<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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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<TABLE>
<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. [ ]
- ---------------
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. [ ]
- ---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, $0.01 par value... 2,645,000 $11.00 $29,095,000.00 $8,583.03
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TOTAL................... 2,645,000 $11.00 $29,095,000.00 $8,583.03
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(1) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(a) under the Securities Act of
1933, as amended.
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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<PAGE> 2
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 JULY 21, 1998
2,300,000 SHARES
Internet America Logo
COMMON STOCK
---------------------
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 to be 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."
---------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 9.
---------------------
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
UNDERWRITING PROCEEDS TO SELLING
PRICE TO 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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</TABLE>
(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.
<PAGE> 3
[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.
- Back cover will contain a road map of Texas with the Company's logo and
the words "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.
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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 profit margins in recent periods that are substantially higher than
those of the publicly traded ISPs.
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 news access service,
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 current 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.
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
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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 March 31, 1998, approximately 45% 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 has previously made a strategic
acquisition and an add-on acquisition.
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 that the Company is now
deploying with the participation of various telecommunications providers
enables the Company to serve existing markets more efficiently and enter
new markets more quickly with a smaller commitment of long-term capital
resources, lower operating costs and less exposure to technological
obsolescence.
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.
5
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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)............ 6,285,984 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, (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 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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NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
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1996 1997 1997 1998
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<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue..................................... $ 3,777 $ 9,413 $ 7,007 $ 7,711
Total operating expenses.......................... 7,129 12,756 10,229 6,588
------- ------- ------- -------
Income (loss) from operations..................... (3,352) (3,343) (3,222) 1,123
Interest expense.................................. 77 481 304 434
------- ------- ------- -------
Net income (loss)................................. $(3,429) $(3,824) $(3,526) $ 689
======= ======= ======= =======
Net income (loss) per share(3):
Basic............................................. $ (1.15) $ (1.12) $ (1.04) $ 0.20
Diluted........................................... $ (1.15) $ (1.12) $ (1.04) $ 0.14
Weighted average shares(3):
Basic............................................. 2,981 3,418 3,378 3,532
Diluted........................................... 2,981 3,418 3,378 4,872
OPERATING DATA:
Approximate number of customers at end of
period......................................... 27,900 39,900 39,800 47,600
EBITDA(4)......................................... $(2,804) $(1,725) $(2,015) $ 2,238
EBITDA margin(4).................................. (74.2)% (18.3)% (28.8)% 29.0%
</TABLE>
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THREE MONTHS ENDED
---------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997(5) 1997 1997 1998
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QUARTERLY STATEMENT OF OPERATIONS DATA:
Total revenue.................................. $2,406 $2,395 $2,519 $2,797
Total operating expenses....................... 2,527 1,976 2,183 2,429
------ ------ ------ ------
Income (loss) from operations.................. $ (121) $ 419 $ 336 $ 368
====== ====== ====== ======
Net income (loss).............................. $ (298) $ 285 $ 187 $ 217
====== ====== ====== ======
QUARTERLY OPERATING DATA:
Approximate number of customers at end of
period...................................... 39,900 39,800 44,600 47,600
EBITDA(4)...................................... $ 290 $ 777 $ 698 $ 763
EBITDA margin(4)............................... 12.1% 32.4% 27.7% 27.3%
</TABLE>
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<CAPTION>
AS OF MARCH 31, 1998
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ACTUAL AS ADJUSTED(6)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash...................................................... $ 191 $12,906
Working capital (deficit)................................. (6,160) 9,256
Total assets.............................................. 2,821 15,536
Long-term debt, net of current portion.................... 121 121
Total shareholders' equity (deficit)...................... (3,992) 11,424
</TABLE>
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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 March 31, 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) 1,381,651 shares of Common Stock issuable upon
exercise of other outstanding options at a weighted average exercise price
of $1.31 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.
(5) During the last quarter of fiscal 1997, the Company was in the midst of
reorganizing its management and operations personnel and implementing a
comprehensive cost control program. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."
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(6) 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 March 31, 1998, the Company had an accumulated deficit of
approximately $6.9 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
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 deteriorating profit margins or losses. Due to these and other
factors, in some future quarter the
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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, which 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 alternate devices, 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 alternate
access devices.
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. 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.
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 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
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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. 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 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,
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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 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.
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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
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.
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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 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
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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 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. Nor can there be any assurance if the Company was 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.
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, 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
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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.
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.
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
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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.
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 49.4%
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;
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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
6,285,984 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 3,985,984 shares
constitute "restricted securities" within the meaning of Rule 144. Of these
"restricted securities," 1,886,361 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 for less than the required
two-year period. The holders of 1,660,780 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." The Company, and its executive officers,
directors and certain shareholders (including all those with registration
rights) who will hold, collectively, 3,285,777 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., except under limited
circumstances. The Company intends to file a Registration Statement on Form S-8
to register all of the shares of Common Stock reserved for issuance pursuant to
the 1996 Option Plan and 1998 Option Plan, as well as 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
18
<PAGE> 19
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 pro forma net tangible book value of the
Common Stock of $8.27 per share at an assumed initial public offering price of
$10.00 per share. To the extent that currently outstanding stock options are
exercised, there will be further dilution. See "Dilution."
19
<PAGE> 20
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 a marketplace.
Of the net proceeds of this Offering, the Company anticipates using (i)
approximately $6.0 million for possible acquisitions of businesses that are
complementary to that of the Company in existing and new markets, (ii)
approximately $5.0 million to fund increased marketing expenses and incremental
capital equipment and infrastructure expenditures related to the Company's
anticipated growth, and (iii) approximately $2.7 million to repay substantially
all current indebtedness, 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 $166,000 (the "Bank Debt"); (c) indebtedness
owing to Webstar, Inc. in connection with the acquisition of subscribers in the
aggregate approximate amount of $375,000 (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 $106,000 (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. The remaining net
proceeds of the Offering will be used for general corporate purposes.
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.
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.
20
<PAGE> 21
CAPITALIZATION
The following table sets forth at March 31, 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>
MARCH 31, 1998
------------------------
HISTORICAL 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)....................................... $ 3,083 $ 381
======= =======
Long-term debt (capital lease obligations).................. $ 121 $ 121
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; 3,532,221 shares issued and outstanding;
6,285,984 shares issued and outstanding, as
adjusted(1)(2)......................................... 36 63
Additional paid-in capital................................ 2,920 18,301
Common Stock in treasury.................................. (13) --
Accumulated deficit....................................... (6,940) (6,940)
------- -------
Total shareholders' equity (deficit).............. (3,992) 11,424
------- -------
Total capitalization.............................. $(3,871) $11,545
======= =======
</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) 1,381,651 shares of Common Stock issuable upon
exercise of other outstanding options at a weighted average exercise price
of $1.31 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.
21
<PAGE> 22
DILUTION
The deficit in pro forma net tangible book value of the Common Stock as of
March 31, 1998 was approximately $4.5 million, or $1.28 per share, 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
March 31, 1998, the Company's pro forma net tangible book value as adjusted at
March 31, 1998 would have been approximately $10.9 million, or $1.73 per share.
This represents an immediate increase in net tangible book value of $3.01 per
share to existing shareholders and an immediate decrease in net tangible book
value to new investors of $8.27 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
March 31, 1998......................................... $(1.28)
Increase per share attributable to new investors.......... 3.01
------
Pro forma net tangible book value per share after this
Offering.................................................. 1.73
------
Dilution per share to new investors......................... $ 8.27
======
Percentage dilution......................................... 82.7%
======
</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)..... 4,585,984 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................. 6,285,984 100.0% $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 3,985,984 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 3,640,984
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
March 31, 1998. Additional options to purchase 1,381,651 of Common Stock were
outstanding as of March 31, 1998 at a weighted average exercise price of $1.31
per share. To the extent these options are exercised, there will be further
dilution to new investors in the Offering. See "Management -- 1996 Incentive
Stock Option Plan," "-- Nonqualified Stock Options Issued to Officers and
Directors" and "-- 1998 Nonqualified Stock Option Plan."
22
<PAGE> 23
SELECTED FINANCIAL AND OPERATING DATA
The statement of operations data for the years ended June 30, 1996 and
1997, and the balance sheet data as of June 30, 1996 and 1997 have been derived
from the Company's audited financial statements. The selected financial data as
of and for the nine months ended March 31, 1997 and 1998 have been derived from
the Company's unaudited interim financial statements. In the opinion of
management, the unaudited interim financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the Company's financial position and results of operations for
the periods presented. The results for the nine months ended March 31, 1998 are
not necessarily indicative of the operating results for the entire year. 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>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
----------------------- -----------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND CUSTOMER DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue
Access...................................... $ 3,052 $ 8,155 $ 6,028 $ 6,916
Business services........................... 411 1,043 795 777
Other....................................... 314 215 184 18
------- ------- ------- -------
Total revenue.......................... 3,777 9,413 7,007 7,711
Operating expenses
Connectivity and operations................. 2,187 6,171 5,037 3,381
Sales and marketing......................... 1,597 1,912 1,790 739
General and administrative.................. 2,797 2,704 2,195 1,353
Depreciation and amortization............... 548 1,618 1,207 1,115
Impairment of equipment..................... -- 351 -- --
------- ------- ------- -------
Total operating expenses............... 7,129 12,756 10,229 6,588
------- ------- ------- -------
Income (loss) from operations.................... (3,352) (3,343) (3,222) 1,123
Interest expense................................. 77 481 304 434
------- ------- ------- -------
Net income (loss)................................ $(3,429) $(3,824) $(3,526) $ 689
======= ======= ======= =======
Earnings (loss) per share(1):
Basic.......................................... $ (1.15) $ (1.12) $ (1.04) $ 0.20
Diluted........................................ $ (1.15) $ (1.12) $ (1.04) $ 0.14
Weighted average shares(1):
Basic.......................................... 2,981 3,418 3,378 3,532
Diluted........................................ 2,981 3,418 3,378 4,872
OTHER OPERATING DATA:
Approximate number of customers at end of
period...................................... 27,900 39,900 39,800 47,600
EBITDA(2)...................................... $(2,804) $(1,725) $(2,015) $ 2,238
EBITDA margin(2)............................... (74.2)% (18.3)% (28.8)% 29.0%
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF MARCH 31, 1998
------------------ ------------------------
1996 1997 ACTUAL AS ADJUSTED(3)
------- ------- ------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash........................................... $ 79 $ -- $ 191 $12,906
Working capital (deficit)...................... (3,462) (6,834) (6,160) 9,256
Total assets................................... 3,127 3,114 2,821 15,536
Long-term debt, net of current portion......... 373 684 121 121
Total shareholders' equity (deficit)........... (1,063) (4,681) (3,992) 11,424
</TABLE>
23
<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.
(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."
24
<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. At the
end of the third quarter of fiscal 1997, the Company's Board of Directors
replaced the President and Chief Executive Officer of the Company. The new
President and Chief Executive Officer moved quickly to reorganize the Company's
management and operations personnel and implement a comprehensive cost control
program.
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. Since the completion of these changes, 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.
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
25
<PAGE> 26
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.
26
<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 NINE MONTHS
JUNE 30, ENDED MARCH 31,
-------------- ----------------
1996 1997 1997 1998
----- ----- ------ ------
<S> <C> <C> <C> <C>
REVENUE:
Access............................................ 80.8% 86.6% 86.0% 89.7%
Business services................................. 10.9 11.1 11.4 10.1
Other............................................. 8.3 2.3 2.6 0.2
----- ----- ----- -----
Total revenue............................. 100% 100% 100% 100%
----- ----- ----- -----
OPERATING EXPENSES:
Connectivity and operations....................... 57.9 65.6 71.9 43.8
Sales and marketing............................... 42.3 20.3 25.6 9.6
General and administrative........................ 74.1 28.7 31.3 17.6
Depreciation and amortization..................... 14.5 17.2 17.2 14.5
Impairment of equipment........................... -- 3.7 -- --
----- ----- ----- -----
Total operating expenses.................. 188.8 135.5 146.0 85.4
----- ----- ----- -----
Income (loss) from operations....................... (88.8) (35.5) (46.0) 14.6
Interest income (expense), net...................... (2.0) (5.1) (4.3) (5.6)
----- ----- ----- -----
Net income (loss)................................... (90.8)% (40.6)% (50.3)% 9.0%
===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO NINE MONTHS ENDED MARCH 31, 1997
Total Revenue. Total revenue increased by $704,000, or 10.0%, to $7.7
million for the nine months ended March 31, 1998 from $7.0 million for the same
period in the prior year. Access revenue increased by $888,000, or 14.7%, to
$6.9 million for the nine months ended March 31, 1998 from $6.0 million for the
same period in the prior year. The increase in access revenue is primarily
attributable to increased subscription fees derived from an increased number of
dial-up access customers which totaled 46,600 at March 31, 1998 as compared to
38,800 at March 31, 1997. Business services revenue declined by $18,000, or
2.3%, to $777,000 for the nine months ended March 31, 1998 from $795,000 for the
same period in the prior year. Other revenue decreased by $166,000, or 90.2%, to
$18,000 for the nine months ended March 31, 1998 from $184,000 for the same
period in the prior year. 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 32.9%, to $3.4 million for the nine months ended March
31,1998 from $5.0 million for the same period in the prior year. 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 $143,000 and (iii) a decrease in Internet and
telephone connectivity costs of $98,000 due to efficiencies realized due to
improved cost efficiencies in the Company's network infrastructure.
Sales and marketing. Sales and marketing expenses decreased by $1.1
million, or 58.8%, to $739,000 for the nine months ended March 31, 1998 from
$1.8 million for the same period in the prior year. For the nine months ended
March 31, 1998, the Company suspended virtually all advertising until a new
television advertising campaign began in January 1998. During the nine month
period ended March 31, 1998 compared to the same period in the prior year,
marketing payroll and consulting fees declined by $643,000, or 68.0%, and
advertising and promotional costs declined by $603,000, or 61.1%.
27
<PAGE> 28
General and administrative. General and administrative expenses decreased
by $841,000, or 38.3%, to $1.4 million for the nine months ended March 31, 1998
from $2.2 million for the same period in the prior year. The decrease in general
and 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
$92,000, or 7.6%, to $1.1 million for the nine months ended March 31, 1998 from
$1.2 million for the same period in the prior year.
Interest expense. Interest expense increased by $130,000, or 42.7%, to
$434,000 for the nine months ended March 31, 1998 from $304,000 for the same
period in the prior year. This increase in interest expense relates primarily to
interest on certain indebtedness accruing at a default rate of 18%. See "Certain
Transactions." The average principal outstanding for the nine months ended March
31, 1998 was $2.2 million, while the average principal outstanding for the same
period in the prior year was $1.9 million.
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
Total Revenue. Total revenue increased by $5.6 million, or 149%, to $9.4
million for fiscal 1997 from $3.8 million for fiscal 1996. Access revenue
increased by $5.1 million, or 167%, 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 38,900 at June 30, 1997 as compared to
27,500 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 $633,000, 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
$99,000, or 31.6%, to $215,000 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 182%, 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 for the first three quarters of
fiscal 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,
1996 1996 1997 1997 1997 1997 1998
--------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Total Revenue:
Access.............................. $ 1,756 $ 2,180 $2,092 $2,127 $2,131 $2,225 $2,560
Business services................... 194 302 299 248 259 289 229
Other............................... 85 76 23 31 5 5 8
------- ------- ------ ------ ------ ------ ------
Total revenue................. 2,035 2,558 2,414 2,406 2,395 2,519 2,797
------- ------- ------ ------ ------ ------ ------
Operating expenses:
Connectivity and operations......... 1,693 1,792 1,552 1,134 1,117 1,166 1,098
Sales and marketing................. 909 648 233 122 105 216 418
General and administrative.......... 722 836 637 509 396 439 518
Depreciation and amortization....... 351 430 426 411 358 362 395
Impairment of equipment............. -- -- -- 351 -- -- --
------- ------- ------ ------ ------ ------ ------
Total operating expenses...... 3,675 3,706 2,848 2,527 1,976 2,183 2,429
------- ------- ------ ------ ------ ------ ------
Income (loss) from operations......... (1,640) (1,148) (434) (121) 419 336 368
Interest income (expense), net........ (47) (121) (136) (177) (134) (149) (151)
------- ------- ------ ------ ------ ------ ------
Net income (loss)..................... $(1,687) $(1,269) $ (570) $ (298) $ 285 $ 187 $ 217
======= ======= ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------
FISCAL 1997 FISCAL 1998
--------------------------------------------- --------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30 DEC. 31, MAR. 31,
1996 1996 1997 1997 1997 1997 1998
--------- -------- -------- -------- -------- -------- --------
(AS A PERCENTAGE OF TOTAL REVENUE)
<S> <C> <C> <C> <C> <C> <C> <C>
Total Revenue:
Access.............................. 86.3% 85.2% 86.6% 88.4% 89.0% 88.3% 91.5%
Business services................... 9.5 11.8 12.4 10.3 10.8 11.5 8.2
Other............................... 4.2 3.0 1.0 1.3 0.2 0.2 0.3
------- ------- ------- ------- ------- ------ ------
Total revenue................. 100% 100% 100% 100% 100% 100% 100%
------- ------- ------- ------- ------- ------ ------
Operating expenses:
Connectivity and operations......... 83.2 70.1 64.3 47.1 46.6 46.3 39.3
Sales and marketing................. 44.7 25.3 9.7 5.1 4.4 8.6 14.9
General and administrative.......... 35.5 32.7 26.4 21.2 16.5 17.4 18.5
Depreciation and amortization....... 17.2 16.8 17.6 17.1 14.9 14.4 14.1
Impairment of equipment............. -- -- -- 14.6 -- -- --
------- ------- ------- ------- ------- ------ ------
Total operating expenses...... 180.6 144.9 118.0 105.0 82.5 86.7 86.8
------- ------- ------- ------- ------- ------ ------
Income (loss) from operations......... (80.6) (44.9) (18.0) (5.0) 17.5 13.3 13.2
Interest income (expense), net........ (2.3) (4.7) (5.6) (7.4) (5.6) (5.9) (5.4)
------- ------- ------- ------- ------- ------ ------
Net income (loss)..................... (82.9)% (49.6)% (23.6)% (12.4)% 11.9% 7.4% 7.8%
======= ======= ======= ======= ======= ====== ======
</TABLE>
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."
29
<PAGE> 30
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 nine
month period ended March 31, 1998, cash provided by operations was $1.4 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 purchases of property and equipment and the purchase of
customers from a regional ISP in San Angelo, Texas. Cash used in investing
activities for the nine month period ended March 31, 1998 was $573,000, 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. On June 30, 1998, the Affiliate Debt was
refinanced. 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. 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 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. See "Risk Factors -- Year 2000 Compliance."
30
<PAGE> 31
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.
31
<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
transmissions 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
32
<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
33
<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 news access service, 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, uninterruptable 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 March 31, 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
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<PAGE> 35
week. The average "hold" time is less than 45 seconds, and approximately 65% of
all calls are resolved within 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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<PAGE> 36
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 uninterruptable 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 March 31, 1998, 45% 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 market and deploy xDSL. The Company expects that it
will be able to spread the personnel, hardware,
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<PAGE> 38
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.
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
39
<PAGE> 40
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 March 31, 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.
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<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...................... 42 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 1996 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 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 established a Compensation Committee on May 28,
1998. The Compensation Committee 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.
<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."
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<PAGE> 45
The Company currently has 1,381,651 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. 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, the Company made a promissory note in the
original principal amount of $1,767,713 in favor of First Computer (the "First
Computer Note") and issued 544,149 shares of Common Stock to First Computer at a
price equal to approximately $0.43 per share. 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.
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. Under the 1998 Purchase Agreement, Carl Westcott LLC, as
nominee for Messrs. Westcott, Maples and Smith was granted certain registration
rights. See "Description of Securities -- Registration Rights."
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
46
<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.
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 July 1, 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).............. 247,406 5.4% -- 247,406 3.9%
Douglas L. Davis(2)............... 225,000 4.9% -- 225,000 3.6%
James T. Chaney................... -- -- -- -- --
John James Stewart III(2)......... 743 * -- 743 *
Douglas G. Sheldon(2)............. 315,005 6.9% -- 315,005 5.0%
William O. Hunt(2)(3)............. 1,476,243 32.2% 200,000 1,276,243 20.3%
Jack T. Smith(2).................. 547,812 11.9% 60,000 487,812 7.8%
Gary L. Corona.................... 22,500 * -- 22,500 *
Carl Westcott..................... 1,141,812 24.9% 340,000 801,812 12.8%
All directors and executive
officers as a group (eight
persons)(2)..................... 2,834,709 61.8% 260,000 2,574,709 41.0%
</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 and
248,243 shares of Common Stock granted to Messrs. Maples, Davis, Stewart,
Sheldon, Hunt, Smith and all directors and executive officers as a group,
respectively, that are exercisable within 60 days of July 1, 1998.
(3) Includes 234,243 shares of Common Stock owned by BCG Partnership, Ltd., a
limited partnership in which Mr. Hunt and his wife serve as general
partners, 636,113 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 583,387 shares of Common Stock owned by the William O. Hunt
Retirement Trust, for which Mr. Hunt serves as trustee.
(4) Messrs. Hunt, 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 an aggregate of 345,000 shares of Common Stock
at the initial public offering price set forth on the cover of this
Prospectus, less the underwriting discount. See "Underwriting."
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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 July 1, 1998, the Company had 20 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 July 1, 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 1,660,780 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
6,285,984 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 3,985,984 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," 1,886,361
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 for less than the required two-year period. In addition, the
holders of 1,660,780 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."
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 3,285,777 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.
After the Offering, the Company intends to file a Registration Statement on
Form S-8 to register all of the shares of Common Stock reserved for issuance
pursuant to the 1996 Option Plan and the 1998 Option Plan, as well as 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 shares of Common Stock
are released for sale to the public, 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, 1996 and 1997 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.
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<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. The Company has applied to have the Common Stock approved for
quotation on the Nasdaq National Market. Reports and other information
concerning the Company can be inspected at The Nasdaq Stock Market, Inc., 1735 K
Street, NW, Washington, D.C. 20006-1500. 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.
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<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.
56
<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.
57
<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.
58
<PAGE> 59
INTERNET AMERICA INC.
FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996 AND 1997, AND
INDEPENDENT AUDITORS' REPORT
<PAGE> 60
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> 61
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, 1996 and 1997, 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, 1996 and 1997, and
the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- ------------------------------------
Dallas, Texas
July 20, 1998
F-2
<PAGE> 62
INTERNET AMERICA, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------- MARCH 31,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash................................................ $ 78,771 $ -- $ 191,331
Accounts receivable, net of allowance for
uncollectible accounts of $17,046 and $74,707 in
1996 and 1997, respectively...................... 167,045 224,180 318,887
Prepaid expenses and other current assets........... 109,381 53,666 22,245
----------- ----------- -----------
Total current assets........................ 355,197 277,846 532,463
PROPERTY AND EQUIPMENT -- Net......................... 2,739,663 2,510,623 1,667,720
OTHER ASSETS -- Net................................... 32,401 325,678 621,138
----------- ----------- -----------
TOTAL....................................... $ 3,127,261 $ 3,114,147 $ 2,821,321
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of capital lease obligations........ $ 122,730 $ 408,251 $ 333,471
Current maturities of long-term debt................ 80,028 467,800 506,440
Advances under line of credit....................... 150,000 243,000 225,000
Notes payable to shareholders....................... 2,017,713 2,017,713
Bank overdrafts..................................... 226,979
Trade accounts payable.............................. 2,176,816 1,434,643 774,339
Accrued liabilities................................. 616,147 642,666 740,375
Deferred revenue.................................... 671,677 1,670,392 2,095,025
----------- ----------- -----------
Total current liabilities................... 3,817,398 7,111,444 6,692,363
CAPITAL LEASE OBLIGATIONS, net of current portion..... 203,256 375,851 121,273
LONG-TERM DEBT, net of current portion................ 169,972 308,109
----------- ----------- -----------
Total liabilities........................... 4,190,626 7,795,404 6,813,636
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Series A convertible preferred stock, $.01 par
value; 400,000 shares authorized, 379,672 issued
and outstanding in 1996 and 1997................. 3,796 3,796 3,796
Series B convertible preferred stock, $.01 par
value, 300,000 shares authorized, 73,667 issued
and outstanding in 1996 and 1997................. 737 737 737
Common stock, $.01 par value; 40,000,000 shares
authorized, 3,001,196 and 3,560,346 issued and
3,001,196 and 3,532,221 outstanding in 1996 and
1997, respectively............................... 30,012 35,603 35,603
Additional paid-in capital.......................... 2,707,787 2,920,333 2,920,333
Common stock in treasury, 28,125 shares at cost in
1997............................................. (12,500) (12,500)
Accumulated deficit................................. (3,805,697) (7,629,226) (6,940,284)
----------- ----------- -----------
Total shareholders' equity (deficit)........ (1,063,365) (4,681,257) (3,992,315)
----------- ----------- -----------
TOTAL....................................... $ 3,127,261 $ 3,114,147 $ 2,821,321
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE> 63
INTERNET AMERICA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
------------------------- ------------------------
1996 1997 1997 1998
----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Access.................................. $ 3,052,355 $ 8,154,620 $ 6,027,714 $6,915,468
Business services....................... 410,516 1,043,729 795,272 777,211
Other................................... 313,847 214,823 184,300 18,118
----------- ----------- ----------- ----------
Total........................... 3,776,718 9,413,172 7,007,286 7,710,797
----------- ----------- ----------- ----------
OPERATING COSTS AND EXPENSES:
Connectivity and operations............. 2,186,721 6,170,471 5,037,000 3,380,666
Sales and marketing..................... 1,597,138 1,912,265 1,790,736 738,638
General and administrative.............. 2,797,385 2,704,104 2,194,838 1,353,475
Depreciation and amortization........... 547,805 1,618,089 1,206,662 1,115,210
Impairment of equipment................. 350,787
----------- ----------- ----------- ----------
Total........................... 7,129,049 12,755,716 10,229,236 6,587,989
----------- ----------- ----------- ----------
INCOME (LOSS) FROM OPERATIONS............. (3,352,331) (3,342,544) (3,221,950) 1,122,808
INTEREST EXPENSE.......................... 76,550 480,985 304,133 433,866
----------- ----------- ----------- ----------
NET INCOME (LOSS)......................... $(3,428,881) $(3,823,529) $(3,526,083) $ 688,942
=========== =========== =========== ==========
NET INCOME (LOSS) PER COMMON SHARE:
BASIC................................... $ (1.15) $ (1.12) $ (1.04) $ 0.20
=========== =========== =========== ==========
DILUTED................................. $ (1.15) $ (1.12) $ (1.04) $ 0.14
=========== =========== =========== ==========
PRO FORMA (unaudited)................... $ (0.86) $ (0.80) $ 0.14
=========== =========== ==========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 64
INTERNET AMERICA, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY STOCK
----------------- ------------------- PAID-IN ----------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT
------- ------ --------- ------ ---------- ------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995............... -- $ -- 2,473,875 $24,739 $ 6,925 -- $ -- $ (376,816)
Issuance of common stock:
For cash........................... 575,822 3,060 668,075
For conversion of note payable..... 263,059 2,630 147,370
For services....................... 1,125 11 3,739
For extinguishment of debt......... 29,999 2,999 47,001
Deferred compensation for stock
options issued below deemed fair
value.............................. 430,650
Issuance of Class A preferred stock:
For cash........................... 227,368 2,273 850,357
For conversion of common stock..... 152,304 1,523 (342,684) (3,427) 1,904
Issuance of Class B preferred stock:
For cash........................... 73,667 737 551,766
Net loss............................. (3,428,881)
------- ------ --------- ------- ---------- ------ -------- -----------
BALANCE, JUNE 30, 1996............... 453,339 4,533 3,001,196 30,012 2,707,787 (3,805,697)
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............................. (3,823,529)
------- ------ --------- ------- ---------- ------ -------- -----------
BALANCE, June 30, 1997............... 453,339 4,533 3,560,346 35,603 2,920,333 28,125 (12,500) (7,629,226)
Net income (unaudited)............... 688,942
------- ------ --------- ------- ---------- ------ -------- -----------
BALANCE, MARCH 31, 1998
(unaudited)........................ 453,339 $4,533 3,560,346 $35,603 $2,920,333 28,125 $(12,500) $(6,940,284)
======= ====== ========= ======= ========== ====== ======== ===========
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
BALANCE, JUNE 30, 1995............... $ (345,152)
Issuance of common stock:
For cash........................... 671,135
For conversion of note payable..... 150,000
For services....................... 3,750
For extinguishment of debt......... 50,000
Deferred compensation for stock
options issued below deemed fair
value.............................. 430,650
Issuance of Class A preferred stock:
For cash........................... 852,630
For conversion of common stock.....
Issuance of Class B preferred stock:
For cash........................... 552,503
Net loss............................. (3,428,881)
-----------
BALANCE, JUNE 30, 1996............... (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)
-----------
BALANCE, June 30, 1997............... (4,681,257)
Net income (unaudited)............... 688,942
-----------
BALANCE, MARCH 31, 1998
(unaudited)........................ $(3,992,315)
===========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 65
INTERNET AMERICA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
------------------------- ------------------------
1996 1997 1997 1998
----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)....................... $(3,428,881) $(3,823,529) $(3,526,083) $ 688,942
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization........ 547,805 1,618,089 1,206,662 1,115,210
Loss on impairment................... 350,787
Provision for allowance for
uncollectible accounts............. 17,046 57,661 57,661 95,000
Issuance of stock for services....... 3,750 25,000 25,000
Deferred compensation................ 430,650 (39,150) (39,150)
Changes in operating assets and
liabilities:
Accounts receivable................ (168,758) (114,796) (32,138) (189,707)
Prepaid expenses and other current
assets.......................... (81,526) 55,715 (72,619) 31,421
Other assets....................... (14,753) (12,625) (23,568) 5,163
Accounts payable and accrued
liabilities..................... 2,553,046 (545,877) (286,263) (789,574)
Deferred revenue................... 531,964 998,715 1,060,323 424,633
----------- ----------- ----------- ----------
Net cash provided by (used in)
operating activities.......... 390,343 (1,430,010) (1,630,175) 1,381,088
----------- ----------- ----------- ----------
INVESTING ACTIVITIES:
Purchases of property and equipment,
net.................................. (2,980,821) (1,177,894) (1,245,138) (110,508)
Purchase of subscribers................. (356,670) (356,670) (462,422)
Proceeds from sale of equipment......... 21,500 9,000
----------- ----------- ----------- ----------
Net cash used in investing
activities.................... (2,980,821) (1,513,064) (1,592,808) (572,930)
----------- ----------- ----------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of common
stock................................ 671,135 232,287 232,287
Purchase of treasury stock.............. (12,500)
Proceeds for issuance of preferred
stock................................ 1,405,133
Proceeds from sale and leaseback........ 194,052 422,302 422,302
Proceeds from issuance of long term
debt................................. 250,000 2,905,288 2,905,288
Principal payments of long-term debt.... (361,666) (213,151) (269,469)
Principal payments under capital lease
obligations.......................... (50,236) (358,119) (239,225) (329,358)
Proceeds (payments) on line of credit... 150,000 93,000 93,000 (18,000)
Loan origination fees................... (5,000) (56,289) (56,289)
----------- ----------- ----------- ----------
Net cash provided by (used in)
financing activities.......... 2,615,084 2,864,303 3,144,212 (616,827)
----------- ----------- ----------- ----------
NET INCREASE (DECREASE) IN
CASH.................................... 24,606 (78,771) (78,771) 191,331
CASH, BEGINNING OF PERIOD................. 54,165 78,771 78,771
----------- ----------- ----------- ----------
CASH, END OF PERIOD....................... $ 78,771 $ -- $ -- $ 191,331
=========== =========== =========== ==========
SUPPLEMENTAL INFORMATION:
Cash paid for interest.................. $ 76,550 $ 285,070 $ 206,000 $ 593,054
Equipment acquired under capital
leases............................... $ 219,464 $ 816,235 $ 816,235
Conversion of debt to common stock...... $ 200,000
</TABLE>
See notes to financial statements.
F-6
<PAGE> 66
INTERNET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE NINE MONTHS ENDED MARCH 31,
1997 AND 1998 AND PRO FORMA INFORMATION ARE UNAUDITED)
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 assumed 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
F-7
<PAGE> 67
INTERNET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
impairment loss of $350,787 related to the write down of modem equipment was
recognized during the year ended June 30, 1997.
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, 1996 and 1997 and the nine months ended March 31, 1998 were
$1,204,173, $728,404 and $448,343, 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.
Unaudited Interim Information -- The information presented as of March 31,
1998, and for the nine month periods ended March 31, 1997 and 1998, has not been
audited and certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. In the opinion of management, the unaudited
interim financial statements included all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Company's financial
position as of March 31, 1998, and the results of its operations and its cash
flows for the nine months ended March 31, 1997 and 1998, and the shareholders'
deficit for the nine months ended March 31, 1998. The results of operations for
the interim periods presented are not necessarily indicative of the results to
be expected for the full fiscal year.
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 will not be material.
F-8
<PAGE> 68
INTERNET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
JUNE 30,
------------------------ MARCH 31,
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Data communications and office equipment....... $2,957,749 $ 3,327,224 $ 3,440,200
Leasehold improvements......................... 126,758 453,937 450,360
Furniture and fixtures......................... 119,691 255,787 255,787
Computer software.............................. 77,002 88,757 90,856
---------- ----------- -----------
3,281,200 4,125,705 4,237,203
Less accumulated depreciation and
amortization................................. (541,537) (1,615,082) (2,569,483)
---------- ----------- -----------
$2,739,663 $ 2,510,623 $ 1,667,720
========== =========== ===========
</TABLE>
Property under capital lease, primarily data communications equipment
included above, amounted to $387,163, $1,203,398 and $1,203,398 at June 30, 1996
and 1997 and March 31, 1998, respectively. Included in accumulated depreciation
and amortization are amounts related to property under capital lease of $80,521,
$379,478 and $644,075 at June 30, 1996 and 1997 and March 31, 1998,
respectively. Depreciation expense charged to operations was $547,502,
$1,485,782 and $953,411 for the years ended June 30, 1996 and 1997 and the nine
months ended March 31, 1998, respectively, and included $76,087, $321,897 and
$264,597, respectively, pertaining to property under capital lease.
3. OTHER ASSETS
Other assets consist of:
<TABLE>
<CAPTION>
JUNE 30,
------------------- MARCH 31,
1996 1997 1998
------- --------- ---------
<S> <C> <C> <C>
Acquired subscriber base............................ $ -- $ 356,670 $ 819,092
Loan origination fees............................... 5,000 61,289 20,353
Deposits............................................ 27,705 40,331 35,171
------- --------- ---------
32,705 458,290 874,616
Less accumulated amortization....................... (304) (132,612) (253,478)
------- --------- ---------
$32,401 $ 325,678 $ 621,138
======= ========= =========
</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. Management
does not anticipate any additional payments 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 March 31, 1998) and
are collateralized by substantially all assets of the Company, and by the
guarantees of certain officers, shareholders and a director. The outstanding
borrowings at June 30, 1996
F-9
<PAGE> 69
INTERNET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and 1997 and March 31, 1998, were $150,000, $18,000 and $0; respectively, with
$131,291 committed to a standby letter of credit securing a lease.
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 March 31, 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 March 31, 1998 were $225,000.
5. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
JUNE 30,
--------------------- MARCH 31,
1996 1997 1998
-------- --------- ---------
<S> <C> <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 by the limited
guarantee of an officer; 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.............................. $250,000 $ 191,482 $ 105,983
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
Other............................................ 48,332 48,332
-------- --------- ---------
250,000 775,909 506,440
Less current portion............................. (80,028) (467,800) (506,440)
-------- --------- ---------
$169,972 $ 308,109 $ --
======== ========= =========
</TABLE>
As of March 31, 1998, long-term debt of $136,512 is due by June 30, 1998,
and $369,928 is due during fiscal 1999.
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%
F-10
<PAGE> 70
INTERNET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and are due September 25, 1997 and April 1, 1997, respectively. The assets of
the Company collateralize the notes. The loan agreements, which were in default,
were refinanced at the prime rate in June 1998, with borrowings due in monthly
payments approximating $140,000 or upon the effective date of a defined
securities registration. 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.
7. COMMITMENTS AND CONTINGENCIES
The Company leases certain of its facilities under operating leases. Rental
expense under these leases was approximately $93,900, $373,000 and $305,000 for
the years ended June 30, 1996 and 1997 and the nine months ended March 31, 1998.
At March 31, 1998, future minimum lease payments on capital and operating leases
were approximately as follows:
<TABLE>
<CAPTION>
CAPITALIZED OPERATING
LEASES LEASES
----------- ----------
<S> <C> <C>
Three months ended June 30, 1998............................ $ 110,875 $ 141,363
1999...................................................... 361,423 563,756
2000...................................................... 55,082 522,337
2001...................................................... 441,572
--------- ----------
Total minimum lease payments................................ 527,380 $1,669,028
==========
Less amounts representing interest.......................... (72,636)
---------
Present value of minimum capitalized lease payments......... 454,744
Less current portion........................................ (333,471)
---------
Long-term capitalized lease obligations..................... $ 121,273
=========
</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 its 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, 1996, the Company issued
575,822 shares of its common stock at prices ranging from $0.57 to $1.67 per
share in private placement transactions for cash of $671,135. Following the
issuance of the common stock, 342,684 shares were converted to Series A
Preferred Stock.
During July 1995, the Company issued 263,059 shares of its common stock to
a Director for $150,000 in cash. Also, during July 1995, the Company issued
29,999 shares of its common stock in consideration for the extinguishment of
certain indebtedness of the Company in the amount of $50,000. During June 1996,
the Company issued 1,125 shares of common stock in exchange for services
provided by one of the Company's officers. The shares issued were recorded at
$3,750, the value of the services provided.
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.
F-11
<PAGE> 71
INTERNET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
stockholders, 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
stockholders.
During the year ended June 30, 1996, the Company issued 227,368 shares of
Series A Preferred Stock for $852,630 in cash. Additionally, 342,684 shares of
common stock were converted into 152,304 shares of Series A Preferred Stock.
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
stockholders. 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 holders of Series A and Series B Preferred Stock have no
preferential rights as to dividends and therefore are entitled to receive the
same dividends as holders of Common Stock.
During the year ended June 30, 1996, the Company issued 73,667 shares of
Series B Preferred Stock in exchange for total consideration of $552,503, which
represented the estimated fair value of the Series B Preferred Stock on the
dates of issuance.
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 $0.43 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
F-12
<PAGE> 72
INTERNET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
$1.67 per share of common stock.
During December 1995, an officer of the Company 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 Company 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 Company 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 Company. The Board of Directors adjusted the exercise price of
this option to $1.67 per share in March 1998. Additionally, in 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 Company in connection with such founders' pledge of
their stock of the Company to guarantee a bridge loan. The Company currently has
1,381,651 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.
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. The
compensation cost (recovery) that has been charged against operations for the
stock options was $430,650, $(39,150) and $0 in the years ended June 30, 1996
and 1997 and the nine months ended March 31, 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 loss and loss per share would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Net loss
As reported...................................... $(3,428,881) $(3,823,529)
Pro Forma........................................ (3,765,384) (3,990,082)
Basic and Diluted loss per share
As reported...................................... $ (1.15) $ (1.12)
Pro Forma........................................ (1.26) (1.17)
</TABLE>
F-13
<PAGE> 73
INTERNET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock options as of June 30, 1996
and 1997, and March 31, 1998, and changes during the years and nine months ended
on those dates is presented below:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period....... -- $ -- 1,206,765 $1.37 1,255,045 $1.85
Granted................................ 1,227,791 1.37 563,778 3.30 393,750 1.67
Exercised..............................
Forfeited.............................. (21,026) 1.67 (515,498) 2.30 (205,388) 2.43
--------- --------- ---------
Outstanding at end of period............. 1,206,765 1.37 1,255,045 1.85 1,443,407 1.32
========= ========= =========
Options exercisable at year end.......... 652,500 0.97 997,526 1.62 987,224 1.17
========= ========= =========
Weighted-average fair value of options
granted during the year................ 1,227,791 1.67 563,778 0.44 393,750 0.44
========= ========= =========
</TABLE>
On March 24, 1998, the exercise price 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 March 31, 1998. The adjustment of the
exercise price of these options decreased the weighted average exercise price by
$0.40 per share.
The following table summarizes information about stock options outstanding
at March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------
WEIGHTED-AVERAGE OPTIONS EXERCISABLE
REMAINING -------------------------------
RANGE OF NUMBER CONTRACTUAL LIFE NUMBER NUMBER
EXERCISE OUTSTANDING AT AS OF MARCH 31, EXERCISABLE AT EXERCISABLE AT
PRICES MARCH 31, 1998 1998 (YEARS) JUNE 30, 1997 MARCH 31, 1998
-------- -------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
$0.09....................... 337,500 7.4 337,500 337,500
1.67....................... 1,083,407 8.9 366,251 627,224
3.33....................... 22,500 8.6 293,775 22,500
</TABLE>
9. INCOME TAXES
No provision for income taxes has been recognized for the years ended June
30, 1996 and 1997 as the Company incurred net operating losses for income tax
purposes and has no carryback potential.
F-14
<PAGE> 74
INTERNET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities as of June 30, 1996 and 1997, consist
of:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 1,167,000 $ 2,005,000
Stock options granted at a discount..................... 146,000 142,000
Deferred revenue........................................ -- 141,000
Impairment of equipment................................. -- 119,000
Amortization and other.................................. 27,000 165,000
----------- -----------
Total deferred tax assets................................. 1,340,000 2,572,000
Deferred tax liabilities -- depreciation and other........ (56,000) --
----------- -----------
Net deferred tax asset.................................... 1,284,000 2,572,000
Valuation allowance....................................... (1,284,000) (2,572,000)
----------- -----------
$ -- $ --
=========== ===========
</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, 1997, the Company has net operating loss carryforwards of
approximately $6 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.
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 March 31, 1998.
F-15
<PAGE> 75
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 pro
forma net earnings per share follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, NINE MONTHS ENDED MARCH 31,
------------------------- ----------------------------
1996 1997 1997 1998
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net income (loss)................. $(3,428,881) $(3,823,529) $(3,526,083) $ 688,942
=========== =========== =========== ==========
Net income (loss) per common
share:
Basic........................... $ (1.15) $ (1.12) $ (1.04) $ 0.20
=========== =========== =========== ==========
Diluted......................... $ (1.15) $ (1.12) $ (1.04) $ 0.14
=========== =========== =========== ==========
Pro forma....................... $ (0.86) $ (0.80) $ 0.14
=========== =========== ==========
Reconciliation of weighted average
shares:
Shares used in computing basic
net income (loss) per
share........................ 2,981,108 3,417,824 3,377,817 3,532,221
Adjusted to reflect the assumed
conversion of preferred stock
and certain option
exercises.................... 1,339,513
----------- ----------- ----------- ----------
Shares used in computing diluted
net income (loss) per
share........................ 2,981,108 3,417,824 3,377,817 4,871,734
----------- ----------- ----------- ----------
Adjusted to reflect assumed
conversion of preferred
stock........................ 1,020,013 1,020,013
----------- ----------- ----------
Shares used in computing pro
forma net income (loss) per
share........................ 4,437,837 4,397,830 4,871,734
----------- ----------- ----------
</TABLE>
Potentially dilutive securities have been excluded from the computation for
the years ended June 30, 1996 and 1997 as their effect is antidilutive. Warrants
and certain options have been excluded for the nine months ended March 31, 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 convertible preferred stock not included above for
each of the years ended June 30, 1996 and 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 pro forma net income (loss) per share.
12. SUBSEQUENT EVENTS (UNAUDITED)
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.
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,
F-16
<PAGE> 76
INTERNET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 exercisable at $8.00 per share, expire in 10 years and
vest over 4 years.
F-17
<PAGE> 77
- Inside back cover will contain photographs of the Company's television
and billboard advertisements.
<PAGE> 78
- ------------------------------------------------------
- ------------------------------------------------------
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.................... 4
Risk Factors.......................... 9
Use Of Proceeds....................... 20
Dividend Policy....................... 20
Capitalization........................ 21
Dilution.............................. 22
Selected Financial and Operating
Data................................ 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 32
Management............................ 41
Certain Transactions.................. 46
Principal and Selling Shareholders.... 48
Description of Securities............. 49
Shares Eligible for Future Sale....... 52
Underwriting.......................... 53
Legal Matters......................... 54
Experts............................... 54
Available Information................. 55
Glossary of Technical Terms........... 56
Index to Financial Statements......... F-1
</TABLE>
---------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED 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> 79
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.
Also during July 1995, the Registrant issued 29,999 shares of Common Stock
in consideration for the extinguishment of certain indebtedness of the
Registrant in the amount of $50,000.
During the year ended June 30, 1996, the Registrant issued 267,638 shares
of Common Stock at prices ranging from $0.004 to $0.57 per share in private
placement transactions to a director of the Registrant. During the year ended
June 30, 1996, the Company issued 575,822 shares of its Common Stock at prices
ranging from $0.57 to $1.67 per share in private placement transactions for cash
of $671,135.
II-1
<PAGE> 80
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. 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 504 of Regulation D promulgated thereunder.
On March 31, 1996 the Registrant issued a warrant to M.J. Capital Partners,
L.P. There are 33,750 Shares of Common Stock underlying the warrant, at an
exercise price of $1.67 per share.
During June 1996, the Registrant issued 1,125 shares of Common Stock in
exchange for services provided by an officer of the Registrant.
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. 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 504 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.
During fiscal 1997, the Registrant also issued 15,001 shares of Common
Stock in exchange for services provided by one of the employees of the
Registrant.
Pursuant to the Registrant's 1996 Incentive Stock Option Plan, as of March
31, 1998 the Registrant had 61,756 options 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
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 under Section 4(2) of the Securities Act and without the
involvement of an underwriter.
II-2
<PAGE> 81
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
1.1 -- Proposed form of Underwriting Agreement(1)
3.1 -- Registrant's Articles of Incorporation*
3.2 -- Registrant's Articles of Amendment to Articles of
Incorporation*
3.3 -- Registrant's Bylaws*
3.4 -- Registrant's Amendment to Bylaws*
4.1 -- Specimen Common Stock certificate*
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 the
Registrant.*
11.1 -- Statement regarding computation of per share earnings(2)
16.1 -- Letter on change in certifying accountant.*
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.
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;
(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.
II-3
<PAGE> 82
(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-4
<PAGE> 83
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 July 21, 1998.
INTERNET AMERICA, INC.
By: /s/ MICHAEL T. MAPLES
----------------------------------
Michael T. Maples
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Michael T. Maples and James T. Chaney his
true and lawful attorneys-in-fact, each acting alone, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments, including any
post-effective amendments, to this registration statement, and to file the same,
with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact or their substitutes, each acting alone, may lawfully do
or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MICHAEL T. MAPLES Chief Executive Officer, President July 21, 1998
- ----------------------------------------------------- and Director (Principal
Michael T. Maples Executive Officer)
/s/ JAMES T. CHANEY Chief Financial Officer, Vice July 21, 1998
- ----------------------------------------------------- President, Secretary and
James T. Chaney Treasurer (Principal Financial
and Accounting Officer)
/s/ DOUGLAS G. SHELDON Vice President -- Marketing, July 21, 1998
- ----------------------------------------------------- Director
Douglas G. Sheldon
/s/ WILLIAM O. HUNT Chairman of the Board July 21, 1998
- -----------------------------------------------------
William O. Hunt
/s/ JACK T. SMITH Director July 21, 1998
- -----------------------------------------------------
Jack T. Smith
/s/ GARY L. CORONA Director July 21, 1998
- -----------------------------------------------------
Gary L. Corona
</TABLE>
II-5
<PAGE> 84
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
1.1 -- Proposed form of Underwriting Agreement(1)
3.1 -- Registrant's Articles of Incorporation*
3.2 -- Registrant's Articles of Amendment to Articles of
Incorporation*
3.3 -- Registrant's Bylaws*
3.4 -- Registrant's Amendment to Bylaws*
4.1 -- Specimen Common Stock certificate*
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 the
Registrant.*
11.1 -- Statement regarding computation of per share earnings(2)
16.1 -- Letter on change in certifying accountant.*
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.
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
INTRNTUSA, INC
ARTICLE ONE
The name of the Corporation is INTRNTUSA, Inc.
ARTICLE TWO
The period of duration of the Corporation is perpetual.
ARTICLE THREE
The purpose for which the Corporation is organized is to engage in the
transaction of any and all lawful business for which corporations may be
incorporated under the Texas Business Corporation Act.
ARTICLE FOUR
The total number of shares of all classes of capital stock which the
Corporation shall have authority to issue is twenty million (20,000,000), of
which (a) fifteen million (15,000,000) shares shall be designated as Common
Stock, par value $.0l per share, and (b) five million (5,000,000) shares shall
be designated as Preferred Stock, par value $.0l per share.
The following is a statement of the designations, preferences,
limitations, and relative rights, including voting rights, in respect of the
classes of stock of the Corporation and of the authority with respect thereto
expressly vested in the Board of Directors of the Corporation:
COMMON STOCK
(1) Each share of Common Stock of the Corporation shall have identical
rights and privileges in every respect. The holders of shares of Common Stock
shall be entitled to vote upon all matters submitted to a vote of the
shareholders of the Corporation and shall be entitled to one vote for each share
of Common Stock held.
(2) Subject to the prior rights and preferences, if any, applicable to
shares of the Preferred Stock or any series thereof, the holders of shares of
the Common Stock shall be entitled to receive such dividends (payable in cash,
stock, or otherwise) as may be declared thereon by the Board of Directors at any
time and from time to time out of any funds of the Corporation legally available
therefor.
<PAGE> 2
(3) In the event of any voluntary or involuntary liquidation,
dissolution, or winding-up of the Corporation, after distribution in full of the
preferential amounts, if any, to be distributed to the holders of shares of the
Preferred Stock or any series thereof, the holders of shares of the Common Stock
shall be entitled to receive all of the remaining assets of the Corporation
available for distribution to its shareholders, ratably in proportion to the
number of shares of the Common Stock held by them. A liquidation, dissolution,
or winding-up of the Corporation, as such terms are used in this Paragraph (3),
shall not be deemed to be occasioned by or to include any merger of the
Corporation with or into one or more corporations or other entities, any
acquisition or exchange of the outstanding shares of one or more classes or
series of the Corporation, or any sale, lease, exchange, or other disposition of
all or a part of the assets of the Corporation.
PREFERRED STOCK
(4) Shares of the Preferred Stock may be issued from time to time in
one or more series, the shares of each series to have such designations,
preferences, limitations, and relative rights, including voting rights, as shall
be stated and expressed herein or in a resolution or resolutions providing for
the issue of such series adopted by the Board of Directors of the Corporation.
Each such series of Preferred Stock shall be designated so as to distinguish the
shares thereof from the shares of all other series and classes. The Board of
Directors of the Corporation is hereby expressly authorized, subject to the
limitations provided by law, to establish and designate series of the Preferred
Stock, to fix the number of shares constituting each series, and to fix the
designations and the preferences, limitations, and relative rights, including
voting rights, of the shares of each series and the variations of the relative
rights and preferences as between series, and to increase and to decrease the
number of shares constituting each series, provided that the Board of Directors
may not decrease the number of shares within a series to less than the number of
shares within such series that are then issued. The relative powers, rights,
preferences, and limitations may vary between and among series of Preferred
Stock in any and all respects so long as all shares of the same series are
identical in all respects, except that shares of any such series issued at
different times may have different dates from which dividends thereon cumulate.
The authority of the Board of Directors of the Corporation with respect to each
series shall include, but shall not be limited to, the authority to determine
the following:
(a) The designation of such series;
(b) The number of shares initially constituting such
series;
(c) The rate or rates and the times at which dividends on the
shares of such series shall be paid, the periods in respect of which
dividends are payable, the conditions upon such dividends, the
relationship and preferences, if any, of such dividends to dividends
payable on any other class or series of shares, whether or not such
dividends shall be cumulative, partially cumulative, or noncumulative,
if such dividends shall be cumulative or partially cumulative, the
date or dates from and after which, and the amounts in which, they
shall accumulate, whether such dividends shall be share dividends,
cash or other dividends, or any combination thereof, and if such
dividends shall include share dividends, whether such share dividends
shall
2
<PAGE> 3
be payable in shares of the same or any other class or series of
shares of the Corporation (whether now or hereafter authorized), or
any combination thereof and the other terms and conditions, if any,
applicable to dividends on shares of such series. The Board of
Directors of the Corporation is hereby expressly empowered, subject to
the limitations provided by law, to authorize the Corporation to pay
share dividends on any class or series of capital stock of the
Corporation (whether now or hereafter authorized) payable in shares of
the same or any other class or series of capital stock of the
Corporation (whether now or hereafter authorized) or any combination
thereof;
(d) Whether or not the shares of such series shall be
redeemable or subject to repurchase at the option of the Corporation or
the holder thereof or upon the happening of a specified event, if such
shares shall be redeemable, the terms and conditions of such
redemption, including but not limited to the date or dates upon or
after which such shares shall be redeemable, the amount per share which
shall be payable upon such redemption, which amount may vary under
different conditions and at different redemption dates, and whether
such amount shall be payable in cash, property, or rights, including
securities of the Corporation or another corporation;
(e) The rights of the holders of shares of such series (which
may vary depending upon the circumstances or nature of such
liquidation, dissolution, or winding up) in the event of the voluntary
or involuntary liquidation, dissolution, or winding up of the
Corporation and the relationship or preference, if any, of such rights
to rights of holders of stock of any other class or series. A
liquidation, dissolution, or winding up of the Corporation, as such
terms are used in this subparagraph (e), shall not be deemed to be
occasioned by or to include any merger of the Corporation with or into
one or more corporations or other entities, any acquisition or exchange
of the outstanding shares of one or more classes or series of the
Corporation, or any sale, lease, exchange, or other disposition of all
or a part of the assets of the Corporation;
(f) Whether or not the shares of such series shall have voting
powers and, if such shares shall have such voting powers, the terms and
conditions thereof, including, but not limited to, the right of the
holders of such shares to vote as a separate class either alone or with
the holders of shares of one or more other classes or series of stock
and the right to have more (or less) than one vote per share; provided,
however, that the right to cumulate votes for the election of directors
is expressly denied and prohibited;
(g) Whether or not a sinking fund shall be provided for the
redemption of the shares of such series and, if such a sinking fund
shall be provided, the terms and conditions thereof;
(h) Whether or not a purchase fund shall be provided for the
shares of such series and, if such a purchase fund shall be provided,
the terms and conditions thereof;
3
<PAGE> 4
(i) Whether or not the shares of such series, at the option of
either the Corporation or the holder or upon the happening of a
specified event, shall be convertible into stock of any other class or
series and, if such shares shall be so convertible, the terms and
conditions of conversion, including, but not limited to, any provision
for the adjustment of the conversion rate or the conversion price;
(j) Whether or not the shares of such series, at the option of
either the Corporation or the holder or upon the happening of a
specified event, shall be exchangeable for securities, indebtedness, or
property of the Corporation and, if such shares shall be so
exchangeable, the terms and conditions of exchange, including, but not
limited to, any provision for the adjustment of the exchange rate or
the exchange price; and
(k) Any other preferences, limitations, and relative rights as
shall not be inconsistent with the provisions of this Article Four or
the limitations provided by law.
(5) Except as otherwise required by law or in any resolution of the
Board of Directors creating any series of Preferred Stock, the holders of shares
of Preferred Stock and all series thereof who are entitled to vote shall vote
together with the holders of shares of Common Stock, and not separately by
class.
ARTICLE FIVE
No holder of any shares of capital stock of the Corporation, whether
now or hereafter authorized, shall, as such holder, have any preemptive or
preferential right to receive, purchase, or subscribe to (a) any unissued or
treasury shares of any class of stock (whether now or hereafter authorized) of
the Corporation, (b) any obligations, evidences of indebtedness, or other
securities of the Corporation convertible into or exchangeable for, or carrying
or accompanied by any rights to receive, purchase, or subscribe to, any such
unissued or treasury shares, (c) any right of subscription to, any right to
receive, or any warrant or option for the purchase of, any of the foregoing
securities, or (d) any other securities that may he issued or sold by the
Corporation.
ARTICLE SIX
The Corporation will not commence business until it has received for
the issuance of its shares consideration of the value of $1,000.00, consisting
of money, labor done, or property actually received.
ARTICLE SEVEN
Cumulative voting for the election of directors is expressly denied
and prohibited.
4
<PAGE> 5
ARTICLE EIGHT
The Corporation shall have the power and authority to indemnify any
person to the fullest extent permitted by law.
ARTICLE NINE
Any action of the Corporation which, under the provisions of the Texas
Business Corporation Act or any other applicable law, is required to be
authorized or approved by the holders of any specified fraction which is in
excess of one-half or any specified percentage which is in excess of fifty
percent of the outstanding shares (or of any class or series thereof) of the
Corporation shall, notwithstanding any law, be deemed effectively and properly
authorized or approved if authorized or approved by the vote of the holders of
more than fifty percent of the outstanding shares entitled to vote thereon (or,
if the holders of any class or series of the Corporation's shares shall be
entitled by the Texas Business Corporation Act or any other applicable law to
vote thereon separately as a class, by the vote of the holders of more than
fifty percent of the outstanding shares of each such class or series). Without
limiting the generality of the foregoing, the foregoing provisions of this
Article Nine shall be applicable to any required shareholder authorization or
approval of: (a) any amendment to these articles of incorporation; (b) any plan
of merger, share exchange, or reorganization involving the Corporation; (c) any
sale, lease, exchange, or other disposition of all, or substantially all, the
property and assets of the Corporation; and (d) any voluntary dissolution of the
Corporation.
Directors of the Corporation shall be elected by a plurality of the
votes cast by the holders of shares entitled to vote in the election of
directors of the Corporation at a meeting of shareholders at which a quorum is
present.
Except as otherwise provided in this Article Nine or as otherwise
required by the Texas Business Corporation Act or other applicable law, with
respect to any matter, the affirmative vote of the holders of a majority of the
Corporation's shares entitled to vote on, and voted for or against, that matter
at a meeting of shareholders at a meeting of shareholders at which a quorum is
present shall be the act of the shareholders.
Nothing contained in this Article Nine is intended to require
shareholder authorization or approval of any action of the Corporation
whatsoever unless such approval is specifically required by the other provisions
of these articles of incorporation, the bylaws of the Corporation, or by the
Texas Business Corporation Act or other applicable law.
5
<PAGE> 6
ARTICLE TEN
The street address of the initial registered office of the Corporation
is One Dallas Centre, 350 N. St. Paul, Suite 200, Dallas, Texas 75201, and the
name of its initial registered agent at such address is Robert Maynard.
ARTICLE ELEVEN
The number of directors constituting the initial Board of Directors is
one (1) and the name and address of each person who is to serve as director
until the first annual meeting of shareholders and until such director's
successor is elected and qualified or, if earlier, until such director's death,
resignation, or removal as director, is as follows:
NAME ADDRESS
---- -------
Robert J. Maynard One Dallas Centre
350 N. St. Paul
Suite 200
Dallas, Texas 75201
ARTICLE TWELVE
To the fullest extent permitted by applicable law, a director of the
Corporation shall not be liable to the Corporation or its shareholders for
monetary damages for an act or omission in the director's capacity as a
director.
Any repeal or amendment of this Article Twelve by the shareholders of
the Corporation shall be prospective only and shall not adversely affect any
limitation on the personal liability of a director of the Corporation arising
from an act or omission occurring prior to the time of such repeal or amendment.
In addition to the circumstances in which a director of the Corporation is not
personally liable as set forth in the foregoing provisions of this Article
Twelve, a director shall not be liable to the Corporation or its shareholders to
such further extent as permitted by any law hereafter enacted, including without
limitation any subsequent amendment to the Texas Miscellaneous Corporation Laws
Act or the Texas Business Corporation Act.
ARTICLE THIRTEEN
Any action which may be taken, or which is required by law or the
Articles of Incorporation or bylaws of the Corporation to be taken, at any
annual or special meeting of shareholders may be taken without a meeting,
without prior notice, and without a vote, if a consent or consents in writing,
setting forth the action so taken, shall have been signed by the holder or
holders of shares having not less than the minimum number of votes that would be
necessary to take such action at a meeting at which the holders of all shares
entitled to vote on the action were present and voted.
6
<PAGE> 7
ARTICLE FOURTEEN
The name and address of the incorporator are as follows:
NAME ADDRESS
---- -------
Jonathan B. Newton c/o Baker & McKenzie
4500 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201
IN WITNESS WHEREOF, I have hereunto set my hand this 20th day
of July, 1995.
/s/ Jonathan B. Newton
-----------------------------
Jonathan B. Newton
7
<PAGE> 1
EXHIBIT 3.2
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
INTERNET AMERICA, INC. F/K/A INTRNTUSA, INC.
Internet America, Inc., a Texas corporation (the "Company"), pursuant
to the provisions of Article 4.04 of the Texas Business Corporation Act (the
"TBCA"), hereby adopts the following Articles of Amendment (the "Amendments") to
its Articles of Incorporation as they are in effect immediately prior hereto:
ARTICLE I.
Paragraph One of Article Four of the Company's Articles of
Incorporation shall be amended and restated so that it reads in its entirety as
follows:
ARTICLE FOUR
"The total number of shares of all classes of capital stock
which the Corporation shall have authority to issue is forty-five
million (45,000,000), of which (a) forty million (40,000,000) shares
shall be designated as Common Stock, par value $.01 per share, and (b)
five million (5,000,000) shares shall be designated as Preferred Stock,
par value $.01 per share."
ARTICLE II.
The current Article Nine of the Company's Articles of Incorporation
shall be deleted in its entirety and a new Article Nine shall be added that
reads in its entirety as follows:
ARTICLE NINE
"Shareholders of the Corporation may not take action or
actions by written consent. Shareholders of the Corporation may not
adopt, amend, repeal or otherwise alter any bylaw of the Corporation."
ARTICLE III.
The current Article Thirteen of the Company's Articles of Incorporation
shall be deleted in its entirety.
1
<PAGE> 2
ARTICLE IV.
The Amendments have been effected in conformity with the provisions of
the TBCA, and these Amendments were duly adopted by at least two-thirds of the
shareholders of the Company by written consent dated as of July 13, 1998 and by
all of the directors of the Company by written consent dated as of July 13,
1998.
ARTICLE V.
The number of shares of the Company outstanding at the time of such
adoption was 2,035,715; and the number of shares entitled to vote thereon was
2,023,215.
ARTICLE VI.
The holders of 1,467,010 shares, or 72.5% of the shares outstanding
and entitled to vote on the Amendments, voted for such Amendments; the number
of shares voted against such Amendment was zero.
[Remainder of page intentionally left blank.]
2
<PAGE> 3
Dated as of the 13th day of July, 1998.
INTERNET AMERICA, INC.
By: /s/ MICHAEL T. MAPLES
---------------------------------
Michael T. Maples, President
3
<PAGE> 1
EXHIBIT 3.3
BYLAWS
OF
INTRNTUSA, INC.
A Texas Corporation
PREAMBLE
These bylaws are subject to, and governed by, the Texas Business
Corporation Act and the articles of incorporation of INTRNTUSA, Inc. (the
"Corporation"). In the event of a direct conflict between the provisions of
these bylaws and the mandatory provisions of the Texas Business Corporation Act
or the provisions of the articles of incorporation of the Corporation, such
provisions of the Texas Business Corporation Act or the articles of
incorporation of the Corporation, as the case may be, will be controlling.
ARTICLE ONE: OFFICES
1.01 Registered Office and Agent. The registered office and registered
agent of the Corporation shall be as designated from time to time by the
appropriate filing by the Corporation in the office of the Secretary of State of
Texas.
1.02 Other Offices. The Corporation may also have offices at such other
places, both within and without the State of Texas, as the board of directors
may from time to time determine or the business of the Corporation may require.
ARTICLE TWO: SHAREHOLDERS
2.01 Annual Meetings. An annual meeting of shareholders of the
Corporation shall be held during each calendar year on such date and at such
time as shall be designated from time to time by the board of directors and
stated in the notice of the meeting, if not a legal holiday in the place where
the meeting is to be held, and, if a legal holiday in such place, then on the
next business day following, at the time specified in the notice of the meeting.
At such meeting, the shareholders shall elect directors and transact such other
business as may properly be brought before the meeting.
2.02 Special Meetings. A special meeting of the shareholders may be
called at any time by the president, the board of directors, or the holders of
not less than ten percent of all shares entitled to vote at such meeting. Only
business within the purpose or purposes described in the notice of special
meeting may be conducted at such special meeting.
2.03 Place of Meetings. The annual meeting of shareholders may be held
at any place within or without the State of Texas designated by the board of
directors. Special meetings of shareholders may be held at any place within or
without the State of Texas designated by the person or persons calling such
special meeting as provided in Section 2.02 above. Meetings of shareholders
<PAGE> 2
shall be held at the principal office of the Corporation unless another place is
designated for meetings in the manner provided herein.
2.04 Notice. Except as otherwise provided by law, written or printed
notice stating the place, day, and hour of each meeting of the shareholders and,
in case of a special meeting, the purpose or purposes for which the meeting is
called, shall be delivered not less than ten nor more than sixty days before the
date of the meeting by or at the direction of the president, the secretary, or
the person calling the meeting, to each shareholder of record entitled to vote
at such meeting. Notice need not be given to a shareholder if (i) notice of two
consecutive annual meetings and all notices of meetings held during the period
between those annual meetings, if any, or (ii) all (but in no event less than
two) payments (if sent by first class mail) of distributions or interest on
securities during a 12-month period, have been mailed to that shareholder,
addressed at his address as shown on the share transfer records of the
Corporation, and have been returned undeliverable. Any action or meeting taken
or held without notice to such shareholder shall have the same force and effect
as if the notice had been duly given and, if the action taken by the Corporation
is reflected in any articles or document filed with the Texas Secretary of
State, those articles or that document may state that notice was duly given to
all persons to whom notice was required to be given. If such a shareholder
delivers to the Corporation a written notice setting forth his then current
address, the requirement that notice be given to that shareholder shall be
reinstated.
2.05 Voting List. At least ten days before each meeting of
shareholders, the secretary shall prepare a complete list of shareholders
entitled to vote at such meeting, arranged in alphabetical order, including the
address of each shareholder and the number of voting shares held by each
shareholder. For a period of ten days prior to such meeting, such list shall be
kept on file at the registered office or principal place of business of the
Corporation and shall be subject to inspection by any shareholder during usual
business hours. Such list shall be produced at such meeting, and at all times
during such meeting shall be subject to inspection by any shareholder. The
original share transfer records shall be prima facie evidence as to who are the
shareholders entitled to examine such list or transfer records or to vote at any
meeting of shareholders.
2.06 Voting of Shares. Treasury shares, shares of the Corporation's own
stock owned by another corporation the majority of the voting stock of which is
owned or controlled by the Corporation, and shares of the Corporation's own
stock held by the Corporation in a fiduciary capacity shall not be shares
entitled to vote or to be counted in determining the total number of outstanding
shares. Shares standing in the name of another domestic or foreign corporation
of any type or kind may be voted by such officer, agent, or proxy as the bylaws
of such corporation may authorize or, in the absence of such authorization, as
the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian, or conservator may be voted by him, either in
person or by proxy, without transfer of such shares into his name so long as
such shares form a part of the estate served by him and are in the possession of
such estate. Shares held by a trustee may be voted by him, either in person or
by proxy, only after the shares have been transferred into his name as trustee.
Shares standing in the name of a receiver may be voted by such receiver, and
shares held by or under the control of a receiver may be voted by such receiver
without transfer of such shares into his name if authority to do so is contained
in the court order by which such receiver was appointed. A shareholder whose
shares are pledged shall be entitled to vote such shares until
<PAGE> 3
they have been transferred into the name of the pledgee, and thereafter, the
pledgee shall be entitled to vote such shares.
2.07 Quorum; Withdrawal of Quorum. A quorum shall be present at a
meeting of shareholders if the holders of a majority of the shares entitled to
vote are represented at the meeting in person or by proxy, except as otherwise
provided by law or the articles of incorporation. If a quorum shall not be
present at any meeting of shareholders, the shareholders represented in person
or by proxy at such meeting may adjourn the meeting until such time and to such
place as may be determined by a vote of the holders of a majority of the shares
represented in person or by proxy at that meeting. Once a quorum is present at a
meeting of shareholders, the shareholders represented in person or by proxy at
the meeting may conduct such business as may be properly brought before the
meeting until it is adjourned, and the subsequent withdrawal from the meeting of
any shareholder or the refusal of any shareholder represented in person or by
proxy to vote shall not affect the presence of a quorum at the meeting.
2.08 Majority Vote. Directors of the Corporation shall be elected by a
plurality of the votes cast by the holders of shares entitled to vote in the
election of directors of the Corporation at a meeting of shareholders at which a
quorum is present. Except as otherwise provided by law, the articles of
incorporation, or these bylaws, with respect to any matter, the affirmative vote
of the holders of a majority of the Corporation's shares entitled to vote on,
and voted for or against, that matter at a meeting of shareholders at which a
quorum is present shall be the act of the shareholders.
2.09 Method of Voting; Proxies. Every shareholder of record shall be
entitled at every meeting of shareholders to one vote on each matter submitted
to a vote, for every share standing in his name on the original share transfer
records of the Corporation except to the extent that the voting rights of the
shares of any class or classes are increased, limited, or denied by the articles
of incorporation. Such share transfer records shall be prima facie evidence as
to the identity of shareholders entitled to vote. At any meeting of
shareholders, every shareholder having the right to vote may vote either in
person or by a proxy executed in writing by the shareholder or by his duly
authorized attorney-in-fact. A telegram, telex, cablegram or similar
transmission by the shareholder, or a photographic, photostatic, facsimile, or
similar reproduction of a writing executed by the shareholder, shall be treated
as an execution in writing for purposes of this Section 2.09. Each such proxy
shall be filed with the secretary of the Corporation before, or at the time of,
the meeting. No proxy shall be valid after eleven months from the date of its
execution, unless otherwise provided in the proxy. If no date is stated on a
proxy, such proxy shall be presumed to have been executed on the date of the
meeting at which it is to be voted. Each proxy shall be revocable unless the
proxy form conspicuously states that the proxy is irrevocable and the proxy is
coupled with an interest.
2.10 Closing of Transfer Records; Record Date. For the purpose of
determining shareholders entitled to notice of, or to vote at, any meeting of
shareholders or any adjournment thereof, or entitled to receive a distribution
(other than a distribution involving a purchase or redemption by the Corporation
of any of its own shares) or a share dividend, or in order to make a
determination of shareholders for any other proper purpose (other than
determining shareholders entitled to consent to action by shareholders proposed
to be taken without a meeting of shareholders), the board of directors may
provide that the share transfer records of the Corporation shall be closed
<PAGE> 4
for a stated period but not to exceed in any event sixty days. If the share
transfer records are closed for the purpose of determining shareholders entitled
to notice of, or to vote at, a meeting of shareholders, such records shall be
closed for at least ten days immediately preceding such meeting. In lieu of
closing the share transfer records, the board of directors may FIX in advance a
date as the record date for any such determination of shareholders, such date in
any case to be not more than sixty days and, in case of a meeting of
shareholders, not less than ten days prior to the date on which the particular
action requiring such determination of shareholders is to be taken. If the share
transfer records are not closed and if no record date is fixed for the
determination of shareholders entitled to notice of, or to vote at, a meeting of
shareholders or entitled to receive a distribution (other than a distribution
involving a purchase or redemption by the Corporation of any of its own shares)
or a share dividend, the date on which the notice of the meeting is mailed or
the date on which the resolution of the board of directors declaring such
distribution or share dividend is adopted, as the case may be, shall be the
record date for such determination of shareholders. When a determination of
shareholders entitled to vote at any meeting of shareholders has been made as
provided in this Section 2. 10, such determination shall apply to any
adjournment thereof except where the determination has been made through the
closing of the share transfer records and the stated period of closing has
expired.
2.11 Officers' Duties at Meetings. The president shall preside at, and
the secretary shall prepare minutes of, each meeting of shareholders, and in the
absence of either such officer, his duties shall be performed by some person or
persons elected by the vote of the holders of a majority of the outstanding
shares entitled to vote, present in person or represented by proxy.
2.12 Action Without Meeting. Any action which may be taken, or which is
required by law or the articles of incorporation or bylaws of the Corporation to
be taken, at any annual or special meeting of shareholders, may be taken without
a meeting, without prior notice, and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall have been signed by the holder
or holders of shares having not less than the minimum number of votes that would
be necessary to take such action at a meeting at which the holders of all shares
entitled to vote on the action were present and voted. The signed consent or
consents of shareholders shall be placed in the minute books of the Corporation.
The record date for the purpose of determining shareholders entitled to consent
to any action pursuant to this Section 2.12 shall be determined in accordance
with Article 2.26.C of the Texas Business Corporation Act.
ARTICLE THREE: DIRECTORS
3.01 Management. The powers of the Corporation shall be exercised by or
under the authority of, and the business and affairs of the Corporation shall be
managed under the direction of, the board of directors.
3.02 Number; Election; Term; Qualification. The number of directors
which shall constitute the board of directors shall be not less than one. The
first board of directors shall consist of the number of directors named in the
articles of incorporation. Thereafter, the number of directors which shall
constitute the entire board of directors shall be determined by resolution of
the board of
<PAGE> 5
directors at any meeting thereof or by the shareholders at any meeting thereof,
but shall never be less than one. At each annual meeting of shareholders,
directors shall be elected to hold office until the next annual meeting of
shareholders and until their successors are elected and qualified. No director
need be a shareholder, a resident of the State of Texas, or a citizen of the
United States.
3.03 Changes in Number. No decrease in the number of directors
constituting the entire board of directors shall have the effect of shortening
the term of any incumbent director. Any directorship to be filled by reason of
an increase in the number of directors may be FILLED by (i) the shareholders at
any annual or special meeting of shareholders called for that purpose or (ii)
the board of directors for a term of office continuing only until the next
election of one or more directors by the shareholders; provided that the board
of directors may not fill more than two such directorships during the period
between any two successive annual meetings of shareholders. Notwithstanding the
foregoing, whenever the holders of any class or series of shares are entitled to
elect one or more directors by the provisions of the articles of incorporation,
any newly created directorship(s) of such class or series to be filled by reason
of an increase in the number of such directors may be filled by the affirmative
vote of a majority of the directors elected by such class or series then in
office or by a sole remaining director so elected or by the vote of the holders
of the outstanding shares of such class or series, and such directorship(s)
shall not in any case be filled by the vote of the remaining directors or by the
holders of the outstanding shares of the Corporation as a whole unless otherwise
provided in the articles of incorporation.
3.04 Removal. At any meeting of shareholders called expressly for that
purpose, any director or the entire board of directors may be removed, with or
without cause, by a vote of the holders of a majority of the shares then
entitled to vote on the election of directors. Notwithstanding the foregoing,
whenever the holders of any class or series of shares are entitled to elect one
or more directors by the provisions of the articles of incorporation, only the
holders of shares of that class or series shall be entitled to vote for or
against the removal of any director elected by the holders of shares of that
class or series.
3.05 Vacancies. Any vacancy occurring in the board of directors may be
filled by (i) the shareholders at any annual or special meeting of shareholders
called for that purpose or (ii) the affirmative vote of a majority of the
remaining directors though less than a quorum of the board of directors. A
director elected to fill a vacancy shall be elected to serve for the unexpired
term of his predecessor in office. Notwithstanding the foregoing, whenever the
holders of any class or series of shares are entitled to elect one or more
directors by the provisions of the articles of incorporation, any vacancies in
such directorship(s) may be filled by the affirmative vote of a majority of the
directors elected by such class or series then in office or by a sole remaining
director so elected or by the vote of the holders of the outstanding shares of
such class or series, and such directorship(s) shall not in any case be filled
by the vote of the remaining directors or the holders of the outstanding shares
of the Corporation as a whole unless otherwise provided in the articles of
incorporation.
3.06 Place of Meetings. The board of directors may hold its meetings in
such place or places within or without the State of Texas as the board of
directors may from time to time determine.
<PAGE> 6
3.07 First Meeting. Each newly elected board of directors may hold its
first meeting for the purpose of organization and the transaction of business,
if a quorum is present, immediately after and at the same place as the annual
meeting of shareholders, and notice of such meeting shall not be necessary.
3.08 Regular Meetings. Regular meetings of the board of directors may
be held without notice at such times and places as may be designated from time
to time by resolution of the board of directors and communicated to all
directors.
3.09 Special Meetings; Notice. Special meetings of the board of
directors shall be held whenever called by the president or by any director. The
person calling any special meeting shall cause notice of such special meeting,
including therein the time and place of such special meeting, to be given to
each director at least two days before such special meeting. Neither the
business to be transacted at, nor the purpose of, any special meeting of the
board of directors need be specified in the notice or waiver of notice of any
special meeting.
3.10 Quorum; Majority Vote. At all meetings of the board of directors,
a majority of the number of directors fixed in the manner provided in these
bylaws shall constitute a quorum for the transaction of business. If a quorum is
not present at a meeting, a majority of the directors present may adjourn the
meeting from time to time, without notice other than an announcement at the
meeting, until a quorum is present. The act of a majority of the directors
present at a meeting at which a quorum is in attendance shall be the act of the
board of directors, unless the act of a greater number is required by law, the
articles of incorporation, or these bylaws.
3.11 Interested Directors and Officers. No contract or transaction
between the Corporation and one or more of its directors or officers, or between
the Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers or have a financial interest, shall be void or voidable solely for this
reason, solely because the director or officer is present at or participates in
the meeting of the board of directors or committee thereof which authorizes the
contract or transaction, or solely because his or their votes are counted for
such purpose, if:
(a) The material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the
board of directors or the committee, and the board of directors or
committee in good faith authorizes the contract or transaction by the
affirmative vote of a majority of the disinterested directors, even
though the disinterested directors be less than a quorum; or
(b) The material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the
shareholders entitled to vote thereon, and the contract or transaction
is specifically approved in good faith by vote of the shareholders; or
(c) The contract or transaction is fair as to the Corporation
as of the time it is authorized, approved, or ratified by the board of
directors, a committee thereof, or the shareholders.
<PAGE> 7
Common or interested directors may be counted in determining the presence of a
quorum at a meeting of the board of directors or of a committee which authorizes
the contract or transaction.
This provision shall not be construed to invalidate a contract or
transaction which would be valid in the absence of this provision or to subject
any director or officer to any liability that he would not be subject to in the
absence of this provision.
3.12 Procedure; Minutes. At meetings of the board of directors,
business shall be transacted in such order as the board of directors may
determine from time to time. The board of directors shall appoint at each
meeting a person to preside at the meeting and a person to act as secretary of
the meeting. The secretary of the meeting shall prepare minutes of the meeting
which shall be delivered to the secretary of the Corporation for placement in
the minute books of the Corporation.
3.13 Presumption of Assent. A director of the Corporation who is
present at any meeting of the board of directors at which action on any matter
is taken shall be presumed to have assented to the action unless his dissent
shall be entered in the minutes of the meeting or unless he shall file his
written dissent to such action with the person acting as secretary of the
meeting before the adjournment thereof or shall forward any dissent by certified
or registered mail to the secretary of the Corporation immediately after the
adjournment of the meeting. Such right to dissent shall not apply to a director
who voted in favor of such action.
3.14 Compensation. Directors, in their capacity as directors, may
receive, by resolution of the board of directors, a fixed sum and expenses of
attendance, if any, for attending meetings of the board of directors or a stated
salary. No director shall be precluded from serving the Corporation in any other
capacity or receiving compensation therefor.
3.15 Action Without Meeting. Any action which may be taken, or which is
required by law, the articles of incorporation, or these bylaws to be taken, at
a meeting of the board of directors or any committee may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall have
been signed by all of the members of the board of directors or committee, as the
case may be, and such consent shall have the same force and effect, as of the
date stated therein, as a unanimous vote of such members of the board of
directors or committee, as the case may be, and may be stated as such in any
document or instrument filed with the Secretary of State of Texas or in any
certificate or other document delivered to any person. The consent may be in one
or more counterparts so long as each director or committee member signs one of
the counterparts. The signed consent shall be placed in the minute books of the
Corporation.
ARTICLE FOUR: COMMITTEES
4.01 Designation. The board of directors may, by resolution adopted by
a majority of the entire board of directors, designate one or more committees.
<PAGE> 8
4.02 Number; Qualification; Term. The board of directors, by resolution
adopted by a majority of the entire board of directors, shall designate one or
more of its members as members of any committee and may designate one or more of
its members as alternate members of any committee, who may, subject to any
limitations imposed by the board of directors, replace absent or disqualified
members at any meeting of that committee. The number of committee members may be
increased or decreased from time to time by resolution adopted by a majority of
the entire board of directors. Each committee member shall serve as such until
the earliest of (i) the expiration of his term as director, (ii) his resignation
as a committee member or as a director, or (iii) his removal, as a committee
member or as a director.
4.03 Authority. Each committee, to the extent expressly provided in the
resolution establishing such committee, shall have and may exercise all of the
authority of the board of directors, including, without limitation, the
authority to authorize a distribution and to authorize the issuance of shares of
the Corporation. Notwithstanding the foregoing, however, no committee shall have
the authority of the board of directors in reference to:
(a) mending the articles of incorporation, except that a
committee may, to the extent provided in the resolution designating
that committee, exercise the authority of the board of directors vested
in it in accordance with Article 2.13 of the Texas Business Corporation
Act;
(b) proposing a reduction of the stated capital of the
Corporation in the manner permitted by Article 4.12 of the Texas
Business Corporation Act;
(c) approving a plan of merger or share exchange of the
Corporation;
(d) recommending to the shareholders the sale, lease, or
exchange of all or substantially all of the property and assets of the
Corporation otherwise than in the usual and regular course of its
business;
(e) recommending to the shareholders a voluntary dissolution
of the Corporation or a revocation thereof;
(f) amending, altering, or repealing these bylaws or adopting
new bylaws of the Corporation;
(g) filling vacancies in the board of directors;
(h) filling vacancies in, or designating alternate members of,
any committee;
(i) filling any directorship to be filled by reason of an
increase in the number of directors; electing or removing officers of
the Corporation or members or alternate members of any committee;
<PAGE> 9
(k) fixing the compensation of any member or alternate member
of any committee; or
(1) altering or repealing any resolution of the board of
directors that by its terms provides that it shall not be so amendable
or repealable.
4.04 Committee Changes. The board of directors shall have the power at
any time to fill vacancies in, to change the membership of, and to discharge any
committee.
4.05 Regular Meetings. Regular meetings of any committee may be held
without notice at such time and place as may be designated from time to time by
the committee and communicated to all members thereof.
4.06 Special Meetings. Special meetings of any committee may be held
whenever called by any committee member. The committee member calling any
special meeting shall cause notice of such special meeting, including therein
the time and place of such special meeting, to be given to each committee member
at least two days before such special meeting. Neither the business to be
transacted at, nor the purpose of, any special meeting of any committee need be
specified in the notice or waiver of notice of any special meeting.
4.07 Quorum; Majority Vote. At meetings of any committee, a majority of
the number of members designated by the board of directors shall constitute a
quorum for the transaction of business. If a quorum is not present at a meeting
of any committee, a majority of the members present may adjourn the meeting from
time to time, without notice other than an announcement at the meeting, until a
quorum is present. The act of a majority of the members present at any meeting
at which a quorum is in attendance shall be the act of a committee, unless the
act of a greater number is required by law, the articles of incorporation, or
these bylaws.
4.08 Minutes. Each committee shall cause minutes of its proceedings to
be prepared and shall report the same to the board of directors upon the request
of the board of directors. The minutes of the proceedings of each committee
shall be delivered to the secretary of the Corporation for placement in the
minute books of the Corporation.
4.09 Compensation. Committee members may, by resolution of the board of
directors, be allowed a fixed sum and expenses of attendance, if any, for
attending any committee meetings or a stated salary.
4.10 Responsibility. The designation of any committee and the
delegation of authority to it shall not operate to relieve the board of
directors or any director of any responsibility imposed upon it or such director
by law.
<PAGE> 10
ARTICLE FIVE: GENERAL PROVISIONS RELATING TO MEETINGS
5.01 Notice. Whenever by law, the articles of incorporation, or these
bylaws, notice is required to be given to any committee member, director, or
shareholder and no provision is made as to how such notice shall be given, it
shall be construed to mean that any such notice may be given (a) in person, (b)
in writing, by mail, postage prepaid, addressed to such committee member,
director, or shareholder at his address as it appears on the books of the
Corporation or, in the case of a shareholder, the share transfer records of the
Corporation, or (c) by any other method permitted by law. Any notice required or
permitted to be given by mail shall be deemed to be delivered and given at the
time when the same is deposited in the United States mail, postage prepaid, and
addressed as aforesaid.
5.02 Waiver of Notice. Whenever by law, the articles of incorporation,
or these bylaws, any notice is required to be given to any committee member,
shareholder, or director of the Corporation, a waiver thereof in writing signed
by the person or persons entitled to such notice, whether before or after the
time notice should have been given, shall be equivalent to the giving of such
notice. Attendance of a committee member, shareholder, or director at a meeting
shall constitute a waiver of notice of such meeting, except where such person
attends for the express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or convened.
5.03 Telephone and Similar Meetings. Shareholders, directors, or
committee members may participate in and hold a meeting by means of a conference
telephone or similar communications equipment by means of which persons
participating in the meeting can hear each other. Participation in such a
meeting shall constitute presence in person at such meeting, except where a
person participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
ARTICLE SIX: OFFICERS AND OTHER AGENTS
6.01 Number; Titles; Election; Term; Qualification. The officers of the
Corporation shall be a president and a secretary. The Corporation may also have
a chairman of the board, one or more vice presidents (and, in the case of each
vice president, with such descriptive title, if any, as the board of directors
shall determine), a treasurer, one or more assistant treasurers, one or more
assistant secretaries, and such other officers and such agents as the board of
directors may from time to time elect or appoint. The board of directors shall
elect a president and secretary at its first meeting at which a quorum shall be
present after the annual meeting of shareholders or whenever a vacancy exists.
The board of directors then, or from time to time, may also elect or appoint one
or more other officers or agents as it shall deem advisable. Each officer and
agent shall hold office for the term for which he is elected or appointed and
until his successor has been elected or appointed and qualified. Any person may
hold any number of offices. No officer or agent need be a shareholder, a
director, a resident of the State of Texas, or a citizen of the United States.
6.02 Removal. Any officer or agent elected or appointed by the board of
directors may be removed by the board of directors whenever in its judgment the
best interest of the Corporation will
<PAGE> 11
be served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an officer
or agent shall not of itself create contract rights.
6.03 Vacancies. Any vacancy occurring in any office of the Corporation
may be filled by the board of directors.
6.04 Authority. Officers shall have such authority and perform such
duties in the management of the Corporation as are provided in these bylaws or
as may be determined by resolution of the board of directors not inconsistent
with these bylaws.
6.05 Compensation. The compensation, if any, of officers and agents
shall be fixed from time to time by the board of directors; provided, that the
board of directors may by resolution delegate to any one or more officers of the
Corporation the authority to fix such compensation.
6.06 Chairman of the Board. The chairman of the board shall have such
powers and duties as may be prescribed by the board of directors.
6.07 President. Unless and to the extent that such powers and duties
are expressly delegated to a chairman of the board by the board of directors,
the president shall be the chief executive officer of the Corporation and,
subject to the supervision of the board of directors, shall have general
management and control of the business and property of the Corporation in the
ordinary course of its business with all such powers with respect to such
general management and control as may be reasonably incident to such
responsibilities, including, but not limited to, the power to employ, discharge,
or suspend employees and agents of the Corporation, to fix the compensation of
employees and agents, and to suspend, with or without cause, any officer of the
Corporation pending final action by the board of directors with respect to
continued suspension, removal, or reinstatement of such officer. The president
may, without limitation, agree upon and execute all division and transfer
orders, bonds, contracts, and other obligations in the name of the Corporation.
6.08 Vice Presidents. Each vice president shall have such powers and
duties as may be prescribed by the board of directors or as may be delegated
from time to time by the president and (in the order as designated by the board
of directors, or in the absence of such designation, as determined by the length
of time each has held the office of vice president continuously) shall exercise
the powers of the president during that officer's absence or inability to act.
As between the Corporation and third parties, any action taken by a vice
president in the performance of the duties of the president shall be conclusive
evidence of the absence or inability to act of the president at the time such
action was taken.
6.09 Treasurer. The treasurer shall have custody of the Corporation's
funds and securities, shall keep full and accurate accounts of receipts and
disbursements, and shall deposit all moneys and valuable effects in the name and
to the credit of the Corporation in such depository or depositories as may be
designated by the board of directors. The treasurer shall audit all payrolls and
vouchers of the Corporation, shall receive, audit, and consolidate all operating
and financial statements of the Corporation and its various departments, shall
supervise the accounting and auditing practices of the
<PAGE> 12
Corporation, and shall have charge of matters relating to taxation.
Additionally, the treasurer shall have the power to endorse for deposit,
collection, or otherwise all check&, drafts, notes, bills of exchange, and other
commercial paper payable to the Corporation and to give proper receipts and
discharges for all payments to the Corporation. The treasurer shall perform such
other duties as may be prescribed by the board of directors or as may be
delegated from time to time by the president.
6.10 Assistant Treasurers. Each assistant treasurer shall have such
powers and duties as may be prescribed by the board of directors or as may be
delegated from time to time by the president. The assistant treasurers (in the
order as designated by the board of directors or, in the absence of such
designation, as determined by the length of time each has held the office of
assistant treasurer continuously) shall exercise the powers of the treasurer
during that officer's absence or inability to act. As between the Corporation
and third parties, any action taken by an assistant treasurer in the performance
of the duties of the treasurer shall be conclusive evidence of the absence or
inability to act of the treasurer at the time such action was taken.
6.11 Secretary. The secretary shall maintain minutes of all meetings of
the board of directors, of any committee, and of the shareholders, or consents
in lieu of such minutes, in the Corporation's minute books, and shall cause
notice of such meetings to be given when requested by any person authorized to
call such meetings. The secretary may sign with the president, in the name of
the Corporation, all contracts of the Corporation and affix the seal of the
Corporation thereto. The secretary shall have charge of the certificate books,
share transfer records, stock ledgers, and such other stock books and papers as
the board of directors may direct, all of which shall at all reasonable times be
open to inspection by any director at the office of the Corporation during
business hours. The secretary shall perform such other duties as may be
prescribed by the board of directors or as may be delegated from time to time by
the president.
6.12 Assistant Secretaries. Each assistant secretary shall have such
powers and duties as may be prescribed by the board of directors or as may be
delegated from time to time by the president. The assistant secretaries (in the
order designated by the board of directors or, in the absence of such
designation, as determined by the length of time each has held the office of
assistant secretary continuously) shall exercise the powers of the secretary
during that officer's absence or inability to act. As between the Corporation
and third parties, any action taken by an assistant secretary in the performance
of the duties of the secretary shall be conclusive evidence of the absence or
inability to act of the secretary at the time such action was taken.
ARTICLE SEVEN: CERTIFICATES AND SHAREHOLDERS
7.01 Certificated and Uncertificated Shares. The shares of the
Corporation may be either certificated shares or uncertificated shares. As used
herein, the term "certificated shares" means shares represented by instruments
in bearer or registered form, and the term "uncertificated shares" means shares
not represented by instruments and the transfers of which are registered upon
books maintained for that purpose by or on behalf of the Corporation.
<PAGE> 13
7.02 Certificates for Certificated Shares. The certificates
representing certificated shares of stock of the Corporation shall be in such
form as shall be approved by the board of directors in conformity with law. The
certificates shall be consecutively numbered, shall be entered as they are
issued in the books of the Corporation or in the records of the Corporation's
designated transfer agent, if any, and shall state upon the face thereof: (a)
that the Corporation is organized under the laws of the State of Texas; (b) the
name of the person to whom issued; (c) the number and class of shares and the
designation of the series, if any, which such certificate represents; (d) the
par value of each share represented by such certificate, or a statement that the
shares are without par value; and (e) such other matters as may be required by
law. The certificates shall be signed by the (y) chairman of the board,
president or any vice president and the secretary or assistant secretary or the
treasurer or an assistant treasurer, at the time or previously in office; and
(z) shall have been manually signed by a duly authorized signatory of the
Corporations designated transfer agent, if any; however, the signatures of any
of such officers may be facsimiles. The certificates may be sealed with the seal
of the Corporation or a facsimile thereof.
7.03 Issuance. Shares with or without par value may be issued for such
consideration and to such persons as the board of directors may from time to
time determine, except in the case of shares with par value the consideration
must be at least equal to the par value of such shares. Shares may not be issued
until the full amount of the consideration has been paid. After the issuance of
uncertificated shares, the Corporation or the transfer agent of the Corporation
shall send to the registered owner of such uncertificated shares a written
notice containing the information required to be stated on certificates
representing shares of stock as set forth in Section 7.02 above and such
additional information as may be required by ss.8.408 of the Texas Uniform
Commercial Code as currently in effect and as the same may be amended from time
to time hereafter.
7.04 Consideration for Shares. To the extent permitted by law, the
board of directors may authorize shares to be issued for consideration
consisting of any tangible or intangible benefit to the Corporation including
cash, promissory notes, services performed, contracts for services to be
performed, or other securities of the Corporation. In the absence of fraud in
the transaction, the judgment of the board of directors as to the value of
consideration received shall be conclusive. Shares may not be issued until the
full amount of the consideration, fixed as provided by law, has been paid. When
consideration, fixed as provided by law, has been paid, the shares shall be
deemed to have been issued and shall be considered fully paid and nonassessable.
The consideration received for shares shall be allocated by the board of
directors, in accordance with law, between stated capital and surplus accounts.
7.05 Lost, Stolen, or Destroyed Certificates. The Corporation shall
issue a new certificate or certificates in place of any certificate representing
shares previously issued if the registered owner of the certificate:
(a) Claim. Makes proof by affidavit, in form and
substance satisfactory to the board of directors or
any proper officer, that a previously issued
certificate representing shares has been lost,
destroyed, or stolen;
<PAGE> 14
(b) Timely Request. Requests the issuance of a new
certificate before the Corporation has notice that
the certificate has been acquired by a purchaser for
value in good faith and without notice of an adverse
claim;
(c) Bond. If required by the board of directors or any
proper officer, in its or such officer's discretion,
delivers to the Corporation a bond or indemnity
agreement in such form, with such surety or sureties,
and with such fixed or open penalty, as the board of
directors or such officer may direct, in its or such
officer's discretion, to indemnify the Corporation
(and its transfer agent and registrar, if any)
against any claim that may be made on account of the
alleged loss, destruction, or theft of the
certificate; and
(d) Other Requirements. Satisfies any other reasonable
requirements imposed by the board of directors.
7.06 Transfer of Shares. Shares of stock of the Corporation shall be
transferable only on the books of the Corporation by the shareholders thereof in
person or by their duly authorized attorneys or legal representatives. With
respect to certificated shares, upon surrender to the Corporation or the
transfer agent of the Corporation for transfer of a certificate representing
shares duly endorsed and accompanied by any reasonable assurances that such
endorsements are genuine and effective as the Corporation may require and after
compliance with any applicable law relating to the collection of taxes, the
Corporation or its transfer agent shall, if it has no notice of an adverse claim
or if it has discharged any duty with respect to any adverse claim, issue one or
more new certificates to the person entitled thereto, cancel the old
certificate, and record the transaction upon its books. With respect to
uncertificated shares, upon delivery to the Corporation or the transfer agent of
the Corporation of an instruction originated by an appropriate person (as
prescribed by ss.8.308 of the Texas Uniform Commercial Code as currently in
effect and as the same may be amended from time to time hereafter) and
accompanied by any reasonable assurances that such instruction is genuine and
effective as the Corporation may require and after compliance with any
applicable law relating to the collection of taxes, the Corporation or its
transfer agent shall, if it has no notice of an adverse claim or has discharged
any duty with respect to any adverse claim, record the transaction upon its
books, and shall send to the new registered owner of such uncertificated shares,
and, if the shares have been transferred subject to a registered pledge, to the
registered pledgee, a written notice containing the information required to be
stated on certificates representing shares of stock set forth in Section 7.02
above and such additional information as may be required by ss.8.408 of the
Texas Uniform Commercial Code as currently in effect and as the same may be
amended from time to time hereafter.
7.07 Registered Shareholders. The Corporation shall be entitled to
treat the shareholder of record as the shareholder in fact of any shares and,
accordingly, shall not be bound to recognize any equitable or other claim to or
interest in such shares on the part of any other person, whether or not it shall
have actual or other notice thereof, except as otherwise provided by law.
7.08 Legends. The board of directors shall cause an appropriate legend
to be placed on certificates representing shares of stock as may be deemed
necessary or desirable by the board of
<PAGE> 15
directors in order for the Corporation to comply with applicable federal or
state securities or other laws.
7.09 Regulations. The board of directors shall have the power and
authority to make all such rules and regulations as it may deem expedient
concerning the issue, transfer, registration, or replacement of certificates
representing shares of stock of the Corporation.
ARTICLE EIGHT: INDEMNIFICATION
8.01 Indemnification. The Corporation shall indemnify any officer or
director to the fullest extent permitted by law. The Corporation may indemnify
any employee or agent of the Corporation to the fullest extent permitted by law.
ARTICLE NINE: MISCELLANEOUS PROVISIONS
9.01 Dividends. Subject to provisions of applicable statutes and the
articles of incorporation, dividends may be declared by and at the discretion of
the board of directors at any meeting and may be paid in cash, in property, or
in shares of stock of the Corporation.
9.02 Books and Records. The Corporation shall keep books and records of
account and shall keep minutes of the proceedings of its shareholders, the board
of directors, and each committee of the board of directors. The Corporation
shall keep at its registered office or principal place of business, or at the
office of its transfer agent or registrar, a record of the original issuance of
shares issued by the Corporation and a record of each transfer of those shares
that have been presented to the Corporation for registration of transfer, giving
the names and addresses of all past and current shareholders and the number and
class of the shares held by each of such shareholders. Books and records may be
in written form or any other form capable of being converted into written form
within a reasonable time.
9.03 Fiscal Year. The fiscal year of the Corporation shall be fixed by
the board of directors; provided, that if such fiscal year is not fixed by the
board of directors and the board of directors does not defer its determination
of the fiscal year, the fiscal year shall be the calendar year.
9.04 Seal. The seal, if any, of the Corporation shall be in such form
as may be approved from time to time by the board of directors. If the board of
directors approves a seal, the affixation of such seal shall not be required to
create a valid and binding obligation against the Corporation.
9.05 Attestation by the Secretary. With respect to any deed, deed of
trust, mortgage, or other instrument executed by the Corporation through its
duly authorized officer or officers, the attestation to such execution by the
secretary of the Corporation shall not be necessary to constitute such deed,
deed of trust, mortgage, or other instrument a valid and binding obligation
against the Corporation unless the resolutions, if any, of the board of
directors authorizing such execution expressly state that such attestation is
necessary.
<PAGE> 16
9.06 Resignation. Any director, committee member, officer, or agent may
resign by so stating at any meeting of the board of directors or by giving
written notice to the board of directors, the president, or the secretary. Such
resignation shall take effect at the time specified in the statement made at the
board of directors' meeting or in the written notice, but in no event may the
effective time of such resignation be prior to the time such statement is made
or such notice is given. If no effective time is specified in the resignation,
the resignation shall be effective immediately. Unless a resignation specifies
otherwise, it shall be effective without being accepted.
9.07 Securities of Other Corporations. The president or any vice
president of the Corporation shall have the power and authority to transfer,
endorse for transfer, vote, consent, or take any other action with respect to
any securities of another issuer which may be held or owned by the Corporation
and to make, execute, and deliver any waiver, proxy, or consent with respect to
any such securities.
9.08 Amendment of Bylaws. The power to amend or repeal these bylaws or
to adopt new bylaws is vested in the board of directors, but is subject to the
right of the shareholders to amend or repeal these bylaws or to adopt new
bylaws.
9.09 Invalid Provisions. If any part of these bylaws is held invalid or
inoperative for any reason, the remaining parts, so far as is possible and
reasonable, shall remain valid and operative.
9.10 Headings; Table of Contents. The headings and table of contents
used in these bylaws are for convenience only and do not constitute matter to be
construed in the interpretation of these bylaws.
The undersigned, the secretary of the Corporation, hereby certifies
that the foregoing bylaws were adopted by the board of directors of the
Corporation as of July 21, 1995.
/s/ Robert Maynard
----------------------------------
Robert Maynard, Secretary
<PAGE> 1
EXHIBIT 3.4
AMENDMENTS TO THE
BYLAWS OF
INTERNET AMERICA, INC. F/K/A INTRNTUSA, INC.
The Board of Directors and Shareholders of Internet America, Inc., a
Texas corporation (the "Company"), adopted the following amendments to the
Company's Bylaws as of July 13, 1998:
1. The current Article Two, Section 2.02 of the Company's Bylaws
shall be amended and restated so that it reads in its entirety as follows:
"2.02 Special Meetings. A special meeting of the shareholders may be
called at any time by the president, board of directors, or the holders
of not less than fifty percent of all shares entitled to vote at such
meeting. Only business within the purpose or purposes described in the
notice of special meeting may be conducted at such special meeting."
2. The current Article Two, Section 2.12 of the Company's Bylaws
shall be deleted in its entirety.
3. The current Article Three, Section 3.02 of the Company's Bylaws
shall be amended and restated so that it reads in its entirety as follows:
"3.02 Number; Election; Term; Quorum. The number of directors which
shall constitute the board of directors shall be not less than one. The
first board of directors shall consist of the number of directors named
in the articles of incorporation. Thereafter, the number of directors
which shall constitute the entire board of directors shall be
determined by resolution of the board of directors at any meeting
thereof, but shall never be less than one. At each annual meeting of
shareholders, directors shall be elected to hold office until the next
annual meeting of shareholders and until their successors are elected
and qualified. No director need be a shareholder, a resident of the
State of Texas or a citizen of the United States."
4. The current Article Nine, Section 9.08 of the Company's Bylaws
shall be amended and restated so that it reads in its entirety as follows:
"9.08 Amendment of Bylaws. The power to amend or repeal these bylaws
is vested in the board of directors."
<PAGE> 2
Dated as of the 13th day of July, 1998.
INTERNET AMERICA, INC.
By: /s/ JAMES T. CHANEY
-------------------------------
James T. Chaney, Secretary
2
<PAGE> 1
EXHIBIT 4.1
[LOGO OF EAGLE WITH OLIVE BRANCH APPEARS HERE]
INCORPORATED UNDER THE LAWS
OF THE STATE OF TEXAS
[CERTIFICATE NUMBER PAR VALUE
APPEARS HERE] $.01 PER SHARE
Internet America, Inc.
The Corporation is authorized to issue 40,000,000 Common Shares $.01
Par Value, of one class
THIS CERTIFIES THAT _________________________________ IS THE OWNER OF __________
Fully Paid and Non-Assessable Shares of the Common Stock of INTERNET AMERICA,
INC. transferable on the books of the Corporation by the holder hereof in person
or by duly authorized Attorney upon surrender of this Certificate properly
endorsed. WITNESS, the seal of the Corporation and the signatures of its duly
authorized officers. DATED
[SEAL OF THE COMPANY APPEARS HERE]
________________________________ ___________________________________
Secretary President
Please insert social security or other identifying number of assignee
_____________________ For value received ___________________________ hereby
sell, assign and transfer unto ________________________________________________
Shares represented by the within Certificate, and do hereby irrevocably
constitute and appoint __________________ Attorney to transfer the said Shares
on the books of the within named corporation with full power of substitution in
the premises.
Dated _______________ 19_____
In the presence of __________________________________________
________________________________
<PAGE> 2
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
A STATEMENT DENYING PREEMPTIVE RIGHTS OF SHAREHOLDERS IS SET FORTH IN THE
ARTICLES OF INCORPORATION ON FILE IN THE OFFICE OF THE SECRETARY OF STATE. THE
CORPORATION WILL FURNISH A COPY OF SUCH STATEMENT TO THE RECORD HOLDER OF THIS
CERTIFICATE WITHOUT CHARGE ON REQUEST TO THE CORPORATION AT ITS PRINCIPAL PLACE
OF BUSINESS OR REGISTERED OFFICE.
THE CORPORATION IS AUTHORIZED TO ISSUE SHARES OF MORE THAN ONE CLASS AND TO
ISSUE PREFERRED SHARES IN SERIES. A STATEMENT OF THE DESIGNATIONS, PREFERENCES,
LIMITATIONS, AND RELATIVE RIGHTS OF THE SHARES OF EACH CLASS AUTHORIZED TO BE
ISSUED BY THE CORPORATION, THE VARIATIONS IN THE RELATIVE RIGHTS AND PREFERENCES
OF THE SHARES OF EACH SERIES OF PREFERRED SHARES TO THE EXTENT THEY HAVE BEEN
FIXED AND DETERMINED, AND THE AUTHORITY OF THE BOARD OF DIRECTORS OF THE
CORPORATION TO FIX AND DETERMINE THE RELATIVE RIGHTS AND PREFERENCE OF ANY
SERIES OF PREFERRED SHARES IS SET FORTH IN THE ARTICLES OF INCORPORATION OF THE
CORPORATION ON FILE IN THE OFFICE OF THE SECRETARY OF STATE OF TEXAS. THE
CORPORATION WILL FURNISH A COPY OF SUCH STATEMENT TO THE RECORD HOLDER OF THIS
CERTIFICATE WITHOUT CHARGE ON WRITTEN REQUEST TO THE CORPORATION AT ITS
PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE.
<PAGE> 1
EXHIBIT 10.1
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this "Agreement") is entered into
as of September 25, 1996, between First Computer Services Corporation, a
Delaware corporation (the "Buyer"), and Internet America, Inc., a Texas
corporation (the "Company").
ARTICLE 1
PURCHASE AND SALE
1.1 Agreement to Purchase and Sell. Upon the basis of the
representations and warranties, for the consideration, and subject to the terms
and conditions set forth in this Agreement, the Company agrees to sell to the
Buyer, and the Buyer agrees to purchase from the Company (a) the Promissory
Note in the form of Exhibit A attached hereto (the "Senior Note") for
$1,767,713, and (b) 232,287 shares (the "Shares" and, together with the
Senior Note, the "Securities" ) of the Company's common stock, par value $.01
per share ("Common Stock"), for $232,287.
1.2 Closing. The closing of the transactions contemplated hereby
(the "Closing") shall take place at the offices of Baker & McKenzie, at 10:00
a.m., local time, on September 25, 1996, or at such other time and place and/or
on such other date as the Buyer and the Company may agree. The date on which
the Closing occurs is hereinafter referred to as the "Closing Date." At the
Closing, the Company shall deliver to the Buyer the Securities and the Buyer
shall deliver to the Company by wire transfer an amount equal to $2,000,000.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Buyer as follows:
2.1 Organization and Standing. The Company is a corporation duly
organized, validly existing, and in good standing under the laws of the State
of Texas and has full corporate power and authority to conduct its business as
presently conducted and as proposed to be conducted by it and to enter into and
perform and to carry out the transactions contemplated by this Agreement and
the agreements and documents executed and delivered herewith. The Company is
duly qualified to do business as a foreign corporation and is in good standing
in every jurisdiction in which the failure to so qualify would have a material
adverse effect on the operations or financial condition of the Company. The
Company has furnished to the Buyer true and complete copies of its Articles of
Incorporation and Bylaws, each as amended to date and presently in effect.
2.2 Capitalization. The authorized capital stock of the Company
consists of 15,000,000 shares of Common Stock and 5,000,000 shares of the
Company's preferred stock, $.01 par value per share ("Preferred Stock"), of
which 400,000 shares have been designated as Series A Preferred Stock (herein
so called) and 300,000 shares have been designated as Series B Preferred Stock
(herein so
<PAGE> 2
called). 1,333,865 shares of Common Stock, 379,672 shares of Series A
Preferred Stock and 73,667 shares of Series B Preferred Stock are issued and
outstanding, and 501,340 shares of Common Stock and no shares of Preferred
Stock are reserved for issuance upon the exercise of outstanding options and
warrants. All of the issued and outstanding shares of the Company's capital
stock have been duly authorized and validly issued and are fully paid and
nonassessable. Except as set forth in Section 2.2 of the schedule attached
hereto (the "Schedule"), (i) no subscription, warrant, option, convertible
security, or other right (contingent or otherwise) to purchase or acquire any
shares of capital stock of the Company is authorized or outstanding, (ii) the
Company has not committed to issue any subscription, warrant, option,
convertible security, or other such right or to issue or distribute to holders
of any shares of its capital stock any evidences of indebtedness or assets of
the Company, and (iii) the Company has no obligation (contingent or otherwise)
to purchase, redeem, or otherwise acquire any shares of its capital stock or
any interest therein or to pay any dividend or make any other distribution in
respect thereof. Except as provided in this Agreement, no person or entity is
entitled to (i) any preemptive or similar right with respect to the issuance of
any capital stock of the Company or (ii) any rights with respect to the
registration of any capital stock of the Company under the Securities Act of
1933, as amended (the "Securities Act"). All of the issued and outstanding
shares of capital stock of the Company have been offered, issued, and sold by
the Company in compliance with applicable Federal and state securities laws.
To the best of the Company's knowledge, no stockholder of the Company has
granted options or other rights to purchase any shares of capital stock of the
Company from such stockholder. The Fully Diluted Number of shares of Common
Stock outstanding is 2,288,544. As used herein, the "Fully Diluted Number"
means that number of shares of Common Stock that would be outstanding assuming
all convertible securities, warrants, options, and other rights to purchase
Common Stock that are outstanding at the time of determination of the Fully
Diluted Number had been converted and/or exercised as of such time.
2.3 Subsidiaries. The Company has no subsidiaries and does not
own or control, directly or indirectly, any interest in any other corporation,
association, or business entity.
2.4 Stockholder List and Agreements. Set forth in Section 2.4 of
the Schedule is a true and complete list of the stockholders of the Company,
showing the number of shares of Common Stock or other securities of the Company
held by each stockholder as of the date hereof and the consideration paid to
the Company for such shares. Except as set forth in Section 2.4 of the
Schedule, there are no agreements, written or oral, between the Company and any
holder of its capital stock, or, to the best knowledge of the Company, among
any holders of its capital stock, relating to the acquisition, disposition, or
voting of the capital stock of the Company.
2.5 Issuance of Securities. The issuance, sale, and delivery of
the Securities in accordance with this Agreement have been duly authorized by
all necessary corporate action on the part of the Company. Upon consummation
of the transactions contemplated hereby, the Securities will be validly issued,
fully paid, and nonassessable.
2.6 Authority for Agreement. The execution, delivery, and
performance by the Company of this Agreement and the agreements and documents
to be executed and delivered in accordance herewith have been duly authorized
by all necessary corporate action. This Agreement has been, and upon
consummation of the transactions contemplated hereby, the agreements and
documents to be
<PAGE> 3
executed and delivered in accordance herewith will have been, duly executed and
delivered by the Company. This Agreement constitutes, and upon consummation of
the transactions contemplated hereby, the agreements and documents to be
executed and delivered in accordance herewith will constitute, valid and
binding obligations of the Company enforceable in accordance with their
respective terms. Except as set forth in Section 2.6 of the Schedule, the
execution and performance of the transactions contemplated by this Agreement
and the agreements and documents to be executed and delivered in accordance
herewith and the compliance with their provisions by the Company will not
violate any provision of law and will not conflict with or result in any breach
of any of the terms, conditions, or provisions of, or constitute a default
under, its Articles of Incorporation or Bylaws, any indenture, lease,
agreement, or other instrument to which the Company is a party or by which it
or any of its properties is bound, or any decree, judgment, order, statute,
rule, or regulation applicable to the Company.
2.7 Governmental Consents. No consent, approval, order, or
authorization of, or registration, qualification, designation, declaration, or
filing with, any governmental authority is required on the part of the Company
in connection with (i) the execution and delivery of this Agreement and the
agreements and documents to be executed and delivered in accordance herewith,
(ii) the offer, issue, sale, and delivery of the Securities, or (iii) the other
transactions to be consummated in accordance with this Agreement, except such
filings as shall have been made prior to and shall be effective on and as of
the date first above written. The offer and sale of the Securities to the
Buyer is, and shall be, in compliance with applicable Federal and state
securities laws.
2.8 Litigation. There is no action, suit, proceeding, or
investigation pending, or, to the best of the Company's knowledge, any basis
therefor or threat thereof, which questions the validity of this Agreement or
the agreements and documents to be executed and delivered in accordance
herewith or the right of the Company to enter into this Agreement or the
agreements and documents to be executed and delivered in accordance herewith,
or which might result, either individually or in the aggregate, in any material
adverse change in the assets, condition (financial or otherwise), business, or
prospects of the Company, nor is there any litigation pending, or, to the best
of the Company's knowledge, any basis therefor or threat thereof, against the
Company by reason of the past employment relationships of any of the Company's
employees, the proposed activities of the Company, or negotiations by the
Company with possible investors in the Company.
2.9 Financial Statements. The Company has furnished to the Buyer
a complete and correct copy of the unaudited balance sheet of the Company as at
June 30, 1996, the related unaudited statements of operations and changes in
financial position of the Company for the year ended June 30, 1996, the
unaudited balance sheet of the Company as at July 31, 1996 (the "July Balance
Sheet"), and the unaudited statements of operations and changes in financial
position of the Company for the one month ended July 31, 1996 (collectively,
the "Financial Statements"). Except as set forth in Section 2.9 of the
Schedule, the Financial Statements are complete and correct in all material
respects, are in accordance with the books and records of the Company, present
fairly the financial condition and results of operations of the Company as at
the dates and for the periods indicated, and have been prepared in accordance
with generally accepted accounting principles consistently applied ("GAAP")
except as otherwise specifically set forth therein.
<PAGE> 4
2.10 Absence of Liabilities. Except as disclosed in Section 2.10
of the Schedule, the Company did not have, at July 31, 1996, any liabilities of
any type which in the aggregate exceeded $5,000, whether absolute or
contingent, which were not fully reflected on the July Balance Sheet, and,
since July 31, 1996, the Company has not incurred or otherwise become subject
to any such liabilities or obligations except those incurred in the ordinary
course of business which are not material in amount.
2.11 Taxes. The amount shown on the July Balance Sheet as
provision for taxes is sufficient in all material respects for payment by the
Company of all accrued and unpaid Federal, state, county, local, and foreign
taxes owed by the Company for the period then ended and all prior periods. The
Company has filed or has obtained presently effective extensions with respect
to all Federal, state, county, local, and foreign tax returns which are
required to be filed by it and such returns are true and correct. Except as
disclosed in Section 2.11 of the Schedule, all taxes shown on such returns to
be due have been timely paid with exceptions not material to the Company.
Federal income tax returns of the Company have not been audited by the Internal
Revenue Service, and no controversy with respect to taxes of any type is
pending or, to the knowledge of the Company, threatened.
2.12 Property and Assets. The Company has good title to all of its
material properties and assets, including all properties and assets reflected
in the July Balance Sheet, except those disposed of since the date thereof in
the ordinary course of business, and none of such properties or assets are
subject to any mortgage, pledge, lien, security interest, lease, charge, or
encumbrance other than those the material terms of which are described in
Section 2.12 of the Schedule.
2.13 Patents and Trademarks. The Company owns or possesses all of
the patents, trademarks, service marks, trade names, copyrights, proprietary
rights, trade secrets, and licenses or rights to the foregoing necessary for
the conduct of the Company's business as conducted and as proposed to be
conducted. The business conducted or proposed by the Company does not and will
not cause the Company to infringe or violate any of the patents, trademarks,
service marks, trade names, copyrights, licenses, trade secrets, or other
proprietary rights of any other person or entity. The Company is not aware
that any employee of the Company is obligated under any contract (including any
license, covenant, or commitment of any nature), or subject to any judgment,
decree, or order of any court or administrative agency, that would interfere
with the use of such employee's best efforts to promote the interests of the
Company or would conflict with the Company's business as proposed to be
conducted. To the best of the Company's knowledge, no prior employer of any
employee of the Company's has any right to or interest in any inventions,
improvements, discoveries, or other information ever assigned to the Company by
such employee.
2.14 Insurance. Section 2.14 of the Schedule sets forth a
description of all insurance policies maintained by or on behalf of the
Company.
2.15 Material Contracts and Obligations. Section 2.15 of the
Schedule sets forth a list of all material agreements of any nature to which
the Company is a party or by which it is bound, including without limitation
(a) each agreement which requires future expenditures by the Company in excess
of $25,000, (b) all employment and consulting agreements, employee benefit,
bonus,
<PAGE> 5
pension, profit-sharing, stock option, stock purchase, and similar plans and
arrangements, and distributor and sales representative agreements, and (c) any
agreement to which any stockholder, officer, or director of the Company, or any
Affiliate (as such term is defined in Rule 144 promulgated under the Securities
Act) of such persons, is presently a party, including without limitation any
agreement or other arrangement providing for the furnishing of services by,
rental of real or personal property from, or otherwise requiring payments to,
any such person or entity. All of such agreements and contracts are valid,
binding, and in full force and effect.
2.16 Compliance. The Company has complied in all material respects
with, is in compliance in all material respects with, and has not received
notice from any third party of any violation of the laws, regulations, and
orders applicable to its present and proposed business, including without
limitation, any federal, state, local, and foreign laws, regulations, codes,
plans, orders, decrees, judgments, injunctions, notices, or demand letters
issued, promulgated, or entered thereunder by any governmental authority or
subdivision thereof relating to pollution or protection of the environment,
including, without limitation, laws, regulations, and orders relating to
emissions, discharges, releases, or threatened releases of pollutants,
contaminants, chemicals, toxic or hazardous substances, wastes, or by-products
(collectively, the "Contaminants") into the environment or otherwise relating
to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of Contaminants, or otherwise relating to
worker health and safety or public health and safety; and has all material
permits and licenses required thereby. There is no term or provision of any
mortgage, indenture, contract, agreement, or instrument to which the Company is
a party or by which it is bound, or of any provision of any state or Federal
judgment, decree, order, statute, rule, or regulation applicable to or binding
upon the Company, or any conditions currently existing or likely to exist,
attributable to the operations of the Company which materially adversely affect
or, so far as the Company may now foresee, in the future is reasonably likely
to materially adversely affect, the business, prospects, condition, affairs, or
operations of the Company or any of its properties or assets. To the best of
the knowledge of the Company, no employee of the Company is in violation of any
term of any employment contract, patent, or other proprietary information
disclosure agreement or any other contract or agreement relating to the
employment of such employee by the Company.
2.17 Absence of Changes. Since July 31, 1996 and except as
expressly listed on the Schedule, there has not been:
(a) any change in the assets, liabilities, financial
condition, or operations of the Company from that reflected in the
Financial Statements, except changes in the ordinary course of
business that have not been, either individually or in the aggregate,
materially adverse to the Company;
(b) any material change, either individually or in the
aggregate, in the contingent obligations of the Company by way of
guaranty, endorsement, indemnity, warranty, or otherwise;
(c) any damage, destruction, or loss, whether or not
covered by insurance, materially and adversely affecting the
properties or business of the Company;
<PAGE> 6
(d) any waiver or compromise by the Company of a valuable
right or of a material debt owed to it;
(e) any loans made by the Company to its employees,
officers, or directors other than travel advances made in the ordinary
course of business;
(f) any extraordinary increases in the compensation of
any of the Company's employees, officers, or directors;
(g) any declaration or payment of any dividend or other
distribution of the assets of the Company;
(h) any issuance or sale by the Company of any shares of
its capital stock (except for the issuance or sale by the Company of
any of its capital stock pursuant to options or warrants outstanding
as of July 31, 1996 and described in Section 2.2 of the Schedule);
(i) any other event or condition of any character that
has materially and adversely affected the Company's business or
prospects; or
(j) any agreement or commitment by the Company to do any
of the things described in this Section 2.17.
2.18 ERISA. The Company has no employee benefit plan subject to
the Employee Retirement Income Security Act of 1974.
2.19 Brokers. No broker's, finder's, or similar fees (or expenses
of any broker or finder) have been, are, or will be payable by the Company in
connection with the transactions contemplated by this Agreement.
2.20 Disclosures. Neither this Agreement, nor any of the
agreements and documents to be executed and delivered in accordance herewith,
nor any exhibit hereto, nor any report, certificate, or instrument furnished or
to be furnished to the Buyer in connection with the transactions contemplated
by this Agreement, when read together, contain or will contain any material
misstatement of fact or omit or will omit to state a material fact necessary to
make the statements contained herein or therein not misleading. The Company
knows of no information or fact which has or would have a material adverse
effect on the financial condition, business, or prospects of the Company which
has not been disclosed to the Buyer. Each projection furnished to Buyer or its
agents was prepared with due care based on reasonable assumptions and
represents the Company's best estimate of future results based on information
available as of the date of the projections.
<PAGE> 7
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE BUYER
The Buyer represents and warrants to the Company as follows:
3.1 Investment.
(a) The Buyer is an accredited investor as defined in
Rule 501(a)(3) of Regulation D under the Securities Act and, except as
contemplated hereby, the Buyer will acquire the Securities for
investment and not with a view to any distribution thereof in
violation of the Securities Act.
(b) The Buyer understands that it may have to bear the
economic risk of its investment in the Securities for an indefinite
period of time because, among other reasons, the Securities have not
been registered under the Securities Act or any state securities laws
and therefore cannot be disposed of unless such Securities are
subsequently registered or exemptions from such registration are
available.
(c) The Buyer understands that each instrument
representing the Securities will bear a legend substantially in the
following form:
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("THE
SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE
OFFERED, SOLD, PLEDGED, OR OTHERWISE TRANSFERRED OR DISPOSED
OF UNLESS AND UNTIL SUCH SECURITIES ARE REGISTERED UNDER THE
SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
(d) The Buyer is capable of evaluating the merits and
risks of an investment in the Company and is able to bear the economic
risk of loss of its entire investment in the Company.
3.2 Authority. The execution, delivery, and performance by the
Buyer of this Agreement and the agreements and documents to be executed and
delivered by it in accordance herewith have been duly authorized by all
necessary corporate action and have been or, at the Closing, will have been,
duly executed and delivered by the Buyer. This Agreement constitutes, and the
agreements and documents to be executed and delivered by the Buyer in
accordance herewith shall constitute, valid and binding obligations of the
Buyer enforceable in accordance with their respective terms.
3.3 No Brokers. The Buyer does not and shall not owe any broker
or other person or entity any broker's or finder's fees as a result of its
execution, delivery, or consummation of this Agreement or the other agreements
and documents executed in connection herewith.
<PAGE> 8
ARTICLE 4
COVENANTS
From the date hereof to the Closing, the Company covenants and agrees
that:
4.1 Inspection. The Company shall give to the Buyer and its
officers, attorneys, accountants, and representatives free, full, and complete
access during reasonable business hours to all books, records, tax returns,
files, correspondence, personnel, facilities, and properties of the Company;
provide the Buyer and its officers, attorneys, accountants, and representatives
all information and material pertaining to the business and affairs of the
Company as the Buyer may deem necessary or appropriate; and use its best
efforts to afford Buyer and its officers, attorneys, accountants, and
representatives the opportunity to meet with the customers and suppliers of the
Company to discuss the business, condition (financial or otherwise),
operations, and prospects of the Company. Any investigation by the Buyer or
its officers, attorneys, accountants, or representatives shall not in any
manner affect the representations and warranties of the Company contained
herein.
4.2 Compliance. The Company shall not take or fail to take any
action which action or failure to take such action shall cause the
representations and warranties made by the Company herein to be untrue or
incorrect as of the Closing.
4.3 Satisfaction of All Conditions Precedent. The Company shall
use its best efforts to cause all conditions precedent to the obligations of
the Buyer hereunder to be satisfied by the Closing.
4.4 Notice of Developments. The Company shall notify the Buyer of
any material problems or developments with respect to the business, operations,
or prospects of the Company.
4.5 Notice of Breach. The Company shall, immediately upon
becoming aware thereof, give detailed written notice to the Buyer of the
occurrence of, or the impending or threatened occurrence of, any event which
would cause or constitute a breach, or would have caused or constituted a
breach had such event occurred or been known to the Company prior to the date
of this Agreement, of any of the Company's covenants, agreements,
representations, or warranties contained or referred to herein or in any
document delivered in accordance with the terms hereof.
4.6 Notice of Litigation. Immediately upon becoming aware
thereof, the Company shall notify the Buyer of (a) any suit, action, or
proceeding (including, without limitation, any tax claim, assessment, notice,
or audit or proceeding involving a labor dispute or grievance or union
recognition or any suit, action, or proceeding alleging the violation of any
environmental law, regulation, or code) to which the Company becomes a party or
which is threatened against the Company, (b) any order or decree or any
complaint praying for an order or decree restraining or enjoining the
consummation of this Agreement or the agreements and documents to be executed
and delivered in accordance herewith, or (c) any notice from any tribunal of
its intention to institute an investigation into, or to institute a suit or
proceeding to restrain or enjoin the consummation of, this Agreement or the
agreements and documents to be executed and delivered in accordance herewith or
to nullify or render ineffective this Agreement or the agreements and documents
to be executed and delivered in accordance herewith.
<PAGE> 9
ARTICLE 5
CONDITIONS TO CLOSING
5.1 Conditions to Obligations of Buyer. The obligations of the
Buyer to consummate the transactions contemplated hereby are subject to the
fulfillment of each of the following conditions:
(a) The representations and warranties of the Company
contained in this Agreement shall be true and correct at and as of the
Closing with the same effect as though such representations and
warranties had been made on and as of the Closing Date; the Company
shall have performed and complied with all agreements required by this
Agreement to be performed or complied with by the Company at or prior
to the Closing; and the Buyer shall have received a certificate, dated
as of the Closing Date, signed by the Company to the foregoing effect.
(b) No action or proceeding shall have been instituted or
threatened for the purpose or with the possible effect of enjoining or
preventing the consummation of this Agreement or seeking damages on
account thereof.
(c) The Buyer shall have received from the Company a
certificate of the Secretary of the Company certifying as to (i) the
Articles of Incorporation and Bylaws of the Company, (ii) resolutions
of the Company's Board of Directors authorizing the execution,
delivery, and performance of this Agreement and the agreements and
documents to be executed and delivered in accordance herewith, (iii)
the incumbency of the directors and officers of the Company, and (iv)
the signatures of the officers who execute documents on behalf of the
Company in connection herewith.
(d) The Buyer shall have received certificates and
instruments representing the Securities, each registered in the name
of the Buyer.
(e) Each of the Maynard Family Trust, the John N. Nanni
Trust, and Tim Martin (the "Original Stockholders") shall have
executed and delivered to the Buyer a Pledge and Security Agreement
(herein so called) substantially in the form of Exhibit C attached
hereto and delivered to the Buyer the certificates evidencing the
shares of capital stock of the Company owned by such Original
Stockholders, together with appropriate stock powers and financing
statements, and Robert Maynard and Tim Martin shall have terminated
that certain Transfer of Voting Rights Agreement, which termination
shall be irrevocable and effective upon the occurrence of an Event of
Default (as defined under the Pledge and Security Agreement to be
executed by Tim Martin).
<PAGE> 10
(f) Pursuant to the Pledge and Security Agreements, the
Original Stockholders will have pledged that number of shares of
Common Stock that equals at least 40.87% of the Fully Diluted Number
of shares of Common Stock.
(g) The Company shall have executed and delivered to the
Buyer the Security Agreement in the form of Exhibit B attached hereto.
(h) All consents and approvals required in connection
with the execution, delivery, and performance of this Agreement and
the agreements and documents to be executed and delivered in
accordance herewith shall have been obtained, and the Buyer shall have
received a certificate, dated as of the Closing Date, signed by the
Company to the foregoing effect.
(i) M. J. Capital Partners, L.P. shall have executed and
delivered to the Buyer the Subordination and Intercreditor Agreement
in the form of Exhibit D attached hereto.
(j) William O. Hunt, his spouse, the William Hunt
Retirement Trust, B&G Partnership, Ltd. and BCG Partnership, Ltd.
shall have executed and delivered to the Buyer a Voting Agreement
(herein so called) in the form of Exhibit F attached hereto.
(k) All certificates, instruments, and other documents
required to be executed or delivered by or on behalf of the Company
and the Original Stockholders under the provisions of this Agreement,
and all other actions and proceedings required to be taken by or on
behalf of the Company and the Original Stockholders in furtherance of
the transactions contemplated hereby, shall be reasonably satisfactory
in form and substance to counsel for the Company.
The decision of the Buyer to consummate the transactions contemplated hereby
without the satisfaction of any of the preceding conditions shall not
constitute a waiver of any of the Company's representations, warranties,
covenants, or indemnities herein.
5.2 Conditions to Obligations of the Company. The obligations of
the Company to consummate the transactions contemplated hereby are subject to
the fulfillment of the following conditions:
(a) The Buyer's representations and warranties contained
in this Agreement shall be true and correct at and as of the Closing
with the same effect as though such representations and warranties had
been made as of the Closing; all agreements to be performed hereunder
by the Buyer at or prior to the Closing shall have been performed; and
the Company shall have received a certificate, dated as of the Closing
Date, signed by the Buyer to the foregoing effects.
(b) The Buyer shall have delivered to the Company the
consideration for the Securities provided for in Section 1.2 hereof.
<PAGE> 11
ARTICLE 6
TERMINATION
This Agreement may be terminated prior to the Closing by (a) the
mutual consent of the Buyer and the Company, (b) the Company upon the failure
of the Buyer to perform or comply with any of its covenants or agreements
contained herein prior to the Closing or if any representation or warranty of
the Buyer hereunder shall not have been true and correct as of the time at
which such was made, (c) the Buyer upon the failure of the Company to perform
or comply with any of its covenants or agreements contained herein or if any
representation or warranty of the Company hereunder shall not have been true
and correct as of the time at which such was made, or (d) either the Company or
the Buyer if the Closing does not occur by September 30, 1996; provided, that
no party may terminate this Agreement pursuant to (b) or (c) above if such
party is, at the time of any such attempted termination, in breach of any term
hereof.
ARTICLE 7
REGISTRATION RIGHTS
7.1 Demand Registration. If, at any time after the Closing Date,
the Buyer shall request the Company to effect the registration under the
Securities Act of the Shares or any other shares of Common Stock held by the
Buyer (collectively, the "Buyer Stock"), then the Company shall promptly use
its best efforts to effect the registration under the Securities Act of the
shares of Buyer Stock that the Company has been requested to register. The
Company shall not be obligated to effect more than one registration statement
pursuant to this Section 7.1 (provided, however, that if the Buyer is unable to
make any sales of Buyer Stock pursuant to any such registration statement
through no fault of its own, the Buyer shall not be deemed to have forfeited
its registration rights under this Section 7.1). No securities owned by any
person or entity other than the Buyer may be included in such registration
statement without the consent of the Buyer. Notwithstanding the foregoing, the
Company shall not be required to effect a registration pursuant to this Section
7.1 until the earlier to occur of (a) the date the Company has first sold any
securities pursuant to a registration statement filed with the Securities and
Exchange Commission (the "SEC") under the Securities Act or (b) the Company
otherwise becomes subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended.
7.2 Piggyback Registration. If the Company at any time proposes
for any reason to register any of its securities under the Securities Act
(other than pursuant to a registration statement on Form S-4 or Form S-8 or a
similar or successor form), it shall each such time promptly give written
notice to the Buyer of its intention so to do, and, upon the written request of
the Buyer given within 30 days after receipt of any such notice to register any
of its Buyer Stock (which request shall specify the Buyer Stock intended to be
sold or disposed of by the Buyer), the Company shall use its best efforts to
cause all such Buyer Stock to be registered under the Securities Act promptly
upon receipt of the written request of the Buyer for such registration, all to
the extent requisite to permit the sale or other disposition by the Buyer of
the Buyer Stock so registered. If the proposed registration by the Company is,
in whole or in part, an underwritten public offering of Common Stock, then any
request pursuant to this Section 7.2 to register the Buyer Stock may specify
that such
<PAGE> 12
shares are to be included in the underwriting on the same terms and conditions
as the shares of Common Stock otherwise being sold through underwriters under
such registration; provided, however, that if the managing underwriter or
underwriters of such offering shall advise the Company in writing that, because
of the size of the offering intended to be made, the success of the offering
would be materially and adversely effected by the inclusion of the Buyer Stock
requested to be included, then the amount of securities to be offered for the
account of the Buyer shall be reduced to the extent necessary to reduce the
total amount of securities to be included in such offering to the amount
recommended by such managing underwriter or underwriters; provided, further,
that the proportion by which the amount of Buyer Stock to be offered by the
Buyer is reduced shall not exceed the proportion by which the amount of Common
Stock intended to be offered by each other shareholder of the Company is
reduced.
7.3 Preparation and Filing. If and whenever the Company is under
an obligation pursuant this Article 7 to effect the registration of the Buyer
Stock, the Company shall, as expeditiously as practicable:
(a) prepare and file with the SEC a registration
statement with respect to such Buyer Stock and use its best efforts to
cause such registration statement to become and remain effective;
(b) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for at least nine months or until the Buyer Stock
is sold pursuant to such registration statement, whichever is earlier,
and to comply with the provisions of the Securities Act with respect
to the sale or other disposition of all the Buyer Stock covered by
such registration statement;
(c) furnish to the Buyer such number of copies of a
summary prospectus or other prospectus, including a preliminary
prospectus, in conformity with the requirements of the Securities Act,
and such other documents as the Buyer may reasonably request in order
to facilitate the public sale or other disposition of the Buyer Stock;
(d) use its best efforts to register or qualify the Buyer
Stock covered by such registration statement under the securities or
blue sky laws of such jurisdictions as the Buyer shall reasonably
request and do any and all other acts or things which may be necessary
or advisable to enable the Buyer to consummate the public sale or
other disposition of such securities in such jurisdictions, provided
that the Company will not be required to qualify as a foreign
corporation or to execute a general consent that would subject it to
service of process in suits, other than those arising out of the
offering or sale of the Common Stock, in any jurisdiction where it is
not now so subject;
(e) at any time when a prospectus covered by such
registration statement is required to be delivered under the
Securities Act within the appropriate period mentioned in clause (b)
of this Section 7.3, notify the Buyer of the happening of any event as
a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in
the light of the circumstances then existing, and at the request of
the Buyer, prepare and furnish to the Buyer a reasonable number of
copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such
shares, such prospectus shall not include an
<PAGE> 13
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 the light of the circumstances then
existing; and
(f) furnish, at the request of the Buyer pursuant to this
Article 7, on the date that the Buyer Stock is delivered to the
underwriters for sale in connection with a registration pursuant to
this Article 7, if such securities are being sold through
underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect
to such securities becomes effective, (i) an opinion, dated such date,
of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the
underwriters, if any, and to the Buyer and (ii) a comfort letter dated
such date, from the independent certified public accountants of the
Company, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Buyer.
7.4 Registration Expenses. The Company shall pay all expenses
incurred by the Company in complying with this Article 7 including, without
limitation, all registration and filing fees (including all expenses incident
to filing with the National Association of Securities Dealers, Inc.), all fees
and expenses of complying with securities and blue sky laws, all accounting
fees, all printing expenses, and all fees and disbursements of counsel,
including, with respect to each registration effected pursuant to Section 7.1
or 7.2, reasonable fees and disbursements of not more than one counsel for the
Buyer; provided, however, that all underwriting discounts and selling
commissions applicable to the Buyer Stock covered by registrations effected
pursuant to Sections 7.1 or 7.2 shall be borne by the Buyer in proportion to
the number of shares of Common Stock sold by the Buyer.
7.5 Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless the
Buyer, each of the Buyer's officers and directors, each person
controlling the Buyer, each underwriter, each of such underwriter's
officers and directors, and each person controlling such underwriter
against all claims, losses, damages, and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular, or other
document (including any related registration statement, notification,
or the like) incident to any registration, qualification, or compliance
pursuant to this Article 7, or based on any omission (or alleged
omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or
any violation by the Company of the Securities Act or other securities
laws or any rule or regulation thereunder applicable to the Company and
relating to action or inaction required of the Company in connection
with any such registration,
<PAGE> 14
qualification, or compliance, and will reimburse the Buyer, each of the
Buyer's officers and directors, each person controlling the Buyer, each
such underwriter, each such underwriter's officers and directors, and
each person controlling such underwriter for any legal and any other
expenses reasonably incurred in connection with investigating and
defending any such claim, loss, damage, liability, or action; provided,
however, that the Company will not be liable in any such case to the
extent that any such claim, loss, damage, liability, or expense arises
out of or is based on any untrue statement or omission based upon
written information furnished to the Company by the Buyer or such
underwriter and stated to be specifically for use therein. Such
indemnity shall remain in full force and effect regardless of any
investigation made by the Buyer or other indemnified entity or person
and shall survive the transfer of the Buyer Stock by the Buyer.
(b) The Buyer shall indemnify and hold harmless the
Company, each of the Company's directors and officers, each person
controlling the Company, each underwriter, if any, of the securities
covered by such a registration statement, each person controlling such
underwriter, each other selling stockholder, each of such
stockholder's officers and directors, and each person controlling such
selling stockholder against all claims, losses, damages, and
liabilities (or actions in respect thereof) arising out of or based on
any untrue statement (or alleged untrue statement) of a material fact
contained in any such registration statement, prospectus, offering
circular, or other document, or any omission (or alleged omission) to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will
reimburse the Company and such stockholders, directors, officers,
persons, underwriters, or control persons for any legal or any other
expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability, or action, in each
case to the extent, but only to the extent, that such untrue statement
or omission is made in such registration statement, prospectus,
offering circular, or other document in reliance upon and in
conformity with written information furnished to the Company by the
Buyer and stated to be specifically for use therein; provided,
however, that the obligations of the Buyer hereunder shall be limited
to an amount equal to the proceeds to the Buyer of the sale of the
Buyer Stock pursuant to the specific offering giving rise to such
claims, losses, damages, or liabilities.
(c) Each party entitled to indemnification under this
Section 7.5 (the "Indemnified Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party")
promptly after such Indemnified Party has actual knowledge of any
claim as to which indemnity may be sought and shall permit the
Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be approved by the Indemnified
Party (whose approval shall not unreasonably be withheld), and the
Indemnified Party shall have the right to employ separate counsel in
any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be paid by the Indemnified Party
unless (and such fees and expenses shall be paid by the Indemnifying
Party if) (i) the Indemnifying Party agrees to pay the same, (ii) the
Indemnifying Party fails to assume the defense of such action with
counsel reasonably satisfactory to the Indemnified Party, or (iii) the
named parties to any such action (including any impleaded parties)
have
<PAGE> 15
been advised by counsel for the Indemnified Party that either (A)
representation of the Indemnified Party and the Indemnifying Party by
the same counsel would be inappropriate under applicable standards of
professional conduct or (B) there may be one or more legal defenses
available to the Indemnified Party which are different from or
additional to those available to the Indemnifying Party (in which case
the Indemnifying Party shall not have the right to assume the defense
of such action on behalf of such Indemnified Party), and provided
further that the failure of any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 7.5, except to the extent the
Indemnifying Party is materially prejudiced thereby. Each Indemnified
Party shall furnish such information regarding itself or the claim in
question as an Indemnifying Party may reasonably request in writing
and as shall be reasonably required in connection with defense of such
claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section
7.5 from the Indemnifying Party is unavailable to an Indemnified Party
hereunder in respect of any losses, claims, damages, liabilities, or
expenses referred to herein, then the Indemnifying Party, in lieu of
indemnifying such Indemnified Party, shall contribute to the amount
paid or payable by such Indemnified Party as a result of such losses,
claims, damages, liabilities, or expenses in such proportion as is
appropriate to reflect the relative faults of the Indemnifying Party
and Indemnified Party in connection with the actions which resulted in
such losses, claims, damages, liabilities, or expenses, as well as any
other relevant equitable considerations. The relative faults of such
Indemnifying Party and Indemnified Party shall be determined by
reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact, has been made
by, or relates to information supplied by, such Indemnifying Party or
Indemnified Party, and the parties' relative intent, knowledge, access
to information, and opportunity to correct or prevent such action.
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
7.5(c) above, any legal or other fees or expenses reasonably incurred
by such party in connection with any investigation or proceeding. The
parties hereto agree that it would not be just and equitable if
contribution pursuant to this Subsection 7.5(d) were determined by pro
rata allocation or by any other method of allocation which does not
take into account the equitable considerations referred to in this
Subsection 7.5(d).
7.6 Assignment of Registration Rights. The Company acknowledges
and agrees that, notwithstanding any limitations contained in Section 9.9 of
this Agreement, the rights to cause the Company to register the Buyer Stock
under this Article 7 may (but need not) be transferred or assigned to any
transferee(s) or assignee(s) of any Buyer Stock; provided, however, that in no
event may the holder(s) of less than 25% of the Buyer Stock outstanding at the
time of any demand or request for registration under Sections 7.1 or 7.2 hereof
require the Company to effect any such registration under either such section.
<PAGE> 16
ARTICLE 8
ADDITIONAL POST-CLOSING COVENANTS
8.1 Post-Closing Inspection. For as long as any indebtedness
remains unpaid under the Senior Note or the Buyer and its Affiliates own at
least 10% of the Fully Diluted Number of shares of Common Stock, the Company
shall permit the Buyer, or any authorized representative thereof, to visit and
inspect the properties of the Company, including its corporate and financial
records, and to discuss its business and finances with officers of the Company,
during normal business hours following reasonable notice and as often as may be
reasonably requested.
8.2 Financial Statements and Other Information.
(a) For as long as any indebtedness remains unpaid under
the Senior Note or the Buyer and its Affiliates own at least 10% of
the Fully Diluted Number of shares of Common Stock, the Company shall
deliver to the Buyer:
(i) within 90 days after the end of each fiscal
year of the Company, an audited balance sheet of the Company as at the
end of such year and audited statements of income and of changes in
financial condition of the Company for such year, certified by
certified public accountants of established national reputation
selected by the Company that are reasonably satisfactory to the Buyer,
and prepared in accordance with GAAP;
(ii) within 45 days after the end of each fiscal
quarter of the Company, an unaudited balance sheet of the Company as
at the end of such quarter, and unaudited statements of income and of
changes in financial condition of the Company for such fiscal quarter
and for the current fiscal year to the end of such fiscal quarter;
(iii) within 30 days after the end of each month,
an unaudited balance sheet of the Company as at the end of such month
and unaudited statements of income and of changes in financial
condition of the Company for such month and for the current fiscal
year to the end of such month, setting forth in comparative form the
Company's projected financial statements for the corresponding periods
for the current fiscal year;
(iv) within ten days after the discovery or
notification that the Company is not in compliance with this
Agreement, the agreements and documents executed and delivered
herewith, or any other material agreement to which the Company is a
party, a detailed statement outlining such noncompliance or default;
and
(v) within ten days of delivery, such other
notices, information, and data with respect to the Company as the
Company delivers to the holders of its Common Stock, the SEC, or any
securities exchange on which capital stock of the Company may be
listed, and such other information and data as the Buyer may from time
to time reasonably request.
<PAGE> 17
(b) The foregoing financial statements shall be prepared
on a consolidated basis if the Company then has any subsidiaries. The
financial statements delivered pursuant to clauses (ii) and (iii) of
paragraph (a) of this Section 8.2 shall be accompanied by a
certificate in the form of Exhibit G hereto, executed by the chief
financial officer of the Company (x) stating that such statements have
been prepared in accordance with GAAP and fairly present the financial
condition of the Company at the date thereof and for the periods
covered thereby and (y) certifying and confirming that as of such
date:
(A) no default or "Event of Default" (as defined
in the Senior Note) has occurred, or if any such matter
exists, stating the nature thereof, the period of existence
thereof, and what action the Company proposes to take with
respect thereto; and
(B) the Company has complied with all of the
terms, covenants and conditions set forth in this Agreement,
or if the Company has not so complied, stating the nature of
such non-compliance, the period of existence thereof, and what
action the Company proposes to take with respect thereto.
8.3 Additional Covenants. For as long as any
indebtedness remains unpaid under the Senior Note or the Buyer and its
Affiliates own at least 10% of the Fully Diluted Number of shares of
Common Stock:
(a) The Company shall promptly pay and discharge, or
cause to be paid and discharged, when due and payable, all taxes,
assessments, and governmental charges or levies of any kind, including
without limitation those imposed upon the income, profits, property,
or business of the Company or any subsidiary of the Company; provided,
however, that any such tax, assessment, charge, or levy need not be
paid if the validity thereof shall be contested in good faith by
appropriate proceedings and if the Company shall have set aside on its
books adequate reserves therefor; and provided, further, that the
Company shall pay all such taxes, assessments, charges, or levies
forthwith upon the commencement of proceedings to foreclose any lien
that may have attached as security therefor. The Company shall
promptly pay or cause to be paid when due, or in conformance with
customary trade terms or practices, all other indebtedness incident to
the operations of the Company.
(b) The Company shall keep its properties and those of
its subsidiaries in good repair, working order, and condition,
reasonable wear and tear excepted, and from time to time shall make
all needful and proper repairs, renewals, replacements, additions, and
improvements thereto; and the Company and its subsidiaries shall at
all times comply with the provisions of all material leases to which
any of them is a party or under which any of them occupies property so
as to prevent any loss or forfeiture thereof or thereunder.
(c) The Company shall keep its and its subsidiaries'
assets that are of an insurable character insured by financially sound
and reputable insurers against loss or damage by fire, extended
coverage, and explosion insurance in amounts customary for companies
in similar businesses similarly situated; and the Company shall
maintain, with financially sound and
<PAGE> 18
reputable insurers, insurance against other hazards, risks, and
liabilities to persons and property to the extent and in the manner
customary for companies in similar businesses similarly situated. The
Buyer acknowledges that the insurance policies maintained by or on
behalf of the Company, as described in Section 2.14 of the Schedule,
provide adequate insurance coverage for the year ending one year from
the date hereof.
(d) The Company shall keep true records and books of
account in which full, true, and correct entries will be made of all
dealings or transactions in relation to its business and affairs in
accordance with GAAP.
(e) The Company shall comply in all material respects
with the requirements of all applicable laws, rules, regulations, and
orders of any governmental authority.
8.4 Negative Covenants. For as long as any indebtedness remains
unpaid under the Senior Note, the Company shall not, without the prior written
consent of the Buyer:
(a) issue or sell, or authorize for issuance or sale,
additional shares of any class of capital stock (except for the
issuance or sale by the Company of any of its capital stock pursuant
to the exercise of options or warrants outstanding as of the date
hereof and disclosed in Section 2.2 of the Schedule), or issue, grant,
or enter into any subscription, option, warrant, right, convertible
security, or other agreement or commitment of any character obligating
the Company to issue securities, if as a result of any such issuance,
grant, or sale (i) the sum of the number of shares of Common Stock and
Preferred Stock owned by the Buyer, Carl H. Westcott, Jack Smith and
Buyer's Affiliates, plus the number of shares of Common Stock pledged
to the Buyer pursuant to a Pledge and Security Agreement executed
pursuant hereto shall not equal or exceed 51% of the sum of the number
of shares of Common Stock and Preferred Stock outstanding, or (ii) the
shares of capital stock owned by the Buyer, Carl H. Westcott, Jack
Smith and Buyer's Affiliates, plus the shares of capital stock pledged
to the Buyer pursuant to the Pledge and Security Agreements executed
pursuant hereto shall not, upon the occurrence of a Payment Default
(as defined in the Voting Agreement), entitle the Buyer to a majority
of the voting power of all classes of capital stock of the Company;
(b) declare, set aside, make, or pay any dividend or
other distribution with respect to its capital stock, or redeem,
purchase, or otherwise acquire, directly or indirectly, any of its
capital stock;
(c) make any loan or advance to, or own any stock or
other securities of, any subsidiary or other corporation, partnership,
or other entity;
(d) make any loan or advance to any person, including,
without limitation, any employee or director of the Company or any
subsidiary, except advances and similar expenditures in the ordinary
course of business which, with respect to employees and related
parties, may not exceed $5,000 per individual and $50,000 in the
aggregate;
<PAGE> 19
(e) guarantee, directly or indirectly, any indebtedness;
(f) merge with or into or consolidate with any other
corporation, or sell, lease, or otherwise dispose of all or
substantially all of the Company's properties or assets;
(g) voluntarily dissolve, liquidate, or wind up or carry
out any partial liquidation or distribution or transaction in the
nature of a partial liquidation or distribution;
(h) take any action to cause any amendment, alteration,
or repeal of any of the provisions of the Company's Articles of
Incorporation or Bylaws, or change the size of its Board of Directors
or the quorum requirements for meetings of its Board of Directors;
(i) recapitalize or reorganize;
(j) enter into, modify, amend, or terminate any agreement
between any of the Company's stockholders and the Company;
(k) pledge, mortgage, hypothecate, or grant a lien or
security interest in, or permit or suffer the creation or existence of
any pledge, mortgage, hypothecation, lien, or security interest in,
any of the Company's assets, except (i) security interests and any
other liens in favor of Buyer, (ii) liens for taxes not yet due and
payable, (iii) mechanic's liens and materialman's liens for services
or materials for which payment is not yet due, (iv) landlord's liens
for rental not yet due and payable and which, to the extent the same
encumbers any of the collateral securing the Senior Note, is
subordinate to the security interests in favor of Buyer, (v) liens in
favor of Texas Commerce Bank National Association securing
indebtedness not to exceed $150,000 at any time evidenced by that
certain Revolving Promissory Note dated March 4, 1996, executed by
Company and payable to the order of Texas Commerce Bank National
Association, and (vi) liens created pursuant to that certain Security
Agreement dated March 31, 1996, executed by Company in favor of M.J.
Capital Partners, L.P., provided that such liens are subordinated to
the security interests and liens in favor of Buyer in the manner
provided in the Subordination and Intercreditor Agreement attached
hereto as Exhibit D;
(l) enter into any transaction, including, without
limitation, the purchase, sale, or exchange of property or the
rendering of any service, with any Affiliate except in the ordinary
course of, and pursuant to the reasonable requirements of, the
Company's business and upon fair and reasonable terms no less
favorable to the Company than would have been obtained in a comparable
arm's-length transaction with a person not an Affiliate;
(m) enter into any line of business other than the one in
which the Company is engaged on the date hereof;
(n) make any expenditures for fixed or capital assets if
such expenditures would cause the aggregate of all such expenditures
made by the Company after the date hereof to exceed $100,000 without
the prior written consent of the Buyer, which consent will not be
<PAGE> 20
unreasonably withheld, provided that notwithstanding the foregoing the
Company may make capital expenditures for modem and peripheral
computer equipment with respect to new subscribers of the Company's
services (net of any subscribers who have canceled or failed to renew
the Company's services) in an amount not in excess of $50.00 for each
such new subscriber;
(o) assign or transfer, or attempt to assign or transfer,
any of the Company's rights, duties, or obligations under this
Agreement or any other agreement or document delivered and executed
herewith; or
(p) incur any indebtedness for money borrowed other than
bank debt not to exceed $150,000 in the aggregate.
8.5 Limitation on Issuances of Capital Stock. For as long as the
Buyer and its Affiliates own at least 10% of the Fully Diluted Number of shares
of Common Stock, the Company shall not, without the prior written consent of
the Buyer, issue shares of its Common Stock at, or securities convertible or
exercisable for shares of Common Stock with a conversion or exercise price
equal to, a price per share less than $3.75 (subject to appropriate and
equitable adjustment in the event of stock splits, dividends, subdivisions,
recapitalizations and similar transactions).
8.6 Payment of Taxes. On or before the expiration of fifteen (15)
days following the Closing Date, the Company shall pay in full all amounts
owing with respect to all unpaid payroll and sales taxes, including, without
limitation, the unpaid payroll and sales taxes disclosed in Section 2.11 of the
Schedule.
8.7 Subordination Agreement. On or before the expiration of ten
(10) days following the Closing Date, (i) Texas Commerce Bank National
Association ("TCB") shall have entered into a Subordination and Intercreditor
Agreement with Buyer in the form of Exhibit D attached hereto or otherwise in
form and substance satisfactory to Buyer, in its sole discretion, or (ii)
Company shall have indefeasibly paid in full all outstanding indebtedness owing
to TCB and terminated its loan commitment with TCB.
ARTICLE 9
MISCELLANEOUS
9.1 Survival of Representations, Warranties, and Covenants. All
representations, warranties, and covenants hereunder shall survive the Closing.
All statements contained in any certificate or other instrument delivered by
the Company pursuant to this Agreement or any agreement or document to be
executed and delivered in connection herewith shall constitute representations
and warranties by the Company under this Agreement.
9.2 Indemnification-General. The Company shall indemnify, defend,
and hold the Buyer harmless from and against all liabilities, losses, and
damages, together with all reasonable costs and expenses related thereto
(including legal and accounting fees and expenses), arising from the untruth,
<PAGE> 21
inaccuracy, or breach of any representations, warranties, or covenants made by
the Company herein or in any other agreement or document executed or to be
executed in connection herewith.
9.3 Remedies. In case any one or more of the covenants and/or
agreements set forth in this Agreement shall have been breached by any party
hereto, any of the other parties hereto may proceed to protect and enforce its,
his, or their rights either by suit in equity and/or by action at law,
including, but not limited to, an action for damages as a result of any such
breach and/or an action for specific performance of any such covenant or
agreement contained in this Agreement.
9.4 Governing Law. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of Delaware.
9.5 Fees. The Company shall pay, and hold the Buyer harmless from
and against liability for the payment of, (a) all costs and other expenses
incurred prior to, on, or after the Closing Date in connection with the
Company's performance of and compliance with all agreements and conditions
contained herein on its part to be performed or complied with, and (b) all of
the fees and disbursements of Baker & McKenzie, counsel to the Buyer, for its
services in connection with this transaction, provided that the Buyer shall not
be responsible for the attorney fees referred to in this clause (b) to the
extent they exceed $25,000. The Company shall make such payments to Baker &
McKenzie and the Buyer by certified bank or cashier's checks upon request. The
Company further agrees that it shall pay and shall hold the Buyer harmless from
and against any and all liabilities with respect to any stamp or similar taxes
which may be determined to be payable in connection with the execution and
delivery of this Agreement or any modification, amendment, or alteration of the
terms or provisions of this Agreement and that it will similarly pay and hold
the Buyer harmless from and against all issue taxes in respect of the issuance
of the Securities purchased by the Buyer hereunder.
9.6 Exchanges; Lost, Stolen or Mutilated Certificates. Upon
surrender by the Buyer to the Company of certificates or instruments for
Securities purchased or acquired by the Buyer hereunder, the Company, at its
expense, shall issue in exchange therefor, and deliver to the Buyer, a new
certificate or instrument, as the case may be, in such denomination or
denominations as may be requested by the Buyer. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction, or mutilation of
any certificate or original instrument representing any Securities purchased or
acquired by the Buyer hereunder, and in case of any such loss, theft, or
destruction, upon delivery of any indemnity agreement satisfactory to the
Company, or in case of any such mutilation, upon surrender and cancellation of
such certificate or instrument, the Company at its expense shall issue and
deliver to the Buyer a new certificate or instrument, as the case may be, of
like tenor, in lieu of such lost, stolen, or mutilated certificate.
9.7 Notices. Any notice or other communication required or
permitted hereunder shall be in writing and shall be deemed given (a) when
personally delivered or (b) on the third day following the day it is mailed, by
certified or registered mail, return receipt requested, in either case to the
appropriate address indicated below or such other address as the interested
recipient may have furnished to the other parties hereto:
<PAGE> 22
(i) If to the Buyer:
First Computer Services Corporation
c/o John Curtis
Two Galleria Tower, Suite 900
13455 Noel Road
Dallas, Texas 75240
(ii) If to the Company:
Internet America, Inc.
One Dallas Centre
350 N. St. Paul, Suite 200
Dallas, Texas 75201
Attn: Robert Maynard
Any party may change its address for notices hereunder by proper
notice to all other parties.
9.8 Amendments and Waivers. Except as may otherwise expressly be
provided herein, this Agreement may be amended, and compliance by the Company
with any provision hereof may be waived, by a written agreement or instrument
signed by the Company and the Buyer.
9.9 Parties in Interest; Assignment. All of the terms and
provisions of this Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns. There shall be no third
party beneficiaries of this Agreement. The Buyer may assign any or all of its
rights and privileges under this Agreement and the agreements and documents
executed and to be executed in connection herewith (provided that the Company
need only obtain the written agreement of the Buyer (and not such assignees) in
order to secure a waiver of any covenant set forth herein or therein); provided
that such assignee is an accredited investor (as defined in Regulation D under
the Securities Act) and the Buyer or such assignee provides the Company a
certificate to the foregoing effect. The Company may not assign any of its
rights, privileges, duties, or obligations hereunder without the prior written
consent of the Buyer. Any assignment in violation of the foregoing shall be
null and void.
9.10 Dealings Between the Company and the Buyer. The Company and
the Buyer hereby agree that so long as Jack Smith is an Affiliate of Buyer,
Jack Smith is designated as the Buyer's sole contact with the Company with
respect to the Buyer's dealings with the Company in connection with the
transactions contemplated by this Agreement.
9.11 Counterparts. This Agreement may be executed in counterparts,
and all parties need not execute the same counterpart. However, no party shall
be bound by this Agreement until all parties have executed a counterpart.
<PAGE> 23
9.12 Severability. If any provision of this Agreement shall be
held to be unenforceable by a court of competent jurisdiction, such provision
shall be severed from this Agreement and the remainder of this Agreement shall
continue in full force and effect.
9.13 Complete Agreement. This Agreement and the agreements and
documents to be executed and delivered in connection herewith embody the
complete agreement and understanding among the parties and supersede and
preempt any prior understandings, agreements, or representations by or among
the parties, written or oral, which may have related to the subject matter
hereof in any way.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
THE BUYER:
FIRST COMPUTER SERVICES CORPORATION
By: /s/ John D. Curtis
-------------------------------------
Its: President
THE COMPANY:
INTERNET AMERICA, INC.
By: /s/ Robert Maynard
-------------------------------------
Its: Chief Executive Officer
EXHIBITS
A - Promissory Note
B - Security Agreement
C - Pledge and Security Agreement
<PAGE> 24
EXHIBIT A
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED,
SOLD, PLEDGED, OR OTHERWISE TRANSFERRED OR DISPOSED OF UNLESS AND UNTIL THIS
NOTE IS REGISTERED UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES
LAWS OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
PROMISSORY NOTE
$1,767,713.00 September 25, 1996
FOR VALUE RECEIVED, the undersigned, INTERNET AMERICA, INC., a Texas
corporation ("Maker"), promises to pay to the order of First Computer Services
Corporation, a Delaware corporation ("Payee"), by wire transfer to Chase
Manhattan Bank Delaware, 1201 Market Street, Wilmington, Delaware 19801-1167,
First Computer Services Corporation, Account Number 6301-224-758500 (or such
other place as Payee may from time to time designate), the sum of One Million
Seven Hundred Sixty-Seven Thousand Seven Hundred Thirteen and No/100 Dollars
($1,767,713.00), together with interest on the unpaid principal balance from
time to time outstanding at a rate per annum equal to 10.0% (calculated on the
basis of actual days elapsed, but computed as if each calendar year consisted
of 360 days); provided that, in no event shall the interest rate hereunder
exceed the Highest Lawful Rate (as hereinafter defined); "Highest Lawful Rate"
means, at any given time during which indebtedness shall be outstanding
hereunder, the maximum nonusurious interest rate, if any, that at any time or
from time to time may be contracted for, taken, reserved, charged, or received
on the indebtedness evidenced by this Note under the laws of the United States
and the State of Delaware applicable thereto which are presently in effect or,
to the extent allowed by law, under such applicable laws of the United States
and the State of Delaware which may hereafter be in effect and which allow a
higher maximum nonusurious interest rate than applicable laws now allow, in any
case after taking into account, to the extent required by applicable law, any
and all relevant payments or charges under this Note and any documents executed
in connection herewith.
Interest on this Note shall accrue from the date hereof. All
principal of and interest on this Note shall be paid on the first anniversary
of the date hereof.
All past due principal of and accrued interest on this Note shall bear
interest from maturity (stated, by acceleration, or otherwise) until
indefeasibly paid in full at the lesser of 18% and the Highest Lawful Rate.
1. Prepayments. The accrued but unpaid interest on this Note may
be prepaid in whole or in part at any time without penalty or premium. The
unpaid principal balance of this Note may be
<PAGE> 25
prepaid in whole or in part at any time without premium or penalty, but only if
all accrued interest on the amount of each such prepayment is paid to the date
of such prepayment.
2. Events of Default and Remedies. Without notice or demand
(which are hereby waived), the entire unpaid principal balance of and all
accrued interest on this Note shall immediately become due and payable at the
option of the holder hereof upon the occurrence of any one or more of the
following events of default (individually or collectively, herein called an
"Event of Default"):
(a) the failure or refusal of Maker to pay all or any
part of the principal of or accrued interest on this Note as and when
the same becomes due and payable in accordance with the terms hereof;
(b) the occurrence of a breach, default, or event of
default under Sections 8.4, 8.6 or 8.7 of that certain Securities
Purchase Agreement dated as of September 25, 1996 (the "Securities
Purchase Agreement") between Payee and Maker;
(c) the occurrence of a breach, default, or event of
default under the Securities Purchase Agreement (other than as
specified in Section 2(b) above), and the continuation of such breach,
default, or event of default for a period of twenty days after (i)
written notice thereof is delivered by Payee to Maker or (ii) the
failure of Maker to deliver the compliance certificate required by
Section 8.2(b) of the Securities Purchase Agreement or (iii) the date
specified in the compliance certificate as the date of the occurrence
of such breach, default, or event of default, whichever is the
earliest to occur;
(d) any representation or warranty made by Pledgor (as
defined in those certain Pledge and Security Agreements (herein so
called), dated on or about the date hereof, executed by Payee and each
of the Maynard Family Trust, the John N. Nanni Trust, and Tim Martin),
or any of such Pledgor's officers or trustees, under or in connection
with any of the Pledge and Security Agreements shall prove to have
been incorrect in any material respect when made;
(e) the occurrence of breach or event of default under
that certain Voting Agreement dated on or about the date hereof among
William O. Hunt, his spouse, the William Hunt Retirement Trust, B&G
Partnership, Ltd., BCG Partnership, Ltd. and Maker;
(f) Maker, Pledgor or any guarantor of this Note shall
(i) become insolvent within the meaning of the Bankruptcy Code of the
United States, as amended, (ii) admit in writing its or his inability
to pay or otherwise fail to pay its or his debts generally as they
become due, (iii) voluntarily seek, consent to, or acquiesce in the
benefit or benefits of any Debtor Relief Law (meaning the Bankruptcy
Code of the United States, as amended, and all other applicable
liquidation, conservatorship, bankruptcy, moratorium, rearrangement,
receivership, insolvency, reorganization, or similar debtor relief
laws from time to time in effect affecting the rights of creditors
generally), or (iv) be made the subject of any proceeding provided for
by any Debtor Relief Law that could suspend or otherwise affect any of
the rights of the holder hereof;
<PAGE> 26
(g) the nonpayment when due of any other material
indebtedness owed by Maker, or the occurrence of any event under any
document or instrument evidencing, securing, or executed in connection
with any such indebtedness which could give the holder thereof the
right to declare such indebtedness or any part thereof due prior to
its scheduled maturity;
(h) the discovery by the holder hereof that any
statement, representation, or warranty made by Maker in any writing,
document, or instrument ever delivered to the holder hereof in
connection herewith was at the time made false, misleading, or
erroneous in any material respect;
(i) the occurrence of a breach, default, or event of
default under any security agreement, deed of trust, mortgage,
assignment, or other collateral document or instrument executed and
delivered by Maker (other than as specified above in this Section 2),
any Pledgor or any guarantor in connection herewith and the
continuation of such default or event of default for a period of
twenty days after notice thereof from Payee to Maker;
(j) any guarantor or Pledgor that is an entity dissolves;
a final judgment is entered against Maker, Pledgor or any guarantor of
this Note for the payment of money in excess of $25,000 in the
aggregate and remains unsatisfied for thirty days after entry, or any
property of Maker or any such guarantor or Pledgor is attached,
garnished or otherwise made such to legal process; or
(k) Robert Maynard is no longer the Chief Executive
Officer of Maker.
Upon the occurrence of an Event of Default, the holder of this Note
may (a) offset against this Note any sum or sums owed by the holder hereof to
Maker or any guarantor of this Note, (b) foreclose any or all liens or security
interests given to secure the repayment of the indebtedness evidenced by this
Note, and (c) proceed to protect and enforce its rights either by suit in
equity and/or by action at law, or by other appropriate proceedings, whether
for the specific performance of any covenant or agreement contained in this
Note or any document or instrument executed and delivered by Maker or any
guarantor of this Note in connection with this Note or in aid of the exercise
of any power or right granted by this Note or any document or instrument
executed and delivered by Maker or any guarantor of this Note in connection
with this Note or to enforce any other legal or equitable right of the holder
of this Note.
3. Cumulative Rights. No delay on the part of the holder of this
Note in the exercise of any power or right under this Note, or under any
document or instrument executed in connection herewith, shall operate as a
waiver thereof, nor shall a single or partial exercise of any other power or
right. Enforcement by the holder of this Note of any security for the payment
hereof shall not constitute any election by it of remedies so as to preclude
the exercise of any other remedy available to it.
4. Waiver. Maker, and each surety, endorser, guarantor, and
other party ever liable for the payment of any sum of money payable on this
Note, jointly and severally waive demand,
<PAGE> 27
presentment, protest, notice of nonpayment, notice of intention to accelerate,
notice of acceleration, notice of protest, and any and all lack of diligence or
delay in collection or the filing of suit hereon which may occur; agree that
their liability on this Note shall not be affected by any renewal or extension
in the time of payment hereof, by any indulgences, or by any release or change
in any security for the payment of this Note; and hereby consent to any and all
renewals, extensions, indulgences, releases, or changes hereof or hereto,
regardless of the number of such renewals, extensions, indulgences, releases,
or changes.
5. Attorneys' Fees and Costs. In the event an Event of Default
shall occur, and in the event that thereafter this Note is placed in the hands
of attorneys for collection, or in the event this Note is collected in whole or
in part through legal proceedings of any nature, then and in any such case
Maker promises to pay all costs of collection, including, but not limited to,
reasonable attorneys' fees, incurred by the holder hereof on account of such
collection.
6. NO ORAL AGREEMENTS. THIS NOTE (ALONG WITH THE SECURITIES
PURCHASE AGREEMENT AND THE OTHER DOCUMENTS AND INSTRUMENTS EXECUTED AND
DELIVERED PURSUANT THERETO) REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
7. Governing Law. This Note shall be governed by and construed
in accordance with the laws of the State of Delaware.
8. Severability. If any provision of this Note shall be held to
be unenforceable by a Court of competent jurisdiction, such provisions shall be
severed from this Note and the remainder of this Note shall continue in full
force and effect.
9. Assignment. This Note, or any portion hereof, may be assigned
by Payee without the consent of Maker. Any such assignment by Payee shall be
in compliance with the Securities Act and applicable state securities laws and
Maker shall have received a certificate to the foregoing effect from the Payee
or the assignee.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the
day and year first above written.
INTERNET AMERICA, INC.
By: /s/ Robert Maynard
-------------------------------------
Its: Chief Executive Officer
<PAGE> 28
EXHIBIT B
SECURITY AGREEMENT
THIS SECURITY AGREEMENT is executed as of September 25, 1996, by
INTERNET AMERICA, INC., a Texas corporation (whether one or more, "Debtor"),
for the benefit of FIRST COMPUTER SERVICES CORPORATION, a Delaware corporation
("Secured Party").
FOR VALUABLE CONSIDERATION, the receipt and adequacy of which are
hereby acknowledged, Debtor hereby covenants and agrees with Secured Party as
follows:
1. Certain Definitions. Unless otherwise defined herein, or the
context hereof otherwise requires, each term defined in the UCC is used in this
agreement with the same meaning; provided that if any definition given a term
in Chapter 9 of the UCC conflicts with the definition given that term in any
other chapter of the UCC, the Chapter 9 definition shall prevail. As used
herein, the following terms have the meanings indicated:
Collateral has the meaning set forth in Paragraph 3.
Debtor Relief Law means the Bankruptcy Code of the United
States of America and all other applicable liquidation, conservatorship,
bankruptcy, moratorium, rearrangement, receivership, insolvency,
reorganization, suspension of payments, or similar debtor relief Laws from time
to time in effect affecting the rights of creditors generally.
Default has the meaning set forth in Paragraph 6.
Highest Lawful Rate means the maximum rate of interest (or, if
the context so requires, an amount calculated at such rate) which Secured Party
is allowed to contract for, charge, take, reserve, or receive under applicable
Law after taking into account, to the extent required by applicable Law, any
and all relevant payments or charges under the Related Papers.
Laws means all applicable statutes, laws, ordinances,
regulations, orders, writs, injunctions, or decrees of any state, commonwealth,
nation, territory, possession, county, parish, municipality, or Tribunal.
Lien means any lien, mortgage, security interest, charge, or
encumbrance of any kind, including, without limitation, the rights of a vendor,
lessor, or similar party under any conditional sales agreement or other title
retention agreement or lease substantially equivalent thereto, any production
payment, and any other right of or arrangement with any creditor to have his
claim satisfied out of any property or assets, or the proceeds therefrom, prior
to the general creditors of the owner thereof.
Note means that certain Promissory Note of even date herewith
in the original principal amount of $1,767,713.00 executed by Debtor and
payable to the order of Secured Party, as renewed, extended, amended or
otherwise modified from time to time.
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Obligation means (a) the indebtedness evidenced by the Note,
(b) all other present and future indebtedness, obligations, and liabilities,
now or hereafter owed to Secured Party by Debtor whether such indebtedness,
obligations, and liabilities are direct, indirect, fixed, contingent,
liquidated, unliquidated, joint, several, or joint and several or were, prior
to acquisition thereof by Secured Party, owed to some other person or entity,
(c) all indebtedness, liabilities, and obligations of Debtor arising under this
agreement, (d) interest accruing on, and attorneys' fees, court costs, and
other costs of collection incurred in the collection or enforcement of, any of
the indebtedness, liabilities, or obligations described in clauses (a) through
(c) above, and (e) any and all renewals and extensions of, or amendments to,
any of the indebtedness, liabilities, and obligations described in clauses (a)
through (d) above.
Obligor means any person or entity obligated with respect to
any of the Collateral, whether as an account debtor, obligor on an instrument,
issuer of securities, or otherwise.
Permitted Liens means (a) the Security Interest and any other
Liens in favor of Secured Party, (b) Liens for taxes not yet due and payable,
(c) mechanic's Liens and materialman's Liens for services or materials for
which payment is not yet due, (d) landlord's Liens for rental not yet due and
payable and which, to the extent the same encumbers any of the Collateral, is
subordinate to the Security Interest, (e) Liens in favor of Texas Commerce Bank
National Association securing indebtedness not to exceed $150,000 at any time
evidenced by that certain Revolving Promissory Note dated March 4, 1996,
executed by Debtor and payable to the order of Texas Commerce Bank National
Association, and (f) Liens created pursuant to that certain Security Agreement
dated March 31, 1996, executed by Debtor in favor of M.J. Capital Partners,
L.P., provided that such Liens are subordinated to the Security Interest in the
manner provided in the Subordination and Intercreditor Agreement attached as
Exhibit D to the Securities Purchase Agreement.
Related Papers means (a) this agreement, (b) all present and
future agreements, documents, and instruments now or hereafter evidencing any
of the Obligation, or assuring or securing payment thereof, (c) all agreements,
documents, and instruments now or hereafter executed in connection herewith,
and (d) any and all future renewals and extensions or restatements of, or
amendments or supplements to, all or any part of the foregoing.
Securities Purchase Agreement means that certain Securities
Purchase Agreement dated the date hereof between Debtor and Secured Party.
Security Interest means the security interest granted and the
pledge and assignment made under Paragraph 2.
Tribunal means any court or governmental department,
commission, board, bureau, agency, or instrumentality of the United States or
of any state, commonwealth, nation, territory, possession, county, parish, or
municipality, whether now or hereafter constituted or existing.
UCC means the Uniform Commercial Code as enacted in the State
of Delaware or other applicable jurisdiction, as amended at the time in
question
<PAGE> 30
2. Security Interest. In order to secure the full and complete
payment and performance of the Obligation when due, Debtor hereby grants to
Secured Party a security interest in the Collateral and pledges and assigns the
Collateral to Secured Party, all upon and subject to the terms and conditions
of this agreement. Such Security Interest is granted and pledge and assignment
are made as security only and shall not subject Secured Party to, or transfer
or in any way affect or modify, any obligation of Debtor with respect to any of
the Collateral or any transaction involving or giving rise thereto.
3. Collateral. As used herein, the term "Collateral" means the
following items and types of property:
(a) Whether now owned or hereafter acquired by Debtor,
wherever located, all other present and future accounts, general intangibles,
chattel paper, documents, instruments, inventory, equipment, fixtures, other
goods, minerals, money, and deposit accounts.
(b) The balance of every deposit account of Debtor and
any claim of Debtor against Secured Party, now or hereafter existing, whether
liquidated or unliquidated.
(c) All present and future increases, profits,
combinations, reclassifications, improvements, and products of, accessions,
attachments, and other additions to, tools, parts, and equipment used in
connection with, and substitutes and replacements for, all or part of the
Collateral heretofore described.
(d) All present and future accounts, general intangibles,
chattel paper, documents, instruments, cash and noncash proceeds, and other
rights arising from or by virtue of, or from the voluntary or involuntary sale
or other disposition of, or collections with respect to, or insurance proceeds
payable with respect to, or proceeds payable by virtue of warranty or other
claims against manufacturers of, or claims against any other person or entity
with respect to, all or any part of the Collateral heretofore described in this
subparagraph or otherwise.
(e) All present and future security for the payment to
Debtor of any of the Collateral heretofore described and goods which gave or
will give rise to any of such Collateral or are evidenced, identified, or
represented therein or thereby; provided that the description of Collateral
contained in this Paragraph 3 shall not be deemed to permit any action
prohibited by this agreement or by terms incorporated in this agreement.
4. Representations and Warranties. Debtor represents and warrants
to Secured Party that:
(a) Debtor is duly organized, validly existing, and in
good standing in the jurisdiction of its formation, possesses all requisite
authority, power, licenses, permits, and franchises to conduct its business and
execute, deliver, and comply with the terms of the Related Papers, which have
been duly authorized and approved by all necessary corporate or partnership
action and for which no approval or consent of any Tribunal or other person or
entity is required which has not been
<PAGE> 31
obtained, and has not used or transacted business under any other corporate,
assumed, or trade name in the five-year period preceding the date hereof other
than "INTRNTUSA, INC."
(b) All financial statements of Debtor heretofore
furnished to Secured Party fairly present the financial condition of Debtor as
of the date thereof, Debtor has no material direct or indirect, fixed or
contingent liabilities not reflected therein or the notes thereto, and, except
for transactions heretofore disclosed to Secured Party in writing and
transactions contemplated by the Related Papers, there have been no material
adverse changes in the financial condition of Debtor since the date of the most
recent financial statement of Debtor furnished to Secured Party.
(c) The execution, delivery, and performance of and
compliance with the terms of the Related Papers will not cause Debtor to be in
violation of or default under (i) any applicable Laws, the articles of
incorporation and bylaws or partnership agreement of Debtor (if applicable), or
(ii) any material agreement, document, or instrument to which Debtor is a party
or by which any of its assets may be bound except to the extent any such
violation or default has been waived in writing.
(d) Debtor is not involved in, or aware of the threat of,
any material litigation, which, if determined adversely to Debtor, could have a
material and adverse effect on Debtor's financial condition, and there are no
unpaid or outstanding judgments against Debtor.
(e) All federal, state, foreign, and other tax returns of
Debtor required to be filed have been filed, and all federal, state, foreign,
and other taxes imposed upon Debtor which are due and payable have been paid,
other than taxes being contested in good faith.
(f) The proceeds of and loans which are part of the
Obligation have not and will not be used directly or indirectly for the purpose
of purchasing or carrying, or for the purpose of extending credit to others for
the purpose of purchasing or carrying, any "margin stock" as that term is
defined in Regulation U of the Board of Governors of the Federal Reserve
System, as amended.
(g) Debtor's place of business and chief executive
office is where Debtor is entitled to receive notices hereunder; the present
and foreseeable location of Debtor's books and records concerning any of the
Collateral that is accounts is as set forth on Schedule I hereto, and the
location of all other Collateral is as set forth on Schedule I hereto (but the
failure of such description to be accurate or complete shall not impair the
Security Interest in such Collateral); and, except as noted on Schedule I
hereto, all such books, records, and Collateral are in Debtor's possession.
(h) The Collateral that is or may be fixtures is located
on or affixed to the real property described on Annex A hereto (but the failure
of such description to be accurate or complete shall not impair the Security
Interest in such Collateral).
(i) All Collateral that is accounts, chattel paper,
instruments, or general intangibles is free from any claim for credit,
deduction, or allowance of an Obligor and free from any defense, dispute,
setoff, or counterclaim, and there is no extension or indulgence with respect
thereto.
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(j) All Collateral that is accounts, chattel paper, or
instruments will be paid in full at maturity, and, if not paid, Debtor will,
upon demand, promptly pay the amount represented to be owing on any thereof to
Secured Party, or at Secured Party's option such unpaid amount may be deducted
from any payment then or thereafter due from Secured Party to Debtor, and
Secured Party may retain such account, chattel paper, or instrument as
Collateral for any outstanding portion of the Obligation.
(k) All Collateral that is an assigned contract or
assigned lease is in full force and effect; there have been no renewals or
extensions of, or amendments, modifications, or supplements to, any thereof
about which Secured Party has not been advised in writing; Debtor is in
possession of the property covered by each such assigned lease; and no default
or potential default has occurred and is continuing under any such assigned
contract or assigned lease.
(l) Debtor owns all presently existing Collateral, and
will acquire all hereafter-acquired Collateral, free and clear of all Liens
except Permitted Liens.
The delivery at any time by Debtor to Secured Party of Collateral or
of additional specific descriptions of certain Collateral shall constitute a
representation and warranty by Debtor to Secured Party hereunder that the
representations and warranties of this Paragraph 4 are true and correct with
respect to each item of such Collateral
5. Certain Covenants. Until the Obligation is paid and performed
in full, unless Debtor receives a prior written notification from Secured Party
that Secured Party does not object to a deviation, Debtor covenants and agrees
with Secured Party that Debtor will:
(a) Maintain, at the place where Debtor is entitled to
receive notices under the Related Loan Papers, a current record of where all
Collateral is located, permit representatives of Secured Party at any time
during normal business hours to inspect and make abstracts from such records,
and furnish to Secured Party, at such intervals as Secured Party may request,
such documents, lists, descriptions, certificates, and other information as may
be necessary or proper to keep Secured Party informed with respect to the
identity, location, status, condition, and value of the Collateral.
(b) Fully perform all of Debtor's duties under and in
connection with each transaction to which the Collateral, or any part thereof,
relates, so that the amounts thereof shall actually become payable in their
entirety to Secured Party.
(c) Promptly notify Secured Party of any change in any
fact or circumstances represented or warranted by Debtor with respect to any of
the Collateral or Obligation.
(d) Promptly notify Secured Party of any claim, action,
or proceeding affecting title to all or any of the Collateral or the Security
Interest and, at the request of Secured Party, appear in and defend, at
Debtor's expense, any such action or proceeding.
<PAGE> 33
(e) Hold in trust for Secured Party all Collateral that
is chattel paper, instruments, or documents at any time received by Debtor and
promptly deliver same to Secured Party unless Secured Party at its option
(which may be evidenced only by a writing signed by Secured Party stating that
Secured Party elects to permit Debtor to so retain) permits Debtor to retain
the same, but any chattel paper, instruments, or documents so retained shall be
marked to state that they are assigned to Secured Party (but the failure of
same to be so marked shall not impair the Security Interest thereon).
(f) Not sell, lease, or otherwise dispose of, or permit
the sale, lease, or disposition of, any Collateral except for sales, leases,
and other dispositions except for dispositions in the ordinary course of
Debtor's business not in excess of $50,000 in the aggregate.
(g) Not create, incur, or suffer or permit to be created
or incurred or to exist any Lien upon or against any of the Collateral, except
for Permitted Liens.
(h) Keep the Collateral that is inventory or equipment
in good repair, working order, and condition and promptly make all necessary
repairs or replacements to that end.
(i) Pay, before delinquent, all taxes lawfully levied
against any of the Collateral.
(j) Keep the Collateral fully insured in such amounts,
against such risks, and with such insurers as may be approved by Secured Party.
(k) At Debtor's expense and Secured Party's request,
before or after a Default, file or cause to be filed such applications and take
such other actions as Secured Party may request to obtain the consent or
approval of any Tribunal to the Secured Party's rights hereunder, including,
without limitation, the right to sell all the Collateral upon a Default without
additional consent or approval from such Tribunal (and, because Debtor agrees
that Secured Party's remedies at law for failure of Debtor to comply with this
provision would be inadequate and that such failure would not be adequately
compensable in damages, Debtor agrees that its covenants in this provision may
be specifically enforced).
(l) From time to time promptly execute and deliver to
Secured Party all such other assignments, certificates, supplemental
documents, and financing statements, and do all other acts or things as Secured
Party may reasonably request in order to more fully create, evidence, perfect,
continue, and preserve the priority of the Security Interest.
(m) For any Collateral that is a fixture or an accession
which has been attached to real estate or other goods prior to the perfection
of the Security Interest, furnish Secured Party, upon demand, a disclaimer of
interest in each such fixture or accession and a consent in writing to the
Security Interest of Secured Party therein, signed by all persons and entities
having any interest in such fixture or accession by virtue of any interest in
the real estate or other goods to which such fixture or accession has been
attached.
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(n) If certificates of title are issued or outstanding
with respect to any of the Collateral, cause the Security Interest to be
properly noted thereon.
(o) Not use any of the Collateral, or permit the same to
be used, for any unlawful purpose or in any manner inconsistent with the
provisions or requirements of any policy of insurance thereon.
(p) Not modify or substitute, or permit the modification
or substitution of, any contract to which any of the Collateral which is
accounts relates.
(q) Not relocate Debtor's principal place of business,
chief executive office, or place where Debtor's books and records related to
accounts are kept, or otherwise relocate any of the other Collateral to a
county, parish, or state other than as indicated above unless prior thereto
Debtor (i) gives Secured Party 30 days prior written notice of such proposed
relocation (such notice to include, without limitation, the name of the county
or parish and state into which such relocation is to be made) and (ii) (unless
the relocation is to a jurisdiction in which existing financing statements or
other required filings have previously been made to perfect the Security
Interest in such Collateral) executes and delivers all such additional
documents and performs all additional acts as Secured Party in its sole
discretion may request in order to continue or maintain the existence and
priority of the Security Interest in such Collateral.
6. Default. The term "Default," as used herein, means the
occurrence of any one or more of the following events (including the passage of
time, if any, specified therefor):
(a) The failure or refusal of Debtor to pay principal of
or interest on the Obligation, or any part thereof, or to pay any fees on or in
respect to all or any part of the Obligation, as the same become due in
accordance with the terms of the Related Papers.
(b) The occurrence of an "Event of Default" under the
Note.
(c) Any representation or warranty made by Debtor (or any
of its officers) under or in connection with this agreement which shall prove
to have been incorrect in any material respect when made, or any failure by
Debtor to perform or observe any term, covenant or agreement contained in this
agreement on its part to be performed or observed.
7. Remedies. Should a Default occur and be continuing, Secured
Party may, at its election, exercise any and all rights and remedies available
to a secured party under the UCC, in addition to any and all other rights and
remedies afforded by the Related Papers, at law, in equity, or otherwise,
including, without limitation, (a) declaring the entire unpaid balance of the
Obligation, or any part thereof, immediately due and payable, whereupon it
shall be due and payable (provided that, upon the occurrence of a Default under
Paragraph 6(c), the entire Obligation shall automatically become due and
payable without notice or other action of any kind whatsoever); (b) terminate
its commitment (if applicable) to lend under any of the Related Papers; (c)
reduce any claim to judgment; (d) exercise the rights of offset or banker's
Lien against the interest of Debtor in and to every account and other property
of Debtor which are in possession of Secured Party to the extent of the full
<PAGE> 35
amount of the Obligation; (e) foreclose the Security Interest and any other
Liens Secured Party may have or otherwise realize upon any and all of the
rights Secured Party may have in and to the Collateral, or any part thereof;
(f) requiring Debtor to assemble all or part of the Collateral and make it
available to Secured Party at a place to be designated by Secured Party which
is reasonably convenient to Debtor and Secured Party; (g) surrendering any
policies of insurance on all or part of the Collateral and receiving and
applying the unearned premiums as a credit on the Obligation; (h) applying by
appropriate judicial proceedings for appointment of a receiver for all or part
of the Collateral (and Debtor hereby consents to any such appointment); (i)
applying to the Obligation any cash held by Secured Party under this agreement;
and (j) bringing suit or other proceedings before any Tribunal either for
specific performance of any covenant or condition contained in any of the
Related Papers or in aid of the exercise of any right granted to Secured Party
in any of the Related Papers.
(a) Notice. Reasonable notification of the time and
place of any public sale of the Collateral, or reasonable notification of the
time after which any private sale or other intended disposition of the
Collateral is to be made, shall be sent to Debtor and to any other Person
entitled to notice under the UCC; provided that if any of the Collateral
threatens to decline speedily in value or is of the type customarily sold on a
recognized market, Secured Party may sell or otherwise dispose of the
Collateral without notification, advertisement, or other notice of any kind.
It is agreed that notice sent or given not less than 10 calendar days prior to
the taking of the action to which the notice relates is reasonable notification
and notice for the purposes of this subparagraph.
(b) Application of Proceeds. Secured Party shall apply
the proceeds or any sale or other disposition of the Collateral under this
Paragraph 7 in the following order: First, to the payment of all its expenses
incurred in retaking, holding, and preparing any of the Collateral for sale(s)
or other disposition, in arranging for such sale(s) or other disposition, and
in actually selling or disposing of the same (all of which are part of the
Obligation); second, toward repayment of amounts expended by Secured Party
under Paragraph 8; third, toward payment of the balance of the Obligation in
such order and manner as Secured Party, in its discretion, may deem advisable.
Any surplus remaining shall be delivered to Debtor or as a court of competent
jurisdiction may direct. If the proceeds are insufficient to pay the
Obligation in full, Debtor shall remain liable for any deficiency.
8. Other Rights of Secured Party.
(a) Performance. In the event Debtor shall fail to keep
the Collateral in good repair, working order, and condition as required in this
agreement, or to pay when due all taxes on any of the Collateral, or to
preserve the priority of the Security Interest in any of the Collateral, or to
keep the Collateral insured as required by this agreement, or otherwise fail to
perform any of its obligations under the Related Papers with respect to the
Collateral, then Secured Party may, at its option, but without being required
to do so, make such repairs, pay such taxes, prosecute or defend any suits in
relation to the Collateral, or insure and keep insured the Collateral in any
amount deemed appropriate by Secured Party, or take all other action which
Debtor is required, but has failed or refused, to take under the Related
Papers. Any sum which may be expended or paid by Secured Party under this
subparagraph (including, without limitation, court costs and attorneys' fees)
shall bear interest from the dates of expenditure or payment at the Highest
Lawful Rate until paid and, together with such interest, shall be payable by
Debtor to Secured Party upon demand and shall be part of the Obligation.
<PAGE> 36
(b) Collection. Upon notice from Secured Party, each
Obligor with respect to any payments on any of the Collateral (including,
without limitation, insurance proceeds payable by reason of loss or damage to
any of the Collateral) is hereby authorized and directed by Debtor to make
payment directly to Secured Party, regardless of whether Debtor was previously
making collections thereon. Subject to Paragraph 8(e), until such notice is
given, Debtor is authorized to retain and expend all payments made on
Collateral. Secured Party shall have the right in its own name or in the name
of Debtor to compromise or extend time of payment with respect to all or any
portion of the Collateral for such amounts and upon such terms as Secured Party
may determine; to demand, collect, receive, receipt for, sue for, compound, and
give acquittance for any and all amounts due or to become due with respect to
Collateral; to take control of cash and other proceeds of any Collateral; to
endorse the name of Debtor on any notes, acceptances, checks, drafts, money
orders, or other evidences of payment on Collateral that may come into the
possession of Secured Party; to sign the name of Debtor on any invoice or bill
of lading relating to any Collateral, on any drafts against Obligors or other
persons or entities making payment with respect to Collateral, on assignments
and verifications of accounts or other Collateral and on notices to Obligors
making payment with respect to Collateral; to send requests for verification of
obligations to any Obligor; and to do all other acts and things necessary to
carry out the intent of this agreement. If any Obligor fails or refuses to make
payment on any Collateral when due, Secured Party is authorized, in its sole
discretion, either in its own name or in the name of Debtor, to take such
action as Secured Party shall deem appropriate for the collection of any
amounts owed with respect to Collateral or upon which a delinquency exists.
Regardless of any other provision hereof, however, Secured Party shall never be
liable for its failure to collect, or for its failure to exercise diligence in
the collection of, any amounts owed with respect to Collateral, nor shall it be
under any duty whatever to anyone except Debtor to account for funds that it
shall actually receive hereunder. Without limiting the generality of the
foregoing, Secured Party shall have no responsibility for ascertaining any
maturities, calls, conversions, exchanges, offers, tenders, or similar matters
relating to any Collateral, or for informing Debtor with respect to any of such
matters (irrespective of whether Secured Party actually has, or may be deemed
to have, knowledge thereof). The receipt of Secured Party to any Obligor shall
be a full and complete release, discharge, and acquittance to such Obligor, to
the extent of any amount so paid to Secured Party. The rights granted Secured
Party under this subparagraph may be exercised at any time, whether or not a
Default has occurred and is continuing.
(c) Certain Proceeds. Any cash proceeds of Collateral
which come into the possession of Secured Party (including, without limitation,
insurance proceeds) may, at Secured Party's option, be applied in whole or in
part to the Obligation (to the extent then due), be released in whole or in
part to or on the written instructions of Debtor for any general or specific
purpose, or be retained in whole or in part by Secured Party as additional
Collateral. Any cash Collateral in the possession of Secured Party may be
invested by Secured Party in certificates of deposit issued by Secured Party
(if Secured Party issues such certificates) or by any state or national bank
having combined capital and surplus greater than $10,000,000, or in securities
issued or guaranteed by the United States of America or any agency thereof.
Secured Party shall never be obligated to make any such investment and shall
never have any liability to Debtor for any loss which may result therefrom.
<PAGE> 37
All interest and other amounts earned from any investment of Collateral may be
dealt with by Secured Party in the same manner as other cash Collateral. The
provisions of this subparagraph shall be applicable whether or not a Default
has occurred and is continuing.
(d) Use and Operation of Collateral. Should any
Collateral come into the possession of Secured Party, Secured Party may use or
operate such Collateral for the purpose of preserving it or its value pursuant
to the order of a court of appropriate jurisdiction or in accordance with any
other rights held by Secured Party in respect of such Collateral. Debtor
covenants to promptly reimburse and pay to Secured Party, at Secured Party's
request, the amount of all reasonable expenses (including, without limitation,
the cost of any insurance and payment of taxes or other charges) incurred by
Secured Party in connection with its custody and preservation of Collateral,
and all such expenses, costs, taxes, and other charges shall bear interest at
the Highest Lawful Rate until repaid and, together with such interest, shall be
payable by Debtor to Secured Party upon demand and shall become part of the
Obligation. However, the risk of accidental loss or damage to, or diminution
in value of, Collateral is on Debtor, and Secured Party shall have no liability
whatever for failure to obtain or maintain insurance, nor to determine whether
any insurance ever in force is adequate as to amount or as to the risks
insured. With respect to Collateral that is in the possession of Secured Party,
Secured Party shall have no duty to fix or preserve rights against prior
parties to such Collateral and shall never be liable for any failure to use
diligence to collect any amount payable in respect of such Collateral, but
shall be liable only to account to Debtor for what it may actually collect or
receive thereon. The provisions of this subparagraph shall be applicable
whether or not a Default has occurred and is continuing.
(e) Purchase Money Collateral. To the extent that
Secured Party has advanced or will advance funds to or for the account of
Debtor to enable Debtor to purchase or otherwise acquire rights in Collateral,
Secured Party, at its option, may pay such funds (i) directly to the Person
from whom Debtor will make such purchase or acquire such rights, or (ii) to
Debtor, in which case Debtor covenants to promptly pay the same to such Person,
and forthwith furnish to Secured Party evidence satisfactory to Secured Party
that such payment has been made from the funds so provided by Secured Party for
such payment.
(f) Subrogation. If any of the Obligation is given in
renewal or extension or applied toward the payment of indebtedness secured by
any Lien, Secured Party shall be, and is hereby, subrogated to all of the
rights, titles, interests, and Liens securing the indebtedness so renewed,
extended, or paid.
(g) Indemnification. Debtor hereby assumes all liability
for the Collateral, for the Security Interest, and for any use, possession,
maintenance, and management of, all or any of the Collateral, including,
without limitation, any taxes arising as a result of, or in connection with,
the transactions contemplated herein, and agrees to assume liability for, and
to indemnify and hold Secured Party harmless from and against, any and all
claims, causes of action, or liability, for injuries to or deaths of Persons
and damage to property, howsoever arising from or incident to such use,
possession, maintenance, and management, whether such Persons be agents or
employees of Debtor or of third parties, or such damage be to property of
Debtor or of others. Debtor agrees to indemnify, save, and hold Secured Party
harmless from and against, and covenants to defend Secured Party
<PAGE> 38
against, any and all losses, damages, claims, costs, penalties, liabilities,
and expenses, including, without limitation, court costs and attorneys' fees,
howsoever arising or incurred because of, incident to, or with respect to
Collateral or any use, possession, maintenance, or management thereof.
9. Miscellaneous.
(a) Term. Upon full and final payment and performance of
the Obligation, this agreement shall thereafter terminate upon receipt by
Secured Party of Debtor's written notice of such termination; provided that no
Obligor, if any, on any of the Collateral shall ever obligated to make inquiry
as to the termination of this agreement, but shall be fully protected in making
payment directly to Secured Party.
(b) Actions Not Releases. The Security Interest and
Debtor's obligations and Secured Party's rights hereunder shall not be
released, diminished, impaired, or adversely affected by the occurrence of any
one or more of the following events: (i) the taking or accepting of any other
security or assurance for any or all of the Obligation; (ii) any release,
surrender, exchange, subordination, or loss of any security or assurance at any
time existing in connection with any or all of the Obligation; (iii) the
modification of, amendment to, or waiver of compliance with any terms of any of
the other Related Papers without the notification or consent of Debtor, except
as required therein (the right to such notification and consent being herein
specifically waived by Debtor); (iv) the insolvency, bankruptcy, or lack of
corporate or trust power of any party at any time liable for the payment of any
or all of the Obligation, whether now existing or hereafter occurring; (v) any
renewal, extension, or rearrangement of the payment of any or all of the
Obligation, either with or without notice to or consent of Debtor, or any
adjustment, indulgence, forbearance, or compromise that may be granted or given
by Secured Party to Debtor; (vi) any neglect, delay, omission, failure, or
refusal of Secured Party to take or prosecute any action in connection with any
other agreement, document, guaranty, or instrument evidencing, securing, or
assuring the payment of all or any of the Obligation; (vii) any failure of
Secured Party to notify Debtor of any renewal, extension, or assignment of the
Obligation or any part thereof, or the release of any security, or of any other
action taken or refrained from being taken by Secured Party against Debtor or
any new agreement between Secured Party and Debtor, it being understood that
Secured Party shall not be required to give Debtor any notice of any kind under
any circumstances whatsoever with respect to or in connection with the
Obligation, including, without limitation, notice of acceptance of this
security agreement or any Collateral ever delivered to or for the account of
Secured Party hereunder; (viii) the illegality, invalidity, or unenforceability
of all or any part of the Obligation against any party obligated with respect
thereto by reason of the fact that the Obligation, or the interest paid or
payable with respect thereto, exceeds the amount permitted by Law, the act of
creating the Obligation, or any part thereof, is ultra vires, or the officers,
partners, or trustees creating same acted in excess of their authority, or for
any other reason; or (ix) if any payment by any party obligated with respect
thereto is held to constitute a preference under applicable Laws or for any
other reason Secured Party is required to refund such payment or pay the amount
thereof to someone else.
(c) Waivers. Except to the extent expressly otherwise
provided herein or in other Related Papers, Debtor waives (i) any right to
require Secured Party to proceed against any other Person, to exhaust its
rights in Collateral, or to pursue any other right which Secured Party may
have;
<PAGE> 39
(ii) with respect to the Obligation, presentment and demand for payment,
protest, notice of protest and nonpayment, and notice of the intention to
accelerate; and (iii) all rights of marshaling in respect of any and all of the
Collateral.
(d) Financing Statement. Secured Party shall be entitled
at any time to file this agreement or a carbon, photographic, or other
reproduction of this agreement, as a financing statement, but the failure of
Secured Party to do so shall not impair the validity or enforceability of this
agreement.
(e) Captions; Arrangements; References. The headings,
captions, and arrangements used herein are, unless specified otherwise, for
convenience only and shall not be deemed to limit, amplify, or modify the terms
hereof nor affect the meaning thereof. Whenever herein the singular number is
used, the same shall include the plural where appropriate, and vice versa; and
words of any gender herein shall include each other gender where appropriate.
The words "herein," "hereof," and "hereunder," and other words of similar
import refer to this agreement as a whole and not to any particular part or
subdivision hereof. Reference herein to "Paragraphs" and "Subparagraphs" are
to paragraphs and subparagraphs of this agreement.
(f) Communications. Unless specifically otherwise
provided, whenever this agreement requires or permits any consent, approval,
notice, request, or demand from one party to another, such communication must
be in writing (which may be by cable or tested Telex) to be effective and shall
be deemed to have been given on the day actually delivered or, if mailed, on
the third banking business day in Delaware after it is enclosed in an envelope,
addressed to the party to be notified at the address stated below, properly
stamped, sealed, and deposited in the appropriate official postal service.
Until changed by written notice pursuant hereto, the address and Telex number
for each party for purposes hereof is as follows:
(i) If to the Debtor:
Internet America, Inc.
One Dallas Centre
350 N. St. Paul, Suite 200
Dallas, Texas 75201
Attn: Robert Maynard
(ii) If to Secured Party:
First Computer Services Corporation
c/o John Curtis
Two Galleria Tower, Suite 900
13455 Noel Road
Dallas, Texas 75240
(g) Form and Number of Documents. Each agreement,
document, instrument, or other writing to be furnished to Secured Party under
any provision of this agreement must be in form and substance and in such
number of counterparts as may be satisfactory to Secured Party and its counsel.
<PAGE> 40
(h) Exceptions to Covenants. Debtor shall not be deemed
to be permitted to take any action or fail to take any action which is
permitted as an exception to any of the covenants contained herein if such
action or omission would result in the breach of any other covenant contained
herein.
(i) Survival. All covenants, agreements,
undertakings, representations, and warranties may herein shall survive all
closings hereunder and, except as otherwise indicated, shall not be affected by
any investigation made by any party.
10. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY THE LAW OF
THE STATE OF DELAWARE.
11. Maximum Interest Rate. Regardless of any provision contained
in any of the Related Papers, Secured Party shall never be entitled to receive,
collect, or apply, as interest on the Obligation, any amount in excess of the
Highest Lawful Rate, and, in the event Secured Party ever receives, collects,
or applies as interest, any such excess, such amount which would be excessive
interest shall be deemed a partial prepayment of principal and treated
hereunder as such; and, if the principal of the Obligation is paid in full, any
remaining excess shall forthwith be paid to Debtor.
12. Invalid Provisions. If any provision hereof is held to be
illegal, invalid, or unenforceable under present or future Laws effective
during the term hereof, such provision shall be fully severable; this agreement
shall be construed and enforced as if such illegal, invalid, or unenforceable
provision had never comprised a part hereof; and the remaining provisions
hereof shall remain in full force and effect and shall not be affected by the
illegal, invalid, or unenforceable provision or by its severance herefrom.
Furthermore, in lieu of such illegal, invalid, or unenforceable provision there
shall be added automatically as a part hereof a provision as similar in terms
to such illegal, invalid, or unenforceable provision as may be possible and be
legal, valid, and enforceable.
13. Entirety and Amendments. This instrument and the Related
Papers embody the entire agreement between the parties, supersede all prior
agreements and understandings, if any, relating to the subject matter hereof,
and may be amended only by an instrument in writing executed jointly by an
authorized officer of each party hereto and supplemented only by documents
delivered or to be delivered in accordance with the express terms hereof.
14. Multiple Counterparts. This agreement has been executed in a
number of identical counterparts, each of which shall be deemed an original for
all purposes and all of which constitute, collectively, one agreement; but, in
making proof of this agreement, it shall not be necessary to produce or account
for more than one such counterpart.
15. Parties Bound; Assignment. This agreement shall be binding on
Debtor and Debtor's successors and assigns and shall inure to the benefit of
Secured Party and Secured Party's successors and assigns. If there is more
than one Debtor, their obligations and agreements hereunder are joint
<PAGE> 41
and several and shall be binding upon their respective heirs, legal
representatives, successors, and assigns, and delivery or other accounting of
Collateral to any one or more of them shall discharge Secured Party of all
liability therefor. The Secured Party may assign any or all of its rights and
privileges under this agreement (provided that Debtor need only obtain the
written agreement of the Secured Party (and not such assignees) in order to
secure a waiver of any covenant set forth herein). Any such assignment by
Secured Party shall be in compliance with the Securities Act and applicable
state securities laws and Debtor shall have received a certificate to the
foregoing effect from Secured Party or such assignee. Debtor may not, without
the prior written consent of Secured Party, assign any rights, duties, or
obligations hereunder. In the event of an assignment of all or part of the
Obligation, the Security Interest and other rights and benefits hereunder, to
the extent applicable to the part of the Obligation so assigned, may be
transferred therewith.
EXECUTED as of the day and year first herein set forth.
INTERNET AMERICA, INC.
By: /s/ Robert Maynard
------------------------------------
(Title) Chief Executive Officer
<PAGE> 42
SCHEDULE I
LOCATION WITH RESPECT TO COLLATERAL
The failure of any of the Collateral to be located as represented
below shall not impair or limit the Security Interest therein.
A. LOCATION OF BOOKS AND RECORDS AS TO ACCOUNTS:
One Dallas Centre
350 N. St. Paul, Suite 200
Dallas, Texas 75201
B. LOCATION OF OTHER COLLATERAL:
Description - City, County (or Parish), and State
301 Commerce
Ft. Worth, Texas
610 W. Main Street
Denison, Texas 75020
205 N. Locust
Denton, Texas 76201
3124 Sherwood Way, Suite F
San Angelo, Texas 76901
121 South Main Street
Weatherford, Texas
333 Cedar Street, Suite 230
Abilene, Texas 79601
900 Hamilton Bldg., Suite 311
Wichita Falls, Texas 76301
200 North 13th Street
Corsicana, Texas 75151
<PAGE> 43
EXHIBIT C
PLEDGE AND SECURITY AGREEMENT
(STOCK AND SECURITIES, ETC.)
PLEDGE AND SECURITY AGREEMENT, dated as of the 25th day of September,
1996, by ______________ ("Pledgor"), with [its] [his] principal residence at
______________________, to and in favor of First Computer Services
Corporation, a Delaware corporation ("Pledgee").
W I T N E S S E T H:
PRELIMINARY STATEMENT. Pledgor is now the direct legal and beneficial
owner of ______ shares of the issued and outstanding shares of capital stock of
Internet America, Inc., a Texas corporation ("Issuer"), as more particularly
described on Exhibit A hereto (the "Pledged Securities"). In order to induce
Pledgee to loan (the "Loan") to Issuer the moneys contemplated by that certain
Securities Purchase Agreement dated September 25, 1996 between Issuer and
Pledgee, Pledgor has agreed to secure the payment and performance of the
Obligations (as hereinafter defined) and to accomplish same by (i) executing
and delivering to Pledgee this Pledge and Security Agreement, (ii) delivering
to Pledgee such of the Pledged Securities as Pledgee shall now or hereafter
have in its possession from time to time, together with appropriate powers
and/or endorsements duly executed in blank by Pledgor, and (iii) delivering to
Pledgee any and all other documents which Pledgee deems necessary to protect
Pledgee's interests hereunder or with respect to the Obligations.
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, receipt of which is hereby acknowledged, Pledgor
hereby agrees as follows:
1. Definitions
(a) "Note" shall mean that certain Promissory Note of
even date herewith in the original principal amount of $1,767,713
executed by Issuer and payable to the order of Pledgee, as renewed,
extended, amended or otherwise modified from time to time.
(b) "Obligations" shall mean and include all present and
future obligations, indebtedness and liabilities of Issuer to Pledgee
under the Note and all costs, expenses and reasonable attorneys' fees
incurred or paid by Pledgee in enforcing or attempting to enforce its
rights with respect to this Pledge Agreement, the Other Agreements,
and the Pledged Property (each as herein defined) and in preserving,
maintaining, protecting, selling, foreclosing or otherwise disposing
of the Pledged Property.
(c) "Other Agreements" shall mean any agreement,
document, guaranty, note or instrument executed by Issuer or Pledgor
with or in favor of Pledgee.
(d) "Pledge Agreement" shall mean and include this Pledge
and Security Agreement, as amended, modified or supplemented from time
to time.
<PAGE> 44
(e) "Pledged Property" shall mean and include (i) the
Pledged Securities, together with all investment property, cash
dividends, stock dividends, interest, profits, redemptions, warrants,
subscription rights, stock, securities options, substitutions,
exchanges and other distributions now or hereafter distributed by
Issuer or which may hereinafter be acquired by or delivered to the
possession of Pledgor or Pledgee with respect to the Pledged
Securities, (ii) Pledgor's records with respect to the foregoing and
(iii) the proceeds of all of the foregoing.
(f) All other terms hereinbefore or hereinafter defined
in this Pledge Agreement shall have the meanings herein assigned to
such terms.
(g) All capitalized terms not specifically defined herein
which are defined in the Uniform Commercial Code (the "Code") as
presently in effect in the State of Delaware shall be construed in
accordance with the definitions set forth in the Code.
2. Grant of Security Interest
As collateral security for the prompt and unconditional payment and
performance when due of each and every one of the Obligations, Pledgor hereby
assigns, mortgages, pledges, hypothecates, transfers and sets over to Pledgee
and grants to Pledgee a security interest in and lien upon all of the Pledged
Property.
3. Representations, Warranties, Covenants and Waiver
Pledgor hereby covenants, represents and warrants, with and to
Pledgee that (all of such covenants, representations and warranties being
continuing in nature so long as any of the Obligations are outstanding):
(a) The Pledged Securities are duly authorized, validly
issued, fully paid and non-assessable securities of the Issuer,
constitute Pledgor's entire interest in the Issuer and are not
registered, nor has Pledgor authorized the registration thereof, in
the name of any person or entity other than Pledgor or Pledgee.
(b) The Pledged Property is directly, legally and
beneficially owned by Pledgor free and clear of all claims, liens,
pledges and encumbrances of any kind, nature or description except for
the first and prior pledge and security interest with respect thereto
in favor of Pledgee.
(c) The Pledged Property is not subject to any
restrictions relative to the transfer thereof, and Pledgor has the
right to transfer and hypothecate the Pledged Property free and clear
of any liens, encumbrances or restrictions, except as otherwise
provided herein.
(d) The Pledged Property is duly and validly pledged to
Pledgee, and no consent or approval of any governmental or regulatory
authority or of any securities exchange or the
<PAGE> 45
like, nor any consent or approval of any other third party was or is
necessary to the validity and enforceability of this Pledge Agreement.
(e) Pledgee is authorized, but not required, to (i)
store, deposit and safeguard the Pledged Property, (ii) perform any
and all other acts which Pledgee in good faith deems reasonable and/or
necessary for the protection and preservation of the Pledged Property
or its value or Pledgee's security interest therein, including without
limitation, transferring, registering or arranging for the transfer or
registration of the Pledged Property to or in Pledgee's own name and
receiving the income therefrom as additional collateral for the
Obligations and (iii) pay any charges or expenses which Pledgee deems
necessary for the foregoing purposes. Any obligation of Pledgee for
reasonable care for the Pledged Property in Pledgee's possession shall
be limited to the same degree of care which Pledgee uses for similar
property owned by Pledgee.
(f) Pledgor will pay all charges and assessments of any
nature against the Pledged Property or with respect thereto prior to
said charges and/or assessments being delinquent.
(g) Pledgor shall promptly reimburse Pledgee on demand,
together with interest at the rate provided in the Other Agreements,
for any charges, assessments or expenses paid or incurred by Pledgee
in Pledgee's discretion for the protection and preservation and
maintenance of the Pledged Property and the enforcement of Pledgee's
rights hereunder, including, without limitation, reasonable attorneys'
fees and legal expenses incurred by Pledgee in seeking to protect,
collect or enforce Pledgee's rights in the Pledged Property or
otherwise hereunder.
(h) During the term of this Pledge Agreement, if Pledgor
shall receive, have registered in its name or become entitled to
receive or acquire or have registered in its name any stock
certificate, option or right with respect to the securities of Issuer
(including without limitation, any certificate representing a dividend
on or a distribution or exchange of or in connection with any
reclassification of the Pledged Securities) whether as an addition to,
in substitution of, or in exchange for any of the Pledged Property or
otherwise, Pledgor agrees to accept same as Pledgee's agent, to hold
same in trust for Pledgee and to deliver same forthwith to Pledgee or
Pledgee's agent or bailee in the form received, with the
endorsement(s) of Pledgor where necessary and/or duly executed
appropriate powers and/or assignments, to be held by Pledgee or
Pledgee's agent or bailee subject to the terms hereof, or, if any of
the foregoing is uncertificated, register same with the Pledgee's
security interest noted therein, as further security for the
Obligations.
(i) During the term of this Pledge Agreement, Pledgor
shall not directly or indirectly sell, assign, transfer, or otherwise
dispose of, or grant any option with respect to the Pledged Property,
nor shall Pledgor create, incur or permit any further pledge,
hypothecation, encumbrance, lien, mortgage or security interest with
respect to the Pledged Property.
<PAGE> 46
(j) So long as no Event of Default (as hereinafter
defined) has occurred, Pledgor shall have the right to vote and
exercise all corporate rights with respect to the Pledged Securities,
except as expressly prohibited herein.
(k) Pledgee may notify Issuer or the appropriate transfer
agent of the Pledged Property to register the security interest and
pledge granted herein and honor the rights of Pledgee with respect
thereto.
(l) Pledgor waives (i) all rights to require Pledgee to
proceed against any other person, entity or collateral or to exercise
any remedy, (ii) the defense of the statute of limitations in any
action upon any of the Obligations, (iii) any rights as a guarantor or
surety, including, without limitation, the right to be informed of
additional credit extended by Pledgor, any financial information
relating to Issuer, the value of the Pledged Property, any
deterioration thereof, or of any other matter, unless specifically
required by applicable law and non-waivable and (iv) to the extent
permissible, its rights under Section 9-112 and 9-207 of the Code.
Pledgor agrees that the Pledged Property, other collateral, Issuer or
any other guarantor or endorser may be released, substituted or added
with respect to the Obligations, in whole or in part, without
releasing or otherwise affecting the liability of Pledgor, the pledge
and security interests granted hereunder, or this Pledge Agreement.
(m) Pledgor shall not relocate Pledgor's principal
residence to a state other than as indicated in the preface above
unless prior thereto Pledgor (i) gives Pledgee 30 days prior written
notice of such proposed relocation (such notice to include, without
limitation, the name of the county or parish and state into which such
relocation is to be made) and (ii) (unless the relocation is to a
jurisdiction in which existing financing statements or other required
filings have previously been made to perfect the Pledgee's security
interest in the Pledged Property) executes and delivers all such
additional documents and performs all additional acts as Pledgee in
its sole discretion may request in order to continue or maintain the
existence and priority of the security interest in the Pledged
Property.
4. Events of Default
The occurrence of any one or more of the following events of default
(individually or collectively, herein called an "Event of Default"):
(a) the failure or refusal of Issuer to pay all or any
part of the principal of or accrued interest on the Note as and when
the same becomes due and payable (whether at maturity, by
acceleration, or otherwise) in accordance with the terms thereof;
(b) Issuer, Pledgor or any guarantor of the Note shall
(i) become insolvent within the meaning of the Bankruptcy Code of the
United States, as amended, (ii) admit in writing its or his inability
to pay or otherwise fail to pay its or his debts generally as they
become due, (iii) voluntarily seek, consent to, or acquiesce in the
benefit or benefits of any Debtor Relief Law (meaning the Bankruptcy
Code of the United States, as amended, and all other applicable
liquidation, conservatorship, bankruptcy, moratorium, rearrangement,
receivership,
<PAGE> 47
insolvency, reorganization, or similar debtor relief laws from time to
time in effect affecting the rights of creditors generally), or (iv)
be made the subject of any proceeding provided for by any Debtor
Relief Law that could suspend or otherwise affect any of the rights of
the holder hereof; or
(c) any representation or warranty made by Pledgor (or
any of its officers or trustees) under or in connection with this
Pledge Agreement which shall prove to have been incorrect in any
material respect when made, or any failure by Pledgor to perform or
observe any term, covenant or agreement contained in this Pledge
Agreement on its part to be performed or observed.
5. Remedies After Default
Subsequent to the occurrence and during the continuance of an Event of
Default:
(a) Pledgee, at its option, shall be empowered to
exercise its continuing right to instruct Issuer (or the appropriate
transfer agent of the Pledged Securities) to register any or all of
the Pledged Securities and/or other Pledged Property in the name of
Pledgee or in the name of Pledgee's nominee and Pledgee may complete,
in any manner Pledgee may deem expedient, any and all stock powers,
assignments or other documents heretofore or hereafter executed in
blank by Pledgor and delivered to Pledgee. After said instruction,
and without further notice, Pledgee, in its discretion, shall have the
exclusive right to exercise all voting and corporate rights with
respect to the Pledged Securities and other Pledged Property and
exercise any and all rights of conversion, redemption, exchange,
subscription or any other rights, privileges, or options pertaining to
any shares of the Pledged Securities or the other Pledged Property as
if Pledgee were the absolute owner thereof, including without
limitation, the right to exchange, in its discretion any and all of
the Pledged Securities and other Pledged Property upon any merger,
consolidation, reorganization, recapitalization or other readjustment
with respect to Issuer. Upon the exercise of any such rights,
privileges or options by Pledgee, Pledgee shall have the right to
deposit and deliver any and all of the Pledged Securities and other
Pledged Property to any committee, depository, transfer agent,
registrar or other designated agency upon such terms and conditions as
Pledgee may determine, all without liability, except to account for
property actually received by Pledgee. However, Pledgee shall not
have any duty to exercise any of the aforesaid rights, privileges or
options (all of which are exercisable in the sole discretion of
Pledgee) and shall not be responsible for any failure to do so or
delay in doing so.
(b) In addition to all the rights and remedies of a
secured party under applicable law, Pledgee shall have the right, at
any time and without demand of performance or other demand,
advertisement or notice of any kind (except the notice specified below
of time and place of public or private sale) to or upon Pledgor or any
other person (all and each of which demands, advertisements and/or
notices are hereby expressly waived to the extent permitted by law),
to proceed forthwith to collect, redeem, receive, appropriate, sell,
or otherwise dispose of and deliver the Pledged Property or any part
thereof in one or more lots at public or private sale or sales at any
exchange, brokers board or at any of Pledgee's offices or
<PAGE> 48
elsewhere at such prices and on such terms as Pledgee may deem best.
The foregoing disposition(s) may be for cash or on credit or for
future delivery without assumption of any credit risk by Pledgee, with
Pledgee having the right to purchase all or any part of said Pledged
Property so sold at any such sale or sales, public or private, free of
any right or equity of redemption in Pledgor, which right or equity is
hereby expressly waived or released by Pledgor. In connection with
any sale or other disposition of the Pledged Property, Pledgee is
hereby authorized by Pledgor to complete the appropriate
instruments(s) of transfer executed and delivered by Pledgor with
respect to the Pledged Property in such manner as Pledgee shall deem
appropriate to effectuate such sale or other disposition. All of
Pledgee's rights and remedies, including, but not limited to, the
foregoing, shall be cumulative and not exclusive and shall be
enforceable alternatively, successively or concurrently, as Pledgee
may deem expedient. The proceeds of any such collection, redemption,
recovery, receipt, appropriation, realization, sale or other
disposition, after deducting all costs and expenses of every kind
incurred relative thereto or incidental to the care, safekeeping or
otherwise of any and all Pledged Property or in any way relating to
the rights of Pledgee hereunder (including, without limitation,
reasonable attorneys' fees and legal expenses) shall be applied first
to the satisfaction of the Obligations (in such order as Pledgee may
elect) and then to the payment of any other amounts required by
applicable law. Any surplus then remaining shall be delivered to
Pledgor or its successors or assigns or as a court of competent
jurisdiction may direct. Pledgor agrees that ten (10) calendar days
prior notice by Pledgee, sent by certified mail, postage prepaid,
designating the date after which a private sale may take place or a
public auction may be held, is reasonable notification of such
matters.
(c) Pledgor recognizes that Pledgee may be unable to
effect a public sale of all, or part of the Pledged Property by reason
of certain prohibitions contained in the Securities Act of 1933, as
amended, as now or hereafter in effect or in applicable Blue Sky or
other state securities law, as now or hereafter in effect, but may be
compelled to resort to one or more private sales to a restricted group
of purchasers who will be obliged to agree, among other things, to
acquire such Pledged Property for their own account for investment and
not with a view to the distribution or resale thereof. If at the time
of any sale of the Pledged Property or any part thereof the same shall
not, for any reason whatsoever, be effectively registered (if
required) under the Securities Act of 1933 (or other applicable state
securities law), as then in effect, Pledgee in its sole and absolute
discretion is authorized to sell such Pledged Property or such part
thereof by private sale in such manner and under such circumstances as
Pledgee or its counsel may deem necessary or advisable in order that
such sale may legally be effected without registration. Pledgor
agrees that private sales so made may be at prices and on terms less
favorable to the seller than if such Pledged Property were sold at
public sale, and that Pledgee has no obligation to delay the sale of
any such Pledged Property for the period of time necessary to permit
Issuer, even if Issuer would agree, to register such Pledged Property
for public sale under such applicable securities laws. Pledgor agrees
that any private sales made under the foregoing circumstances shall be
deemed to have been made in a commercially reasonable manner.
(d) All of the Pledgee's rights and remedies, including
but not limited to the foregoing and those otherwise arising under
this Pledge Agreement, the Other Agreements,
<PAGE> 49
the instruments and securities comprising the Pledged Property,
applicable law or otherwise, shall be cumulative and not exclusive and
shall be enforceable alternatively, successively or concurrently as
Pledgee may deem expedient. No failure or delay on the part of
Pledgee in exercising any of Pledgee's options, powers or rights or
partial or single exercise thereof, shall constitute a waiver of such
option, power or right.
6. Further Assurances
Pledgor agrees that at any time and from time to time upon the written
request of Pledgee, Pledgor will execute and deliver such further documents,
including but not limited to irrevocable proxies or stock powers, in form
satisfactory to counsel for Pledgee, and will take or cause to be taken such
further acts as Pledgee may reasonably request in order to effect the purposes
of this Pledge Agreement and perfect or continue the perfection of the security
interest in the Pledged Property granted to Pledgee hereunder.
7. Miscellaneous
(a) Beyond the exercise of reasonable care to assure the
safe custody of the Pledged Property while held by Pledgee hereunder,
as provided in Section 3(e) hereof, Pledgee or Pledgee's agent or
bailee shall have no duty or liability to protect or preserve any
rights pertaining thereto and shall be relieved of all responsibility
for the Pledged Property upon surrendering it to Pledgor or
foreclosure with respect thereto. Pledgee shall not have any
obligation or duty to return or release its security interest in the
Pledged Property, except upon the written request of Pledgor, at the
sole expense of Pledgor and only after all Obligations are
indefeasibly paid in full.
(b) No course of dealing between Pledgor and Pledgee, nor
any failure or delay by Pledgee to exercise any right, power or
privilege under the Pledge Agreement, the Other Agreements or under
any other agreements, instruments and documents executed and delivered
in connection therewith, shall operate as a waiver hereof or thereof;
nor shall any single or partial exercise of any right, power or
privilege hereunder or thereunder preclude any other or further
exercise thereof or the exercise of any other right, power or
privilege. No waiver of any provision of this Pledge Agreement shall
be effective unless the same shall be in writing and signed by
Pledgee, and then such waiver shall be effective only in the specific
instance and for the purpose for which given.
(c) This Pledge Agreement may not be changed, modified or
amended, in whole or in part, except by a writing signed by Pledgor
and Pledgee.
(d) The provisions of this Pledge Agreement and the Other
Agreements are severable, and if any clause or provision hereof or
thereof shall be held invalid or unenforceable in whole or in part in
any jurisdiction, then such invalidity or unenforceability shall
attach only to such clause or provision in any such jurisdiction or
part thereof, and shall not in any manner affect such clause or
provision in any other jurisdiction or any other clause or provision
in this Pledge Agreement or the Other Agreements in any jurisdiction.
<PAGE> 50
(e) THE PARTIES HERETO WAIVE TRIAL BY JURY IN ANY ACTION
OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT WHETHER ARISING OUT
OF, UNDER OR BY REASON OF THIS PLEDGE AGREEMENT, THE PLEDGED PROPERTY,
THE OTHER AGREEMENTS OR ANY MATTER OR PROCEEDING RELATING THERETO.
(f ) This Pledge Agreement shall inure to the benefit of
Pledgor and Pledgee and their respective successors and assigns, and
shall be binding upon Pledgor and its successors and assigns.
(g) Pledgee shall be entitled at any time to file this
Pledge Agreement or a carbon, photographic, or other reproduction of
this Pledge Agreement, as a financing statement, but the failure of
Pledgee to do so shall not impair the validity or enforceability of
this Pledge Agreement.
8. Counterparts
This Pledge Agreement may be signed in any number of counterparts with
the same effect as if the signatures were upon the same instrument.
9. Joint and Several Liability
If there are one or more Pledgors, the Obligations of the Pledgor
shall be several and also joint, each with all and also each with any one or
more of the others, and may be enforced at the option of the Pledgee against
each severally, any two or more jointly, or some severally and some jointly.
10. Governing Law
THIS PLEDGE AGREEMENT AND ANY OTHER AGREEMENT, INSTRUMENT OR DOCUMENT
DELIVERED IN CONNECTION HEREWITH, AND THE OBLIGATIONS OF THE PARTIES HEREUNDER
OR THEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF DELAWARE.
IN WITNESS WHEREOF, the undersigned has caused these presents to be
duly executed and delivered on the day and year first above written.
----------------------------------------
[NAME]
<PAGE> 51
EXHIBIT A
PLEDGED SECURITIES
All of Pledgor's now owned or hereafter acquired right, title and
interest in and to the securities described below:
[Description of Securities]
All investment property, stocks, bonds or other securities and
personal property, cash, proceeds, increases, and profits now existing
or hereafter arising therefrom or relating thereto, together with any
passbook or certificates which may from time to time evidence the
same, and together with all moneys now or hereafter on deposit
therein, both principal and interest, all proceeds and products
thereof, and all of Pledgor's right, title and interest therein.
<PAGE> 1
EXHIBIT 16.1
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
We have read and agree with the comments made pursuant to Item 304(a) of
Regulation S-B contained in the Form SB-2 of Internet America, Inc.
/s/ Farmer, Fuqua, Hunt & Munselle, P.C.
- ----------------------------------------
Farmer, Fuqua, Hunt & Munselle, P.C.
Dallas, Texas
July 8, 1998
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Internet America, Inc.
on Form SB-2 of our report dated July 20, 1998, appearing in the Prospectus,
which is part of this Registration Statement.
We also consent to the reference to us under the heading of "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
- -----------------------------------
Deloitte & Touche LLP
Dallas, Texas
July 21, 1998
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