state and federal telecommunications, employment,
truth-in-advertising, franchising, immigration and environmental laws
and regulations, except where failure to be so in compliance would not
materially adversely affect the condition (financial or otherwise),
business, results of operations or prospects of the Company.
(p) The Company has filed all federal, state and foreign
income and franchise tax returns or extensions therefor required to be
filed and have paid all taxes shown as due thereon; and the Company
has no knowledge of any tax deficiency which has been or might be
asserted or threatened against the Company which could materially and
adversely affect the business, operations or properties of the
Company.
(q) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) sales
and other business transactions are executed in accordance with
management's general or specific authorizations; (ii) sales and other
business transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; and
(iii) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(r) The Company is not required to make, and following
receipt of the proceeds from the sale of the Common Shares will not be
required to make, any filing or to register under the Investment
Company Act of 1940, as amended.
(s) There is no proceeding pending or threatened which may
lead to the revocation, suspension, termination or nonrenewal or any
certificate, order, license, permit, easement, consent, waiver,
approval, franchise, grant, authorization or concession required to
conduct the business of the Company as now conducted and as proposed
to be conducted and which are material to the Company.
(t) There is no proceeding pending or threatened which may
lead to the disqualification, delisting or suspension from trading of
the Common Stock on the Nasdaq National Market.
(u) Neither the Company nor any subsidiary of the Company
conducts business with the Government of Cuba, or in Cuba, or with any
Cuban business entity or enterprise.
(v) No transfer taxes are required to be paid under the laws
of the State of Texas in connection with the sale and delivery of the
Common Shares to the Underwriters hereunder.
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<PAGE> 7
SECTION 3. Representations, Warranties and Covenants of the Selling
Shareholders.
(a) Each Selling Shareholder severally represents and
warrants to, and agrees with, the several Underwriters that:
(i) Such Selling Shareholder has good and valid
title to the Common Shares proposed to be sold by such Selling
Shareholder hereunder and the full right, power and authority
to enter into this Agreement and to sell, assign, transfer and
deliver such Common Shares hereunder, free and clear of all
liens, claims, equities or other encumbrances of any kind or
character, other than those pursuant to this Agreement and
those which will be waived or terminated prior to the First
Closing Date or the Second Closing Date, as the case may be;
and upon delivery of and payment for such Common Shares
hereunder, the Underwriters will acquire good and valid title
thereto, free and clear of all liens, claims, equities or
other encumbrances of any kind or character.
(ii) Such Selling Shareholder has executed and
delivered a Custody Agreement and Power of Attorney
(hereinafter referred to as the "Shareholder Agreement") and,
in connection herewith, such Selling Shareholder further
represents, warrants and agrees that it has deposited in
custody, under the Shareholder Agreement with the agent named
therein (the "Agent") as custodian, certificates in negotiable
form for the Common Shares to be sold hereunder by such
Selling Shareholder for the purpose of further delivery
pursuant to this Agreement. Such Selling Shareholder agrees
that the Common Shares owned by such Selling Shareholder and
to be sold on deposit with the Agent are subject to the
interests of the Company and the Underwriters, that the
arrangements made for such custody are in that extent
irrevocable, and that the obligations of such Selling
Shareholder hereunder shall not be terminated, except as
provided in this Agreement or in the Shareholder Agreement, by
any act of such Selling Shareholder, by operation of law, by
the death or incapacity of such Selling Shareholder or by the
occurrence of any other event. If such Selling Shareholder
should die, become incapacitated, or if any other event should
occur before the delivery of the Common Share owned by such
Selling Shareholder and hereunder, the certificates and
documents evidencing Common Shares owned by such Selling
Shareholder then on deposit with the Agent shall be delivered
by the Agent in accordance with the terms and conditions of
this Agreement as if such death, incapacity or other event had
not occurred, regardless of whether the Agent shall have
received notice thereof. This Agreement and the Shareholder
Agreement have been duly executed and delivered by or on
behalf of such Selling Shareholder.
(iii) The performance of this Agreement and the
Shareholder Agreement and the consummation of the transactions
contemplated hereby and by the Shareholder Agreement will not
result in a breach or violation by such Selling Shareholder of
any of the terms or provisions of, or constitute a default by,
such Selling Shareholder under any indenture, mortgage, deed
of trust, trust (constructive or other), loan agreement,
lease, franchise, license or other agreement or instrument to
which such Selling Shareholder is a party or by which such
Selling Shareholder or any of its properties is bound, or any
statute, judgment, decree, order, rule or regulation of any
court or governmental agency or body applicable to such
Selling Shareholder or any of its properties.
(iv) Such Selling Shareholder has not taken and
will not take, directly or indirectly, any action designed to,
or which has constituted or which might reasonably be expected
to cause or result in, stabilization or manipulation of the
price of any security of the Company to facilitate the sale or
resale of the Common Shares.
(v) The information pertaining to such Selling
Shareholder in each Preliminary Prospectus, Prospectus and
Registration Statement in response to Item 507 of Regulation
S-B
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<PAGE> 8
promulgated under the Act is complete and accurate in all
material respects. Such Selling Shareholder has reviewed the
Preliminary Prospectus and will review the Prospectus and the
Registration Statement. To the best knowledge of such Selling
Shareholder, each Preliminary Prospectus has not included any
untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein not
misleading in light of the circumstances under which they were
made; and, to the best knowledge of such Selling Shareholder,
neither the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto will include any untrue
statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the
statements therein not misleading.
(vi) To the best knowledge of such Selling
Shareholder, the representations and warranties of the Company
set forth in Section 2 above are true and correct in all
material respects.
SECTION 4. Representations and Warranties of the Underwriters.
(a) The Underwriters represent and warrant to the Company
and the Selling Shareholders that the information set forth (i) on the
cover page of the Prospectus with respect to price, underwriting
discount and terms of the offering; and (ii) under "Underwriting" in
the Prospectus furnished to the Company by the Representatives for use
in connection with the preparation of the Registration Statement and
the Prospectus is true, accurate and correct in all material respects
and contains all information required to be included therein by
applicable laws, rules and regulations. The Company and the Selling
Shareholders acknowledge that this information is the sole information
furnished to the Company by the Representatives for inclusion in the
Registration Statement, any Preliminary Prospectus, any Prospectus, or
any amendment or supplement thereto.
(b) The Underwriters are registered as broker/dealers
with the Commission and the NASD. Each of the Representatives is a
corporation validly existing and in good standing in its jurisdiction
of incorporation and has the full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated
hereby. This Agreement has been duly authorized, executed and
delivered by the Representatives and constitutes a valid and binding
obligation of the Underwriters, enforceable against the Underwriters
in accordance with its terms, except to the extent that (i) the
validity and binding effect and enforcement of this Agreement may be
limited by any applicable bankruptcy, reorganization, moratorium, or
similar law of general application, (ii) the availability of equitable
remedies may be limited by principles of equity, whether considered in
a proceeding at law or in equity, and (iii) the terms thereof
(including, without limitation, indemnity) may be limited by
applicable securities laws and the policies embodied therein. The
Representatives have obtained clearance of the Underwriters'
compensation by the NASD and have taken all action deemed necessary in
their judgment to register or qualify the sale of the Firm Common
Shares and the Optional Common Shares in each state in which such Firm
and/or Optional Common Shares are to be offered and sold and each
Underwriter is registered and qualified to offer and sell the Common
Shares in each state in which such Common Shares will be offered and
sold by such Underwriters. There is not now pending nor overtly
threatened against either Representative any material action or
proceeding before the Commission, the NASD, any state securities
commission, the Commodities Futures Trading Commission or any state or
federal court prohibiting or attempting to prohibit, or penalizing it
from or for acting as an underwriter, broker, dealer, salesman or
agent for the sale of securities.
SECTION 5. Purchase, Sale and Delivery of Common Shares. On the
basis of the representations, warranties and agreements herein contained, but
subject to the terms and conditions herein set forth, the Company agrees to
issue and sell to the Underwriters 1,700,000 Firm Common Shares, and the
Selling Shareholders agree to sell to the Underwriters 600,000 Firm Common
Shares, and the Underwriters agree, severally and not jointly, to purchase from
the Company and the Selling Shareholders the number of Firm Common Shares set
forth opposite their respective names in Schedule A hereto. The purchase price
per share to be paid by the Underwriters to the Company and the Selling
Shareholders shall be $_______ per share.
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<PAGE> 9
Delivery of certificate(s) for the Firm Common Shares to be purchased
by the Underwriters shall be made by or on behalf of the Company and the
Selling Shareholders to the Underwriters or to the account of Hoak Breedlove
Wesneski & Co. at the Depositary Trust Corporation, New York, New York ("DTC"),
as the Representatives may direct, for the respective accounts of the
Underwriters against payment of the purchase price. In the event certificates
are delivered to the Underwriters other than through DTC, such delivery shall
be made on the First Closing Date (as hereinafter defined) or the Second
Closing Date (as hereinafter defined), as applicable, at the offices of Jackson
Walker L.L.P., 901 Main Street, Suite 6000, Dallas, Texas 75202 (or such other
place as may be agreed upon by the Company, the Selling Shareholders and the
Representatives). Delivery of certificates, whether through DTC or otherwise,
shall be made at such time and date, not later than the third (or, if the Firm
Common Shares are priced, as contemplated by Rule 15cb-1(c) promulgated under
the Securities Exchange Act of 1934, as amended, after 4:30 p.m., Washington,
D.C. time, the fourth) full business day following the first day that any of
Common Shares are released by the Underwriters for sale to the public, as the
Representatives shall designate (the "First Closing Date"); provided, however,
that if the Prospectus is at any time prior to the First Closing Date
recirculated to the public, the First Closing Date shall occur upon the later
of the third or fourth, as the case may be, full business day following the
first date that any of the Common Shares are released by the Underwriters for
sale to public or the date that is 48 hours after the date that the Prospectus
has been so recirculated. The certificates for the Firm Common Shares shall be
registered in such names and denominations as the Representatives shall have
requested at least two full business days prior to the First Closing Date and
shall be made available for checking and packaging on the business day
preceding the First Closing Date at a location in New York, New York, as may be
designated by the Representatives. Time shall be of the essence, and delivery
at the time and place specified in this Agreement is a further condition to the
obligations of the Underwriters. Payment by the Underwriters for the purchase
price for the Firm Common Shares shall be made by wire transfer to such
accounts as designated in writing by the Company and the Selling Shareholders.
In addition, on the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Selling Shareholders hereby grant an option to the Underwriters to
purchase up to the number of Optional Common Shares indicated on the first page
of this Agreement at the purchase price per share to be paid for the Firm
Common Shares, for use solely in covering any over-allotments made by the
Underwriters in the sale and distribution of the Firm Common Shares. The
option granted hereunder may be exercised at any time within 30 days after the
first date that any of the Firm Common Shares are released by the Underwriters
for sale to the public upon notice by the Underwriters to the Company and the
Selling Shareholders setting forth the aggregate number of Optional Common
Shares as to which the Underwriters are exercising the option, the names and
denominations in which the certificates for such shares are to be registered
and the time and place at which such certificates will be delivered. Such time
of delivery (which may not be earlier than the First Closing Date), being
herein referred to as the "Second Closing Date," shall be determined by the
Underwriters, but if at any time other than the First Closing Date shall not be
earlier than three nor later than five full business days after delivery of
such notice of exercise. The number of Optional Common Shares to be purchased
by each Underwriter shall be determined by multiplying the aggregate number of
Optional Common Shares with respect to which are the options are exercised
pursuant to such notice of exercise by a fraction, the numerator of which is
the number of Firm Common Shares to be purchased by such Underwriter as set
forth opposite its name in Schedule A and the denominator of which is the total
number of Firm Common Shares (subject to such adjustments to eliminate any
fractional share purchases as the Underwriters in their discretion may make).
Certificates for the Optional Common Shares will be made available for checking
and packaging on the business day preceding the Second Closing Date at a
location in New York, New York, designated by you. The manner of payment for
and delivery of the Optional Common Shares shall be the same as for the Firm
Common Shares purchased, as specified in this Section 5. At any time before
lapse of the option, the Underwriters may cancel such option by giving written
notice of such cancellation to the Company. If the option is canceled or
expires unexercised in whole or in part, the Company will deregister under the
Act the number of Optional Common Shares as to which the option has not been
exercised.
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<PAGE> 10
Subject to the terms and conditions hereof, the Underwriters propose
to make a public offering of their respective portions of the Firm Common
Shares, and of the Optional Common Shares if and to the extent that the
Underwriters exercise their option to purchase Optional Common Shares, as soon
after the effective date of the Registration Statement as in the judgment of
the Underwriters is advisable and at the public offering price set forth on the
cover page of and on the terms set forth in the Prospectus.
Not later than 12:00 p.m. on the second business day following the
date the Common Shares are released by the Underwriters for sale to the public,
the Company shall deliver or cause to be delivered copies of the Prospectus in
such quantities and at such places as the Representatives shall request.
SECTION 6. Covenants of the Company. The Company covenants and
agrees that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at
the time and date that this Agreement is executed and delivered by the
parties hereto, to become effective. If the Registration Statement
has become or becomes effective pursuant to Rule 430A of the Rules and
Regulations, or the filing of the Prospectus is otherwise required
under Rule 424(b) of the Rules and Regulations, the Company will file
the Prospectus, properly completed, pursuant to the applicable
paragraph of Rule 424(b) of the Rules and Regulations within the time
period prescribed and will provide evidence satisfactory to the
Representatives of such timely filing. The Company will promptly
advise the Representatives in writing (i) of the receipt of any
comments of the Commission; (ii) of any request of the Commission for
amendment of or supplement to the Registration Statement (either
before or after it becomes effective), any Preliminary Prospectus or
the Prospectus or for additional information; (iii) when the
Registration Statement shall have become effective; and (iv) of the
issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the institution of
any proceedings for that purpose. If the Commission shall enter any
such stop order at any time, the Company will use its best efforts to
obtain the lifting of such order at the earliest possible moment. The
Company will not file any amendment or supplement to the Registration
Statement (either before or after it becomes effective), any
Preliminary Prospectus or the Prospectus of which the Representatives
have not been furnished with a copy a reasonable time prior to such
filing or to which the Representatives reasonably object in writing or
which is not in compliance with the Act and the Rules and Regulations.
(b) The Company will prepare and file with the Commission,
promptly upon the Representatives' request, any amendments or
supplements to the Registration Statement or the Prospectus which in
the Representatives' judgment may be necessary or advisable to enable
the Underwriters to continue the distribution of the Common Shares and
will use its best efforts to cause the same to become effective as
promptly as possible. The Company will fully and completely comply
with the provisions of Rule 430A of the Rules and Regulations with
respect to information omitted from the Registration Statement in
reliance upon such Rule.
(c) If at any time within the nine-month period referred to
in Section 10(a)(3) of the Act during which a prospectus relating to
the Common Shares is required to be delivered under the Act any event
occurs as a result of which the Prospectus, including any amendments
or supplements, would include an untrue statement of a material fact,
or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, or if it is
necessary at any time to amend the Prospectus, including any
amendments or supplements, to comply with the Act or the Rules and
Regulations, the Company will promptly advise the Representatives
thereof and will promptly prepare and file with the Commission, at its
own expense, an amendment or supplement which will correct such
statement or omission or an amendment or supplement which will effect
such compliance and will use its best efforts to cause the same to
become effective as soon as possible; and, in case any Underwriter is
required to
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<PAGE> 11
deliver a prospectus after such nine-month period, the Company, upon
request, but at the expense of such Underwriter, will promptly prepare
such amendment or amendments to the Registration Statement and such
Prospectus or Prospectuses as may be necessary to permit compliance
with the requirements of Section 10(a)(3) of the Act.
(d) As soon as practicable, but not later than 45 days after
the end of the first quarter ending after one year following the
"effective date of the Registration Statement" (as defined in Rule
158(c) of the Rules and Regulations), the Company will make generally
available to its security holders an earnings statement (which need
not be audited) covering a period of 12 consecutive months beginning
after the effective date of the Registration Statement which will
satisfy the provisions of the last paragraph of Section 11(a) of the
Act.
(e) During such period as a prospectus is required by law to
be delivered in connection with sales by an Underwriter or dealer, the
Company, at its expense, but only for the nine-month period referred
to in Section 10(a)(3) of the Act, will furnish to the Underwriters or
mail copies of the Registration Statement, the Prospectus, the
Preliminary Prospectus and all amendments and supplements to any such
documents, in each case as soon as available and in such quantities as
the Representatives may request, for the purposes contemplated by the
Act.
(f) The Company shall cooperate with the Representatives and
their counsel in order to qualify or register the Common Shares for
sale under (or obtain exemptions from the application of) the Blue Sky
laws of such jurisdictions as the Representatives designate, will
comply with such laws and will continue such qualifications,
registrations and exemptions in effect so long as reasonably required
for the distribution of the Common Shares. The Company shall not be
required to qualify as a foreign corporation or to file a general
consent to service of process in any such jurisdiction where it is not
presently qualified or where it would be subject to taxation as a
foreign corporation. The Company will advise the Representatives
promptly of the suspension of the qualification or registration of (or
any such exemption relating to) the Common Shares for offering, sale
or trading in any jurisdiction or any initiation or overt threat of
any proceeding for any such purpose, and in the event of the issuance
of any order suspending such qualification, registration or exemption,
the Company, with the Representatives' cooperation, will use its best
efforts to obtain the withdrawal thereof.
(g) During the period of five years hereafter, the Company
will furnish to each of the Representatives: (i) as soon as
practicable after the end of each fiscal year, copies of the Annual
Report to Shareholders of the Company containing the balance sheet of
the Company as of the close of such fiscal year and statements of
income, shareholders' equity and cash flows for the year then ended
and the opinion thereon of the Company's independent public
accountants; (ii) as soon as practicable after the filing thereof,
copies of each proxy statement, Annual Report on Form 10-K, Quarterly
Report on Form 10-Q, Report on Form 8-K or other report filed by the
Company with the Commission, the NASD or any securities exchange; and
(iii) as soon as available, copies of any report or communication of
the Company mailed generally to holders of its Common Stock.
(h) During the period of 180 days from the date of the
Prospectus, without the prior written consent of Hoak Breedlove
Wesneski & Co. (the giving or withholding of such written consent
being in the sole discretion of Hoak Breedlove Wesneski & Co.), the
Company will not issue, offer, sell, grant options to purchase or
otherwise dispose of any of the Company's equity securities or any
other securities convertible into or exchangeable with its Common
Stock or other equity security, except for securities used as
consideration in acquisitions of the assets, stock or business of
another person or entity, securities issued upon exercise or
conversion of securities outstanding on the date of this Agreement,
and the grant of options
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<PAGE> 12
in the ordinary course of business pursuant to the Company's 1996
Incentive Stock Option Plan and 1998 Nonqualified Stock Option Plan,
as described in the Prospectus.
(i) The Company will deliver on or prior to the date hereof
lock-up agreements, in a form reasonably satisfactory to you, from all
officers, directors and Selling Shareholders, and their respective
affiliates.
(j) The Company will apply the net proceeds of the sale of
the Common Shares sold by it substantially in accordance with its
statements under the caption "Use of Proceeds" in the Prospectus.
(k) The Company will qualify or register its Common Stock for
sale in non-issuer transactions under (or obtain exemptions from the
application of) the Blue Sky laws of the State of California (and
thereby permit market making transactions and secondary trading in the
Common Stock in California), will comply with such Blue Sky laws and
will use its best efforts to maintain such qualifications,
registrations and exemptions in effect for a period of three years
after the date hereof.
The Representatives may, in their sole discretion, waive in writing
the performance by the Company of any one or more of the foregoing covenants or
extend the time for their performance.
SECTION 7. Payment of Expenses. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective or
is terminated, the Company agrees to pay all costs, fees and expenses incurred
in connection with the performance of its and the Selling Shareholders'
obligations hereunder, including without limiting the generality of the
foregoing, (i) all expenses incident to the issuance and delivery of the Common
Shares (including all printing and engraving costs), (ii) all fees and expenses
of the registrar and transfer agent of the Common Stock, (iii) all necessary
issue, transfer and other stamp taxes in connection with the issuance and sale
of the Common Shares to the Underwriters, (iv) all fees and expenses of the
Company's counsel, Selling Shareholders' counsel and the Company's independent
accountants, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution to the Underwriters
and dealers of the Registration Statement, each Preliminary Prospectus and the
Prospectus (including all exhibits and financial statements) and all amendments
and supplements provided for herein, this Agreement, the Agreement Among
Underwriters, the Selected Dealers Agreement, the Underwriters' Questionnaire,
the Underwriters' Power of Attorney and the preliminary Blue Sky memorandum and
final Blue Sky memorandum, (vi) all filing fees, attorneys' fees and expenses
incurred by the Company or the Underwriters in connection with qualifying or
registering (or obtaining exemptions from the qualification or registration of)
all or any part of the Common Shares for offer and sale under the Blue Sky
laws, not to exceed $10,000 plus reasonable and documented out-of-pocket
expenses, (vii) the filing fee of the NASD and attorneys fees and expenses
incurred by the Company in obtaining a letter of no objection from the NASD,
and (viii) all other fees, costs and expenses referred to in Item 25 of the
Registration Statement; provided, however, that the Selling Shareholders shall
pay their own underwriting discounts and commissions for the Common Shares sold
by them. Except as provided in this Section 7 and in Section 9 and Section 11
hereof, the Underwriters shall pay all of their own costs and expenses,
including the fees and disbursements of their counsel (excluding those relating
to qualification, registration or exemption under the Blue Sky laws and the
Blue Sky memoranda), travel, general advertising expenses associated with the
offering and related out-of-pocket expenses).
SECTION 8. Conditions of the Obligations of the Underwriters. The
obligations of the Underwriters to purchase and pay for the Firm Common Shares
on the First Closing Date and the Optional Common Shares on the Second Closing
Date shall be subject to the accuracy of the representations and warranties on
the part of the Company and the Selling Shareholders herein set forth as of the
date hereof and as of the First Closing Date or the Second Closing Date, as the
case may be, to the accuracy of the statements of Company officers and the
Selling
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<PAGE> 13
Shareholders made pursuant to the provisions of this Agreement, to the
performance by the Company and the Selling Shareholders of their respective
obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective;
if the filing of the Prospectus, or any supplement thereto, is
required pursuant to Rule 424(b) of the Rules and Regulations, the
Prospectus shall have been filed in the manner and within the time
period required by Rule 424(b) of the Rules and Regulations; and prior
to such Closing Date, no stop order suspending the effectiveness of
the Registration Statement, any Rule 462(b) Registration Statement or
any post-effective amendment to the Registration Statement shall have
been issued and no proceedings for that purpose shall have been
instituted or shall be pending or, to the knowledge of the Company,
the Selling Shareholders or the Representatives, shall be contemplated
by the Commission; and any request of the Commission for inclusion of
additional information in the Registration Statement, or otherwise,
shall have been complied with to the Representatives' satisfaction.
(b) The Representatives shall be satisfied that since the
respective dates as of which information is given in the Registration
Statement and Prospectus, (i) there shall not have been any change in
the capital stock of the Company or any material change in the
indebtedness of the Company, except as contemplated by the Prospectus;
(ii) except as set forth in or contemplated by the Registration
Statement or the Prospectus, no material verbal or written agreement
or other transaction shall have been entered into by the Company which
is not in the ordinary course of business and which reasonably could
be expected to result in a material reduction in the future earnings
of the Company; (iii) no loss or damage (whether or not insured) to
the property of the Company shall have been sustained which materially
and adversely affects the condition (financial or otherwise),
business, results of operations or prospects of the Company; (iv) no
legal or governmental action, suit or proceeding affecting the Company
which could have a material adverse effect upon the Company, or which
affects or may affect the transactions contemplated by this Agreement
shall have been instituted or threatened; and (v) there shall not have
been any material change in the condition (financial or otherwise),
business, management, results of operations or prospects of the
Company which makes it impractical or inadvisable in the judgment of
the Representatives to proceed with the public offering or purchase of
the Common Shares as contemplated hereby. For all purposes of this
Agreement, the "prospects" of the Company shall refer to the business
outlook and the potential or foreseeable opportunities available to
the Company.
(c) There shall have been furnished to the Representatives on
each Closing Date, in form and substance satisfactory to the
Representatives, such documents and certificates as the
Representatives shall reasonably request, including the following:
(i) An opinion of Jackson Walker L.L.P., counsel for
the Company and for the Selling Shareholders, addressed to the
Representatives and dated the First Closing Date, or the
Second Closing Date, as the case may be, to the effect that:
(1) The Company has been duly incorporated
and is validly existing as a corporation in good
standing under the laws of its jurisdiction of
incorporation, is duly qualified to do business as a
foreign corporation and is in good standing in all
other jurisdictions where, to the knowledge of such
counsel, the ownership or leasing of properties or
the conduct of its business requires such
qualification, except for jurisdictions in which the
failure to so qualify would not have a material
adverse effect on the Company, and it has full
corporate power to own its properties and conduct its
business as described in the Registration Statement;
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<PAGE> 14
(2) The authorized capital stock of the
Company is as set forth under the caption
"Capitalization" in the Prospectus as of the date set
forth under such caption, and the number of shares of
Common Stock that will be issued and outstanding
after the consummation of the transactions
contemplated hereby is as set forth under the caption
"Prospectus Summary - The Offering" (assuming the
Underwriters do not elect to purchase any of the
Optional Common Shares, and after giving effect to
the conversion of all outstanding shares of Preferred
Stock into the indicated number of shares of Common
Stock); all necessary and proper corporate
proceedings have been taken in order to validly
authorize such authorized Common Stock and to validly
issue such issued and outstanding Common Stock; all
outstanding shares of Common Stock (including the
Firm Common Shares and Optional Common Shares, if
any) have been duly and validly authorized and
issued, are, to the knowledge of such counsel after
due inquiry, fully paid and nonassessable, were not,
to the knowledge of such counsel after due inquiry,
issued in violation of any preemptive rights or other
rights to subscribe for or purchase any securities
and conform to the description thereof contained in
the Prospectus; without limiting the foregoing, to
the knowledge of such counsel after due inquiry,
there are no preemptive or other rights to subscribe
for or purchase any of the Common Shares to be sold
by the Company hereunder; neither the Articles of
Incorporation nor Bylaws of the Company, nor, to the
knowledge of such counsel after due inquiry, does any
contract contain any restriction upon the voting or
transfer of any of the shares of capital stock of the
Company (including the Firm Common Shares and the
Optional Common Shares), except such restrictions as
may be imposed by federal and state securities laws
or as may be expressly described in the Prospectus
and except for a Voting Agreement which will
terminate upon consummation of this offering;
(3) To the best of such counsel's knowledge,
the Company does not own or control, directly or
indirectly, any interest in any corporation,
association or other entity.
(4) The certificate(s) evidencing the Common
Shares to be delivered hereunder and sold by the
Company are in due and proper form under Texas law,
and when duly countersigned by the Company's transfer
agent and registrar, and delivered to the
Underwriters or to the order of the Underwriters
against payment of the agreed consideration therefor
in accordance with the provisions of this Agreement,
the Common Shares represented by such certificate(s)
will be duly authorized and validly issued, fully
paid and nonassessable, will pass to the Underwriters
free and clear of any liens, claims, equities or
other encumbrances of any kind or character, to the
knowledge of such counsel after due inquiry, will not
have been issued in violation of or subject to any
preemptive rights or other rights to subscribe for or
purchase securities, and will conform to the
description thereof contained in the Prospectus;
(5) Except as disclosed in the Prospectus,
to the knowledge of such counsel after due inquiry,
there are no outstanding options, warrants or other
rights calling for the issuance of, and no
commitments or obligations to issue, any shares of
capital stock of the Company or any security
convertible into or exchangeable for capital stock of
the Company;
(6) Assuming no amendment to the Certificate
of Designations of the Company, on the thirtieth day
following the First Closing Date all shares of
Preferred Stock will automatically convert into
1,575,000 shares of Common Stock, without any
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<PAGE> 15
further required action on the part of any party,
and, to the best knowledge of such counsel after due
inquiry, no party will have any legal right,
authority or ability to prevent or hinder such
conversion in any way. To the best knowledge of such
counsel after due inquiry, the holders of the
Preferred Stock have no right, whether accrued, due
or payable, to receive anything of value with respect
to such preferred shares other than the
aforementioned shares of Common Stock;
(7) (a) The Registration Statement has
become effective under the Act, and, to such
counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement or
preventing the use of the Prospectus has been issued
and no proceedings for that purpose have been
instituted or are pending or overtly threatened by
the Commission; any required filing of the Prospectus
and any supplement thereto pursuant to Rule 424(b) of
the Rules and Regulations has been made in the manner
and within the time period required by such Rule
424(b);
(b) The Registration Statement, the
Prospectus and each amendment or supplement thereto
(except for the financial statements and schedules
and other statistical financial data and schedules
included therein, as to which such counsel need
express no opinion), as of their respective effective
or issue dates, comply as to form in all material
respects with the requirements of the Act and the
Rules and Regulations; and
(c) To such counsel's knowledge, there
are no franchises, leases, contracts, agreements or
documents of a character required to be disclosed in
the Registration Statement or Prospectus or to be
filed as exhibits to the Registration Statement which
are not disclosed or filed, as required;
(d) The description of the Company's
capital stock as set forth under the caption
"Description of Securities" in the Registration
Statement and Prospectus is true and correct in all
material respects.
(8) The Company has full corporate power and
authority to enter into this Agreement and to sell
and deliver the Common Shares to be sold by it to the
Underwriters; this Agreement has been duly and
validly authorized by all necessary corporate action
by the Company, has been duly and validly executed
and delivered by and on behalf of the Company, and is
a valid and binding agreement of the Company
enforceable against the Company in accordance with
its terms, except to the extent that (i) the validity
and binding effect and enforcement of this Agreement
may be limited by any applicable bankruptcy,
reorganization, moratorium, or similar laws of
general application, (ii) the availability of
equitable remedies may be limited by principles of
equity, whether considered in a proceeding at law or
in equity, and (iii) the terms hereof (including,
without limitation, indemnity) may be limited by
applicable securities laws and the policies embodied
therein; and no approval, authorization, order,
consent, registration, filing, qualification, license
or permit of or with any court, regulatory,
administrative or other governmental body is required
for the execution and delivery of this Agreement by
the Company or the consummation of the transactions
contemplated by this Agreement, except such as have
been obtained and are in full force and effect under
the Act and such as may be required under applicable
Blue Sky laws in connection with the purchase and
distribution of the Common Shares by the Underwriters
and the obtaining of a letter of
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<PAGE> 16
no objection from the NASD with respect to such
offering, provided that such counsel shall not be
required to express any opinion as to the
requirements of any Blue Sky laws;
(9) The execution and performance of this
Agreement, the issuance, sale and delivery of the
Common Shares and the consummation of the
transactions herein contemplated will not violate any
of the provisions of the Articles of Incorporation or
Bylaws of the Company, in each case as amended, or
conflict with, result in the breach of, or
constitute, either by itself or upon notice or the
passage of time or both, a default under any
agreement, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument filed
as an exhibit to the Registration Statement or
otherwise identified on an exhibit attached to the
letter of opinion that is acceptable to the
Representatives to which the Company is a party or by
which the Company or any of its property may be bound
or affected, or violate any statute, judgment,
decree, order, rule or regulation of any court or
government body having jurisdiction over the Company
or any of its property (other than state securities
or Blue Sky laws and regulations as to which counsel
need not express any opinion);
(10) To the best of such counsel's knowledge
after due inquiry, the Company is not in violation of
its Articles of Incorporation or Bylaws and is not in
breach of or default with respect to any provision of
any agreement, mortgage, deed of trust, lease, loan
agreement, security agreement, license, indenture,
permit or other instrument to which the Company is a
party or by which the Company or any of its
properties may be bound or affected, except where
such default would not materially adversely affect
the Company; and, to such counsel's knowledge, the
Company is in compliance with all laws, rules,
regulations, judgments, decrees, orders and statutes
of any court or jurisdiction to which they are
subject, except where noncompliance would not
materially adversely affect the Company;
(11) To such counsel's knowledge, there are
no legal actions, suits or governmental proceedings
pending or threatened before any court or
governmental agency, authority or body which, if
determined adversely to the Company would have a
material adverse effect on the financial position,
shareholders' equity or results of operations of the
Company;
(12) To such counsel's knowledge, no holders
of securities of the Company have rights to the
registration of shares of Common Stock or other
securities which would be required to be included in
the Registration Statement filed by the Company or
included in the offering contemplated thereby which
have not been duly waived in writing;
(13) No transfer taxes are required to be
paid under the laws of the State of Texas in
connection with the sale and delivery of the Common
Shares to the Underwriters hereunder;
(14) The Company has Federal registrations
of the service marks "Internet America" and
"1-800-BE-A-GEEK" (the "Registered Marks"). Based
solely on a trademark search conducted by such
counsel and a certificate of the Company, except for
a Company in Michigan using the "Internet America"
name, to such counsel's knowledge, the Registered
Marks do not infringe the rights of any other person
or entity and no claims of any infringement or
violation are pending or have been threatened or
asserted against the Company with respect to the
Registered Marks. To such counsel's
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<PAGE> 17
knowledge after due inquiry, the Company has not
entered into any license, release, order or other
agreement that restricts the right of the Company to
use the Registered Marks in any way.
(15) Each Selling Shareholder which is not a
natural person has full right, power and authority to
enter into and to perform its obligations under this
Agreement and the Shareholders Agreement to be
executed and delivered by it in connection with the
transactions contemplated in this Agreement; this
Agreement and the Shareholders Agreements have been
duly authorized, executed and delivered by the
Selling Shareholders; the performance of this
Agreement and the Shareholder Agreements and the
consummation of the transactions herein contemplated
by the Selling Shareholders will not result in a
breach of, or constitute a default under, any
indenture, mortgage, deeds of trust, trust
(constructive or other), loan agreement, lease,
franchise, license or other agreement or instrument
known to such counsel after due inquiry to which any
of the Selling Shareholders is a party or by which
any of the Selling Shareholders or any of their
properties may be bound, or violate any statute,
judgment, decree, order, rule or regulation known to
such counsel of any court or governmental body having
jurisdiction over the Selling Shareholders or any of
the properties of the Selling Shareholders; and to
such counsel's knowledge, no approval, authorization,
order or consent of any court, regulatory body,
administrative agency or other governmental body is
required for the execution and delivery of this
Agreement or the consummation by the Selling
Shareholders of the transactions contemplated by this
Agreement, except such as have been obtained and are
in full force and effect under the Act and such as
may be required under the rules of NASD, applicable
Blue Sky laws;
(16) The Selling Shareholders have the full
right, power and authority to enter into this
Agreement and the Shareholder Agreements and to sell,
transfer and deliver the Common Shares to be sold by
the Selling Shareholders on the Closing Date, and, to
the knowledge of such counsel offer due inquiry,
valid marketable title to such Common Shares so sold,
free and clear of all liens, claims, equities or
other encumbrances of any kind or character, will be
transferred to the Underwriters who have purchased
such Common Shares hereunder; and
(17) This Agreement and the Shareholder
Agreements are valid and binding agreements of the
Selling Shareholders and are enforceable against the
Selling Shareholders in accordance with their terms
except to the extent that (i) the validity and
binding effect and enforcement of this Agreement and
the Shareholder Agreements may be limited by any
applicable bankruptcy, reorganization, moratorium, or
similar laws of general application; (ii) the
availability of equitable remedies may be limited by
principles of equity, whether considered in a
proceeding at law or in equity; and (iii) the
indemnification provisions contained in this
Agreement may be limited by applicable securities
laws and the policies embodied therein.
In rendering such opinion, such counsel may rely, as
to matters of fact, on certificates of the Selling
Shareholders and of officers of the Company and of
governmental officials, in which case their opinion shall
state that they are so doing and that the Underwriters are
justified in relying on such certificates and copies of such
certificates are to be attached to the opinion. The opinion
shall be furnished to the Representatives and shall expressly
state that the Underwriters may rely on such opinion as if it
were addressed to them.
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<PAGE> 18
In addition, such counsel shall state that they have
participated in conferences with officers, employees and other
representatives of the Company, counsel for the Underwriters,
representatives of the independent public accountants for the
Company and representatives of the Underwriters at which the
contents of the Registration Statement and Prospectus and
related matters were discussed and, although such counsel is
not passing upon and does not assume any responsibility for,
the accuracy, completeness or fairness of the statements
contained in the Registration Statement and Prospectus and has
not made any independent check or verification thereof, on the
basis of the foregoing (relying as to materiality to a large
extent upon the statements of officers, employees and other
representatives of the Company), no facts have come to such
counsel's attention that lead them to believe that either the
Registration Statement at the time such Registration Statement
became effective contained an untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein in light
of the circumstances in which they were made, not misleading,
or the Prospectus as of its date contained an untrue statement
of a material fact or omitted to state a material fact
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading,
except, in each case, that such counsel need express no
opinion with respect to the financial statements, schedules
and other statistical and financial data included in the
Registration Statement or Prospectus.
In addition, such counsel may state that its opinion
is limited to matters governed by the federal laws of the
United States of America and the corporate laws of the State
of Texas. Subject to the opinions set forth in paragraphs
(2), 7(b) and 7(d) and to the statements in the immediately
preceding paragraph, the opinions of such counsel may be
qualified by a statement to the effect that such counsel does
not assume any responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration
Statement or Prospectus.
(ii) Such opinion or opinions of Locke Purnell Rain
Harrell (A Professional Corporation), counsel for the
Underwriters, dated the First Closing Date or the Second
Closing Date, as the case may be, with respect to such matters
as the Representatives may reasonably require, and the Company
and the Selling Shareholders shall have furnished to such
counsel such documents and shall have exhibited to them such
papers and records as they reasonably may request for the
purpose of enabling them to pass upon such matters. In
connection with such opinions, such counsel may rely on
representations or certificates of the Selling Shareholders
and of officers of the Company and governmental officials.
(iii) A certificate of the Company executed by the
Chief Executive Officer and the Chief Financial Officer of the
Company, dated the First Closing Date or the Second Closing
Date, as the case may be, to the effect that as of such date:
(1) The representations and warranties of
the Company set forth in Section 2 of this Agreement
are true and correct as of the date of this Agreement
and as of the First Closing Date or the Second
Closing Date, as the case may be, and the Company has
complied with all the agreements and satisfied all
the conditions on its part to be performed or
satisfied on or prior to such Dates, respectively;
(2) The Commission has not issued any order
preventing or suspending the use of the Prospectus or
any Preliminary Prospectus filed as a part of the
Registration Statement or any amendment thereto; no
stop order suspending the effectiveness of the
Registration Statement has been issued; and to the
best of the knowledge of the respective
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<PAGE> 19
signers, no proceedings for that purpose have been
instituted or are pending or overtly threatened under
the Act;
(3) Each of the respective signers of the
certificate has carefully examined the Registration
Statement and the Prospectus; in his opinion and to
the best of his knowledge, the Registration Statement
and the Prospectus and any amendments or supplements
thereto contain all statements required to be stated
therein regarding the Company, and neither the
Registration Statement nor the Prospectus nor any
amendment or supplement thereto includes any untrue
statement of a material fact or omits to state any
material fact required to be stated therein or
necessary to make the statements therein not
misleading in light of the circumstances under which
they were made;
(4) Since the initial date on which the
Registration Statement was filed, no agreement,
written or oral, transaction or event has occurred
which should have been set forth in an amendment to
the Registration Statement or in a supplement to or
amendment of any Prospectus which has not been
disclosed in such a supplement or amendment;
(5) Since the respective dates as of which
information is given in the Registration Statement
and the Prospectus, and except as disclosed in or
contemplated by the Prospectus, there has not been
any material adverse change or a development
involving a material adverse change in the condition
(financial or otherwise), business, properties,
results of operations, management or prospects of the
Company; and no legal or governmental action, suit or
proceeding is pending or, to the best knowledge of
the respective signors, threatened against the
Company which is material to the Company, whether or
not arising from transactions in the ordinary course
of business, or which may adversely affect the
transactions contemplated by this Agreement; the
Company has not entered into any verbal or written
agreement or other transaction which is not in the
ordinary course of business or which reasonably could
be expected to result in a material reduction in the
future earnings of the Company, or incurred any
material liability or obligation, direct, contingent
or indirect, made any change in its capital stock,
made any material change in its short-term debt or
long-term debt or repurchased or otherwise acquired
any of the Company's capital stock; and the Company
has not declared or paid any dividend, or declared or
made any other distribution, with respect to its
outstanding capital stock payable to shareholders of
record, except as disclosed in the Prospectus, on a
date prior to the First Closing Date or Second
Closing Date, as the case may be; and
(6) Since the respective dates as of which
information is given in the Registration Statement
and the Prospectus and except as disclosed in or
contemplated by the Prospectus, the Company has not
sustained a material loss or damage by strike, fire,
flood, windstorm, accident or other calamity (whether
or not insured).
(iv) On the First Closing Date, a certificate, dated
such Closing Date and addressed to the Underwriters, signed by
or on behalf of each Selling Shareholder to the effect that
the representations and warranties of such Selling Shareholder
set forth in Section 3 of this Agreement are true and correct
as if made at and as of such Closing Date, and such Selling
Shareholder has complied with all the agreements and satisfied
all the conditions to be performed or satisfied prior to the
First Closing Date.
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<PAGE> 20
(v) On the date before this Agreement is executed
and also on the First Closing Date and the Second Closing
Date, a letter addressed to the Representatives from Deloitte,
independent accountants, the first letter to be dated the day
before the date of this Agreement, the second letter to be
dated the First Closing Date and the third letter (in the
event of a Second Closing) to be dated the Second Closing
Date, in form and substance satisfactory to you.
All such opinions, certificates, letters and documents shall
be in compliance with the provisions hereof only if they are
reasonably satisfactory to the Representatives and to Locke Purnell
Rain Harrell (A Professional Corporation), counsel for the
Underwriters. The Company and the Selling Shareholders shall furnish
the Representatives with such manually signed or conformed copies of
such opinions, certificates, letters and documents as the
Representatives request. Any certificate signed by any officer of the
Company and delivered to the Representatives shall be deemed to be a
representation and warranty by the Company to the Underwriters as to
the statements made therein.
If any condition to the Underwriters' obligations hereunder to
be satisfied prior to or at the First Closing Date is not so
satisfied, this Agreement at the election of the Representatives will
terminate upon notification by the Representatives to the Company
without liability on the part of any Underwriter or the Company,
except for the expenses to be paid or reimbursed by the Company
pursuant to Sections 7 and 9 hereof and except to the extent provided
in Section 12 hereof.
SECTION 9. Reimbursement of Underwriters' Expenses. If this Agreement
shall be terminated by the Representatives pursuant to Section 8, or if the
sale to the Underwriters of the Common Shares at the First Closing Date is not
consummated because of any refusal, inability or failure on the part of the
Company or Selling Shareholders to perform any agreement herein or to comply
with any provision hereof, the Company agrees to reimburse the Representatives
and the other Underwriters (or such Underwriters as have terminated this
Agreement with respect to themselves), severally, upon demand for all
out-of-pocket expenses that shall have been reasonably incurred by the
Representatives and the Underwriters in connection with the proposed purchase
and the sale of the Common Shares, including but not limited to fees and
disbursements of Underwriters' counsel, printing expenses, travel expenses,
postage, telecopy charges and telephone charges relating directly to the
offering contemplated by the Prospectus. Any such termination shall be without
liability of any party to any other party, except that the provisions of this
Section, Section 7 and Section 11 shall at all times be effective and shall
apply.
SECTION 10. Effectiveness of Registration Statement. The
Representatives and the Company will use their respective best efforts to cause
the Registration Statement to become effective, to prevent the issuance of any
stop order suspending the effectiveness of the Registration Statement and, if
such stop order be issued, to obtain as soon as possible the lifting thereof.
SECTION 11. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter
within the meaning of the Act against any losses, claims, damages,
liabilities or expenses, joint or several, to which such Underwriter
or such controlling person may become subject, under the Act, the
Exchange Act, or other federal or state statutory law or regulation,
or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of
the Company), insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof as contemplated below) arise
out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state in any of them a material fact
required to be stated therein or necessary to make
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<PAGE> 21
the statements in any of them not misleading in light of the
circumstances under which they were made, or arise out of or are based
in whole or in part on any inaccuracy in the representations and
warranties of the Company contained herein or any failure of the
Company to perform its obligations hereunder or under law; and will
reimburse each Underwriter and each such controlling person for any
legal and other expenses as such expenses are reasonably incurred by
such Underwriter or such controlling person in connection with
investigating, defending, settling, compromising or paying any such
loss, claim, damage, liability, expense or action; provided, that the
Company will not be liable in any such case to the extent that any
such loss, claim, damage, liability or expense arises out of or is
based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto in reliance upon and in conformity with the information
furnished to the Company by the Representatives pursuant to Section 4
hereof; and provided further, that with respect to any untrue
statement or omission or alleged untrue statement or omission made in
any Preliminary Prospectus, the indemnity agreement contained in this
paragraph shall not inure to the benefit of any Underwriter from whom
the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Common Shares concerned (or to the benefit of
any person controlling such Underwriter) to the extent that any such
loss, claim, damage, liability or expense of such Underwriter or
controlling person results from the fact that a copy of the Prospectus
was not sent or given to such person at or prior to the written
confirmation of sale of such Common Shares to such person as required
by the Act, and if the untrue statement or omission has been corrected
in the Prospectus, unless such failure to deliver the Prospectus was a
result of noncompliance by the Company with its obligations under
Section 6(e) hereof.
(b) Each Selling Shareholder severally agrees to indemnify
and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of the Act against any
losses, claims, damages, liabilities or expenses, to which such
Underwriter or such controlling person may become subject, under the
Act, the Exchange Act, or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of
any litigation, if such settlement is effected with the written
consent of such Selling Shareholder), insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof as
contemplated below) arise out of or are based in whole or in part on
any inaccuracy in the representations and warranties of such Selling
Shareholder contained herein or any failure of such Selling
Shareholder to perform its obligations hereunder or under law; and
will reimburse each Underwriter and each such controlling person for
any legal and other expenses as such expenses are reasonably incurred
by such Underwriter or such controlling person in connection with
investigating, defending, settling, compromising or paying any such
loss, claim, damage, liability, expense or action; provided, that such
Selling Shareholder will not be liable in any such case to the extent
that any such loss, claim, damage, liability or expense arises out of
or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto in reliance upon and in conformity with the information
furnished by the Representatives pursuant to Section 4 hereof; and
provided further, that with respect to any untrue statement or
omission or alleged untrue statement or omission made in any
Preliminary Prospectus, the indemnity agreement contained in this
paragraph shall not inure to the benefit of any Underwriter from whom
the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Common Shares concerned (or to the benefit of
any person controlling such Underwriter) to the extent that any such
loss, claim, damage, liability or expense of such Underwriter or
controlling person results from the fact that a copy of the Prospectus
was not sent or given to such person at or prior to the written
confirmation of sale of such Common Shares to such person as required
by the Act, and if the untrue statement or omission has been corrected
in the Prospectus, unless such failure to deliver the Prospectus was a
result of noncompliance by the Company with its obligations under
Section 6(e) hereof; and, provided further, that the aforesaid
liability of each Selling Shareholder under this Section 11(b) shall
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<PAGE> 22
not exceed the sum of the net proceeds received by such Selling
Shareholder from the Common Shares sold by such Selling Shareholder
pursuant hereto.
(c) In addition to their other obligations under this Section
11, the Company and the Selling Shareholders jointly and severally
agree that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or
omission, or any inaccuracy in the representations and warranties of
the Company or the Selling Shareholders herein or failure to perform
the respective obligations of the Company and the Selling Shareholders
hereunder, all as described in Section 11(a) and (b), the Company and
the Selling Shareholders will reimburse each Underwriter on a
quarterly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and
enforceability of the Company's or the Selling Shareholders'
obligations to reimburse each Underwriter for such expenses and the
possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any
such interim reimbursement payment is so held to have been improper,
each Underwriter shall promptly return such payment to the Company and
the Selling Shareholders, pro rata, together with interest, compounded
daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) announced
from time to time by The Chase Manhattan Bank (the "Prime Rate"). Any
such interim reimbursement payments which are not made to an
Underwriter within 30 days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request. This
indemnity agreement will be in addition to any liability which the
Company and the Selling Shareholders may otherwise have.
Notwithstanding anything set forth in this Section 11(c), under no
circumstances shall any Selling Shareholder be obligated to make any
interim reimbursement payments to the Underwriters under this Section
11(c) unless and until the Underwriters shall have made a written
demand on the Company for such payments and such demand shall not have
been paid by the Company within sixty (60) days after the receipt of
such demand by the Company.
(d) Each Underwriter will severally indemnify and hold
harmless the Company and the Selling Shareholders, each of their
respective directors, each of their respective officers who signed the
Registration Statement, and each person, if any, who controls the
Company or any Selling Shareholder within the meaning of the Act,
against any losses, claims, damages, liabilities or expenses to which
the Company, any Selling Shareholder, or any such director, officer,
or controlling person may become subject under the Act, the Exchange
Act, or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if
such settlement is effected with the written consent of such
Underwriter), insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof as contemplated below) arise
out of or are based upon any untrue or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or
arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in
the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, in reliance upon
and in conformity with the information furnished to the Company
pursuant to Section 4 hereof (which information is the sole
information furnished to the Company by the Underwriters for inclusion
in the Registration Statement, any Preliminary Prospectus, any
Prospectus, or any amendment or supplement thereto); and will
reimburse the Company, or any such director, officer, Selling
Shareholder, or controlling person for any legal and other expense
reasonably incurred by the Company, or any such director, officer,
Selling Shareholder or controlling person in connection with
investigating, defending, settling, compromising or paying any such
loss, claim, damage, liability, expense or action. In addition to its
other obligations under this Section 11(d),
-22-
<PAGE> 23
each Underwriter severally agrees that, as an interim measure during
the pendency of any claim, action, investigation, inquiry or other
proceeding arising out of or based upon any statement or omission, or
any alleged statement or omission, described in this Section 11(d)
which relates to information furnished to the Company pursuant to
Section 4 hereof, it will reimburse the Company (and, to the extent
applicable, each officer, director, Selling Shareholder or controlling
person) on a quarterly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the Underwriters' obligation to
reimburse the Company (and, to the extent applicable, each officer,
director, Selling Shareholder or controlling person) for such expenses
and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent
that any such interim reimbursement payment is so held to have been
improper, the Company (and, to the extent applicable, each officer,
director, Selling Shareholder or controlling person) shall promptly
return such payment to the Underwriters, together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made within 30 days of a
request for reimbursement, shall bear interest at the Prime Rate from
the date of such request. This indemnity agreement will be in
addition to any liability which such Underwriter may otherwise have.
(e) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against an
indemnifying party under this Section, notify the indemnifying party
in writing of the commencement thereof; but the omission so to notify
the indemnifying party will not relieve it from any liability which it
may have to any indemnified party for contribution or otherwise
hereunder to the extent it is not materially prejudiced as a proximate
result of such failure. In case any such action is brought against
any indemnified party and such indemnified party seeks or intends to
seek indemnity from an indemnifying party, the indemnifying party will
be entitled to participate in, and, to the extent that it may wish,
jointly with all other indemnifying parties similarly notified, to
assume the defense thereof with counsel reasonably satisfactory to
such indemnified party; provided, however, if the defendants in any
such action include both the indemnified party and the indemnifying
party and the indemnified party shall have reasonably concluded that
there may be a conflict between the positions of the indemnifying
party and the indemnified party in conducting the defense of any such
action and that it would be inappropriate under applicable standards
of professional conduct to have the same counsel represent both
parties, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of its election so to
assume the defense of such action and approval by the indemnified
party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section for any legal expenses
subsequently incurred by such indemnified party in connection with the
defense thereof unless (i) the indemnified party shall have employed
such counsel in connection with the assumption of legal defenses in
accordance with the proviso to the next preceding sentence (it being
understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel, approved by the
Underwriters in the case of Section 11(a) or (b), representing the
indemnified parties who are parties to such action) or (ii) the
indemnifying party shall not have employed counsel reasonably
satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of commencement of the
action, in each of which cases the fees and expenses of counsel shall
be at the expense of the indemnifying party.
(f) If the indemnification provided for in this Section 11 is
required by its terms, but for any reason is held to be unavailable to
or otherwise insufficient to hold harmless any indemnified party under
paragraphs (a), (b), (c) or (d) in respect of any losses, claims,
damages, liabilities or expenses as referred to herein, then each
applicable indemnifying party shall contribute to the amount paid or
payable by such
-23-
<PAGE> 24
indemnified party as a result of any losses, claims, damages,
liabilities or expenses referred to herein (i) in such proportion as
is appropriate to reflect the relative benefits received by the
Company, the Selling Shareholders and the Underwriters from the
offering of the Common Shares or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, then such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the
Company, the Selling Shareholders and the Underwriters in connection
with the statements or omissions or inaccuracies in their
representations and warranties herein which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The respective relative benefits
received by the Company, the Selling Shareholders and the Underwriters
shall be deemed to be in the same proportion, in the case of the
Company and the Selling Shareholders as the total price paid to the
Company and the Selling Shareholders, respectively for the Common
Shares sold by them to the Underwriters (before deducting expenses),
and in the case of Underwriters as the underwriting commissions
received by them, bears to the total of such amounts paid to the
Company and the Selling Shareholders and the amounts received by the
Underwriters as underwriting commissions. The relative fault of the
Company, the Selling Shareholders and the Underwriters shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission of a material fact or the inaccurate or the alleged
inaccurate representations and/or warranty relates to the information
supplied by the Company, the Selling Shareholders or the Underwriters
and the parties relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The
amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in subsection (e) of
this Section 11, any legal or other fees or expenses reasonably
incurred by such party in connection with investigating or defending
any action or claim. The provisions set forth in subsection (e) of
this Section 11 with respect to notice of commencement of any action
shall apply if a claim for contribution is to be made under this
subsection (f); provided, however, that no additional notice shall be
required with respect to any action for which notice has been given
under subsection (d) for the purposes of indemnification. The
Company, the Selling Shareholders, and the Underwriters agree that it
would not be just inequitable if contribution pursuant to this Section
11 were determined solely by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the
equitable considerations referred to in this subsection (f).
Notwithstanding the provisions of this Section 11, no Underwriter
shall be required to contribute any amount in excess of the amount of
the total underwriting commissions received by such Underwriter in
connection with the Common Shares underwritten by it and distributed
to the public, and no Selling Shareholder shall be required to
contribute any amount in excess of the amount of the net proceeds
received by such Selling Shareholder from the Common Shares sold by
such Selling Shareholder pursuant hereto. No person guilty of
fraudulent misrepresentation (within a meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute pursuant to this Section 11 are several in
proportion to their respective underwriting commitments and not joint.
(g) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in this
Section 11, including the amounts of any requested reimbursement
payments and the method of determining such amounts, shall be settled
by arbitration conducted under the provisions of the Code of
Arbitration Procedure of the NASD. Any such arbitration must be
commenced by service of a written demand for arbitration or written
notice of intention to arbitrate, therein electing the arbitration
tribunal. In the event the party demanding arbitration does not make
such designation of an arbitration tribunal in such demand or notice,
then the party responding to said demand or notice is authorized to do
so. Such an arbitration would be limited to the operation of the
interim reimbursement provisions contained in this Section 11 and
would not resolve the ultimate propriety or enforceability of the
obligation to reimburse expenses which is created by the provisions of
this Section 11.
-24-
<PAGE> 25
(h) The Company and the Selling Shareholders may agree, as
among themselves and without limiting the rights of the Underwriters
under this Agreement, as to their respective amounts of
indemnification liability for which they each shall be responsible,
and this Agreement shall not modify or supersede any agreements now in
effect between the Company and the Selling Shareholders with respect
thereto.
SECTION 12. Default of One or More of the Several Underwriters. If,
on the First Closing Date or the Second Closing Date, as the case may be, any
one or more of the several Underwriters shall fail or refuse to purchase Common
Shares that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of
the aggregate number of the Common Shares to be purchased on such date, the
other Underwriters shall be obligated, severally, in the proportions that the
number of Firm Common Shares set forth opposite their respective names on
Schedule A bears to the aggregate number of Firm Common Shares set forth
opposite the names of all such non-defaulting Underwriters, or in such other
proportions as may be specified by the Representatives with the consent of the
nondefaulting Underwriters, to purchase the Common Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date. If, on the First Closing Date or the Second Closing Date, as the case
may be, any one or more of the Underwriters shall fail or refuse to purchase
Common Shares and the aggregate number of Common Shares with respect to which
such default occurs exceeds 10% of the aggregate number of Common Shares to be
purchased on such date, and arrangements satisfactory to the Representatives
and the Company with respect to the First Closing Date or the Second Closing
Date for the purchase of such Common Shares are not made within 48 hours, the
Agreement shall terminate without liability of any party to any other party
except that the provisions of Section 7 and Section 11 shall at all times be
effective and survive such termination. In any such case either the
Representatives or the Company, acting jointly, shall have the right to
postpone the First Closing Date and the Second Closing Date, as the case may
be, but in no event for longer than seven days in order that the required
changes, if any, to the Registration Statement and the Prospectus or any other
documents or arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
12. Any action taken under this Section 12 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
SECTION 13. Effective Date. This Agreement shall become effective at
such time as the Registration Statement has become effective and you shall have
released the Firm Common Shares for sale to the public; provided, however, that
the provisions of Sections 7, 9, 11, 14 and 15 hereof shall at all times be
effective. For the purposes of this Section 13, the Firm Common Shares shall
be deemed to have been so released upon the release by the Underwriters for
publication, at any time after the Registration Statement has become effective,
of any newspaper advertisement relating to any of the Common Shares, or upon
the release by the Underwriters of any of the Common Shares for sale to the
public, whichever may occur first.
SECTION 14. Termination. Without limiting the right to terminate
this Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company and the
Selling Shareholders by notice to the Representatives or by the
Representatives by notice to the Company and the Selling Shareholders
at any time prior to the time this Agreement shall become effective as
to all its provisions, and any such termination shall be without
liability on the part of the Company or the Selling Shareholders to
the Underwriters (except for the expenses to be paid or reimbursed by
the Company pursuant to Sections 7 and 9 hereof and except to the
extent provided in Sections 11 and 15 hereof) or of any Underwriter to
the Company (except to the extent provided in Sections 7 and 11
hereof).
-25-
<PAGE> 26
(b) This Agreement may also be terminated by the
Representatives prior to the First Closing Date or prior to the Second
Closing Date, as the case may be, by notice to the Company and the
Selling Shareholders (i) if additional material governmental
restrictions not in force and effect on the date hereof shall have
been imposed upon trading in securities generally or minimum or
maximum prices shall have been generally established on the New York
Stock Exchange or on the American Stock Exchange or in the Nasdaq
National Market or in the over the counter market by the NASD, or
trading in securities generally shall have been suspended on either
such Exchange or in the Nasdaq National Market or in the over the
counter market by the NASD or the Commission, or a general banking
moratorium shall have been established by federal, New York or Texas
authorities, (ii) if an outbreak of hostilities or other national or
international calamity or any material change in political, financial
or economic conditions shall have occurred or shall have accelerated
to such an extent that the effect on the financial markets shall, in
the judgment of the Representatives, affect adversely the
marketability of the Common Shares, (iii) if any adverse event shall
have occurred or shall exist which makes untrue or incorrect in any
material respect any statement or information contained in the
Registration Statement or Prospectus or which is not reflected in the
Registration Statement or Prospectus but should be reflected therein
in order to make the statements or information contained therein not
misleading in any material respect, or (iv) if there shall be any
action, suit or proceeding pending or threatened, or there shall have
been any development or prospective development involving particularly
the business or properties or securities of the Company or the
transactions contemplated by this Agreement, which, in the judgment of
the Representatives, may materially and adversely affect the business
or earnings of the Company or makes it impracticable to offer or sell
the Common Shares. Any termination pursuant to this subsection (b)
shall be without liability on the part of the Underwriters to the
Company or the Selling Shareholders or on the part of the Company or
the Selling Shareholders to the Underwriters (except for expenses to
be paid or reimbursed by the Company or the Selling Shareholders
pursuant to Sections 7 or 11 hereof and except to the extent provided
in Sections 11 and 15).
SECTION 15. Failure of the Selling Shareholders to Sell and Deliver.
If the Selling Shareholders fail to sell and deliver to the Underwriters the
Common Shares to be sold and delivered by the Selling Shareholders at the First
Closing Date or the Second Closing Date under the terms of this Agreement, then
the Representatives may at their option, by written notice to the Company and
the Selling Shareholders, either (i) terminate this Agreement without any
liability on the part of any Underwriter or, except as provided in Sections 7,
9, and 11 hereof, the Company or the Selling Shareholders, or (ii) purchase the
shares which the Company has sold and delivered to the Underwriters in
accordance with the terms hereof. In the event of a failure by the Selling
Shareholders to sell and deliver as referred to in this Section, either the
Representatives or the Company shall have the right to postpone the Closing
Date for a period not exceeding seven (7) business days in order that the
necessary changes in the Registration Statement, Prospectus and any other
documents, as well as any other arrangements, may be effective.
SECTION 16. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company and its officers, the Selling Shareholders and of the
Underwriters set forth in or made pursuant to this Agreement will remain in
full force and effect, regardless of any investigation made by or on behalf of
the Underwriters or the Company, or the Selling Shareholders, or any of their
partners, officers or directors or any controlling person, as the case may be,
and will survive delivery of and payment for the Common Shares sold hereunder
and any termination of this Agreement.
SECTION 17. Notices. All communications hereunder shall be in
writing and, if sent to the Underwriters, shall be mailed, delivered or
telecopied or telegraphed and confirmed to the Underwriters at Hoak Breedlove
Wesneski & Co., One Galleria Tower, 13355 Noel Road, Suite 1650, Dallas, Texas
75240, Attention: Lawrence E. Wesneski, with a copy to Locke Purnell Rain
Harrell (A Professional Corporation), 2200 Ross Avenue, Suite 2200, Dallas,
Texas 75201, Attention: John B. McKnight; and if sent to the Company or the
Selling Shareholders
-26-
<PAGE> 27
shall be mailed, delivered or telecopied or telegraphed and confirmed to the
Company at One Dallas Center, 350 N. St. Paul, Suite 3000, Dallas, Texas
75201, Attention: Michael T. Maples, President, with a copy to Jackson Walker
L.L.P, 901 Main Street, Suite 6000, Dallas, Texas 75202, Attention: Richard F.
Dahlson. The Company, the Selling Shareholders or the Underwriters may change
the address for receipt of communications hereunder by giving notice to the
others.
SECTION 18. Successors. This Agreement will inure to the benefit of
and be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 12 hereof, and to the benefit of the officers and directors
and controlling persons referred to in Section 11, and in each case their
respective successors, personal representatives and assigns, and no other
person will have any right or obligation hereunder. No such assignment shall
relieve any party of its obligations hereunder. The term "successors" shall
not include any purchaser of the Common Shares as such from any of the
Underwriters merely by reason of such purchase.
SECTION 19. Partial Unenforceability. The invalidity or
unenforceability of any Section, subsection, paragraph or provision of this
Agreement shall not affect the validity or enforceability of any other Section,
paragraph or provision hereof. If any Section, subsection, paragraph or
provision of this Agreement is for any reason determined to be invalid or
unenforceable, there shall be deemed to be made such minor changes (and only
such minor changes) as are necessary to make it valid and enforceable.
SECTION 20. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of Texas.
SECTION 21. General. This Agreement constitutes the entire agreement
of the parties to this Agreement and supersedes all prior written or oral and
all contemporaneous oral agreements, understandings and negotiations with
respect to the subject matter hereof. This Agreement may be executed in
several counterparts, each one of which shall be an original, and all of which
shall constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be
amended or modified, and the observance of any term of this Agreement may be
waived, only by a writing signed by the Company, the Selling Shareholders and
the Underwriters.
If the foregoing is in accordance with the Underwriters' understanding
of our agreement, kindly sign and return to us the enclosed copies hereof,
whereupon it will become a binding agreement among the Company, the Selling
Shareholders and the Underwriters, all in accordance with its terms.
Very truly yours,
INTERNET AMERICA, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
-27-
<PAGE> 28
SELLING SHAREHOLDERS
BCG PARTNERSHIP, LTD.
------------------------------------
WILLIAM O. HUNT, General Partner
WILLIAM O. HUNT RETIREMENT TRUST
By:
--------------------------------
WILLIAM O. HUNT, Trustee
--------------------------------
JACK T. SMITH
--------------------------------
CARL WESTCOTT
The foregoing Underwriting Agreement
is hereby confirmed and accepted by
the Representatives as of the date
first above written, acting as
Representatives of the several
Underwriters named in the attached
Schedule A.
HOAK BREEDLOVE WESNESKI & CO.
FERRIS, BAKER WATTS, INCORPORATED
By: HOAK BREEDLOVE WESNESKI & CO.
By:
-----------------------
Name:
---------------------
Title:
-------------------
-28-
<PAGE> 29
SCHEDULE A
<TABLE>
<CAPTION>
Number of Firm Common
Name of Underwriter Shares to be Purchased
- ------------------- ----------------------
<S> <C>
Hoak Breedlove Wesneski & Co.
Ferris, Baker Watts, Incorporated
[NAMES OF OTHER UNDERWRITERS]
---------------
Total 2,300,000
===============
</TABLE>
<PAGE> 30
SCHEDULE B
<TABLE>
<CAPTION>
Number of Common Shares
Name of Selling Shareholder to be Sold by Selling Shareholder
- --------------------------- ---------------------------------
Firm Common Option Common
Shares Shares
-------------- -------------
<S> <C> <C>
BCG Partnership, Ltd. 200,000 --
William O. Hunt Retirement Trust -- 120,000
Jack T. Smith 60,000 25,000
Carl Westcott 340,000 200,000
-------------- -------------
Total 600,000 345,000
</TABLE>
<PAGE> 1
EXHIBIT 3.5
APPLICATION FOR
CERTIFICATE OF WITHDRAWAL
OF
INTERNET AMERICA, INC.
To the Secretary of State
of the State of Texas:
Pursuant to the provisions of Article 8.14 of the Texas Business
Corporation Act, the undersigned corporation hereby applies for a certificate of
withdrawal from the State of Texas, and for that purpose submits the following
statement:
1. The name of the corporation is Internet America, Inc.
2. It is incorporated under the laws of Arizona.
3. It is not transacting business in the State of Texas.
4. It hereby surrenders its authority to transact business in said
state.
5. It revokes the authority of its registered agent in the State of
Texas to accept service of process and consents that service of process in any
action, suit or proceeding based upon any cause of action arising in the State
of Texas during the time it was authorized to transact business therein may
thereafter be made on it by service thereof on the secretary of state of the
State of Texas.
6. The post office address to which the secretary of state may mail a
copy of any process against the corporation that may be served on it is 350 N.
St. Paul, Suite 200, Dallas, Texas 75201.
7. All sums due or accrued by this corporation to the State of Texas
have been paid, or adequate provision has been made for the payment thereof.
8. All known creditors or claimants have been paid or provided for
and the corporation is not involved in or threatened with litigation in any
court in the State of Texas.
By: /s/ John N. Nanni
----------------------------------
John N. Nanni, President
<PAGE> 1
EXHIBIT 3.6
ARTICLES OF MERGER
MERGING
INTERNET AMERICA, INC., AN ARIZONA CORPORATION,
WITH AND INTO
INTRNTUSA, INC., A TEXAS CORPORATION
Pursuant to the provisions of Article 5.04 of the Texas Business
Corporation Act and Section 10-074 of the Arizona General Corporation Law, the
undersigned corporations adopt the following Articles of Merger for the purpose
of effecting a merger in accordance with the provisions of Article 5 of the
Texas Business Corporation Act and Article 4 of the Arizona General Corporation
Law.
1. An Agreement and Plan of Merger (the "Plan of Merger") adopted in
accordance with the provisions of Article 5.03 of the Texas Business Corporation
Act and the Arizona General Corporation Law attached hereto as Exhibit A and is
hereby incorporated herein by reference, which provides for the merger of
Internet America, Inc., an Arizona corporation ("IA Arizona"), with and into
INTRNTUSA, Inc., a Texas corporation ("IA Texas"), and resulting in IA Texas
being the surviving corporation (the "Surviving Corporation"). Pursuant to the
Plan of Merger, the Surviving Corporation's name will be changed to "Internet
America, Inc."
2. As to each of the undersigned corporations, the approval of whose
shareholders is required, the number of outstanding shares of stock of such
corporation entitled to vote on the Plan of Merger is as follows:
<TABLE>
<CAPTION>
Number of
Name of Shares
Corporation Outstanding
----------- -----------
<S> <C>
Internet America, Inc. 1,099,500 shares of
Common Stock
INTRNTUSA, Inc. 1 share of
Common Stock
</TABLE>
3. As to each of the undersigned corporations, the approval of whose
shareholders is required, the number of shares voted for and against the Plan of
Merger, respectively, is as follows:
<TABLE>
<CAPTION>
Total Total
Name of Voted Voted Total
Corporation For Against Abstaining
----------- --- ------- ----------
<S> <C> <C> <C>
Internet America, Inc. 1,099,500 0 0
INTRNTUSA, Inc. 1 0 0
</TABLE>
<PAGE> 2
4. IA Arizona hereby declares that the approval of the Plan of Merger
was duly authorized by all action required by the laws under which it was
incorporated or organized and by its constituent documents.
<PAGE> 3
IN WITNESS WHEREOF, the undersigned have executed these Articles of
Merger as of the 21st day of July, 1995.
INTRNTUSA, INC.,
a Texas corporation
/s/ John N. Nanni
------------------------------------------
John N. Nanni, President
INTERNET AMERICA, INC.,
an Arizona corporation
/s/ Robert J. Maynard
------------------------------------------
Robert J. Maynard, Chief Executive Officer
<PAGE> 4
Exhibit A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is made and
entered into as of July 21, 1995, by and among INTRNTUSA, Inc., a Texas
corporation ("IA Texas"), and Internet America, Inc., an Arizona corporation
("IA Arizona").
RECITALS:
A. IA Arizona desires to merge with and into IA Texas, and IA Texas
desires to merge with IA Arizona (the "Merger").
B. The terms and conditions of Merger, the mode of carrying the same
into effect, the manner and basis of canceling the shares of $.01 par value
common stock of IA Arizona ("IA Arizona Common Stock"), the issuance of the
shares of $.01 par value common stock of IA Texas ("IA Texas Common Stock"), and
such other terms and provisions as the parties desire to be stated in this
Agreement are set forth below.
C. The current shareholders of IA Arizona shall be the only
shareholders of IA Texas immediately upon the completion of the Merger, and each
such shareholder shall own the same percentage of IA Texas Common Stock as he
owned of IA Arizona Common Stock prior to the Merger.
D. The Boards of Directors of IA Arizona and IA Texas deem the Merger
to be desirable and in the best interests of their respective corporations and
shareholders.
THEREFORE, in consideration of the premises and the mutual agreements
contained herein, the parties hereto agree as follows:
AGREEMENTS
ARTICLE I
THE MERGER
1.1 Merger. At the Effective Time (as defined in Section 1.2), IA
Arizona shall be merged with and into IA Texas, the separate existence of IA
Arizona shall cease, and IA Texas, as the surviving corporation (the "Surviving
Corporation"), shall continue to exist by virtue of and shall be governed by the
laws of the State of Texas, and the name of the Surviving Corporation shall be
changed to "Internet America, Inc."
<PAGE> 5
1.2 Effective Time of Merger. The Articles of Merger setting forth the
information required by, and otherwise in compliance with, the Texas Business
Corporation Act with respect to the Merger, shall be delivered for filing with
the Secretary of State of the State of Texas. Certified copies of the Articles
of Merger and the Agreement and Plan of Merger ("Certified Copies"), issued by
the Secretary of State of the State of Texas and setting forth the information
required by, and otherwise in compliance with the General Corporation Law of the
State of Arizona, shall be delivered for filing to the Arizona Corporation
Commission. The Merger shall become effective on the day and at the time the
Secretary of State of the State of Texas files such Articles of Merger (the time
of such effectiveness is herein called the "Effective Time"). Notwithstanding
the foregoing, either IA Arizona or IA Texas, by action of its Board of
Directors, may terminate this Agreement at any time prior to the earlier of (i)
the filing of the Articles of Merger with the Secretary of State of the State of
Texas or (ii) the filing of the Certified Copies with the Arizona Corporation
Commission.
1.3 Effects of Merger. At the Effective Time, IA Texas, without further
action, as provided by the laws of the State of Arizona and the laws of the
State of Texas, shall succeed to and possess all of the rights, privileges,
powers, and franchises, of a public as well as of a private nature, of IA
Arizona; and all property, real, personal and mixed, and all debts due on
whatsoever account, including subscriptions to shares, and all other choses in
action, and all and every other interest, of or belonging to or due to IA
Arizona shall be deemed to be vested in IA Texas without further act or deed;
and the title to any real estate, or any interest therein, vested in IA Texas or
IA Arizona shall not revert or be in any way impaired by reason of the Merger.
Such transfer to and vesting in IA Texas shall be deemed to occur by operation
of law, and no consent or approval of any other person shall be required in
connection with any such transfer or vesting unless such consent or approval is
specifically required in the event of merger or consolidation by law or express
provision in any contract, agreement, decree, order, or other instrument to
which IA Texas or IA Arizona is a party or by which either of them is bound. IA
Texas shall thenceforth be responsible and liable for all debts, liabilities,
and duties of IA Arizona which may be enforced against IA Texas to the same
extent as if said debts, liabilities, and duties had been incurred or contracted
by it. Neither the rights of creditors nor any liens upon the property of IA
Arizona and IA Texas shall be impaired by the Merger.
1.4 Articles of Incorporation. The Articles of Incorporation of IA
Texas before the merger shall be and remain the Articles of Incorporation of IA
Texas after the Effective Time, until the same shall thereafter be altered,
amended, or repealed in accordance with law and IA Texas's Articles of
Incorporation; provided, however, that at the time of the Merger the Articles of
Incorporation of IA Texas shall be amended as provided on Exhibit I, attached
hereto and incorporated herein by reference, in order to change the name of the
Surviving Corporation to Internet America, Inc.
1.5 Bylaws. The Bylaws of IA Texas as in effect at the Effective Time
shall be and remain the Bylaws of IA Texas, as the Surviving Corporation, until
the same shall thereafter be
2
<PAGE> 6
altered, amended, or repealed in accordance with law, IA Texas's Articles of
Incorporation, or such Bylaws.
ARTICLE II
EFFECT ON OUTSTANDING STOCK
2.1 IA Texas Common Stock. At the Effective Time, all of the shares of
IA Texas Common Stock that were outstanding immediately before the Effective
Time shall, without any action on the part of the holder thereof, be canceled.
2.2 IA Arizona Common Stock. At the Effective Time, each outstanding
share of IA Arizona Common Stock shall, without any action on the part of the
holders thereof, be deemed converted into and represent the same number of
shares of IA Texas Common Stock as each holder of IA Arizona Common Stock owned
prior to the Merger.
2.3 Surrender of Certificates of IA Arizona Common Stock. At or after
the Effective Time, each holder of IA Arizona Common Stock that was outstanding
immediately before the Effective Time shall surrender the certificate(s) that
represented that holder's shares immediately before the Effective Time, and IA
Texas shall, upon receipt of such certificate(s), immediately cancel such
certificate(s) and issue certificate(s) for IA Texas Common Stock in the name of
that holder or in the name of any person that the holder so directs. Whether or
not so surrendered, at and after the Effective Time, the certificate(s)
representing IA Arizona Common Stock shall be deemed for all purposes to have
been canceled and shall not evidence any right or interest in or claim against
IA Texas or IA Arizona.
ARTICLE III
OFFICERS AND DIRECTORS
3.1 Directors. At the Effective Time, each of the persons who was
serving as a director of IA Texas immediately prior to the Effective Time shall
continue to be a director of IA Texas, and each shall serve in such capacity
until the next annual meeting of shareholders of IA Texas and until his
successor is duly elected and qualified or, if earlier, until his death,
resignation, or removal from office.
3.2 Officers. At the Effective Time, each of the persons who was
serving as an officer of IA Texas immediately prior to the Effective Time shall
continue to be an officer of IA Texas and shall continue to serve in such
capacity at the pleasure of the Board of Directors of IA Texas or, if earlier,
until their respective death or resignation.
3
<PAGE> 7
ARTICLE IV
MISCELLANEOUS
4.1 Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
4.2 Amendment. To the extent permitted by law, this Agreement may be
amended or supplemented at any time and in any respect, to the extent such
amendment or supplement relates to the Merger, by action taken by the Boards of
Directors of IA Arizona and IA Texas, if prior to the Effective Time, or by the
Board of Directors of IA Texas, if on or after the Effective Time.
4.3 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas with respect to all matters
except to the extent the laws of the State of Arizona apply to matters of
corporate governance relating to IA Arizona.
4.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same agreement.
4
<PAGE> 8
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement as of the date first written above.
INTRNTUSA, INC.,
a Texas corporation
By: /s/ Robert J. Maynard
---------------------------------
Title: CEO
INTERNET AMERICA, INC.,
an Arizona corporation
By:/s/ John N. Nanni
---------------------------------
Title: President
5
<PAGE> 1
EXHIBIT 4.2
CERTIFICATE OF DESIGNATION
OF THE
SERIES A PREFERRED STOCK
($.01 PAR VALUE)
OF
INTERNET AMERICA, INC.
Pursuant to Article 2.13 of the
TEXAS BUSINESS CORPORATION ACT
------------------------
The undersigned DOES HEREBY CERTIFY that the following resolution was
duly adopted on November 10, 1995 by the Board of Directors (the "Board") of
Internet America, Inc., a Texas corporation (the "Company"), acting pursuant to
the provisions of Article 2.13 of the Texas Business Corporation Act. Such
resolution was duly adopted by all necessary action on the part of the Company.
RESOLVED, that pursuant to authority expressly granted to and vested in
the Board by provisions of the Articles of Incorporation of the Company, as
amended (the "Articles of Incorporation"), the issuance of a series of Preferred
Stock, par value $.0l per share, which shall consist of 350,000 shares of
Preferred Stock designated as Series A Preferred Stock, be, and the same hereby
is, authorized, and the Board hereby fixes the designations, preferences,
limitations, and relative rights, including voting rights, of the shares of such
series to the same extent that such designations, preferences, limitations, and
relative rights could be stated if fully set forth in the Articles of
Incorporation, but subject to and within the limitations set forth in the
Articles of Incorporation as follows:
1. DESIGNATION: The distinctive serial designation of the series of
Preferred Stock authorized by this resolution shall be "Series A Preferred
Stock" (the "Series A Preferred Stock"). The number of shares of Series A
Preferred Stock shall initially be 350,000, which number may from time to time
be increased or decreased (but not below the number then outstanding) by the
Board of Directors. Shares of Series A Preferred Stock which have been issued
and reacquired in any manner, including shares purchased or converted, shall be
retired.
2. RANK. The Series A Preferred Stock, with respect to rights on
liquidation, winding up and dissolution, shall rank senior to all classes and
series of the common stock, par value $.0l per share ("Common Stock") of the
Company and may rank senior to other classes of Preferred Stock now or hereafter
authorized, issued or outstanding (collectively, the "Junior Securities").
Notwithstanding the preceding sentence, the Company reserves the right, and may
in its discretion,
<PAGE> 2
issue other series of Preferred Stock of the Company with dividend rights and
rights on liquidation, winding up and dissolution, pari passu with the Series A
Preferred Stock.
3. DIVIDENDS. The Series A Preferred Stock shall have no specified
dividend rate and the holders of the shares of Series A Preferred Stock shall be
entitled to receive dividends (i) pari passu with the holders of Common Stock as
though the shares of Series A Preferred Stock had been converted into shares of
Common Stock, and (ii) when, as and if otherwise declared by the Board of
Directors, out of funds legally available therefor.
4. LIQUIDATION PREFERENCE. (a) In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Company, then, before any distribution or payment shall be made to the holders
of any Junior Securities, including the Common Stock, the holders of the shares
of Series A Preferred Stock then outstanding shall be entitled to be paid out of
the assets of the Company available for distribution to its stockholders an
amount in cash equal to the purchase price for each share of Series A Preferred
Stock outstanding (which amount is hereinafter referred to as the "liquidation
preference"). If the assets of the Company are not sufficient to pay in full the
liquidation preference payments payable to the holders of all outstanding shares
of the Series A Preferred Stock (plus holders of any shares of Preferred Stock
holding rights on liquidation, winding up and dissolution pari passu with the
Series A Preferred Stock), then the holders of all such Preferred Shares shall
share ratably in any distribution of assets in accordance with the proportionate
amount which would be payable on such distribution if the amounts to which the
holders of outstanding shares of Series A Preferred Stock are entitled were paid
in full.
(b) For the purposes of this paragraph 4, neither the voluntary sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property or assets of the
Company nor the consolidation or merger of the Company with any other
corporation shall be deemed to be a voluntary or involuntary liquidation,
dissolution or winding up of the Company, unless such voluntary sale,
conveyance, exchange, transfer, consolidation or merger shall be in connection
with a plan of liquidation, dissolution or winding up of the Company.
5. CONVERSION. (a) Each share of the Series A Preferred Stock shall
be convertible at any time and from time to time into one share of the Company's
Common Stock (the "Common Stock Equivalent"). Each share of the Series A
Preferred Stock shall automatically be converted, without further action by the
Company, into one fully paid and nonassessable share of the Company's Common
Stock on the date thirty (30) days after the "successful completion" of a public
offering of shares of Common Stock of the Company pursuant to a registration
statement filed with and declared effective by the Securities and Exchange
Commission under the Securities Act of 1933, as amended (or such registration
statement shall have otherwise become effective). For purposes of this
subsection, "successful completion" shall mean that the receipt by the Company
of gross proceeds from such public offering of at least $5,000,000 where the per
share price of the Common Stock offered therein was at least $5.00 per share.
<PAGE> 3
(b) In order to exercise the conversion privilege, a holder of the
Series A Preferred Stock shall surrender the certificate(s) evidencing the
shares, duly endorsed or assigned to the Company or in blank, at the Company's
principal executive offices accompanied by written notice to the Company that
the holder elects to convert the Series A Preferred Stock. Upon the receipt by
the Company of the conversion election notice as contemplated in the previous
sentence (the "Conversion Date"), such election shall be binding on the electing
holder of the Series A Preferred Stock and all such holder's shares, without any
other action on the part of the holder thereof, shall be deemed automatically
converted into an equal number of fully paid and nonassessable shares of the
Common Stock, and at such time the rights of the holder in the Series A
Preferred Stock shall cease, and the holder shall be entitled to receive the
Common Stock issuable upon conversion and shall be treated for all purposes as
the record holder of such Common Stock at such time. As promptly as practicable
on or after the Conversion Date, the Company shall issue and deliver to the
holder a certificate or certificates for the number of shares of Common Stock
issuable upon conversion. In the event of a successful completion of a public
offering of shares as contemplated in paragraph 5(a), the Company shall issue
and deliver to the holder a certificate or certificates for the number of shares
of Common Stock issuable upon such conversion upon receipt by the Company from
the holder the certificate(s) evidencing the shares of Series A Preferred Stock
so converted, duly endorsed or assigned to the Company or in blank. On the date
set for automatic conversion as contemplated in paragraph 5(a), the rights of
the holder in the Series A Preferred Stock shall cease and such holder shall be
treated for all purposes as the record holder of such Common Stock at such time.
(c) The conversion rate of the Series A Preferred Stock is subject to
adjustment from time to time upon the occurrence of the events enumerated in
this paragraph 5(c). For purposes of this paragraph 5(c), "Common Stock" means
shares now or hereafter authorized of any class of common stock of the Company
and any other stock of the Company, however designated, that has the right
(subject to any prior rights of any class or series of Preferred Stock) to
participate in any distribution of the assets or earnings of the Company without
limit as to per share amount. If the Company:
(1) subdivides, combines or reclassifies its outstanding shares of
Common Stock; or
(2) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock or any other series of stock
convertible into Common Stock;
then the number of shares of Common Stock comprising the Common Stock Equivalent
shall be proportionately adjusted to reflect such action so that the total
number of shares comprising the Common Stock Equivalent shall be equal to that
number of shares that would have been owned immediately following such action if
the conversion election had been exercised immediately prior to such actions.
Any fractional shares resulting from any such adjustment shall be eliminated and
the number of shares of Common Stock to be issued shall be rounded up to the
nearest whole share. The adjustment shall become effective immediately after the
record date in the case of a dividend
<PAGE> 4
or distribution and immediately after the effective date in the case of a
subdivision, combination or reclassification.
6. VOTING RIGHTS. In addition to any other rights provided in the
Company's Bylaws or by law to the Series A Preferred Stock voting as a class,
each share of Series A Preferred Stock shall entitle the holder thereof to one
vote per share and such holders shall be entitled to vote on all matters as to
which holders of Common Stock shall be entitled to vote, in the same manner and
with the same effect as such holders of Common Stock, voting together with the
holders of Common Stock and Series A Preferred Stock as one class.
IN WITNESS WHEREOF, the undersigned has caused this Certificate to be
made under the seal of the Company and signed by John N. Nanni and attested by
Cindy B. Carradine, this 13th day of November, 1995.
/s/ John N. Nanni
---------------------------------
John N. Nanni, President
[SEAL]
/s/ Cindy B. Carradine
---------------------------------
Cindy B. Carradine, Secretary
<PAGE> 1
EXHIBIT 4.3
AMENDED CERTIFICATE OF DESIGNATION
OF THE
SERIES A PREFERRED STOCK
($.01 PAR VALUE)
OF
INTERNET AMERICA, INC.
Pursuant to Article 2.13 of the
TEXAS BUSINESS CORPORATION ACT
----------------------------
The undersigned DOES HEREBY CERTIFY that the following resolution was
duly adopted on March 22, 1996, by the Board of Directors (the "Board") of
Internet America, Inc., a Texas corporation (the "Company"), acting pursuant to
the provisions of Article 2.13 of the Texas Business Corporation Act. Such
resolution was duly adopted by all necessary action on the part of the Company.
WHEREAS, pursuant to resolutions adopted on November 10, 1995 by the
Board of Directors of the Company, the Board of Directors authorized a series of
preferred stock entitled "Series A Preferred Stock" and authorized the Company
to issue 350,000 shares of Series A Preferred Stock; and
WHEREAS, the Company has or anticipates receiving subscriptions for an
aggregate amount of Series A Preferred Stock in excess of 350,000 shares; and
WHEREAS, the Board of Directors desire to authorize to increase the
number of Series A Preferred Stock which the Company may issue; and
WHEREAS, the initial designation for the Series A Preferred Stock
contemplates an increase from time to time in the number of shares to be issued
thereunder.
NOW, THEREFORE, BE IT RESOLVED, that pursuant to authority expressly
granted to and vested in the Board of Directors by provisions of the Articles of
Incorporation of the Company, as amended (the "Articles of Incorporation"), the
number of Series A Preferred Stock, which the Company may issue shall be
increased to 400,000, which number may from time to time be further increased or
decreased (but not below the number then outstanding) by the Board of Directors.
The Series A Preferred Stock to be issued shall have such designations,
preferences,
<PAGE> 2
limitations and relative rights, including voting rights, as set forth in the
designation of the Series A Preferred Stock as adopted by the Board of Directors
on November 10, 1995.
FURTHER RESOLVED, that the officers of the Company be, and each is
hereby authorized, empowered and directed, for and on behalf of the Company, to
execute any and all such certificates, documents and instruments as each may
deem necessary or advisable to consummate any filings as may be required with
the Secretary of State of Texas and/or as otherwise to fulfill the intent of the
foregoing resolutions.
IN WITNESS WHEREOF, the undersigned have caused this Certificate to be
made under the seal of the Company and signed by Robert J. Maynard and attested
by John Nanni this 3rd day of April, 1996.
/s/ Robert J. Maynard
---------------------------------
Robert J. Maynard, President
[SEAL]
/s/ John Nanni
---------------------------------
John Nanni, Secretary
<PAGE> 1
EXHIBIT 4.4
CERTIFICATE OF DESIGNATION
OF THE
SERIES B PREFERRED STOCK
($.01 PAR VALUE)
OF
INTERNET AMERICA, INC.
Pursuant to Article 2.13 of the
TEXAS BUSINESS CORPORATION ACT
------------------------------------
The undersigned DOES HEREBY CERTIFY that the following resolution was
duly adopted on May 15, 1996, by the Board of Directors (the "Board") of
Internet America, Inc., a Texas corporation (the "Company"), acting pursuant to
the provisions of Article 2.13 of the Texas Business Corporation Act. Such
resolution was duly adopted by all necessary action on the part of the Company.
WHEREAS, pursuant to resolutions adopted on May 15, 1996 by the Board
of Directors of the Company, the Board of Directors authorized a series of
preferred stock entitled "Series B Preferred Stock" and authorized the Company
to issue 300,000 shares of Series B Preferred Stock; and
WHEREAS, the Board of Directors is authorized within the limitations
and restrictions stated in the Articles of Incorporation of the Company, to fix
by resolution or resolutions the designation of each series of preferred stock,
$.01 par value of the Company (the "Preferred Stock") and the powers,
preferences and relative, participating, optional or other special rights and
qualifications, limitations or restrictions thereof, including, without limiting
the generality of the foregoing, such provisions as may be desired concerning
voting, dissolution or distribution of assets, conversion or exchange, and such
other subjects or matters as may be fixed by resolutions of the Board of
Directors under the Texas Business Corporation Act; and
WHEREAS, it is the desire of the Board of Directors, pursuant to its
authority as aforesaid, to authorize and fix the term of a series of Preferred
Stock and the number of shares constituting such series.
NOW, THEREFORE, BE IT RESOLVED, that pursuant to authority expressly
granted to and vested in the Board by provisions of the Articles of
Incorporation of the Company, as amended (the "Articles of Incorporation"), the
issuance of a series of Preferred Stock, par value $.01 per share, which shall
consist of 300,000 shares of Preferred Stock designated as Series B Preferred
Stock, be, and the same hereby is, authorized, and the Board hereby fixes the
designation, preferences, limitations, and relative rights, including voting
rights, of the shares of such series to
<PAGE> 2
the same extent that such designations, preferences, limitations, and relative
rights could be stated if fully set forth in the Articles of Incorporation, but
subject to and within the limitations set forth in the Articles of Incorporation
as follows:
1. DESIGNATION. The distinctive serial designation of the series of
Preferred Stock authorized by this resolution shall be "Series B Preferred
Stock" (the "Series B Preferred Stock"). The number of shares of Series B
Preferred Stock shall initially be 300,000, which number may from time to time
be increased or decreased (but not below the number then outstanding) by the
Board of Directors. Shares of Series B Preferred Stock which have been issued
and reacquired in any manner, including shares purchased or converted, shall be
retired.
2. RANK. The Series B Preferred Stock, with respect to rights on
liquidation, winding up and dissolution, shall rank senior to all classes and
series of the common stock, par value $.01 per share ("Common Stock") of the
Company and may rank senior to other classes of Preferred Stock now or hereafter
authorized, issued or outstanding (collectively, the "Junior Securities"). The
Series B Preferred Stock, with respect to rights on liquidation shall rank pari
passu with the previously issued Series A Preferred Stock. Notwithstanding the
preceding sentences, the Company reserves the right and may in its discretion,
issue other series of Preferred Stock of the Company with dividend rights and
rights on liquidation, winding up and dissolution, pari passu with the Series B
Preferred Stock.
3. DIVIDENDS. The Series B Preferred Stock shall have no specified
dividend rate and the holders of the shares of Series B Preferred Stock shall be
entitled to receive dividends (i) pari passu with the holders of Common Stock
and the Series A Preferred Stock as though the shares of Series B Preferred
Stock had been converted into shares of Common Stock, and (ii) when, as and if
otherwise declared by the Board of Directors, out of funds legally available
therefor.
4. LIQUIDATION PREFERENCES. (a) In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Company, then, before any distribution or payment shall be made to the holders
of any Junior Securities, including the Common Stock, the holders of the shares
of Series B Preferred Stock then outstanding shall be entitled to be paid out of
the assets of the Company available for distribution to its stockholders an
amount in cash equal to the purchase price for each share of Series B Preferred
Stock then outstanding shall be entitled to be paid out of the assets of the
Company available for distribution to its stockholders an amount in cash equal
to the purchase price for each share of Series B Preferred Stock outstanding
(which amount is hereinafter referred to as the "liquidation preference"). The
liquidation preference payments payable to the holders of Series B Preferred
Stock shall be made pari passu with the holders of Series A Preferred Stock
based on the aggregate purchase price for the shares of the Series A Preferred
Stock and Series B Preferred Stock, respectively, held by each such holder. If
the assets of the Company are not sufficient to pay in full the liquidation
preference payments payable to the holders of all outstanding shares of the
Series B Preferred Stock (plus holders of any shares of Preferred Stock holding
rights on liquidation, winding up and dissolution pari passu with the Series B
Preferred Stock, including the Series A Preferred Stock), then the holders of
all such Preferred
<PAGE> 3
Shares shall share ratably in any distribution of assets in accordance with the
proportionate amount which would be payable on such distribution if the amounts
to which the holders of outstanding shares of Series B Preferred Stock are
entitled were paid in full.
(b) For the purposes of this paragraph 4, neither the voluntary sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property or assets of the
Company nor the consolidation or merger of the Company with any other
corporation shall be deemed to be a voluntary or involuntary liquidation,
dissolution or winding up of the Company, unless such voluntary sale,
conveyance, exchange, transfer, consolidation or merger shall be in connection
with a plan of liquidation, dissolution or winding up of the Company.
5. CONVERSION. (a) Each share of the Series B Preferred Stock shall
be convertible at any time and from time to time into one share of the Company's
Common Stock (the "Common Stock Equivalent"). Each share of the Series B
Preferred Stock shall automatically be converted, without further action by the
Company, into one fully paid and nonassessable share of the Company's Common
Stock on the date thirty (30) days after the "successful completion" of a public
offering of shares of Common Stock of the Company pursuant to a registration
statement filed with and declared effective by the Securities and Exchange
Commission under the Securities Act of 1933, as amended (or such registration
statement shall have otherwise become effective). For purposes of this
subsection, "successful completion" shall mean that the receipt by the Company
of gross proceeds from such public offering of at least $5,000,000 where the per
share price of the Common Stock offered therein was at least $7.50 per share.
(b) In order to exercise the conversion privilege, a holder of the
Series B Preferred Stock shall surrender the certificate(s) evidencing the
shares, duly endorsed or assigned to the Company or in blank, at the Company's
principal executive offices accompanied by written notice to the Company that
the holder elects to convert the Series B Preferred Stock. Upon the receipt by
the Company of the conversion election notice as contemplated in the previous
sentence (the "Conversion Date"), such election shall be binding on the electing
holder of the Series B Preferred Stock and all such holder's shares, without any
other action on the part of the holder thereof, shall be deemed automatically
converted into an equal number of fully paid and nonassessable shares of the
Common Stock, and at such time the rights of the holder in the Series B
Preferred Stock shall cease, and the holder shall be entitled to receive the
Common Stock issuable upon conversion and shall be treated for all purposes as
the record holder of such Common Stock at such time. As promptly as practicable
on or after the Conversion Date, the Company shall issue and deliver to the
holder a certificate or certificates for the number of shares of Common Stock
issuable upon conversion. In the event of a successful completion of a public
offering of shares as contemplated in paragraph 5(a), the Company shall issue
and deliver to the holder a certificate or certificates for the number of shares
of Common Stock issuable upon such conversion upon receipt by the Company from
the holder the certificate(s) evidencing the shares of Series B Preferred Stock
so converted, duly endorsed or assigned to the Company or in blank. On the date
set for automatic conversion as contemplated in paragraph 5(a), the rights of
the holder in the Series B Preferred Stock shall cease
<PAGE> 4
and such holder shall be treated for all purposes as the record holder of such
Common Stock at such time.
(c) The conversion rate of the Series B Preferred Stock is subject to
adjustment from time to time upon the occurrence of the events enumerated in
this paragraph 5(c). For purposes of this paragraph 5(c), "Common Stock" means
shares now or hereafter authorized of any class of common stock of the Company
and any other stock of the Company, however designated, that has the right
(subject to any prior rights of any class or series of Preferred Stock) to
participate in any distribution of the assets or earnings of the Company without
limit as to per share amount. If the Company:
(1) subdivides, combines or reclassifies its outstanding shares of
Common Stock; or
(2) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock or any other series of stock
convertible into Common Stock;
then the number of shares of Common Stock comprising the Common Stock Equivalent
shall be proportionately adjusted to reflect such action so that the total
number of shares comprising the Common Stock Equivalent shall be equal to that
number of shares that would have been owned immediately following such action if
the conversion election had been exercised immediately prior to such actions.
Any fractional shares resulting from any such adjustment shall be eliminated and
the number of shares of Common Stock to be issued shall be rounded up to the
nearest whole share. The adjustment shall become effective immediately after the
record date in the case of a dividend or distribution and immediately after the
effective date in the case of a subdivision, combination or reclassification.
6. VOTING RIGHTS. In addition to any other rights provided in the
Company's Bylaws or by law to the Series B Preferred Stock voting as a class,
each share of Series B Preferred Stock shall entitle the holder thereof to one
vote per share and such holders shall be entitled to vote on all matters as to
which holders of Common Stock shall be entitled to vote, in the same manner and
with the same effect as such holders of Common Stock, voting together with the
holders of Common Stock, Series A Preferred Stock and Series B Preferred Stock
as one class.
IN WITNESS WHEREOF, the undersigned have caused this Certificate to be
made under the seal of the Company and signed by Robert J. Maynard and attested
by John Nanni this 20th day of May, 1996.
/s/ Robert J. Maynard
----------------------------------
Robert J. Maynard, President
[SEAL]
/s/ John Nanni
----------------------------------
John Nanni, Secretary
<PAGE> 1
EXHIBIT 10.2
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (the "Agreement") is entered into
effective this 31st day of July, 1996 by and between INTERNET AMERICA, INC., a
Texas corporation ("Buyer"), and WEBSTAR, INC., a Texas corporation ("Seller").
W I T N E S S E T H:
WHEREAS, Seller is in the business of providing dial-up internet
access services and related services to customers, both individuals and
businesses, in the San Angelo, Texas market (the "Business"); and
WHEREAS, the parties hereto desire to enter into this Agreement for
the purchase of the Business and to establish the parties ongoing business
relationship regarding other matters.
NOW, THEREFORE, for and in consideration of the mutual understandings,
promises and covenants contained herein, the parties hereto agree as follows:
1. TERMS OF PURCHASE AND SALE; CLOSING.
1.1 Purchase and Sale of Certain Assets of the Seller. Upon the
basis of the representations and warranties and subject to the terms and
conditions of this Agreement, Buyer agrees to purchase and acquire from Seller,
and Seller agrees to sell, convey, transfer, assign, and deliver to Buyer, on
the Closing Date (as defined in Section 1.5 hereto) the Assets, free and clear
of any pledge, lien, claim or other encumbrance of any kind whatsoever, except
for those obligations as described in Section 1.1(b) below, against receipt on
the Closing Date of the Purchase Price specified in Section 1.4 hereof. The term
"Assets" shall mean all of the assets of the Seller relating to the Business
including but not limited to:
(a) All of Seller's rights, title and interest in and to
those certain tangible assets and property as set forth on Schedule 1.1(a) (the
"Fixed Assets"); and
(b) All of Seller's rights, title and interest in Lease
Agreements as set forth in Schedule 1.1(b), providing each named Lessor agrees
to the assumption by Buyer; and
(c) All of Seller's cash accounts, accounts receivable,
billing receipts and collections systems, deposits; and
(d) All of Seller's rights, title and interest in and to
all of Seller's customers as of the effective date of this agreement, customer
lists, all goodwill associated therewith (the "Customers"); and
(e) All of Seller's existing marketing and promotional
materials.
ASSET PURCHASE AGREEMENT - Page 1
<PAGE> 2
1.2 H & H Liabilities. Buyer shall not assume any liabilities,
incurred by Seller, to H & H Consulting (related party of Seller).
1.3 Purchase Price. The purchase price (the "Purchase Price") for
the Assets shall be cash in the amount of $8,000.00 and the issuance and
delivery by Buyer of its promissory note in the original principal amount of
$352,125.00 (the "Note"), such Note to be substantially in the form attached
hereto as Exhibit "A".
1.4 Instruments of Transfer and Conveyance.
(a) The sale, conveyance, transfer, assignment and
delivery of the Assets, as herein provided, shall be effected by delivery by
Seller on the Closing Date of such bills of sale, endorsements, assignments,
certificates, drafts, checks or other instruments of transfer and conveyance,
as Buyer shall reasonably deem necessary, to vest in Seller good and marketable
title to the Assets. Except for those obligations as described in Section
1.1(b) above, such instruments of transfer and conveyance shall contain
warranties as to marketable title and that such Assets are free and clear of
all pledges, liens, options, security interests, mortgages, claims, charges or
other encumbrances of any kind whatsoever.
(b) Seller agrees that it will from time to time after
the Closing Date, upon the request of Buyer, promptly do, execute, acknowledge
and deliver, and will cause to be done, executed, acknowledged and delivered,
all such further instruments, certificates, assignments, transfers,
conveyances, powers of attorney, assurances and other documents, as may be
reasonably necessary or advisable to assure or confirm Buyer's free and clear
title to and interest in, or to enable Buyer to deal with and dispose of, any
of the Assets.
1.5 Closing. The closing hereunder (the "Closing") shall be held
at the offices of the Buyer as of the effective date of this Agreement, or at
such other time and place as the parties may agree upon (the "Closing Date").
At the Closing:
(a) Seller will execute and deliver to Buyer the
following: a General Bill of Sale and Conveyance in the form acceptable to
Buyer; and such other instruments of transfer and conveyance as are required
pursuant to Section 1.4 above; and
(b) Buyer will execute and deliver to Seller the Note;
and
(c) Each party will execute and deliver to the others
such other agreements, certificates, assignments, consents and other documents
as are required or specified in this Agreement or as may reasonably be
requested by the other party to evidence compliance with the terms hereof
Simultaneously with the deliveries contemplated herein, Seller
will use its best efforts and take all such other action as may be reasonably
necessary to put Buyer in possession and control of the Assets.
2. REPRESENTATIONS AND WARRANTIES OF SELLER.
Seller represents and warrants to Buyer as follows:
ASSET PURCHASE AGREEMENT - Page 2
<PAGE> 3
2.1 Corporate Status. Seller is a corporation duly organized,
validly existing and in good standing under the laws of Texas and has all
necessary corporate power and authority to carry on its business as now
conducted and to own or lease and operate its properties, and to execute,
deliver and perform its obligations hereunder.
2.2 Authority for Agreement. This Agreement constitutes the valid
and legally binding obligation of Seller and the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary action on the part of the board of
directors and shareholders of Seller, will not conflict with or result in any
violation of, or default under, any provisions of the charter or bylaws of
Seller and will not conflict with or result in any violation of, or default
with respect to, any mortgage, indenture, lease, agreement or other instrument
affecting the Assets, or to which Seller or its affiliates, is a party, or by
which Seller or its affiliates is bound.
2.3 Properties. Seller has good, valid and marketable title to
the Assets subject to no liens, encumbrances, security interests or mortgages,
except for those obligations as described in Section 1.1(b) above. The legal
and beneficial interests in the Assets are owned exclusively by Seller.
2.4 Brokers, Finders, etc. No broker, finder or other financial
consultant has acted on behalf of Seller or its affiliates in connection with
the transactions contemplated by this Agreement and all negotiations relative
to this Agreement have been carried on directly without the intervention of any
such third party.
3. REPRESENTATIONS AND WARRANTIES OF BUYER.
3.1 Corporate Status. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of the State of Texas.
Buyer has full power and authority to execute and deliver the Agreement on
Buyer's behalf, and to perform its obligations hereunder.
3.2 Authority for Agreement. Buyer has all necessary power and
authority to execute and deliver this Agreement and to carry out its
obligations hereunder. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by the Board of Directors of Buyer. No notice, consent, approval, order or
authorization of, or registration, declaration or filing with, any person or
entities, or with any governmental authority is required in connection with the
execution and delivery of this Agreement or the consummation by Seller of the
transactions contemplated hereby or thereby.
3.3 Brokers, Finders, etc. No broker, finder or other financial
consultant has acted on behalf of Buyer or its affiliates in connection with
the transactions contemplated by this Agreement and all negotiations relative
to this Agreement have been carried on directly without the intervention of any
such third party.
ASSET PURCHASE AGREEMENT - Page 3
<PAGE> 4
4. INDEMNIFICATION.
4.1 Indemnification.
(a) Seller covenants and agrees to indemnify and hold
Buyer harmless from and against any and all losses, liabilities, damages,
demands, claims, suits, actions, judgments or causes of action, assessments,
costs and expenses, including, without limitation, interest, penalties,
attorneys' fees, any and all expenses incurred in investigating, preparing or
defending against any litigation, commenced or threatened, in writing or any
other claim, and any and all amounts paid in settlement of any claim asserted
in writing or litigation, asserted against, resulting to, imposed upon, or
incurred or suffered by Buyer, directly or indirectly, as a result of or
arising from the operation of the Business prior to the Closing Date and during
the "Transitional Period" ("Transitional Period" is defined as the period
between closing date and cessation of Seller's duties assumed under paragraph
5.3), other than as otherwise contemplated herein.
(b) Buyer covenants and agrees to indemnify and hold
Seller harmless from and against any and all losses, liabilities, damages,
demands, claims, suits, actions, judgments or causes of action, assessments,
costs and expenses, including, without limitation, interest, penalties,
attorneys' fees, any and all expenses incurred in investigating, preparing or
defending against any litigation, commenced or threatened, in writing or any
other claim, and any and all amounts paid in settlement of any claim asserted
in writing or litigation, asserted against, resulting to, imposed upon, or
incurred or suffered by Seller, directly or indirectly, as a result of or
arising from the operation of the Business from and after the Closing Date,
other than as otherwise contemplated herein.
5. POST CLOSING COVENANTS.
5.1 Covenant Not to Compete. In exchange for the representations
and warranties and fulfillment of the agreements contained herein by Buyer,
Seller and each of its principals severally agrees not to compete, either
directly or indirectly, as an officer, director, employee, partner, consultant
or shareholder, for a period of three (3) years commencing with the Closing
Date in the Territory, in any internet access endeavor which is in competition
with the Business. For purposes of this Section 5.1, the term "Territory"
shall mean any area where Buyer has a local point-of-presence (defined as
equipment installed to cover a particular geographical area). Additionally,
Seller agrees during the one year period following the Closing Date to forward
any and all sales leads generated from the Territory to Buyer.
5.2 Utilities. Seller will transfer all utilities servicing the
Business, including telephones, water and power to Buyer on or prior to closing
date.
5.3 Consulting Fees. Buyer agrees to pay Seller a fee in the
amount of $3,500.00 per month, payable on the first day of the month, for
services consisting of continuation of billing, collection, and operating
activities during the Transitional Period. Seller or Buyer may cancel these
consulting services with seven days notice before the start of any month.
ASSET PURCHASE AGREEMENT - Page 4
<PAGE> 5
6. MISCELLANEOUS PROVISIONS.
6.1 Entire Agreement. This Agreement, together with all the
schedules and exhibits hereto, constitutes the entire agreement among the
parties hereto pertaining to the subject matter hereof and supersedes all prior
and contemporaneous agreements,. understandings, negotiations and discussions,
whether oral or written, of the parties, and there are no warranties,
representations or other agreements between the parties in connection with the
subject matter hereof except as specifically set forth herein.
6.2 Amendment. This Agreement may be amended by the parties
hereto at any time, but only by an instrument in writing duly executed and
delivered on behalf of each of the parties hereto.
6.3 Headings. The section headings are not to be considered part
of this Agreement and are included solely for convenience and are not intended
to be full or accurate descriptions of the contents thereof. References to
Sections are to portions of this Agreement unless the context requires
otherwise.
6.4 Exhibits, etc. Exhibits and schedules referred to in this
Agreement are an integral part of and are incorporated in this Agreement by
reference.
6.5 Assignment; Successors and Assigns. All of the terms and
provisions of this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective transferees, successors and
assigns.
6.6 Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered or sent Federal Express or other reputable overnight
courier, postage prepaid or by certified mail, return receipt requested:
(a) if to the Seller:
WEBSTAR, INC.
P.O. Box 505
Savoy, TX 75479
(b) if to Buyer:
INTERNET AMERICA, INC.
One Dallas Centre
350 N. St. Paul Street, Suite 200
Dallas, Texas 75201
6.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.
ASSET PURCHASE AGREEMENT - Page 5
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6.8 Severability. The provisions of this Agreement are severable,
and in the event that any one or more provisions are deemed illegal or
unenforceable, the remaining provisions shall remain in full force and effect.
6.9 Counterparts. This Agreement may be executed simultaneously
in any number of counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereby have duly executed this
Agreement as of the day and year first above written.
INTERNET AMERICA, INC.
a Texas corporation
By: /s/ MICHAEL MAY
--------------------------------
Its: SR VP
-------------------------------
WEBSTAR, INC.
a Texas corporation
By: /s/ WALT HARRIS
--------------------------------
Its: President
-------------------------------
Executed by the undersigned as of the day and year first above written
to reflect the undersigned's agreement to the provisions of Section 5.1 hereof.
/s/ Walt Harris
- -------------------------------------- -----------------------------------
Signature Signature
Walt Harris
- -------------------------------------- -----------------------------------
Please Print Name Please Print Name
ASSET PURCHASE AGREEMENT - Page 6
<PAGE> 1
EXHIBIT 10.3
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (the "Agreement") is entered into
effective this 26th day of November, 1997 by and between WHY?
TELECOMMUNICATIONS, INC., a Texas corporation ("Seller"), and INTERNET AMERICA,
INC., a Texas corporation ("Buyer").
W I T N E S S E T H:
WHEREAS, Seller is in the business of providing internet access
services to its customers (the "Business"); and
WHEREAS, the parties hereto desire to enter into this Agreement for the
purchase of the Business and to establish the parties ongoing business
relationship regarding other matters; and
WHEREAS, certain defined terms as utilized in this Agreement are set
forth in Article 7 of this Agreement and such terms shall have the meanings set
forth therein;
NOW, THEREFORE, for and in consideration of the mutual understandings,
promises and covenants contained herein (including the recitals set forth
above), the parties hereto agree as follows:
1. TERMS OF PURCHASE AND SALE; CLOSING.
1.1 Purchase and Sale of Certain Assets of the Seller. Upon the basis
of the representations and warranties and subject to the terms and conditions of
this Agreement, Buyer agrees to purchase and acquire from Seller, and Seller
agrees to sell, convey, transfer, assign, and deliver to Buyer, on or before the
Closing Date (as defined in Section 1.6 hereto) the Assets, free and clear of
any pledge, lien, claim or other encumbrance of any kind whatsoever, against
receipt on the Closing Date and thereafter of the Purchase Price as specified in
Section 1.3 hereof. The term "Assets" shall mean:
ASSET PURCHASE AGREEMENT - Page 1
<PAGE> 2
(a) all of Seller's right, title and interest in and to the
list of its Subscribers including all pertinent customer information for each
Subscriber and all pertinent credit and/or other billing information for each
Subscriber and the expiration date of each Subscriber's service agreement;
(b) all of Seller's right, title and interest in and to all
service agreements for each Subscriber relating to the provision of internet
access services; and
(c) all related goodwill with regard to any of the foregoing.
1.2 Excluded Assets. Buyer shall not purchase from Seller, and Seller
shall not sell to Buyer, any assets which are not described on Section 1.1 (the
"Excluded Assets").
1.3 Purchase Price. The purchase price (the "Purchase Price") for the
Assets shall be calculated and paid as follows:
(a) on the Closing Date, Buyer will pay to Seller an advance
(the "Advance") of $50,000 which shall be credited against the first amounts due
to Seller representing Adjusted Monthly Payments; and
(b) on the tenth day of each month following the calculation
of any Adjusted Monthly Payment, Buyer will pay to Seller seventy five percent
(75%) of the Adjusted Monthly Payment then due after deduction of any amount of
the Advance not previously deducted. The parties recognize that the calculation
of Adjusted Monthly Payments shall be cumulative so that, in the event the
calculation of the Adjusted Monthly Payment for any month is negative, no
amounts shall be due for the following months until the cumulative amounts
(including such negative amount) shall be positive and then only up to such
positive amount;
ASSET PURCHASE AGREEMENT - Page 2
<PAGE> 3
(c) in addition to the Adjusted Monthly Payment, on the tenth
day of each month following the calculation of the Bonus Amount, Buyer will pay
to Seller seventy-five percent (75%) of the Bonus Amount then due after
deduction of any amount of the Advance not previously deducted against the
Adjusted Monthly Payment contemplated in Section 1.3(b), above. The parties
shall treat payments of Bonus Amounts on a cumulative basis in the same fashion
as the Adjusted Monthly Payments; and
(d) on January 10, 1999 Buyer shall pay to Seller an amount
not to exceed the cumulative Adjusted Monthly Payments and Bonus Amounts
previously withheld from Seller less the Advance and all Adjusted Monthly
Payments and Bonus Amounts actually paid.
On or before the tenth day of each month during which any payments
under this Agreement may be due and payable, Buyer shall provide Seller a
written calculation of all Accepted Subscribers and Rejected Subscribers for the
immediately preceding calendar month.
Seller shall have the right to inspect such books and records of Buyer,
not more often than once every three months, upon reasonable notice to the Buyer
and during the normal business hours of the Buyer, in order to allow Seller to
audit the calculations made by Buyer under this Section 1.3.
1.4 Liabilities Assumed. In exchange for the Payment Credit Buyer
agrees to provide the Buyer's standard internet access services to the
Subscribers for the balance of their original prepaid service agreement provided
(i) no such service agreement shall have a term in excess of twelve (12) months
from the date of this Agreement and (ii) each Subscriber complies with the
acceptable use policies of Buyer. Buyer does not assume any other obligation or
liability of Seller including, but not limited to, any obligation of Seller to
maintain web pages for any Subscriber
ASSET PURCHASE AGREEMENT - Page 3
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or the obligation of Seller to provide any refunds, rebates, commissions, fees
or payments to any Subscriber of other Person, all of which shall remain with
Seller.
1.5 Instruments of Transfer and Conveyance.
(a) The sale, conveyance, transfer, assignment and delivery of
the Assets, as herein provided, shall be effected by delivery by Seller on the
Closing Date of such bills of sale, endorsements, assignments, certificates,
drafts, checks or other instruments of transfer and conveyance as Buyer shall
reasonably deem necessary to vest in Buyer good and marketable title to the
Assets. Such instruments of transfer and conveyance shall contain warranties as
to marketable title and that such Assets are free and clear of all pledges,
liens, options, security interests, mortgages, claims, charges or other
encumbrances of any kind whatsoever.
(b) Seller agrees that it will from time to time after the
Closing Date, upon the request of Buyer, promptly do, execute, acknowledge and
deliver, and will cause to be done, executed, acknowledged and delivered, all
such further instruments, certificates, assignments, transfers, conveyances,
powers of attorney, assurances and other documents, as may be reasonably
necessary or advisable to assure or confirm Buyer's free and clear title to and
interest in, or to enable Buyer to deal with and dispose of, any of the Assets.
(c) Seller agrees to provide, and continue paying all monthly
amounts relating to, and make available to Buyer, all telecommunication charges
relating to Seller's Dallas Dial-Up, Ft. Worth Dial-Up and Business Line
Services through December 8, 1997 and thereafter until December 31, 1997 Seller
agrees to use its best efforts to maintain such lines in service.
ASSET PURCHASE AGREEMENT - Page 4
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1.6 Closing. The closing hereunder (the "Closing") shall be held at the
offices of Buyer as of the effective date of this Agreement, or at such other
time and place as the parties may agree upon (the "Closing Date"). At the
Closing:
(a) Seller will execute and deliver to Buyer the following: a
General Bill of Sale and Conveyance in the form acceptable to Buyer and such
other instruments of transfer and conveyance as are required pursuant to Section
1.5 above;
(b) Buyer will execute and deliver to Seller an Assumption of
Liabilities relating to the liabilities set forth in Section 1.4 above; and
(c) Each party will execute and deliver to the others such
other agreements, certificates, assignments, consents and other documents as are
required or specified in this Agreement or as may reasonably be requested by the
other party to evidence compliance with the terms hereof.
Simultaneously with the deliveries contemplated herein, Seller will use
its best efforts and take all such other action as may be reasonably necessary
to put Buyer in possession and control of the Assets.
1.7 License. In addition to the Assets purchased hereunder, Seller
hereby grants to Seller a one-year, paid-up, nontransferable, exclusive license
to use Seller's domain name "Why.net." Following the expiration of one-year, all
right, title and interest in and to such domain name shall revert back to Seller
without further action by either party hereto.
2. REPRESENTATIONS AND WARRANTIES OF SELLER.
Seller represents and warrants to Buyer as follows:
ASSET PURCHASE AGREEMENT - Page 5
<PAGE> 6
2.1 Corporate Status. Seller is a corporation duly organized, validly
existing and in good standing under the laws of Texas and has all necessary
corporate power and authority to carry on its business as now conducted and to
own or lease and operate its properties, and to execute, deliver and perform its
obligations hereunder.
2.2 Authority for Agreement. This Agreement constitutes the valid and
legally binding obligation of Seller and the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by all necessary action on the part of the board of directors
(listed on Schedule 2.2) and all shareholders (listed on Schedule 2.2) of
Seller, will not conflict with or result in any violation of, or default under,
any provisions of the charter or bylaws of Seller, will not conflict with or
result in any violation of, or default with respect to, any mortgage, indenture,
lease, agreement or other instrument affecting the Assets, or to which Seller or
its affiliates is a party, or by which Seller or its affiliates is bound and
will not require the consent or approval or notice to any Person or any
governmental agency.
2.3 Properties. Seller has good, valid and marketable title to the
Assets subject to no liens, encumbrances, security interests or mortgages
whatsoever. The legal and beneficial interests in the Assets are owned
exclusively by Seller.
2.4 Taxes. Seller has paid all federal, state and local income, sales,
use, value-added, payroll, franchise and withholding taxes due and owing as a
result of the operation of the Business prior to the Closing.
2.5 Litigation. There is no pending or threatened litigation or
governmental or administrative proceeding to which the Seller is a party or by
which the Business or the Assets may be adversely affected.
ASSET PURCHASE AGREEMENT - Page 6
<PAGE> 7
2.6 Brokers, Finders, etc. No broker, finder or other financial
consultant has acted on behalf of Seller or its affiliates in connection with
the transactions contemplated by this Agreement and all negotiations relative to
this Agreement have been carried on directly without the intervention of any
such third party.
3. REPRESENTATIONS AND WARRANTIES OF BUYER.
3.1 Corporate Status. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Texas. Buyer has
full power and authority to execute and deliver this Agreement on Buyer's
behalf, and to perform its obligations hereunder.
3.2 Authority for Agreement. Buyer has all necessary power and
authority to execute and deliver this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by the Board of
Directors of Buyer. No notice, consent, approval, order or authorization of, or
registration, declaration or filing with, any person or entities, or with any
governmental authority is required in connection with the execution and delivery
of this Agreement or the consummation by Buyer of the transactions contemplated
hereby or thereby.
3.3 Brokers, Finders, etc. No broker, finder or other financial
consultant has acted on behalf of Buyer or its affiliates in connection with the
transactions contemplated by this Agreement and all negotiations relative to
this Agreement have been carried on directly without the intervention of any
such third party.
4. INDEMNIFICATION.
4.1 Indemnification. Seller covenants and agrees to indemnify and hold
Buyer harmless from and against any and all losses, liabilities, damages,
demands, claims, suits, actions,
ASSET PURCHASE AGREEMENT - Page 7
<PAGE> 8
judgments or causes of action, assessments, costs and expenses, including,
without limitation, interest, penalties, attorneys' fees, any and all expenses
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, in writing or any other claim, and any and all amounts
paid in settlement of any claim asserted in writing or litigation (each a
"Loss") asserted against, resulting to, imposed upon, or incurred or suffered by
Buyer, directly or indirectly, as a result of or arising from the operation of
the Seller or Business prior to the Closing Date, other than as otherwise
contemplated herein. To the extent Buyer suffers any Loss under this Section
4.1(a), or has identified a loss but has not quantified the dollar value
thereof, Buyer may withhold and off-set any payments due to Seller under this
Agreement to compensate (to the extent of any such payment due) Seller for any
such Loss.
5. POST CLOSING COVENANTS.
5.1 Covenant Not to Compete. In exchange for the representations and
warranties and fulfillment of the agreements contained herein by Buyer, Seller,
and by their signature hereto each of Sellers' shareholders, directors and
officers agrees not to compete, either directly or indirectly, for a period of
one (1) year commencing with the Closing Date in the Territory, in any endeavor
competitive with the Business. For purposes of this Section 5.1 the term
"Territory" shall mean the State of Texas. Additionally, Seller agrees during
the one year period following the Closing Date to forward any and all sales
leads for the provision of consumer dial-up and dedicated internet access
services generated from the Territory to Buyer.
6. MISCELLANEOUS PROVISIONS.
6.1 Entire Agreement. This Agreement, together with all the schedules
and exhibits hereto, constitutes the entire agreement among the parties hereto
pertaining to the subject matter
ASSET PURCHASE AGREEMENT - Page 8
<PAGE> 9
hereof and supersedes all prior and contemporaneous agreements, understandings,
negotiations and discussions, whether oral or written, of the parties, and there
are no warranties, representations or other agreements between the parties in
connection with the subject matter hereof except as specifically set forth
herein.
6.2 Amendment. This Agreement may be amended by the parties hereto at
any time, but only by an instrument in writing duly executed and delivered on
behalf of each of the parties hereto.
6.3 Headings. The section headings are not to be considered part of
this Agreement and are included solely for convenience and are not intended to
be full or accurate descriptions of the contents thereof. References to Sections
are to portions of this Agreement unless the context requires otherwise.
6.4 Exhibits, etc. Exhibits and schedules referred to in this Agreement
are an integral part of and are incorporated in this Agreement by reference.
6.5 Assignment; Successors and Assigns. All of the terms and provisions
of this Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective transferees, successors and assigns.
6.6 Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered or sent Federal Express or other reputable overnight courier, postage
prepaid or by certified mail, return receipt requested:
(a) if to the Seller:
201 E. Abram, Suite 640
Arlington, Texas 76010
Attn: President
ASSET PURCHASE AGREEMENT - Page 9
<PAGE> 10
(b) if to the Buyer:
One Dallas Center
350 N. St. Paul Street, Suite 200
Dallas, Texas 75201
Attn: President
6.7 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas.
6.8 Severability. The provisions of this Agreement are severable, and
in the event that any one or more provisions are deemed illegal or
unenforceable, the remaining provisions shall remain in full force and effect.
6.9 Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
6.10 Publicity and Disclosures. Seller and its officers and directors
agree not to issue or cause the publication of any press release or other
announcement with respect to this Agreement or the other transactions
contemplated hereby without the prior written consent of Buyer except to the
extent disclosure by Seller is required by any applicable law or regulation, by
an authorized administrative or governmental agency.
7. DEFINITIONS.
The following capitalized terms as used in this Agreement shall have
the following meanings:
7.1 "Accepted Subscriber" shall mean a Subscriber who purchases
internet access services from Buyer pursuant to one of Buyer's standard internet
access service offerings on or before the calendar month during which such
Subscriber's original prepaid service agreement with Seller shall expire.
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7.2 "Adjusted Monthly Payment" shall mean an amount for each calendar
month following the Closing equal to the Unadjusted Monthly Payment less an
amount equal to $100 multiplied by the Rejected Subscribers for such month. The
Adjusted Monthly Payment may be a negative number.
7.3 "Base Price" means an amount equal to (i) the Subscribers
Transferred multiplied by $100 less (ii) $350,000 (the "Payment Credit").
7.4 "Bonus Amount" means an amount calculated each month equal to $20
multiplied by that number of Accepted Subscribers in excess of fifty percent
(50%) of the Subscribers whose original prepaid service agreement expired during
such month.
7.5 "Person" means an individual, corporation, partnership, trust,
joint venture or other legal entity.
7.6 "Per Subscriber Price" means an amount equal to the Base Price
divided by the number of Subscribers Transferred.
7.7 "Rejected Subscriber" shall mean a Subscriber who does not purchase
internet access services from Buyer pursuant to one of Buyer's standard internet
access service offerings before the expiration of calendar month during which
such Subscriber's original prepaid service agreement with Seller shall expire.
7.8 "Subscriber" shall mean a Person to whom Seller provides internet
access services prior to the date of this Agreement pursuant to a prepaid
service agreement with a term not to exceed twelve (12) months from the
initiating date of such services.
7.9 "Subscribers Transferred" means 8,213 Subscribers who are given
notice by Seller to commence utilizing the internet access services of Buyer
pursuant to a transfer notice posted by Seller to the Subscribers prior to the
date of this Agreement.
7.10 "Unadjusted Monthly Payment" shall mean an amount calculated each
calendar month following the effective date of this Agreement equal to the
number of Subscribers whose
ASSET PURCHASE AGREEMENT - Page 11
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original prepaid service agreement with Seller shall expire during such month
multiplied by the Per Subscriber Price. The parties acknowledge that each
Subscriber may only be counted once for purposes of this calculation, and that
Subscribers whose original prepaid service agreement with Seller extends beyond
twelve (12) months from the effective date of this Agreement shall not be
counted.
IN WITNESS WHEREOF, the parties hereby have duly executed this
Agreement as of the day and year first above written.
WHY? TELECOMMUNICATIONS, INC.
a Texas corporation
By: /s/ MARK WRIGHT
----------------------------------
Its: President
----------------------------------
INTERNET AMERICA, INC.
a Texas corporation
By: /s/ MIKE MAPLES
----------------------------------
Its: CEO
----------------------------------
By their signature hereto each of the following agree to be
individually bound by the provisions of Section 5.1 and 6.10 of this
Agreement.
/s/ RUSSELL B. WRIGHT
----------------------------------
Russell B. Wright
/s/ MARK C. WRIGHT
----------------------------------
Mark C. Wright
ASSET PURCHASE AGREEMENT - Page 12
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EXHIBIT 10.4
GOLDEN HARBOR OF TEXAS, INC.
NETWORK SERVICES AGREEMENT
This Network Services Agreement (this "Agreement") is made as of August 25,
1997 by and between Golden Harbor of Texas, Inc., a Texas corporation with
principal offices at 401 Carlson Circle, San Marcos, Texas 78666 ("Golden
Harbor"), and Internet America, Inc., a Texas corporation with principal offices
at One Dallas Centre, 350 N. St. Paul, Suite 200, Dallas, Texas 75201
("Customer").
Golden Harbor offers local telephone and Internet access network services
(collectively, the "Available Services") to its customers. The Available
Services are described more particularly in the Service Description which is
attached hereto and incorporated herein by reference as Schedule 1. Golden
Harbor agrees to provide and Customer agrees to purchase one or more of the
Available Services (the "Services") as set forth on the attached service orders
from the originating areas identified on the attached service orders. During the
term of this Agreement, Customer and Golden Harbor may agree to the purchase and
provision of additional Available Services by attaching to this Agreement
additional service orders specifying such services and executed by both parties.
As part of a promotional offer of a new service offering, Golden Harbor and
Customer have agreed that because Customer may experience some inconveniences
due to Golden Harbor's initial facility limitations from the local exchange
companies and because Customer will be assisting in testing Golden Harbor's
network, the charges for services used by Customer will accrue but not be due
and payable until after a certain transition period.
1. TERM OF SERVICES.
(A) Term. This Agreement shall be effective as of the date first above
written and shall continue through December 31, 1998 (the "initial term"). Upon
the expiration of the initial term, this Agreement shall automatically renew
for successive one year terms under the same terms and conditions except that
there shall be no "Transition Period" as described in Subsection 1(D) and no
provisions for delayed billing with respect thereto for any subsequent renewal
term, subject to termination by either party upon written notice to the other
party at least 60 days prior to the expiration of the initial term or applicable
subsequent renewal term (such initial term and any subsequent renewal term shall
be the "Term"). Customer shall be liable for all charges associated with the
usage of the Services during the Term.
(B) Service Order. The Service Orders executed by both parties and attached
as Exhibits hereto are incorporated herein by reference (the "Service Orders").
The Service Orders set forth the charges for the Services due under this
Agreement, the originating areas from which the Services are available, and
other pertinent information.
EXECUTION COPY
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(C) Start of Service. Golden Harbor's obligation to provide and Customer's
obligation to accept and pay for non-usage sensitive charges for Services shall
be binding to the extent provided for in this Agreement or the fully executed
Service Orders. Customer's obligation to pay for usage sensitive, user sensitive
or other variable recurring charges for a Service and the billing for such
charges shall commence, after such Service is made available to Customer, on the
date ("Start of Service") that is the earlier of (i) the "Requested Service
Date" set forth in the applicable Service Order, or (ii) the date such Service
is accepted by Customer.
(D) Transition Period. Commencing on September 1, 1997 (the "Commencement
Date"), Golden Harbor and Customer shall begin transferring Customer's customers
to Golden Harbor's network. The transfer of Customer's customers will be phased
in as Golden Harbor is able to obtain the necessary facilities from the
appropriate local exchange company. For purposes of this Agreement, the
"Transition Period" shall mean the period from and including the Commencement
Date through the Cutover Date (as defined in Subsection 3(E)).
(E) Service Area. As Golden Harbor obtains the necessary network
facilities, the Services shall be provided to Customer in the Originating Areas
identified on the Service Orders.
2. CANCELLATION.
(A) Cancellation Charge. After a Service Order is accepted by Golden
Harbor, Customer may cancel all or a portion of the Services described therein
during the initial term if Customer provides written notification thereof to
Golden Harbor at least 30 days prior to the effective date of cancellation. In
the event that such cancellation occurs during the initial term but after the
Transition Period, Customer shall pay to Golden Harbor all charges for Services
provided through the effective date of such cancellation plus a cancellation
charge equal to the number of months remaining in the initial term after the
effective date of such cancellation, multiplied by either (i) $30,000, if, after
such cancellation is effective, Customer does not maintain the "Minimum
Requirement" (as defined in Subsection 3(E) hereof), dedicated for Customer
dial-up access Internet products; or (ii) 50% of the average charges for the
canceled Services, if, after such cancellation is effective, Customer continues
to maintain the Minimum Requirement. In the event that such cancellation occurs
during the Transition Period, Customer shall pay to Golden Harbor all charges
for Services provided through the effective date of such cancellation plus a
cancellation charge equal to: (i) the number of months remaining in the initial
term after the effective date of such cancellation, multiplied by (ii) the
amount equal to the accrued charges for Services for the month in the Transition
Period that had the highest usage of Services. In the event that such
cancellation occurs during a renewal term, Customer must provide at least 90
days prior written notice of cancellation, and Customer and Golden Harbor shall
mutually agree as to the cancellation charges that will apply.
(B) Liquidated Damages. It is agreed that Golden Harbor's damages in the
event Customer cancels any Service shall be difficult or impossible to
ascertain. The provision for a cancellation charge in Subsection 2(A) and for
additional charges in Subsection 2(C) is intended,
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therefore, to establish liquidated damages in the event of a cancellation and is
not intended as a penalty.
(C) Additional Charges. In the event of any cancellation described in
Subsection 2(A), Customer shall also pay Golden Harbor an amount equal to any
termination charges, expenses, fees or penalties incurred by Golden Harbor from
any third party for reducing the number or size of network facilities that
connect the premises of Golden Harbor and Customer as a result of such
cancellation:
3. CUSTOMER'S RESPONSIBILITIES
(A) Expedite Charges. In the event Customer requests expeditious Service
and/or changes to Service Orders and Golden Harbor agrees to such request,
Golden Harbor will pass through the charges assessed by any suppliers or
providers involved at the same rate to Customer. Golden Harbor may further
condition its performance of such request upon Customer's payment of additional
charges to Golden Harbor.
(B) Preparation; Customer Facilities.
(1) In conformity with each Service Order, Customer shall, at its own
expense: (i) provide all necessary preparations required to comply with Golden
Harbor's installation and maintenance specifications; (ii) be responsible for
the costs of relocation of Service once installed by Golden Harbor, and (iii)
provide to Golden Harbor and its contractors, agents and their respective
employees and the suppliers of communications lines reasonable access to
Customer's premises to perform any acts required by this Agreement. Customer has
the sole responsibility for installation, testing and operation of facilities,
services, hardware, equipment and software other than that specifically provided
by Golden Harbor as part of the Services described in a Service Order (such
facilities, services, hardware, equipment and software are "Customer
Facilities"). In no event will the untimely installation or non-operation of
Customer Facilities (including local access when Customer is responsible
therefor and Customer premises equipment) relieve Customer of its obligation to
pay charges for the Services as of Start of Service.
(2) Golden Harbor shall not be responsible for the installation,
operation, maintenance or repair of Customer Facilities; nor shall Golden Harbor
be responsible for the transmission or reception of information by the Customer
Facilities.
(3) Customer shall be responsible for the use and compatibility of all
Customer Facilities. In the event that Customer uses Customer Facilities that
impair Customer's use of the Services, Customer shall nonetheless be liable for
payment for the Services. Upon notice from Golden Harbor that Customer
Facilities are causing or are likely to cause hazard, interference or service
obstruction, Customer shall eliminate the likelihood of hazard, interference or
service obstruction. Customer shall, if necessary and if Golden Harbor agrees to
perform such troubleshooting, pay Golden Harbor to troubleshoot difficulties
caused by Customer Facilities at
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a rate of: $75.00 per hour with a one hour minimum between 8:00 a.m. and 5:00
p.m. on weekdays that are not holidays observed by national banking associations
in San Marcos, Texas; and $90.00 per hour with a two hour minimum between 5:01
p.m. and 7:59 a.m. on weekdays and at any time on weekends and holidays.
(4) Golden Harbor shall not be responsible if any changes in the
Services cause Customer Facilities to become obsolete, require modification or
alteration, or otherwise affect performance of equipment or hardware not
provided by Golden Harbor.
(C) Use of Services. If any "Service Abuse" (as defined below) occurs,
Golden Harbor may send Customer a written notice of Service Abuse (an "Abuse
Notice"). From the date of the Abuse Notice, Customer shall have a cure period
of six business days within which to terminate the Service Abuse. If Customer
fails to terminate such Service Abuse within the cure period or fails to take
appropriate action to prevent any similar Service Abuse from occurring from the
same source within the cure period, then Golden Harbor may, at its option and in
addition to all other rights or remedies that Golden Harbor may have under this
Agreement at law, or in equity (i) terminate this Agreement or (ii) suspend all
or any portion of the Services until such time as the Service Abuse is
terminated and Customer has taken appropriate action to prevent any similar
Service Abuse from occurring from the same source, provided that Golden Harbor
shall not be precluded from terminating this Agreement at any time after
suspending service if the appropriate cure and assurance is not made by the date
of termination. If Golden Harbor elects to terminate this Agreement under this
Section, such termination shall be effective on the date the cure period
expires. In the event of such termination, Customer shall not be relieved of its
obligations to pay Golden Harbor the applicable cancellation and other charges
described in Section 2. Notwithstanding the foregoing, upon Customer's receipt
of any oral or written notice of a Service Abuse, Customer shall immediately
take all diligent actions to terminate the Service Abuse and, if possible, in a
shorter time period than six business days. If Customer provides Golden Harbor
with sufficient evidence of a valid and effective order from a court with proper
jurisdiction that requires Customer, for purposes of a pending law enforcement
investigation, to continue providing service that may constitute a Service Abuse
or Material Service Abuse, Golden Harbor shall not suspend Service or terminate
this Agreement under this Section solely due to such Service Abuse or Material
Service Abuse (if Golden Harbor's Service is a necessary component for Customer
to be able to comply with such order) until such order or investigation
terminates or is no longer in effect.
Notwithstanding anything in this Agreement to the contrary, if Golden
Harbor has a reasonable basis for believing that a "Material Service Abuse" (as
defined below) has occurred and is continuing or there is a reasonable
likelihood that a similar Material Service Abuse will occur, then, without
notice or an opportunity to cure, Golden Harbor may terminate this Agreement
and/or deny Customer access to all or part of the Services. In the event of such
termination of this Agreement, Customer shall not be relieved of its obligations
to pay Golden Harbor the applicable cancellation and other charges described in
Section 2. If Golden Harbor denies Customer access to the Services because of
such a Material Service Abuse, neither Customer nor
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Customer's customers or authorized users shall have any right (i) to access the
Services, (ii) to access through Golden Harbor any materials stored on the
Internet, (iii) to obtain any credit(s) otherwise due to Customer, or (iv) to
access third party services, merchandise or information on the Internet through
Golden Harbor or the Services, and Golden Harbor shall have no responsibility to
notify any third-party providers of services, merchandise or information of such
denial of access nor any responsibility for any consequences resulting from lack
of notification.
For purposes of this Agreement a "Service Abuse" shall mean that Customer
or any of its customers or authorized users or any other person: (i) abuses or
fraudulently uses any Service in any way, or (ii) uses any Service in violation
of the law or in aid of any unlawful act or uses any Service in any way that
would constitute a criminal offense, give rise to civil liability, violate a
copyright or other proprietary right or otherwise violate any local, state,
national or international law or regulation. For purposes of this Agreement, a
"Material Service Abuse" means a Service Abuse that (i) may have a material
adverse effect on Golden Harbor or any of its customers, (ii) may give rise to a
danger or harm to the public, or (iii) is related to an investigation,
injunction or order of any court, agency or federal, state or local government.
Upon the occurrence of any Service Abuse, Golden Harbor shall be completely
released from any liability arising out of or relating to any Service Abuse and
Customer shall be liable to Golden Harbor for all costs and damages incurred by
Golden Harbor resulting therefrom.
(D) Billing and User ID/Password Policy. Customer agrees to comply with, if
applicable, Golden Harbor's Billing and User ID/Password Policy, a copy of which
is attached hereto as Schedule 2 and is incorporated herein by reference.
Customer agrees that Golden Harbor may, at its sole discretion, modify such
policy as necessary or desirable, with notice to Customer.
(E) Minimum Requirement. Customer shall maintain and pay Golden Harbor the
charges related to the Minimum Requirement through the Term from the date (the
"Cutover Date") that is the later of (i) November 30, 1997 or (ii) the date that
Golden Harbor has the facilities available to provide the Services to Customer's
customers with an aggregate amount of at least 30,000 User/IDs. For purposes of
this Agreement, the "Minimum Requirement" shall mean Customer's customers with
an aggregate amount of at least 30,000 User IDs that obtain Internet access
through at least 40 Golden Harbor Ascend Max 4004s that are dedicated for
Customer's dial-up access Internet products. For purposes of this Agreement and
the Service Orders, an "Ascend Max 4004" shall mean an Ascend Max 4004 or
another communications access server.
If Customer requests that Golden Harbor provide Services in excess of the
Minimum Requirement, Golden Harbor will make available to Customer additional
Ascend Max 4004s, as Golden Harbor acquires such equipment, provided that Golden
Harbor is able to obtain the local exchange company facilities that are
necessary to deliver the Services.
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(F) Use of Golden Harbor's NXXs. For the use of the Services, Customer
shall use Golden Harbor's NXXs and the local telephone numbers that Golden
Harbor assigns to Customer. Customer agrees to: (i) have Customer's customers
dial any applicable local telephone number that Golden Harbor assigns to
Customer for dial-up access and/or (ii) forward to Golden Harbor Customer's
telephone numbers that are used for dial-up access to the Internet.
(G) Transfer; Forecasts. Customer shall coordinate with Golden Harbor in
the orderly transfer of Customer's customers to the Golden Harbor network.
Customer will provide reasonable notice to Golden Harbor of anticipated peak
demands for Golden Harbor's facilities from the orderly transfer of Customer's
customers during the Transition Period and any anticipated peak demands after
the Transition Period. Notwithstanding anything in this Agreement to the
contrary, Golden Harbor will not be responsible for any blockage or busy signal
that occurs due to Customer's underestimation of the facility requirements
during the Term. If Golden Harbor has facilities available, Golden Harbor will
allocate additional Ascend Max 4004s to minimize the impact of blockage or busy
signal that results from Customer's underestimation of the number of Ascend Max
4004s that are required at any time during the Term, provided that Customer
consents to such additional allocation. In such event, Customer will be liable
for any applicable monthly charges for each Ascend Max 4004 added by Golden
Harbor to minimize the impact of such blockage.
4. CHARGES AND PAYMENT TERMS.
(A) Invoices. Customer agrees to pay all charges incurred hereunder. All
charges will be invoiced monthly and calculated according to the rates set forth
in the applicable Service Order. Notwithstanding anything in this Section to the
contrary, the charges for Services provided to Customer during the Transition
Period will be accrued monthly and invoiced on or about December 5, 1997. All
subsequent charges will be invoiced monthly. Customer acknowledges that the
summary of the call detail on a Golden Harbor invoice may not be directly
associated with calls completed in that month.
During the Transition Period, Customer will incur accrued charges for each
Ascend Max 4004 that is dedicated to Customer at any time during each month. For
purposes of determining the number of Ascend Max 4004s dedicated to Customer
during a given month, simultaneously dedicated Ascend Max 4004s will be counted.
For example, if one Ascend Max 4004 is dedicated to Customer on September 1 and
one Ascend Max 4004 is added on September 20, the accrued charges for September
will be for two Ascend Max 4004s. After the Transition Period, the Minimum
Requirement applies and Customer will be charged for at least a minimum of 40
Ascend Max 4004s per month. Charges for dedicated Ascend Max 4004s will be
considered variable monthly recurring charges under the Billing and User
ID/Password Policy.
(B) Due Dates; Interest. All charges hereunder shall be due and payable by
Customer to Golden Harbor by the date (the "Due Date") that is 30 days after the
date of the invoice from Golden Harbor. Any amount due and payable to Golden
Harbor by Customer hereunder, but not
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received in Golden Harbor's office or as otherwise directed by Golden Harbor, on
the Due Date specified above, will be deemed past due. Any past due amount is
subject to a late charge in the amount of one and one-half percent (1.5%) per
month, or the maximum rate allowable by applicable law, whichever is less, from
the Due Date until payment is received by Golden Harbor.
(C) Taxes. Customer acknowledges and understands that Golden Harbor
computes all charges herein exclusive of any applicable federal, state or local
use, excise, gross receipts, sales and privilege taxes, duties, fees or similar
liabilities (other than general income or property taxes), whether charged to or
against Golden Harbor or Customer because of Services furnished to Customer
("Additional Fees"). Customer shall pay such Additional Fees in addition to all
other charges provided for herein.
(D) Price Changes; Modification of Services. Golden Harbor reserves the
right to eliminate Service offerings and/or modify charges or rates for Service
offerings and/or to increase the charges or rates for any usage of Services
other than the Minimum Requirement upon not less than 90 days prior notice to
Customer, which notice will state the effective date for the charge, rate or
Service modifications. Golden Harbor reserves the right to eliminate service
offerings and/or modify charges or rates for service offerings and/or to
increase the charges or rates for the Minimum Requirement, upon not less than 90
days prior notice to Customer, to be effective during any renewal term, which
notice will state the effective date for the charge, rate or service
modifications. In the event Golden Harbor notifies Customer of the elimination
of a Service offering or an increase in the charges or rates for Service
offerings, Customer may terminate the affected Service, without incurring a
cancellation charge or other charge by notifying Golden Harbor, in writing, at
least 30 days prior to the effective date of the increase in charges, subject to
Golden Harbor's option of cancellation or termination under Subsection 5(C).
(E) Billing Disputes. Late fees shall apply (but shall not be due and
payable for a period of 60 days following the Due Date therefor) for amounts
reasonably and in good faith disputed by Customer, provided Customer: (i) pays
all undisputed charges on or before the Due Date; (ii) presents a written
statement of any billing discrepancies to Golden Harbor in reasonable detail
within 20 days after the Due Date of the invoice in question; and (iii)
negotiates in good faith with Golden Harbor for the purpose of resolving the
dispute within such 60 day period. In the event such dispute is resolved in
favor of Golden Harbor, Customer agrees to pay Golden Harbor the disputed
amounts together with any applicable late fees within five days of the
resolution. In the event such dispute is resolved in favor of Customer, Customer
shall receive a credit for the disputed charges in question and late fees
applicable to such disputed charges. Each party shall use reasonable, good faith
efforts to resolve any billing dispute. In the event the dispute is not resolved
within such 60 day period, Customer shall pay Golden Harbor all disputed amounts
together with applicable late fees immediately and in no event later than five
days after the expiration of such 60 day period. The preceding sentence shall
not be construed to prevent Customer from pursuing any available legal remedies.
Golden Harbor shall not be obligated to consider any Customer notice of billing
discrepancies that are received by Golden
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Harbor more than 20 days after the Due Date of the invoice in question. Golden
Harbor has no obligation to investigate discrepancies between invoices and
reporting data provided where the discrepancy is ten percent (10%) or less.
(F) Suspension of Service. If (i) payment in full is not received from
Customer on or before 30 days following the Due Date with respect to undisputed
amounts or on or before 60 days following the Due Date with respect to amounts
reasonably disputed in accordance with the requirements of Subsection 4(E),
(ii) Golden Harbor gives Customer six business days prior notice of suspension,
and (iii) Customer fails to cure during the six business day period, then Golden
Harbor shall have the right to suspend all or any portion of the Services until
such time as Customer has paid in full all charges then due, including any late
fees as specified herein. Following such payment, Golden Harbor shall be
required to reinstitute Service to Customer only upon the provision by Customer
of assurance satisfactory to Golden Harbor of Customer's ability to pay for
Services (such as a deposit) and Customer's advance payment of the cost of
reinstituting Services. If Customer fails to make such payment by a date
determined by and acceptable to Golden Harbor, Customer will be deemed to have
canceled the suspended Service effective the date of such suspension. Such
cancellation shall not relieve Customer of its obligations to pay to Golden
Harbor the applicable cancellation and additional charges described in Section
2.
(G) In each month of the Term that Customer is in compliance with all of
the terms and conditions of this Agreement, including without limitation the
requirements set forth in Subsections 3(E) and 3(F), Golden Harbor shall waive
the fees for that month for any Dedicated Local Service or Local Service Resale
(as defined in Schedule 1) provided to Customer solely for administrative
purposes at Customer's business offices located in Dallas, Texas.
5. TERMINATION OF AGREEMENT.
(A) By Golden Harbor For Cause. In addition to Golden Harbor's right to
terminate for cause as provided in Subsection 3(C), upon the expiration of the
six business day cure period from the date of written notice to Customer of the
occurrence of an Event of Default (as defined herein), Golden Harbor may, if
such Event is not cured during such cure period, at Golden Harbor's option and
in addition to such other rights or remedies as Golden Harbor may have under
this Agreement, at law, or in equity: (i) suspend the Services to Customer until
such time as such circumstance is corrected, provided Golden Harbor shall not be
precluded from terminating this Agreement at any time after suspending Services
if the appropriate cure has not been made by the date of termination; or (ii)
terminate this Agreement. For purposes of this Agreement, an "Event of Default"
shall mean that:
(1) Customer breaches or violates any provision of this Agreement,
including but not limited to the provisions regarding payment, the Minimum
Requirement set forth in Subsection 3(E), and the use of NXX and telephone
number requirement set forth in Subsection 3(F); or
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(2) Customer breaches or violates any provision of any agreement
between Customer and any entity controlling, controlled by or under common
control with Golden Harbor; or
(3) Customer files or initiates proceedings or has proceedings filed
or initiated against it, relating to its liquidation, insolvency, reorganization
or other relief (such as the appointment of a trustee, receiver, liquidator,
custodian or other official) under any bankruptcy, insolvency or other similar
law which remains undismissed for more than 30 days, or makes an assignment for
the benefit of its creditors or enters into an agreement for the composition,
extension or adjustment of its obligations in connection with the foregoing.
With respect to an Event of Default described in the foregoing clause (1) or (2)
and subject to the terms of Subsection 3(C), Golden Harbor shall not suspend
Service and/or terminate the Agreement unless Customer fails to cure within the
six business days after Customer's receipt of a notice of an Event of Default.
With respect to an Event of Default described in the foregoing clause (3),
Golden Harbor may terminate this Agreement or suspend Services without giving
Customer any notice or any opportunity to cure.
(B) By Golden Harbor Without Cause. Upon at least 90 days prior written
notice to Customer, Golden Harbor may terminate this Agreement, in its sole
discretion, for any reason or no reason. Such 90 days prior written notice shall
not be required for termination under Subsection 5(A).
(C) By Golden Harbor Upon Cancellation of Service by Customer.
Notwithstanding anything in this Agreement to the contrary, if Customer cancels
any Service hereunder for any reason other than for cause under Subsection 5(D)
such that the Minimum Requirement is not maintained by Customer after such
cancellation, Golden Harbor, in its sole discretion, may cancel any or all of
the remaining Services or terminate this Agreement in its entirety immediately
upon delivery of written notice of such cancellation to Customer. In the event
of any such termination, Customer shall not be relieved of its obligations to
pay the applicable cancellation charges under Section 2.
(D) By Customer for Unsatisfactory Service. Network availability shall be
maintained to published standards for telecommunications services, currently the
P.01 standard average busy-hour grade of service as provided by the incumbent
local exchange company. (Inbound grade of service is the responsibility of the
incumbent local exchange company; Golden Harbor will coordinate with the
incumbent local exchange company.) Quality of connection shall be maintained
based on empirical comparisons to be performed jointly by Customer and Golden
Harbor. Connection problems reported to Golden Harbor will be investigated
expeditiously. Service affecting problems associated with the malfunction of
Golden Harbor equipment will be resolved expeditiously. In the event that Golden
Harbor fails to provide a P.01 level of service on Golden Harbor's circuits for
local access arrangements under Golden Harbor's control or
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otherwise fails to provide a competitive level of service as compared to data
transmission rates (as of the date of this Agreement) of providers of services
that are substantially similar to the Services, for any reason other than due to
a Force Majeure Event (as defined in Section 10), for more than 30 days after
Customer delivers written notice to Golden Harbor of the failure to provide such
level of service, then Customer may terminate this Agreement upon delivery of
written notice of termination to Golden Harbor, and in the event of such a
termination, Customer shall have no obligation to pay any cancellation charge or
other charge under Subsection 2(A) or 2(C). Customer's termination rights under
this Subsection 5(D) shall not apply, however, in the event any failure to
maintain the P.01 level or such other competitive level of service is caused or
contributed to, directly or indirectly, by any act or omission of Customer or
any of its customers, affiliates, agents, representatives, invitees or
licensees.
(E) By Successor or Assign Upon Change in Ownership and Control. Subject to
the consent requirements set forth in Section 17 hereof, in the event of a
transfer of substantially all of the assets of Customer (including without
limitation this Agreement), Customer's permitted successor or assign shall have
the right to provide Golden Harbor at least 180 days prior written notice of
intent to terminate the Agreement. In the event of such termination, Customer's
permitted successor or assign shall have no obligation to pay any cancellation
charge or other charge under Subsection 2(A) or 2(C). Subject to the consent
requirements set forth in Section 17 hereof, in the event of a transfer in
ownership of 75% or more of the outstanding stock of Customer, Customer shall
have the right to provide Golden Harbor at least 180 days prior written notice
of intent to terminate the Agreement. In the event of such termination due to a
transfer of at least 75% of the outstanding stock of Customer to a third party
who is an affiliate, employee, shareholder, director, lender or lessor of
Customer, Customer shall pay the applicable cancellation charges and other
charges under Subsection 2(A) and 2(C). In the event of such termination due to
a transfer of at least 75% of the outstanding stock of Customer to a third party
who is not an affiliate, employee, shareholder, director, lender or lessor of
Customer, Customer shall have no obligation to pay any cancellation charge or
other charge under Subsection 2(A) or 2(C).
(F) By Customer without Cause during Term. During a renewal term, Customer
may terminate this Agreement, in its sole discretion, for any reason or no
reason, provided that Customer delivers at least 90 days prior written notice of
termination to Golden Harbor.
6. NETWORK TROUBLE RESOLUTION
Golden Harbor will provide telephone numbers or pager numbers for Customer
to reach a network technician for the purpose of reporting network trouble 24
hours per day, seven days per week. Network technicians are available for
regular network trouble resolution status updates. Upon resolution of network
trouble, a network technician will notify a Customer representative responsible
for accepting such information. Customer realizes that one or more underlying
networks may impair Golden Harbor's capability to synchronize its equipment with
that of Customer.
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7. CREDITWORTHINESS.
If at any time there is a material adverse change in Customer's
creditworthiness, then in addition to any other remedies available to Golden
Harbor, Golden Harbor may elect, in its sole discretion, to exercise one or more
of the following remedies: (i) cause Start of Service for Services described in
a previously executed Service Order to be withheld; (ii) cease providing
Services upon written notice of suspension with a six business day opportunity
to cure; or (iii) decline to accept a Service Order or other requests from
Customer to provide Services unless Customer gives an assurance of payment which
shall be a deposit or such other means satisfactory to Golden Harbor to
establish reasonable assurance of payment. A "material adverse change" in
Customer's creditworthiness shall mean: (i) Customer's breach or default of its
obligations to Golden Harbor or any of its affiliates under this or any other
agreement with Golden Harbor; (ii) failure of Customer to make full payment of
charges due hereunder or thereunder or before the Due Date on three or more
occasions during any period of 12 or fewer months or Customer's failure to make
such payment on or before the Due Date in any two consecutive months; (iii)
acquisition of Customer (whether in whole or by majority or controlling
interest) by an entity which is insolvent, which is subject to bankruptcy or
insolvency proceedings, which owes past due amounts to Golden Harbor or any
Golden Harbor affiliate or which is a greater credit risk than Customer; or (iv)
Customer is subject to or has filed for bankruptcy or insolvency proceedings,
and such proceedings continue undismissed or unstayed and in effect for a period
of 60 days or Customer is insolvent.
8. DISCLAIMER OF WARRANTIES.
(A) Customer understands that Customer and its customers or authorized
users may access the Internet through the Services, if the attached Service
Orders include Services that permit Internet access. Customer understands
further that neither Golden Harbor nor any of its affiliates operates or
controls the Internet in any way, and that all merchandise, information and
services offered or made available or accessible on the Internet are offered or
made available or accessible by third parties who are not affiliated with Golden
Harbor or its affiliates. CUSTOMER ASSUMES TOTAL RESPONSIBILITY AND RISK FOR
CUSTOMER'S USE AND FOR CUSTOMER'S CUSTOMERS' AND AUTHORIZED USERS' USE OF THE
SERVICES AND THE INTERNET. NEITHER GOLDEN HARBOR NOR ITS AFFILIATES MAKE ANY
EXPRESS OR IMPLIED WARRANTIES, REPRESENTATIONS OR ENDORSEMENTS WHATSOEVER
(INCLUDING WITHOUT LIMITATION WARRANTIES OF TITLE OR NONINFRINGEMENT OR THE
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE) WITH
REGARD TO ANY MERCHANDISE, INFORMATION OR SERVICE PROVIDED THROUGH THE SERVICES
OR THE INTERNET, AND THEY SHALL NOT BE LIABLE FOR ANY COST OR DAMAGE ARISING
EITHER DIRECTLY OR INDIRECTLY FROM ANY SUCH TRANSACTION. IT IS SOLELY CUSTOMER'S
RESPONSIBILITY AND CUSTOMER'S CUSTOMERS' AND AUTHORIZED USERS' RESPONSIBILITY TO
11
<PAGE> 12
EVALUATE THE ACCURACY, COMPLETENESS AND USEFULNESS OF ALL OPINIONS, ADVICE,
SERVICES AND OTHER INFORMATION, AND THE QUALITY AND MERCHANTABILITY OF ALL
MERCHANDISE, PROVIDED THROUGH THE SERVICES OR ON THE INTERNET GENERALLY.
(B) CUSTOMER UNDERSTANDS FURTHER THAT THE INTERNET CONTAINS UNEDITED
MATERIALS SOME OF WHICH ARE SEXUALLY EXPLICIT OR MAY BE OFFENSIVE TO SOME
PEOPLE. CUSTOMER, CUSTOMER'S CUSTOMERS AND CUSTOMER'S AUTHORIZED USERS ACCESS
SUCH MATERIALS AT CUSTOMER'S OWN RISK. GOLDEN HARBOR HAS NO CONTROL OVER AND
ACCEPTS NO RESPONSIBILITY WHATSOEVER FOR SUCH MATERIALS.
(C) ALL OF GOLDEN HARBOR'S SERVICES ARE PROVIDED ON AN "AS IS" AND "AS
AVAILABLE" BASIS WITHOUT WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED,
INCLUDING BUT NOT LIMITED TO WARRANTIES OF TITLE, NONINFRINGEMENT OR QUALITY OF
SERVICE OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE. NO ADVICE OR INFORMATION GIVEN BY GOLDEN HARBOR, ITS AFFILIATES OR ITS
CONTRACTORS OR AGENTS OR ANY OF THEIR RESPECTIVE EMPLOYEES SHALL CREATE A
WARRANTY. NEITHER GOLDEN HARBOR NOR ITS AFFILIATES WARRANTS THAT ANY OF THE
SERVICES WILL BE UNINTERRUPTED OR ERROR FREE OR THAT ANY INFORMATION, SOFTWARE
OR OTHER MATERIAL ACCESSIBLE ON THE SERVICES IS FREE OF VIRUSES, WORMS, TROJAN
HORSES OR OTHER HARMFUL COMPONENTS.
(D) UNDER NO CIRCUMSTANCES SHALL GOLDEN HARBOR, ITS AFFILIATES OR ITS
CONTRACTORS, AGENTS OR EMPLOYEES BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL,
SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES THAT RESULT IN ANY WAY FROM
CUSTOMER'S (OR CUSTOMER'S CUSTOMERS' OR AUTHORIZED USERS') USE OF OR INABILITY
TO USE ANY OF THE SERVICES OR TO ACCESS THE INTERNET OR ANY PART THEREOF, OR
CUSTOMER'S (OR CUSTOMER'S CUSTOMERS' OR AUTHORIZED USERS') RELIANCE ON OR USE OF
INFORMATION, SERVICES OR MERCHANDISE PROVIDED ON OR THROUGH THE SERVICES, OR
THAT RESULT FROM MISTAKES, OMISSIONS, INTERRUPTIONS, DELETION OF FILES, ERRORS,
DEFECTS, DELAYS IN OPERATION, OR TRANSMISSION, OR ANY FAILURE OF PERFORMANCE.
(E) If Customer is dissatisfied with any of the Services or with any terms,
conditions, rules, policies, guidelines, or practices of Golden Harbor in
operating such Services, Customer's sole and exclusive remedy is to terminate
this Agreement in accordance with Section 2 above and discontinue using such
Services, except as otherwise provided in Subsection 5(D).
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<PAGE> 13
(F) Golden Harbor has no obligation to monitor any of the Services.
However, Customer agrees that Golden Harbor has the right to monitor the
Services electronically from time to time and to disclose any information as
necessary to satisfy any law, regulation or other governmental request, to
operate the Services properly, or to protect itself or its customers or their
respective authorized users. Golden Harbor will not intentionally monitor or
disclose any private electronic-mail message unless required by law, regulation
or governmental request. Golden Harbor reserves the right to refuse to post or
to remove any information or materials, in whole or in part, that, in its sole
discretion, are unacceptable, undesirable or in violation of this Agreement.
9. LIMITATION OF LIABILITY AND INDEMNIFICATION
(A) Limited Liability. In no event shall Golden Harbor be liable, either in
contract or in tort, for protection from unauthorized access of Customer's
Facilities, including without limitation, Customer's transmission facilities and
Customer premises equipment, or from unauthorized access to or alteration, theft
or destruction of Customer's data files, programs, procedures or information
through accident, fraudulent means or devices, or any other method.
NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, GOLDEN HARBOR SHALL
NOT BE LIABLE FOR ANY INDIRECT, CONSEQUENTIAL, SPECIAL, OR PUNITIVE DAMAGES, OR
FOR ANY LOST PROFITS OF ANY KIND OR NATURE WHATSOEVER, WHETHER IN CONTRACT OR IN
TORT, AND CUSTOMER'S SOLE AND EXCLUSIVE REMEDY IS SET FORTH IN SUBSECTION 8(E).
Notwithstanding anything in this Agreement to the contrary, in no event shall
Golden Harbor be liable to Customer for more than an amount equal to more than
the total amount received by Golden Harbor for monthly charges hereunder.
Notwithstanding anything in this Agreement to the contrary, Golden Harbor shall
not be liable for claims or damages resulting from or caused by: (i) Customer's
fault, negligence or failure to perform Customer's responsibility; (ii) claims
against Customer by any other party; (iii) any act or omission of any other
party; (iv) equipment or services furnished by any other party; or (v) any
"Service Abuse" (as defined in Subsection 3(C).
(B) Indemnity by Customer. CUSTOMER SHALL INDEMNIFY, DEFEND AND HOLD GOLDEN
HARBOR AND ITS AFFILIATES AND THEIR RESPECTIVE EMPLOYEES AND ITS AGENTS,
UNDERLYING PROVIDERS, SUPPLIERS AND CONTRACTORS (COLLECTIVELY, THE
"INDEMNITEES") HARMLESS FROM ANY AND ALL LIABILITIES, CAUSES OF ACTION, CLAIMS,
LOSSES, SUITS FOR INJURY TO OR DEATH OF ANY PERSONS OR DAMAGE TO ANY PROPERTY,
COSTS AND EXPENSES, INCLUDING REASONABLE ATTORNEYS' FEES INCURRED IN SEEKING TO
PROVE THE INDEMNITEES' RIGHT TO INDEMNIFICATION AS WELL AS TO DEFEND THE
INDEMNITEES, RELATED TO OR ARISING FROM: (i) ANY VIOLATION OF THIS AGREEMENT BY
CUSTOMER, CUSTOMER'S CUSTOMERS OR AUTHORIZED USERS; (ii) THE USE OF THE SERVICES
OR THE INTERNET OR THE PLACEMENT OR TRANSMISSION OF ANY MESSAGE, INFORMATION,
SOFTWARE OR OTHER MATERIALS ON THE INTERNET BY CUSTOMER, CUSTOMER'S
13
<PAGE> 14
CUSTOMERS OR AUTHORIZED USERS; (iii) ANY AND ALL ACTS OR OMISSIONS OF CUSTOMER'S
OFFICERS, EMPLOYEES, AGENTS OR CONTRACTORS IN CONNECTION WITH THE CONSTRUCTION,
INSTALLATION, MAINTENANCE, PRESENCE, USE OR REMOVAL OF SYSTEMS, CHANNELS OR
TERMINAL EQUIPMENT OR SOFTWARE NOT PROVIDED BY GOLDEN HARBOR WHICH ARE CONNECTED
OR ARE TO BE CONNECTED TO THE SERVICES; (iv) ANY AND ALL CLAIMS FOR INFRINGEMENT
OF PATENTS ARISING FROM THE USE OF EQUIPMENT AND SOFTWARE APPARATUS AND SYSTEMS
NOT PROVIDED BY GOLDEN HARBOR IN CONNECTION WITH THE SERVICES; (v) FRAUDULENT
USE OF OR FRAUDULENT TRANSACTIONS ARISING OUT OF THE USE OF THE SERVICES; (vi)
ANY AND ALL CLAIMS FOR LIBEL, SLANDER OR THE INFRINGEMENT OF COPYRIGHT ARISING
FROM THE MATERIAL TRANSMITTED USING THE SERVICES OR THE USE THEREOF BY THE
CUSTOMER; OR (vi) ANY "SERVICE ABUSE" (AS DEFINED IN SUBSECTION 3(C) HEREOF).
10. FORCE MAJEURE.
If Golden Harbor's performance of this Agreement or any obligation
hereunder is prevented, restricted or interfered with by any events or causes
beyond its reasonable control (each such event or cause shall be a "Force
Majeure Event") including, but not limited to, acts of God, fire, explosion,
vandalism, cable or power outage, terrorism, storm or other similar occurrence,
any law, order, regulation, direction, action or request of the United States
government, or state or local governments, or of any agency, commission, court,
bureau, corporation or other instrumentality of any one or more such
governments, or of any civil or military authority, or national emergency,
insurrection, riot, war, strike, lockout or work stoppage or other labor
difficulties, or supplier or provider failure, shortage, breach or delay, or any
event or condition whereby Golden Harbor is unable to acquire facilities at a
commercially reasonable cost, then Golden Harbor shall be excused from such
performance on a day-to-day basis to the extent of such restriction or
interference. Golden Harbor shall use reasonable efforts under the circumstances
to avoid or remove such causes of nonperformance and shall proceed to perform
with reasonable dispatch whenever such events or causes are removed or cease.
11. NOTICES.
Notice required to be given under this Agreement shall be deemed given (1)
three days after deposited in the U.S. Mail, postage paid, via certified mail,
return receipt requested, (ii) upon transmission via facsimile, (iii) one day
after sent by overnight service with a reputable overnight courier, or (iv) when
delivered in person, to the attention of the person at the address or facsimile
number set forth in this Agreement, or such other address or facsimile number as
each of the parties may from time to time advise the other in accordance with
this Section.
14
<PAGE> 15
If to Customer: Internet America, Inc.
One Dallas Centre
350 N. St. Paul, Suite 200
Dallas, Texas 75201
Attention: Mike Maples, President and CEO
Telephone No.: (214) 861-2540
Facsimile No.: (214) 861-2663
With a copy to: Patrick V. Stark
Kane, Russell, Coleman & Logan
3700 Thanksgiving Tower
1601 Elm Street
Dallas, Texas 75201
Telephone No.: (214) 416-4260
Facsimile No.: (214) 416-4299
If to Golden Harbor: Golden Harbor of Texas, Inc.
401 Carlson Circle
San Marcos, Texas 78666
Attention: Jerry L. James, General Manager
Telephone No.: (512) 392-6284
Facsimile No.: (512) 392-6276
With a copy to: Golden Harbor of Texas, Inc.
401 Carlson Circle
San Marcos, Texas 78666
Attention: Harold E. Lovelady, President
Telephone No.: (512) 392-6284
Facsimile No.: (512) 392-6276
12. NO WAIVER.
No term or provision of this Agreement shall be deemed waived and no breach
or default shall be deemed consented to unless such waiver or consent shall be
in writing and signed by the party claimed to have waived or consented. Such a
waiver or consent by either party, whether express or implied, shall not
constitute a waiver of any term or provision on any other occasion or consent to
any different or subsequent breach or default.
13. PARTIAL INVALIDITY; GOVERNMENT ACTION.
(A) Partial Invalidity. If any part of any provision of this Agreement or
any other agreement, document or writing given pursuant to or in connection with
this Agreement shall be invalid or unenforceable under applicable law, rule or
regulation, that part shall be ineffective to
15
<PAGE> 16
the extent of such invalidity only, without in any way affecting the
remaining parts of that provision or the remaining provisions of this
Agreement. In such event, Customer and Golden Harbor will negotiate in good
faith with respect to any such invalid or unenforceable part to the extent
necessary to render such part valid and enforceable.
(B) Government Action. Upon 30 days prior notice, either party shall
have the right, without liability to the other, to cancel an affected
portion of the Services if any material rate or term contained herein and
relevant to the affected Services is substantially changed (to the
detriment of the terminating party) or found to be unlawful or the
relationship between the parties hereunder is found to be unlawful by the
highest court of competent jurisdiction to which the matter is appealed,
the FCC (if it has jurisdiction), or other local, state or federal
governmental authority of competent jurisdiction.
14. USE OF SERVICE; USE OF NAME.
Upon Golden Harbor's acceptance of a Service Order hereunder, Golden
Harbor will provide the Services specified therein to Customer upon the
condition that the Services shall not be used for any unlawful purpose.
The provision of Services will not create a partnership or joint venture
between the parties or result in a joint communications service offering to
any third parties. Only upon express prior written consent of Golden Harbor
shall Customer be permitted to use Golden Harbor's name, trademarks,
tradename, service marks or any other intangible property owned by Golden
Harbor.
15. CHOICE OF LAW; LIMITATION.
(A) Law. This Agreement shall be governed by and construed under the
laws of the State of Texas without regard to that state's choice of law
principles.
(B) Limitation of Action. Subject to the limitations set forth
herein, any legal action arising out of failure, malfunction or defect in
the Services shall be brought within one year of the discovery of the
occurrence.
16. CONFIDENTIAL INFORMATION.
(A) Limited Disclosure. Customer understands and agrees that the
terms and conditions of this Agreement and all documents referenced herein
are confidential and shall not be disclosed by Customer to any person or
entity other than Customer's directors, lenders, officers, agents, and
employees who have a need to know the same and have specifically agreed to
nondisclosure of the terms and conditions hereof, except if the information
(i) is or becomes publicly known through no wrongful act of Customer; or
(ii) is required to be disclosed by Customer to any governmental agency or
is otherwise required to be disclosed by applicable law, provided that
before making such disclosure, Customer shall give Golden Harbor prior
written notice of such required disclosure in order that Golden Harbor may
interpose an objection thereto
16
<PAGE> 17
or otherwise take action to protect the confidentiality of such
information. Any violation by Customer or any of its directors, officers,
employees, or agents of the foregoing sentence shall entitle Golden Harbor
to an injunction or restraining order. Remedies stated in this paragraph
are in addition to, and not exclusive of, other remedies available at law
or in equity.
(B) Survival of Confidentiality. The provisions of this Section 16
will be effective as of the date first above written and remain in full
force and effect for a period which will be the longer of (i) two years
following the date of Agreement or (ii) one year from the termination
of all Services hereunder.
17. SUCCESSORS AND ASSIGNMENT.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors or assigns, provided,
however, that Customer shall not assign or transfer its rights or
obligations under this Agreement without the prior written consent of
Golden Harbor, which consent shall not be unreasonably withheld or delayed.
18. GENERAL.
(A) Survival of Terms. The terms and provisions contained in this
Agreement that by their sense and context are intended to survive the
performance thereof by the parties hereto shall so survive the completion
of performance and termination of this Agreement, including, without
limitation, the provisions of Sections 8 and 9 and the provisions regarding
the making of any and all payments due hereunder.
(B) Headings. Descriptive headings in this Agreement are for
convenience only and shall not affect the construction of this Agreement.
(C) Industry Terms. Words having well-known technical or trade
meanings shall be so construed, and all listings of items shall not be
taken to be exclusive, but shall include other items, whether similar or
dissimilar to those listed, as the context reasonably requires.
(D) Rules of Construction. No rule of construction requiring
interpretation against the drafting party hereof shall apply in the
interpretation of this Agreement.
19. ENTIRE AGREEMENT.
This Agreement consists of (i) all the terms and conditions contained
herein, and, (ii) all documents incorporated herein specifically by
reference. This Agreement constitutes the complete and exclusive statement
of the understandings between the parties and supersedes all proposals and
prior agreements (oral or written) between the parties relating to the
Services provided hereunder. No subsequent agreement between the parties
concerning the Services shall be effective or binding unless it is made in
writing and executed by Customer and Golden Harbor.
17
<PAGE> 18
Golden Harbor: Customer:
Golden Harbor of Texas, Inc. Internet America, Inc.
By: /s/ ILLEGIBLE By: /s/ MIKE MAPLES
------------------------------- --------------------------------
Printed Name: ILLEGIBLE Printed Name: Mike Maples
------------------- ------------------
Title: Vice President Title: CEO
-------------------------- --------------------------
18
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-59527 of Internet America, Inc. of our report dated August 12, 1998,
appearing in the Prospectus, which is part of this Registration Statement and
to the reference to us under the headings "Selected Financial and Operating
Data" and "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
- -----------------------------------
Deloitte & Touche LLP
Dallas, Texas
August 28, 1998
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